Growth prospects related to both the size and geographical coverage of the Group will also be addressed. The new phase in strategy entails increasing the proportion of direct end-user and project sales from its current level of 35% to at least 50% over the next five years. It also includes expansion of capacity in value-added special products from one third to a half, while maintaining cost leadership in standard grade volume production. The capital expenditure decisions made up to date for the next five years represent so far a total investment of over EUR 2 billion. The excellence programs are expanded to include supply chain management and procurement, increasing the targeted benefits.
Increasing Outokumpu's capacity in value-added special products will include a broadening of the range of grades manufactured and an increase in the production of low-nickel duplex grades. Growth targets also include a scaling up of production capacity in ferritic grades to help reduce the earnings cyclicality driven by volatile nickel prices.
As a major step in increasing the Group's capacity in value-added special products, Outokumpu has decided to invest EUR 550 million, to expand capacity in special grades at the Avesta Works in Sweden. This investment will increase finished products capacity at Avesta from its current 250 000 tons to some 650 000 tons in mainly duplex grades, with the additional capacity operational from 2010. An investment decision was also made to expand Outokumpu's capacity in hot rolled plate (quarto plate) at Degerfors, Sweden by 80 000 tons and at New Castle (IN), the US by 20 000 tons. Following these EUR 220 million investments, total quarto plate production capacity will increase from its current level of 160 000 tons to 260 000 tons in 2010. Outokumpu is investing some EUR 10 million in Long Products' finishing facilities in Sheffield in the UK. The new equipment is scheduled to be operational in mid 2009. The investment creates an integrated manufacturing route for small bar and rebar complementing the existing melt shop and the wire rod mill, both in Sheffield.
Further, in order to shift customer and product mix, Outokumpu will start producing high-quality ultra-clean ferritic stainless steel grades, as well as bright-annealed austenitic and ferritic stainless products. The decision to invest EUR 370 million over three years to broaden the product range of Tornio Works was made in early 2008. The investment, together with the on-going replacement of the no. 2 Annealing and Pickling Line, will increase total finished products installed capacity of Tornio Works from the current 1.2 million tons to some 1.3 million tons by the end of 2010. Establishment of a service center near Stuttgart in southern Germany that focuses on these bright-annealed austenitic and ferritic products is included in this investment.
Outokumpu will also expand the Group's ferrochrome production capacity in Tornio, Finland by an investment totaling some EUR 420 million. This investment will double the plant’s annual capacity to 530 000 tons and the additional capacity is scheduled to be available during the first quarter of 2011. The expansion of ferrochrome capacity will make Outokumpu comfortably self-sufficient in its primary chromium needs. The investment will support Outokumpu’s strategy realization, maintain cost leadership, secure the sourcing of raw materials and capitalize on the Group's own chromium mine in Kemi.
The transformation towards increased end-user and project sales requires investment in the Group's service capabilities. To this end, Outokumpu's service center network is being upgraded and expanded by 350 000 tons over three years. In total, investments of EUR 230 million to service centers in China, Finland, France, Germany, India, Italy, Poland and Sweden have been decided. Due to delays in land purchasing, the start-up of the service center in Poland has been rescheduled from planned end of 2008 until the end of 2009.
In April, Outokumpu signed an agreement to acquire the SoGePar Group, an Italian distributor of stainless steel from the Borromeo family, its current owners. Outokumpu will pay EUR 215 million in cash and take on company debt totaling some EUR 120 million. The acquisition was closed on July 30, 2008. The total consideration is subject to final review once the closing balance sheet, expected by the end of the third quarter, has been approved.
SoGePar operates stainless steel service centers in Castelleone in Italy and in Rotherham in the UK. SoGePar also has stock operations in Italy, the UK, Belgium, Finland, France and Ireland, as well as a commercial office in Germany and a representative office in Turkey. Sales by the SoGePar Group in 2007 totaled EUR 560 million, with an operating profit of EUR 44 million and deliveries totaling 134 000 tons.
The coil service center being built in India is to be expanded from the original plan to become a combined coil and plate service-center, first of its kind in India. This service center is expected to be operational in the first quarter of 2010.
The feasibility study on building a cold rolling mill in India has been finalized. Outokumpu has decided not to proceed with the investment at this point. Other options for strengthening Outokumpu's presence in the growing Indian market are currently being explored.
Due to the good profitability and tight capital expenditure in the past three years, Outokumpu's balance sheet is now very strong and can tolerate these fairly sizeable strategic investments. In addition to the organic growth investments, the Group is continuously mapping a variety of structural growth alternatives for accelerating global expansion.
Originally the set combined benefit targets from the longer-term Commercial and Production Excellence programs were some EUR 40 million in 2007, EUR 80 million in 2008 and EUR 160 million on an annual basis thereafter. Encouraged by the success of these initiatives, they have been expanded to include the supply chain management. The first phase of the Supply Chain Excellence program will concentrate on procurement.
Addition of this new initiative into the Operational Operational Excellence programs will increase
the EUR 160 million combined cumulative benefit target for the year 2009 to EUR 200 million, and the target from 2010 onwards to some EUR 300 million.
Through the measures outlined above, Outokumpu is steadily moving forward on the path towards the vision of becoming the undisputed number one in stainless. Actions decided on cover the priority areas of ensuring the competitiveness of the Group's European asset base, increased focus on managing the customer interface, steps towards growth and readiness for global consolidation as well as developing stability over the business cycle. Outokumpu is well positioned for multiplying
its operations and pursuing the global leadership.