Bolfo leaves the helm to his Chinese partner
CEO Gozzi confirms talks are being finalized to sell the majority of shares (although not the governance) of Duferco Trading to Hebei, already 10% partner through Tangshan
Hebei Iron and Steel Group Co Ltd in intentioned to take a 52% controlling stake into Swiss-based steel trader Duferco to offset pressure from domestic overcapacity.
The deal, with an investment worth some 400 million USD (relative to some 40% of the capital yet to be acquired) is to be signed within the end of the year after China's largest steelmaker, ranking no. 3 in the world, gets the Bejing government's green light.
The existing shareholders, in confirming the substance of the negotiations in progress, are quick to point out that the governance and management will remain firmly in the hands of the founders - the entrepreneur Bruno Bolfo of Chiavari (Genoa), who emigrated four decades ago in New York and Brazil first, then Lugano - could be enshrined official handover of the majority shares of Duferco SA (52%) to its current partner (since March 2013) with 10% bought by its subsidiary Tangshan.
The news issued by China Daily was confirmed by Duferco to Ship2Shore: “This is a confidentiality agreement in course that is not completed yet” said a spokesman from Lugano’s headquarters. “I confirm that our Chinese partners have expressed their intent to have a greater participation in Duferco Trading. In regard to timing and shares, I cannot comment on rumors reported by the Chinese press, since everything is still in progress and, therefore, there is currently nothing for sure” commented CEO Antonio Gozzi (nephew of Bolfo), who is also chairman of Federacciai, the Italian association of steelmakers. “I should point out that present management and members of Duferco will retain significant shares. Meetings to define rules of management are in progress, comments will be made after the signing; any other assessment is premature” Gozzi said.
The Chinese company is not the first external shareholder in Duferco. Ukraine's Industrial Union of Donbass, a steel producer with annual capacity of 10 million tons, owns a stake.
The ratio of the initiative by the Chinese side is obvious: the agreement represents an important opportunity for internationalization of Hebei, which in recent months has been trying to look out to foreign markets in order to overcome the difficulties of the Chinese market, suffocated from its overcapacity: the steel factory will be forced to reduce its production by 60 million tons in 2016 and by 26 million in 2017. In 2013 Tangshan Iron & Steel Group Co (Tangsteel), part of Hbis, acquired 10% of Duferco Trading for 78million USD, taking advantage of Duferco’s extensive network of international sales and distribution, in exchange for exclusive rights to sell its steel off Asia.
“Duferco has a global network covering the iron and steel market in South Africa, and it can help us expand in the overseas market” Peng Zhaofeng, general manager of HBIS, was quoted saying.
Hebei Iron and Steel Group Company Limited was established in June 2008 with the merger of Tangsteel and Hansteel in Hebei province, and is expected to produce an annual capacity of 30 million tons of steel; it had revenues of 40,829 million USD last year and had 124,031 employees.
Located over 50 countries, with 3,041 employees throughout the world, producing 23.3 million tons war materials and selling 18.4 million tons of steel products, Duferco clearly defined current strategy in its recent Annual Report 2013, that outlined a quite challenging environment for the steel industry, that suffers from a severe global overcapacity, with specific regional differences; Europe in particular, is showing apparent demand still 25% lower than the peak of 2007, with a significantly reduced ability to compensate with higher export due to its lower competitiveness.
A reduction of supply is very problematic in countries like China and Europe due to the socio-political impact consequent to permanent closures as well as to the significant cost increases (due to the high fixed cost of integrated mills) of temporary reductions of production.
A positive turn could come from a new Chinese stimulus of the sort of the one adopted in 2009 and from a QE of the ECB. Both steps are facing problems of different nature: in China, the concerns of rising debt problems and in Europe the expected opposition coming from North-European states.
“Under this difficult and uncertain scenario, we managed to report a positive performance in 2013; consolidated revenue increased by 3.3%. Profit from operations was 76 million USD compared
with 42 million USD for 2012 while profit before tax reached 17 million USD. Duferco is definitely defensive in the steel area, while open to take advantage of opportunities in more predictable sectors such as the energy trading/distribution business in Europe and Italy that are already showing good results with a net profit after taxes of approximately 25 million USD; our target is to extend it geographically, in quality of business and in volumes, expansion into new markets such as Spain, Portugal and Eastern Europe is the focus of management for the near future. The shipping business, concentrated in smaller ships where pricing fluctuations are more contained, is expected to show positive cash flow in 2014 (after debt service) while 2013 results were heavily affected by one-off impairments in the carrying amounts of certain vessels and partly suffered the poor market conditions that characterized the shipping worldwide market in 2013. Due to complexities we decided years ago to split the shipping structure into two main locations: Lugano and Singapore which complement each other. All regional business is given highest attention, based on better local knowledge, which translates into greater efficiency and outcomes” the Swiss company revealed.
Within such a framework the Trading Group maintains its global leadership and reported a satisfactory net profit of 45 million USD. “Our trading division performed admirably recording 21% improvement in pre-tax results whilst our distribution and processing businesses remained a solid contributor to our bottom line despite a drop of 27% in pre-tax profits due to adverse foreign exchange impact on assets in South America. Return on equity has significantly come down, but these are days where to be greedy would result in a critical mistake. Therefore we remain largely conservative in our approach to business. This has allowed us to maintain the full support of the banking system, in spite of the financial crisis that our major competitors underwent, and that had obviously concerned the financial institutions supporting our business. Our business model of strategic alliances has worked well and besides the traditional institutional trade flow with I.S.D. of Ukraine and J.S.W. of India, we have further cemented the relationship with the Hebei Group of China with a 10% share participation of Tangshan Steel (Heibei subsidiaries) in the equity of D.I.T.H. (our steel trading Holding). We do not expect significant improvements for 2014 and 2015 and utilize these two years of probable difficult trading environment, to strengthen further our organization in both the commercial area and the management/control sector. The two industrial assets included in the perimeter of the Trading Group: D.S.P. of South Africa and Makstil in Macedonia are currently a drag on our overall profitability but we can minimize their negative impact allowing us to survive the negative cycle and eventually enjoy the results of a more positive environment. The Italian industrial activities (50-50 owned with Nucor of USA) are heavily impacted by the dramatic fall in consumption of the products, utilized in the construction industry”.