Published: November 01, 2012
As a diverse business with three distinct business segments, Ruukki has different capital profiles and working capital requirements in each case. The business is capital-intensive, particularly Ruukki Metals, and we have around €2bn capital employed, of which €1.5bn is required by the metals division. Our total working capital is around €700m. Consequently reducing the overall working capital requirement is a priority for Ruukki so that we can maximise investment in the business.
We recently changed our operating model in the Metals division, so we now operate an efficient organisational structure, with a principal company in Finland, and subsidiaries operate as agents, which enables us to reduce working capital requirements by owning inventory centrally. However, in addition to structuring the business appropriately, we needed to be proactive in optimising the elements that contribute to working capital. We have therefore embarked on a variety of working capital initiatives to improve the ratio of working capital to net sales.
SEB has been a core bank for Ruukki for a number of years, and our relationship extends to a variety of areas, including both trade finance and cash management. Consequently, the bank takes a major strategic role in helping us to meet our financial objectives in areas such as working capital. One of the initiatives that we have worked on together was to go through SEB’s Corporate Financial Value Chain™ (CFVC) programme, a structured way of identifying and addressing points of weakness in the financial supply chain. Based on this analysis, we identified a variety of areas in which we recognised scope for improvement, which has been highly beneficial for our business.
Reducing days sales outstanding (DSO) is an essential element in managing working capital, and this is a major area in which we have been supported by SEB. We purchase our primary raw materials, such as coking coal, through the global markets, particularly from Australia, United States and Canada. SEB has helped us to optimise our commercial position without compromising our working capital objectives through the use of trade finance instruments.
Conversely, as we continue to enter new markets as part of our speciality steel strategy, SEB is supporting us in reducing our counterparty risk through the use of trade finance instruments such as letters of credit. This is a relatively new development for our organisation, so SEB has been instrumental in helping to educate our team, identifying the most appropriate instruments and processes, and building our internal systems. Leveraging our bank’s expertise and knowledge of industry best practices has been very helpful in helping to streamline processes and reduce errors that could otherwise delay trade settlement and result in reputational damage. Implementing efficient, consistent processes across 30 countries can be very challenging, due to the diversity of language, cultural backgrounds and expertise that exists, so we have appreciated SEB’s support across the countries in which we operate.
We have reduced our working capital requirement substantially, and we are also able to mitigate our counterparty risk and forecast cash flow more effectively, which again contributes to more efficient use of working capital.
Looking ahead, we are seeking to expand our market share in emerging markets, which currently comprise around one third of our revenues. To achieve this business growth, whilst managing our risk and minimising working capital requirements, our relationship with SEB to provide trade finance instruments will become even more important. While there was formerly a trend towards the use of open account transactions, the world has changed, and risk, liquidity and working capital are priorities for our business just as they are for many others, and the use of trade finance tools enables us to achieve our business and financial objectives.[[[PAGE]]]
Rautaruukki Corporation (‘Ruukki’) is a leading international provider of energy-efficient steel solutions, with around 10,800 employees in some 30 countries, including the Nordic countries, the Baltics, Russia, Ukraine and Central & Eastern Europe. The company comprises three key business segments:
Ruukki had 2011 revenues of €2.8bn and is quoted on NASDAQ OMX Helsinki (Rautaruukki Oyj: RTRKS).
One of the major challenges experienced by large manufacturers such as Ruukki is volatility of input costs, particularly metals and coking coal. As such, it is at one end of the supply chain for the mining and metallurgy business segments, on which many of the world’s most important global industries rely.
The last ten years have seen some of the greatest ups and downs the mining industry has ever experienced. In 2011 the top 40 groups posted record profits of $133bn (on revenues of $700bn), generated record operating cash flows (up 27% on 2010), and yet market capitalisation fell by 25%.
The short- to medium-term future of the sector will be about the participants’ ability to increase supply through developing the right projects, making optimal use of available capital (in light of potentially volatile movements in underlying commodity prices) and providing an attractive return to investors. In essence this has given rise to competing demands for cash and increasing importance of robust working capital management.
Overall net working capital across the top 40 players remained unchanged compared to 2010 at approximately $44bn. However, within this trade creditors, inventory and accounts receivable have increased. Trade payables have increased 17% to $110bn, with creditor days falling from 90 to 84 days in 2011. Inventory has increased by 12% to $76bn. The increase has been directly impacted by more expensive consumables and also increased unit costs for stock piles, work-in-progress and finished goods. Accounts receivable were up 10% to $77bn. While revenue was up 26% in 2011, the difference between the increase in accounts receivable and revenue does not reflect a tightening in receivable terms, but falling commodity prices at the end of 2011.
In PwC’s experience of working in the mining sector, the key working capital levers include the following:
NOTE
This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, ‘PwC’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
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