Press release - Stemcor

we also hold stocks at a number of port locations. In France, Italy and Central Europe, our fast
expanding businesses now hold unsold stocks at various ports, as we have done for many years in the
UK. In 2007 we purchased a well established steel stockholder and processor, SPS, which is
headquartered in Birmingham, England, but has an international business with special focus on the
offshore oil and gas industry. SPS holds stock in Birmingham, Glasgow, Rotterdam, Dubai and
Singapore. We are planning further acquisitions and, although we fully intend to go global in
stockholding, we believe this will be more easily accomplished by initially building up a strong base
in the developed world. With this in mind we have just completed the acquisition of Barclay &
Mathieson, a general steel stockholding group with 12 depots in the UK.
We monitor and control the level of unsold stocks very closely and every unit has to operate within
limits set by our risk director. Our unsold stocks amount to just 3% of the total steel tonnage we sell
annually. We focus on the length of time material has been in stock to ensure minimum stock levels
with maximum stock-turns. Any stock that is more than six months old is subject to obsolescence
provisions, which are among the more conservative in the industry. This also serves to motivate our
unit managers to ensure that our stock really does turn over quickly.
Prices that go up can also come down. Stockholders benefit from stock appreciation in a rising
market but, even if they are skilled in controlling stock levels and anticipating price movements, they
will still suffer when prices fall. This price risk has been difficult to avoid in the absence of a futures
market and is one of the many reasons that we welcome the introduction of steel futures at the LME
and other futures exchanges. We look forward to being able to hedge at least part of our price risk on
our own steel stocks through futures markets. Steel futures will take time to become generally
accepted but we are confident that they will take hold and have major implications for our industry.
Apart from the ability to hedge trading positions we believe that more and more sales in future will
be linked to exchange prices. We are exploring further activities we could undertake in the new
world of steel futures and we have set up a specialist team for this purpose.
2007 was a very strong year for steel trading. The unprecedented rise in the cost of freight, however,
did have a substantial negative effect on our profitability. We do hedge our freight exposure as
appropriate, but it is often not possible to do so effectively. Volatility in our markets is becoming
more pronounced and increasingly it will become necessary for a steel trading company to hedge its
risk exposure both to steel and to freight prices.
Raw materials also saw strong growth in 2007. The disposal of the majority of our holding in Savage
River in Australia might look premature in view of the recently announced steep rise in iron ore
pricing, but we are re-investing the proceeds into iron ore projects in Orissa in India, where we
believe we can obtain a better long-term return.
Our portfolio today extends beyond traditional trading into financial services. One example was our
advisory role in the successful restructuring and privatisation of the Georgian ferro-manganese
industry. This was a transaction that any investment bank would have been proud to accomplish. Our
fee-based consultancy services in offset also had a good year.
Overall, 2007 was a mixed year for the global steel industry as the arrival of increased Chinese
exports affected prices in the second half, despite the world-wide construction boom and the growth
in world steel consumption. At the beginning of 2008 clear evidence that China was intent on
controlling and reducing steel exports started an upward spike in steel prices, which is continuing as
I write, and which has been described by one commentator as a price volcano. Other commentators