Vesuvius buoyed by China supply-side reforms

Vesuvius (VSVS) falls into that category. Shares in the FTSE 250 constituent, a supplier of engineered metal flow devices (ceramics) and related expertise, have risen strongly and we think the earnings upgrade cycle that has driven the shares higher over the past 12 months is likely to continue thanks to a combination of ongoing restructuring measures and long-term structural drivers.

The global outlook for steel pricing has undoubtedly improved on the back of China’s ongoing supply-side reforms. China’s net steel exports between January and July 2017 were down almost a third year on year, improving profitability for global producers, drawing excess capacity out of markets and – importantly for the likes of Vesuvius – providing more assurance for those making decisions on capital investments. China has undertaken reforms in order to close older, less efficient mills partly on environmental grounds, but also to avoid anti-dumping moves by trading partners.

Although steel prices have improved markedly through 2017, the industry continues to rationalise in certain quarters. Steelmakers have been chasing comparative advantage, moving operations closer to end markets, upscaling and modernising plant to create efficiencies. Ancillary industries have had to follow suit, so Vesuvius closed its European flow control site plants in Ostrawa in Czech Republic, and Avezzano and Cagliari in Italy. All up, restructuring measures delivered £7.7m in cost savings during the first half. The company also announced that, at a cost of £25m, it would extend its restructuring programme to 2020 and increase the ultimate target for annual savings from £40m to £55m. The effect at the operating level can be gauged by estimates from broker Numis, which forecasts that group margins will rise from 9.5 per cent last year to 10.9 per cent by 2019.

The improvement is particularly noticeable within the foundry division (trading as Foseco), which supplies equipment to factories that produce metal castings. Return on sales hit 12.9 per cent at the division in the six months to June, against 11.5 per cent in the first half of 2016.

Vesuvius achieved a modest reduction in working capital as a percentage of sales during the first half, but there are various initiatives under way to reduce working capital further. The results are coming through in two areas: getting more credit from suppliers, while making material progress in speeding up payment from customers in China.

Aside from China’s westward push, global steel production should be underpinned by Asia’s other emerging market superpower, India. It recently claimed the title of the world's second-largest producer behind China, and production is expected to more than double over the next decade-and-a-half, bolstered by strong economic growth rates, a step-up in construction and increasing urbanisation, according to the Indian Steel Association.