CEO says iron ore to fall to sustainable level at 19%

It overhauls management, creates position to cater solely to the republic

STUTTGART/BERLIN: Volkswagen elevated China’s status within its sprawling empire and reasserted control over its wayward trucks brands with an extensive overhaul of senior management as it bids for global market dominance.

The company created a management board position dedicated solely to China – it’s single largest market – which will be filled by Jochem Heizmann, who has been heading up the group’s commercial vehicles businesses.

Volkswagen was the first overseas carmaker to enter China three decades ago, and with its two local partners is investing 14 billion euros (US$17.3bil) up to 2016 to build factories around the country.

It has been scooping up brands like Scania, MAN, Porsche and Ducati in recent years as part of an effort to overtake General Motors and Toyota at the top of the industry by 2018.

“Our company has grown strongly and become more international in recent years. This fundamental reorganisation is the right response to the increasing challenges,” Volkswagen chief executive Martin Winterkorn told reporters at a news conference in Stuttgart.

Officials say the restructuring is necessary to better control the company’s remarkable growth.

Since grabbing the reins in January 2007, Winterkorn has transformed Volkswagen from a company selling 5.7 million vehicles a year to nearly 8.4 million.

“They’re admitting that China is so unique a market that they can’t manage it together with the other businesses – it’s not a different coun-

It’s timely: try, it’s a different planet. You need to treat China independently from the rest and not tether it to the mothership,” said industry analyst Christoph Stuermer from IHS Automotive.

Heizmann, a manufacturing expert, will have the job of expanding Volkswagen’s business in China, where the group sold 2.3 million vehicles last year.

Volkswagen’s two local joint ventures contributed earnings of more than 2.6 billion euros in 2011, more than the combined worldwide operating profit of French carmakers Renault and Peugeot Citroen.

“We need someone who can serve as a representative to the Chinese government and take some of the burden off of Winterkorn,” a company source told Reuters on Friday.

Karl-Thomas Neumann, the former head of auto parts supplier Continental, has so far been heading up Volkswagen’s operations in China, but not as a member of the management board.

“We will look for new tasks within the company for Neumann,” said Winterkorn at the press conference.

It’s unclear whether Neumann will stay with the company.

Analysts have named him as a possible candidate to replace Winterkorn when the CEO’s contract expires at the end of 2016.

Heizmann’s previous responsibilities on the board would be taken over by Leif Ostling, the chief executive of Swedish truckmaker Scania, bought by Volkswagen in 2008.

Incoming Scania CEO Martin Lundstedt said that working with MAN would help the Swedish truckmaker reduce its investment spending even as the company sticks to its current strategy focused on the highmargin premium end of the truck market.

“There are a number of projects within purchasing and technology where we see opportunities to cooperate to strengthen positions,” he said in an interview with Reuters on Saturday.

“The products are complex and lead times are fairly long, so we’re looking at when is the right time to introduce new (innovations) for example,” Lundstedt added.

As part of the reshuffle MAN CEO Georg Pachta-Reyhofen was effectively side-lined, losing day-to-day responsibility for the key European trucks business to Scania manager Anders Nielsen.

By better linking operations at the two former rivals, the company expects to fetch about 200 million euros annually in extra revenue and profit, Winterkorn said.

Volkswagen patriarch Ferdinand Piech once told MAN shareholders an alliance between the two could help generate synergies of as much as one billion euros, so the latest figure illustrates how slow progress has been. – Reuters SYDNEY: Iron ore prices will fall 19% before finding a “long term, sustainable” level as China’s economy slows, according to the head of Fortescue Metals Group Ltd, Australia’s thirdbiggest producer.

The steel-making raw material will drop to about US$110 a tonne, Fortescue chief executive officer Neville Power said on Inside Business programme on the Australian Broadcasting Corp.

Iron ore traded at US$135 on June 1, according to a price index compiled by The Steel Index Ltd.

“Looking forward, we’ve allowed the forecast to drop down to around US$110 a tonne and done all our modeling around that,” Power told the ABC.

“Long term, that will be the sustainable price.” He didn’t say how long that decline may take.

Iron ore in May posted the biggest monthly drop since October on concern that slower growth in China, the biggest buyer, is curbing demand from mills.

While the nation is still expanding at an enviable rate, the Chinese economy is enduring “short-term fluctuations,” Power said.

China’s economy is forecast to expand 8.2% this year, the least since 1999, based on the median estimate of analysts surveyed by Bloomberg last month.

Power said iron ore has proved to be “resilient” and will fetch between US$130 and US$150 a tonne “in the short term.”

Forecasting declines, Power said the Australian government would struggle to meet income targets from its mining tax.

The contribution from Perthbased Fortescue, which plans to almost triple annual iron-ore output to 155 million tonnes by June 2013, will be “negligible” over the next two to three years, Power said.

A tax on profits from iron ore and coal, which won Australian Senate approval in March and takes effect July 1, will reap about A$6.5bil in revenue over two years from companies including BHP Billiton Ltd. and Rio Tinto Group, government estimates show.

“That’s going to be very difficult for them to achieve those revenues,” Power said. “As the iron ore price goes up, that tax liability goes up, but at these iron ore prices, I don’t see us paying any.”

The commodity has lost 21% in the past year. – Bloomberg