Equity Story

Company profile
RHI is a globally operating supplier of high-grade refractory products, systems and services, which are indispensable for industrial high-temperature processes exceeding 1,200 °C.

With roughly 7,500 employees, 30 production facilities and more than 70 sales offices, RHI serves more than 10,000 customers in the steel, cement, nonferrous metals, glass, energy and chemical industries in nearly all countries of the world. RHI produces more than 1.5 million tons of refractory products per year and supplies customized product and system solutions. [G4-6, G4-8, G4-9, G4-12]

Refractory linings made by RHI ensure that a wide range of aggregates including steel ladles, cement rotary kilns, copper converters or glass furnaces withstand extreme thermal, mechanical and chemical stress.

The production of refractories is resource-intensive. The naturally occurring raw materials magnesite and dolomite are used as basic materials. Roughly 70% of the global deposits are located in three countries: China, North Korea and Russia. RHI covers roughly 80% of its requirements from eight group-owned raw material sites and is therefore largely independent of raw material markets.

The RHI Group attaches great importance to research. The innovative power, which has made RHI the global technology leader, is based on decades of research and development activities, which have given RHI a leading edge. The company invests more than € 20 million annually in this strategically important segment.

Demand for refractory products is primarily driven by growing prosperity, the level of industrial production and infrastructure projects. Although refractory products account for less than 2% of the production costs of customer industries, they are crucial to the quality of the products manufactured.

In the year 2016, RHI generated revenue of € 1,651.2 million. The charts below show revenue by segment and region.

 

Strategy & financial targets

The RHI Group has pursued a clearly defined strategy for several years, which is based on increased market presence in the growth markets, differentiation through technology and innovation, secured self-sufficiency of magnesia raw materials and an optimized cost structure.

In doing so, RHI is confronted with the following central challenges:
  - Reduced global growth with significant regional differences
  - Increased competitive pressure due to a strong focus of customers on their operating costs
  - Increasingly volatile demand by customers
  - Low price level for raw materials and basic materials
  - Substantial excess capacities in global refractories production, above all in China

In order to face up to these challenges, the following important strategic cornerstones were defined on the basis of the RHI Group’s strengths:

>> Selective business expansion with a focus on growth regions and attractive market niches
In accordance with the forecasts of the International Monetary Fund, economic growth will amount to roughly 2% in the advanced economies in the coming years and range between 4% and 5% in the emerging markets. However, there are considerable regional differences. The most dynamic growth in the advanced economies is predicted for the US, at roughly 2.5%, and in the emerging markets for India, at roughly 7.5%. These two countries were already the two largest individual markets for RHI in the year 2016, with revenue totaling roughly € 170 million in India and roughly € 150 million in the US. Based on the strong market presence, RHI should benefit disproportionately from the development in these regions and gain further market share. Moreover, non-basic mixes and a further expansion of the flow control business are considered to be strategically attractive market segments. The chart below shows the revenue development of the RHI group in India as well as the crude steel consumption in kilogram per capita in selected markets.

>> Differentiation through technology leadership and top-class service in strategically important segments
The RHI Group continuously aligns its offer to specific customer requirements. On the one hand, this means differentiation based on technology leadership and service in strategically important segments, and on the other hand, a product portfolio at competitive costs in the remaining segments. A central issue in differentiation is the development towards a complete system supplier through research and innovation, partnerships and selected acquisitions. The focus lies on a “ladle-to-mold” package offer in the steel industry, extended automation options using machines, manipulators and sensors and even includes a connection of customer processes with RHI systems in line with the Industry 4.0 approach. For example, mold and cover powders were added to the product offer in the year 2016 based on a cooperation contract with the Italian company Prosimet S.P.A. The RHI Group is thus able to act as a full-range supplier on the casting platform. For price-sensitive customers, the offer will be adapted to customer expectations based on the use of lower priced raw materials and a higher degree of product and service standardization. Parallel to the existing grade and brand concept, the product portfolio was therefore extended by lower-performance products in the area of basic mixes and magnesia-carbon bricks for customers in the steel industry in 2016. This enables RHI to win new customers while at the same time serving the changing requirements of existing customers. The picture below displays the ladle to mold area.

>> Alignment of the operating set-up to structural market changes in the refractories industry and in the customer industries
The current market environment is characterized by structural excess capacities in many customer industries and an aggressive export strategy of Chinese steel producers as a result of a weak domestic market. This leads to high pressure on the market prices and on the profitability of manufacturers, and subsequently also on suppliers. Therefore it is necessary for the RHI Group to keep stringent control over costs along the entire value chain. Here, the strategic focus lies on aligning production capacity to local demand. As part of the plant concept, the Management Board of RHI AG decided to give up the production of fused cast bricks, which is associated with high fixed costs, in the medium term due to volatile demand and global excess capacities. Hence, the US subsidiary RHI Monofrax, LLC was sold to the German private equity fund Callista in the financial year 2016. In addition, the Management Board of the RHI Group is evaluating whether a structured selling process will be initiated for the plant in San Vito, Italy, and the Russian Podolsk plant or these plants will continue to be operated within the Group. The cart below shows revenue generation and installed production capacities of RHI group per region.

>> Raw material integration completed – strategic focus on optimal balance between in-house production and external raw material purchases
Raw materials account for more than 50% of the total production costs at RHI. Access to and availability of high-quality raw materials are decisive for refractory products because they have a significant influence on their performance characteristics. Roughly 70% of the global magnesite deposits are located in China, North Korea and Russia. Therefore, RHI regards access to its own raw materials as a strategic advantage and invested in increasing the level of self-supply with magnesia raw materials in recent years. RHI considers the target of strategic raw material integration accomplished. The focus is now shifting towards optimizing existing deposits and increasing operating flexibility. In this context, the balance of the strategic use of the internal magnesia supply and external purchasing and selling options is becoming more important. As a result, the Group’s own production of fused magnesia was reduced and purchases from China were increased in the financial year 2016 due to the decline in prices. The chart below shows the price development of fused magnesia and dead-burned magnesia in US-Dollar per ton.

Given the development in the customer industries, the competitive environment and global excess capacities in refractory production, RHI expects a consolidation within the refractories industry in the medium to long term. Especially in China, the world’s largest refractories market, the industry is highly fragmented with more than 2,000 manufacturers. In accordance with the directive of the Chinese government, local producers are sounding out their options for mergers. This directive provides for a consolidation to roughly five companies of international size in the coming years and will also put pressure on refractory producers outside of China to consolidate. RHI plays an active role in this development with the planned combination with Magnesita.