It was and still is unfavorable for all companies in our sector. We are used to downturns in oil cycles but this is not a classic one. It is occurring at a time of considerable global production overcapacity that is challenging the business model of the world’s oil companies. As a key player, Vallourec must participate in the sector’s transformation.
This is the first step of the transformation plan. In the U.S. and Brazil, the overcapacity is cyclical. This is not the case in Europe. So we can’t wait to adapt Vallourec’s industrial base. This is the reason for the proposed 50% reduction in our European capabilities, making what remains competitive and focusing sites on their greatest expertise. Practically speaking, this means focusing on the hot rolling process in Germany and finishing in France. The benefit of this proactive approach of specialization is that it eliminates duplication. Each site is unique in Europe in a diameter class or in a particular stage of production. Its workload is guaranteed and it is more efficient, more productive and more sustainable.
The proposed new organization in Europe involves stopping the activity of two rolling mills in France and two finishing units in Scotland and Germany. We have made clear commitments: there will be no site closures and all means will be utilized to minimize involuntary departures. In 2015, we worked a great deal with employee representatives and we will build on these advances.
Yes, the segments open to Chinese lowcost competition, the conventional premium and entry premium segments, are no longer accessible from Europe. We have already had some losses and other business is threatened. Our plan is focused on winning and on restoring our leadership position. Vallourec is opening two new highly competitive routes, a double initiative that is absolutely decisive strategically. Brazil is already a strong base of exports to the Middle East and West Africa. We are merging our two Brazilian sites into a single, highly competitive and technically efficient production center. The second route is China where we have a longstanding presence. We have several factories there and have developed strong expertise. The creation of this second highly competitive production hub involves the taking over of Tianda Oil Pipe, a Chinese seamless pipe manufacturer in which we have held almost 20% and that is already performing at Vallourec standards on our product orders.
Through technology, innovation and service. We are strengthening our technological cooperation with NSSMC, continuing forty years of partnership on VAM® connections and the success achieved. We will invest more resources and create more synergies between our R&D teams to develop differentiating new products and reduce time to market.
The last strategic initiative of our transformation plan is financial. We are proceeding with a onebillion-euro capital increase. This will allow us to make it through the crisis, even if it lasts, and to finance the transformation in order to return to profitable growth. Our industrial partner, NSSMC, and Bpifrance, a major Group shareholder, who are familiar with Vallourec and its markets, have committed to subscribe for about half the amount. The other half will come from other investors.
Emerging from the crisis, Vallourec will be better positioned on all levels: strategic, industrial and financial. We will be just as strong technologically, but more efficient in our innovation, more global and more competitive. We will be able to support customers with their projects and, above all, be aligned at all points with their priorities and have the size to support their changing business model.
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