Canary in the Coal Mine

All,

Following Schmolz & Bickenbach’s second profit warning yesterday, some macro implications for Germany and Europe:

- To drop H219 EBITDA from E70m (on volumes of -10% Y0Y) to zero, the group must be seeing a 30% YoY drop in demand for its Bright Steel over the summer.

- 80% of Schmolz’ volumes are in low-alloy, low-margin Bright Steel, 40% of which remain in Germany and another 30% are shipped to France and Italy.

- The primary clients for this steel are the German and European automotive industry ~45% as well as manufacturers of other mechanical engineering products ~25%.

Whatever the Germany PMI (below) is measuring, evidence from the Automotive and Engineering industries certainly points to much more drastic developments in those sectors - even more drastic than we have heard from other automotive suppliers such as Adient.

S&B’s bonds dropped accordingly. The issue is too small for us to pursue, but the bank debt may be interesting.