Thyssen-Krupp: Ukraine war jeopardizes rehabilitation

The message of the fictional film, which is set in the year 2045 and was produced by the group itself, is clear: decarbonization is vital for the Ruhr group. For more than 200 years, the group and its predecessor companies have been melting iron ore and coal into steel in Duisburg. Now production has to become climate-friendly with investments in new plants running into the billions – or it has no future.

However, this transformation is in danger: The war in the Ukraine also poses short-term problems for Thyssen-Krupp, which the most recent restructuring successes could make up for. The drastically increased raw material prices burden the business of Germany’s largest steel producer. In addition, Thyssen-Krupp has previously obtained a large part of its raw materials from Russia. These now have to be purchased from other regions of the world at great expense.

The situation is also made more difficult by the sluggish demand from the auto industry, with which the Ruhr group brings in a large part of its profits. The original plan by CEO Martina Merz to make the division independent is therefore now on hold.

Now the workforce is worried about how things will continue: “Everyone who works here is afraid for their future,” says a trainee in conversation with SPD members of the state parliament who visited the training center in Duisburg last week.

Ukraine war whirls everything upside down

CEO Martina Merz actually wanted to relieve the rest of the group of companies from the burdens that the change to climate-neutral production processes means for the steel division. The steel prices, which rose sharply after the corona pandemic, provided a tailwind: the better the prospects for the business, the smaller the dowry that Thyssen-Krupp would have had to give to its traditional business. But then came the war – and since then all plans have been thrown into confusion.

Even if steel prices have hardly fallen, IG Metall recently negotiated with the board not about wage increases, but about short-time work. The works council put the short-term capital requirements of the steel division at 3.2 billion euros.

In an interview with the Handelsblatt, Tekin Nasikkol, head of the works council, also justified the demand with the fact that the transformation to hydrogen-based production, for which the group is dependent on external plant manufacturers, would be more expensive than previously assumed. “Plant manufacturers are currently registering high demand – which is why the conversion will cost more than initially calculated.”

At the same time, increased energy prices are putting pressure on Thyssen-Krupp’s steel business. Originally, Merz’s plan was for the individual divisions to finance their investments from their current business from now on. But because of the war, this goal now seems a long way off, at least in the case of the steel division. The additional electricity costs alone this year are expected to add up to a three-digit million amount – money that was also earmarked to carry out urgent modernization work on the existing systems.

Trade unionist Nasikkol is now obliging shareholders to share in the costs incurred by the war. “We cannot handle the transformation on our own,” said the head of the works council. Originally, the employee representatives had put the financial requirements in the event of a spin-off at 2.5 billion euros. Now it has increased by 700 million euros. “Now the owners have to do their part and inject capital. We must not jeopardize our already ambitious schedule.”

But the shareholders, especially the Krupp Foundation, which currently holds the largest block of shares with a stake of around 21 percent, will probably find it difficult to convey this capital injection. The Ruhr group has already spent a lot on the previous restructuring: Of the 17.2 billion euros that Thyssen-Krupp earned two years ago through the sale of its highly profitable elevator division, there was still a net financial balance of 3.6 billion euros left in September – as well as a re-investment in Elevator of EUR 1.25 billion at the time.

Thyssen-Krupp is thus freed from the multi-billion dollar mountain of debt that arose from bad investments in steel mills in Brazil and the USA. But whether the investments in the transformation of steel production will one day pay off remains to be seen. The conversion could cost between seven and ten billion euros at the Duisburg location alone. At the same time, the electricity requirement has increased tenfold: instead of 4.6 terawatt hours, the group will need 46 terawatt hours of electricity per year in the future – four and a half times as much as the city of Hamburg.

“No investment case behind the transformation”

CEO Merz also knows these numbers. On the same day that the SPD MPs visited the trainees in the steelworks, the manager invited the Board of Trustees of the Stifterverband to the Essen headquarters. The incumbent Prime Minister of North Rhine-Westphalia and CDU top candidate, Hendrik Wüst, had canceled his participation at short notice – and instead went to the flooded area in Bad Münstereifel to inquire there together with Federal Chancellor Olaf Scholz (SPD) about the progress of the construction work.

But even without the Prime Minister, the event in the hall of Q2 in the Essen district was attended by top-class speakers. In front of industry colleagues such as former Eon boss Johannes Teyssen and SMS digital boss Katja Windt in the audience, Merz described her view of things in a panel discussion. “There is currently no investment case behind the transformation,” says the manager. Thyssen-Krupp is currently unable to adequately present the costs and benefits of the green transition. “What we need is a clear regulatory framework and start-up investments.”

But while the group is waiting for political support for its restructuring, the room for maneuver is becoming smaller and smaller. If Merz originally promised at least a balanced free cash inflow for the current financial year, the board had to accept the forecast a few days ago.

The value indicates how much money the company has available for distributions to shareholders. At the 2023 Annual General Meeting, the owners could face the fourth year in a row without a dividend.

For Merz, whose contract will be extended in the coming weeks after the surprising appointment in September 2019, the prospects are not good. The 59-year-old can point to some successes in the restructuring of the other divisions of the group. For example, the sale of the mining machinery business to the Danish competitor FLSmidth is nearing completion, and the loss-making heavy plate division has also been closed. Merz was able to limit the losses in the Multi Tracks segment to 50 million euros, from 184 million euros in the previous year.

According to financial circles, the car plant construction and the supply business with springs and stabilizers are up for sale next. Thyssen-Krupp hopes that plant manufacturers such as Komau, Fives and Dürr will be interested, as well as automotive suppliers such as Denso, Mando and Tenneco. At best, the sales could bring in several hundred million euros.

Thyssen-Krupp is also aiming for income of 500 to 600 million euros as proceeds from the sale of shares in its hydrogen electrolysis subsidiary Nucera. The IPO is planned for the first half of 2022, but could be postponed if volatility in stock markets is too high. The group wants to part with ten to 15 percent of its shares.

Krupp Foundation relies on dividends

If the planned deals work out as announced, new capital would be available to pre-finance the transformation of the steel division, for example. But in view of the dramatic upheavals that could threaten the German energy supply as a result of the Ukraine war, investing in a direct reduction plant, which is initially to be operated with natural gas and later with green hydrogen, is becoming a high-risk investment. The group cannot afford to dig new billions like in Brazil and the USA a second time.

Shareholders are also unlikely to be willing to go without dividends any longer. For example, the Krupp Foundation is groaning because its only source of income – the dividends from Thyssen-Krupp – has been missing for several years. Merz can be sure of the support of its largest shareholder, the CEO is considered a confidante of the head of the board of trustees Ursula Gather. But the pressure should also increase in the event of a contract extension. Because in the coming year at the latest, the foundation will have to limit its previous funding volume without a dividend.

However, from the point of view of the employee representatives, state participation would be the best option. After the previous CDU government took a rather negative stance on this, many in the workforce are now hoping for a victory for the SPD in the upcoming elections in May. Challenger Thomas Kutschaty can imagine a stake in an independent steel division as well as in the entire group – even if the second variant could be “difficult in terms of competition law” from his point of view with regard to the EU Commission.

For works council chief Tekin Nasikkol, who also sits on the group’s supervisory board as an employee representative, it is clear in both cases: “Before I can ask politicians for help, I first have to do my part as the owner.” He sees the board of directors as having a duty , now to present a concrete plan on how to proceed with the steel division. “We cannot afford to muddle through the crisis and the transformation.” The course for the future of the Duisburg location will be set in the coming years.

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