Detailed information about the past financial year can be found in the Financial Report 2008, which can be downloaded and ordered on our homepage: www.k-plus-s.com.
At 3.1 %, the rate of growth for the global economy weakened tangibly in 2008 and thus, above all during the fourth quarter, slowed down to a greater extent than had been foreseen in the Financial Report 2007. The effects of the US property crisis had an increasingly negative impact on global credit and financial markets. Originating in the USA, the economic downturn thus spread to all economies of the industrialised nations. In the emerging market countries, however, the economies still saw significant growth. In China, for example, year-on-year growth rose by 9.1 %. At year-end, however, it was possible to discern signs of a cooling-off there too. With massive interest rate cuts, economic rescue packages and comprehensive measures to support the financial markets, an attempt has been and is being made to counter recessionary trends and bring about a stabilisation of the world's economies. The US Federal Reserve (FED) even went so far as to introduce a zero rate interest policy at the end of 2008. Until the middle of the year, higher prices on the raw materials markets resulted in markedly rising inflation rates in most economies which, however, then flattened out again at the end of the year, against the backdrop of falling raw material prices.
In the European Union, it was above all the economic downturn in the fourth quarter that caused the economic performance of the EU-27 to grow by only 1.2 %, according to provisional estimates. During the course of the year, and in the light of the continued impact of the financial crisis, after having been raised in July to 4.25 %, the key interest rates of the European Central Bank (ECB) were lowered in three moves to 2.50 % in December. While the inflation rate rose to 4.6 % by the middle of the year, in the light of falling commodity prices, however, it fell again to 1.6 % at the end of the year resulting in an annual average rate of 3.7 %.
The German economy grew far more slowly than in the previous year, with an increase in the gross domestic product of 1.3 %; this is mainly attributable to the noticeable slowdown in the economy during the second half of the year. An expansionary monetary policy of the ECB, together with sharply falling raw material prices from the middle of the year, did not provide a boost to the economy to any significant extent. Employment figures hit highs over the course of the year, stimulating demand, which only weakened somewhat at the end of the year. At 2.8 %, the German inflation rate in 2008 was higher than that for the previous year (2007: 2.3 %).
There was no uniform picture on the raw materials markets during the course of the year. After the oil price has risen to an all-time high of US$ 146 per barrel by the middle of the year, it then fell in just a few months by almost 70 % to a level of US$ 46 per barrel at the end of the year. The average annual price for a barrel of oil of just under US$ 99 was, nevertheless, still about US$ 26 or 36 % up on 2007. Most basic materials, such as metals and agricultural raw materials, followed the oil price and fell in price significantly by the end of the year following the mid-year highs.
Developments on the international foreign exchange markets were influenced by the continuingly weak US dollar. Only towards the end of the year did the US dollar recover markedly, ending December now only about 4 % weaker against the euro compared to the previous year. At an annual average, the US dollar lost a good 7 % in value (2008: 1.47 USD/EUR; 2007: 1.37 USD/EUR).
The changes in the macroeconomic environment impacted on the course of business for K+S.
• The economic upturn in the emerging market countries continued and improved the standard of living of the population of such countries. This is increasing per capita consumption of food, including meat, as well as the pressure on the world’s agricultural system to meet this challenge. Also, the South American market for industrial salt and salt for chemical use, important for our Chilean subsidiary SPL, grew in line with the local economic development.
• In the wake of the financial crisis, the strong decline in cereal prices in the agricultural sector is leading to uncertainty about the future revenue situation. K+S is responding to the consequently lower volume of orders from the agricultural sector that became apparent during the fourth quarter, especially in Europe, by curtailing the production of potash fertilizers. At all German potash sites, a total of about 400,000 tonnes of potassium chloride less than planned was produced during the fourth quarter. The production of speciality and industrial products was maintained.
• Our production costs are affected to a not inconsiderable extent by energy costs, in particular for gas. After energy prices had risen sharply during the first six months of the year, which is reflected with a delay of six to nine months in our costs, our energy costs for 2008 as a whole have increased significantly. Due to the energy supply clauses agreed upon with our suppliers, the clear fall in energy prices observed in the second half of the year did not exert an impact on the K+S Group’s energy costs last year.
• At the end of 2007/beginning of 2008, we had reorganised our US dollar hedging system. Since then, options are used for this, which hedged a worst-case scenario for 2008 of about 1.51 USD/EUR including costs. During the second half of the year, however, we were able to participate in a strengthening US dollar. Following the trend on the foreign currency markets, in comparison to 2007, this resulted overall in a far weaker average exchange rate for the Potash and Magnesium Products business segment of about 1.46 USD/EUR (2007: 1.33 USD/EUR).
• In addition to the absolute relationship between the exchange rates, also a relative comparison of the euro and the currencies of our competitors each in relation to the US dollar is of particular importance for us. A weak US dollar has a negative impact on the revenues of most of the world’s potash producers in their respective local currency; this is due to the fact that the bulk of worldwide potash output lies outside the US dollar zone while all sales, with the exception of the European market, are invoiced in US dollars. The following diagram shows that in 2008, the North American, Russian and European producers were confronted with similar currency trends.
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