Graphite, magnesium compounds: RHI Magnesita forgoes dividend as H1 profits fall on lower COVID-19 demand

RHI Magnesita sign

Refractories leader RHI Magnesita (RHI) saw interim profits more than halve as demand at its steel and industrial divisions has been hit by the COVID-19 pandemic.

The company also dropped its half-year dividend as pre-tax profit for the six months to 30 June 2020 slumped to €70M (US$83M), from €165M (US$196M) in 2019, as revenue fell 24% to €1.71Bn (US$2.03Bn).

RHI said economic uncertainty remained. Net debt was stable at €666M (US$792M) and the company said it was still in a strong financial position, with liquidity of €1.1Bn (US$1.3Bn).

The company reported that global steel production contracted by 6% in H1 2020 compared to the same period last year. Excluding China, output was down 14.3%, with a contraction of 24.8% in the second quarter, based on weaker demand from the group’s steel customers across all regions.

This led steel division revenues to decline by 22.4% to €820M (US$975M) on a constant currency basis. Gross margin declined over the same period, predominantly due to lower sales volumes causing poorer fixed cost absorption and lower raw material prices, the company said.

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The lockdown imposed in China in the first few months of 2020, and in Europe and North America over mid-2020, caused a massive drop in final demand for steel across many sectors. Steel production, the key driver for refractories, fell too.

As RHI has noted, the COVID-19 induced recession is expected to have different implications for steel production in China compared with steel production in the rest of the world this year. As was the case during recovery from the 2008-2009 Financial Crisis, the resilience of the Chinese economy is being significantly influenced by government support and infrastructure spending. Under Roskill’s Deep-V macroeconomic scenario, the Chinese economy is forecast to post positive 2.5% GDP growth in 2020, while the world ex-China is expected to experience a 4.6% GDP decline.

However, the nature of infrastructure spending will be different in 2020 as the Chinese government is shifting its priority from ‘traditional infrastructure’, e.g. roads, airports and other large construction projects, to ‘new infrastructure’.

Back in 2008, China implemented a RMB4Tn (US$570Bn) stimulus package, centred around traditional high-steel-intensity infrastructure. However, the 2008 stimulus left China with a chronic overcapacity across heavy industries, inefficient operations and bad debts accumulating in banks’ balance sheets. The focus to drive the economy towards recovery this time around will increasingly be on ‘new infrastructure’, such as that for electric vehicle charging, upgrading of the electrical grid, artificial intelligence, 5G networks, improved transportation systems, and data centres. This shift aligns with the transformation of the Chinese economy, with future investments being less steel intensive than in the past.

Twenty-five Chinese provinces have already published lists of investment programmes for a total amount of RMB50Tn (US$7Tn), including RMB7.6Tn (US$1.1Tn) earmarked for 2020. In its 5-year investment plan, spending on these new infrastructure projects is estimated to reach nearly RMB2Tn (US$280Bn) each year, unlocking at least RMB10Tn (US$1.4Tn) worth of direct investment and RMB17Tn (US$2.4Tn) of indirect investment by 2025.

‘Traditional infrastructure’ will remain an important driver of China’s infrastructure investment growth, although on a declining trajectory as China’s transition from a steel intensive fixed-assets investment economy into a digital economy will gain momentum in the coming years.

Roskill’s NEW Natural & Synthetic Graphite: Outlook to 2030, 13th Edition report will be published soon and will include analysis of recent steel and refractory industry trends on supply, demand, trade and prices, as well as providing forecasts to 2030, profiles of the main producers, and an industry cost curve for spherical graphite. Click here to download the brochure and sample pages for the report, or to access further information.

Roskill’s NEW Magnesium Compounds: Outlook to 2030, 14th Edition report is due to be published in October 2020; click here for more information.

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This article was written by Kerry Satterthwaite. Please get in touch below if you wish to discuss further:

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