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2017 Annual Report

Solutions for Clean Air.

2017 Annual Report

Continental Corporation - 2017 Annual Report
 

Development of Raw Materials Markets

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Various raw materials such as steel, aluminum, copper, precious metals and plastics are key input materials for a wide range of different electronic, electromechanical and mechanical components. We need these components, in turn, in order to manufacture our products and systems for the automotive industry. Consequently, developments in the prices of raw materials usually influence Continental’s production costs indirectly, in most cases, via changes in costs at our suppliers. Depending on the contractual arrangement, these cost changes are either passed on to us after a certain amount of time or redefined in upcoming contract negotiations.

In the reporting year, global economic growth resulted in increasing demand for raw materials. After the sharp rise in the prices of many raw materials in the fourth quarter of 2016, prices initially consolidated year-on-year before mostly increasing palpably again in the second half of 2017, especially among metals.

Carbon steel and stainless steel are input materials for many of the mechanical components such as stamped, turned, drawn and diecast parts integrated by Continental into its products. Average prices for carbon steel increased in Europe by around 30% compared to the previous year’s average. This was due firstly to the growing demand for steel and secondly to the development of global market prices for the primary products iron ore and coking coal. Although these abated again after the sharp rise at the beginning of the year and in the fourth quarter of the previous year, they stabilized at a much higher level than their respective averages in the previous year.

Steel

Steel
indexed to January 1, 2013
Sources: Carbon steel: Hot-rolled coil Germany (Ruhr) from Platts (€ per metric ton). Stainless steel: 2 mm stainless steel 3042B cold-rolled Shanghai market price from Shanghai Steel Home E-Commerce Co., Ltd (€ per metric ton).

The base price for stainless steel in Europe was relatively stable in 2017 with an increase of around 2%. In contrast, the average alloy surcharges for the year rose by more than 30% year-on-year in 2017. Chrome in particular became over 40% more expensive as an annual average, while the average price increase for nickel was relatively limited at 6%. Overall, average prices for stainless steel in Europe increased by around 15% year-on-year in 2017.

Aluminum is used by Continental primarily for die-cast parts and stamped and bent components, while copper is used in particular for electric motors and mechatronic components. The price of aluminum rose sharply in 2017, with the annual average increasing by 23% on a U.S. dollar basis and 20% on a euro basis year-on-year. The price of copper also rose palpably in the second half of 2017, with the annual average increasing by 27% on a U.S. dollar basis and 24% on a euro basis.

Copper and aluminum

Copper and aluminum
indexed to January 1, 2013
Source: Rolling three-month contracts from the London Metal Exchange (U.S. $ per metric ton).

We and our suppliers use precious metals such as gold, silver, platinum and palladium to coat a wide range of components. Prices for gold, silver and platinum in 2017 remained at the average level of the previous year on a U.S. dollar basis, while they got slightly cheaper on a euro basis due to the appreciation of the euro over the course of the year. In contrast, the continued rise in demand for palladium, which is used primarily for catalytic converters, caused a rapid price increase. The average price per troy ounce for the year increased by 42% year-on year on a U.S. dollar basis, by 38% on a euro basis.

Both we and our suppliers require various plastic granulates, known as resins, as technical thermoplastics primarily for manufacturing housing components. The recovery in prices for plastic granulates begun in the second half of the previous year continued very dynamically in the year under review. This was due to growing demand and the increase in the price of oil throughout the year, coupled with scarce supply. Average prices increased by over 30% year-on-year both on a U.S. dollar basis and on a euro basis.

Continental uses various types of natural rubber and synthetic rubber for the production of tires and industrial rubber products in the Rubber Group. It also uses relatively large quantities of carbon black as a filler material and of steel cord and nylon cord as structural materials. Due to the large quantities and direct purchasing of raw materials, their price development, especially that of rubber, has a significant influence on the earnings of the Rubber Group, particularly the Tire division.

After prices for natural rubber at the end of January 2017 had more than doubled since the seven-year low at the start of the previous year due to the weather-related supply shortage, they dropped significantly again, starting in mid-February 2017. This trend persisted until the end of the first half of the year. In the second half of the year, natural rubber prices stabilized at the average level of the previous year due to the further increase in demand. Overall, the average price of the natural rubber TSR 20 for the year increased by 20% on a U.S. dollar basis and 18% on a euro basis. The average price of ribbed smoked sheets (RSS) for the year increased by 22% on a U.S. dollar basis and 20% on a euro basis.

Natural rubber

Natural rubber
indexed to January 1, 2013
Source: Rolling one-month contracts from the Singapore Exchange (U.S. $ cents per kg).

Price of crude oil – the most important basic building block for synthetic- rubber input materials such as butadiene and styrene and also for carbon black and various other chemicals – fell back below the U.S. $50 mark in the first half of 2017 from U.S. $55 per barrel at the start of the year. Although several major oil-exporting countries cut their production, as announced at the end of 2016, and extended their production cuts to the start of 2018, other producers stepped up their production in the first half of 2017. In addition, the U.S.A.’s withdrawal from the Paris climate agreement at the beginning of June caused the price of crude oil to fall below the U.S. $50 mark. In the second half of June, the price dropped to around U.S. $44 per barrel as a result of the excess supply, before stabilizing slightly again. Several hurricanes impaired U.S. crude oil production in the second half of the year, whereupon prices increased again worldwide. In addition to the subsequent reduction in U.S. inventories, the announcement of an extension of the production cuts of several major oil-exporting countries beyond March 2018 triggered a price increase to over U.S. $60 at the end of the year. This was also supported by the rising demand following the very good performance of the global economy. The average price of crude oil for the year increased by over 20% year-on-year both on a U.S. dollar basis and on a euro basis.

Crude oil, butadiene and styrene

Crude oil, butadiene and styrene
indexed to January 1, 2013
Sources: Crude oil: Europe Brent Forties Oseberg Ekofisk price from Bloomberg (U.S. $ per barrel). Butadiene, styrene: South Korea export price (FOB) from PolymerUpdate.com (U.S. $ per metric ton).

The average price of butadiene, the main input material for synthetic rubber, for the year increased by over 30% year-on-year both on a U.S. dollar basis and on a euro basis in 2017. The scarcity-related soaring price increase that began in the fourth quarter of the previous year peaked in February 2017. Subsequently, the increase in supply and falling prices for natural rubber and crude oil divided the price of butadiene by three by the end of the first half of the year. In the second half of the year, it then stabilized again above the average price level of the previous year.

Other input materials for synthetic rubber mostly developed similarly to butadiene in 2017, but with lower volatility. For example, the average price of styrene for the year increased by 18% on a U.S. dollar basis and 16% on a euro basis.

Overall, the described price increases for the various raw materials led to considerable costs for Continental in 2017, which were passed on to customers via price adjustments only in part and with a delay. The Rubber Group was particularly affected by this in the year under review.

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