Integrated Annual Report 2016
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 Strategic objective 2: Driving profitability

We need to reward our stakeholders, including investors, if we are to stay in business. With sustainable profits we will have greater means with which to reward those who grant us our licences to operate

Strategic objective 2: Driving profitability   Strategic objective 2: Driving profitability

Why this is important

Continuing losses threaten the viability of our business. Investors, lenders, employees, suppliers and communities will all benefit from a profitable ArcelorMittal South Africa.

Three-year key performance indicators

  • KPI
  Ebitda per tonne (R/t)            
    2014   2015   2016  
      297   (196)   47  

  • KPI
  Return on capital employed (ROCE) (%)  
    2014   2015   2016  
      (1.2)   (342)   (6.1)  

  • KPI
  Liquid steel production (000 tonne)  
    2014   2015   2016  
      4 518   4 839   4 771  

  • KPI
  Cash generated from operations before working capital (R million)  
    2014   2015   2016  
      1 186   (1 911)   215  

  • KPI
  Net cash/debt position at year-end (R million)  
    2014   2015   2016  
      (546)   (2 865)   (290)  

  • KPI
  On-time deliveries (%)  
    2014   2015   2016  
      55   62   64  

Issues that were most material to driving profitability in 2016

  • Optimising our industrial footprint
  • Seeking the implementation of tariff and non-tariff trade protection and the localisation of steel
  • Establishing a fair price for steel
  • Focusing on customer service and product development
  • Restructuring our balance sheet
  • Debating carbon taxes
  • Reducing input costs, especially raw materials
  • Resolving Competition Commission issues

Key actions taken in 2016 to address our most material driving profitability issues

  • In January we completed a R4.5 billion rights issue (as previously reported)
  • We agreed to a settlement of legacy competition issues, which entailed payment of a R1.5 billion fine
  • Improved on-time deliveries to customers from 62% to 64% and lowered our quality rejection rate
  • Achieved sustainable procurement savings of R860 million on top of savings of R1 billion on raw material costs recorded the previous year.t
    • Undertook necessary (and costly) repairs to our coke ovens and to Saldanha’s Corex furnace
    • Invested R2 billion of capital expenditure in improving processes, product quality and variety, and reliability (investment to maintain and expand operations less environmental expenditure)
    • Grew capital expenditure on new products more than three-fold
    • Achieved process savings, at Vanderbijlpark alone, equivalent to R754 million, many of which improvements were suggested by employees
    • Undertook necessary (and costly) repairs to our coke ovens and to Saldanha’s Corex furnace
    • Reduced our water and energy intensity, in the process lowering
  • Improved on-time deliveries to customers from 62% to 64% and lowered our quality rejection rate
  • Achieved sustainable procurement savings of R860 million on top of savings of R1 billion on raw material costs recorded the previous year.

This year we adjusted prices as appropriate to ensure our sustainability but always with strict reference to costs, the market circumstances and the agreed-upon basket which determined fair prices for flat steel.

In restructuring our balance sheet, an effect of the rights issue was to reduce our financing cost, which in 2015 amounted to R1.2 billion. For more on this and measures taken to address our most material risk, liquidity, click here.

Optimising our industrial footprint

Pleasing, often outstanding results were achieved in 2016 on improving the efficiency of our production processes, in achieving cost savings while raising productivity, in boosting the reliability of our plants and increasing the utilisation of our assets. These achievements (including a limited 3% increase in fixed costs) were recorded in a continuing context of depressed and unpredictable demand and large-scale but necessary repairs at Vanderbijlpark, Newcastle and Saldanha which impacted, in particular, our sales of commercial coke and coal tar.

A more concerted focus on customer requirements required substantial capital investment but will translate into new market opportunities and higher volumes. Less satisfactory was our performance on delivering to customers on time.

Flat steel products – Vanderbijlpark

Vanderbijlpark enjoyed considerable success on optimising its industrial footprint in a year in which a coke battery repair project hampered production, market demand fell short of budgeted levels and considerable challenges were encountered with the quality of coke and iron ore. Also, at the end of November, blast furnace C lost one of three supporting hot blast stoves, resulting in 54 000t of lost production.

Liquid steel production for the year was 2.389 million tonnes, giving an HRC cost of production of USD386/t (2015: USD438/t), an outstanding achievement that speaks of world-class efficiency and the steady realisation at our flagship operation of a high-performance culture. Operating Vanderbijlpark as per market demand, capacity utilisation was 82% (2015: 75%). Problems encountered with the quality of, especially, coke delivered were extremely costly, requiring continuous monitoring and intervention.

As in 2015 a close focus on reliability meant that the hot strip mill’s unplanned maintenance downtime reduced from 26.54% in H2 2015 to 21.37% at the end of 2016. Also, the colour line improved its downtime from 22% to 12% while the steel plant achieved a hard-won 2% improvement in unplanned stoppages.

Most notably, this year our internal Project Focus was driven by the business improvement team which, at Vanderbijlpark, solicited several hundred process improvement suggestions from employees, many of which were implemented, often entailing sizeable capital expenditure but in many cases without any upfront outlay. We believe that in 2016 Project Focus achieved savings of R754 million, of which R550 million was internally audited.

Vanderbijlpark key performance indicators

Full cast regrades (%)*            
  2014   2015   2016  
  2.90   1.27   1.23  

Mean time between failure (hours) (galvanising line)            
  2014   2015   2016  
  48.5   65.3   67.7  

Flat steel products – Saldanha

In Q1 an in-depth business case study was undertaken at Saldanha. This investigation stemmed from persistently low flat steel prices in the export markets on which this plant has traditionally been focused. (In 2016 the average net realised price on exported flat steel was USD410/t while Saldanha’s average cost of production in 2016 was USD433/t.)

The study concluded that the plant’s existing footprint was optimal but that efforts should continue to be made to lower the cost of production and to exploit new, less price-sensitive markets. To this end, this year Saldanha secured an order for 152 000 tonnes from a Western Cape customer which had traditionally processed imported flat steel. This meant that, combined with other new local orders secured and the effects of the mini-reline, the share of Saldanha’s production exported dropped from a typical 64% to some 55% this year.

At the beginning of the year export markets for flat steel had been expected to be so depressed that it was initially planned to shut Saldanha’s iron-making units between April and December. In the event, more buoyant demand meant that these units were shut for just three months, with liquid steel production for the year amounting to 832 000/t (2015: 963 000/t) against an initially projected 500 000/t.

This year a planned Corex campaign extension repair was very successfully undertaken. The project was completed with an excellent safety record and lessons learned from the project and in particular, its safety achievements are being implemented at other sites.

In October an environmental impact assessment report on a planned gas-to-power project, from which Saldanha could obtain power at more predictable and ultimately lower overall energy costs, was forwarded to the authorities. Also this year the rezoning application process for the plant commenced.

Saldanha key performance indicators

HRC < 1.09mm production (tonne/month)            
  2014   2015   2016  
  19 099   23 438   16 941  

Thin slab caster breakdowns (%)            
  2014   2015   2016  
  0.17   0.19   0.29  

Long steel products

Long steel operated as a substantially restructured division following the closure of the Vaal Meltshop in 2015 and that of the 1 600-tonne press towards the end of 2016. With the restructuring, all input billets were produced at Newcastle and distributed to the secondary mills for further processing.

Initial challenges were encountered with especially the high loading of special steel grades at Newcastle but these were mitigated by carrying extra stock and optimising production cycles.

While projections were that local demand for long steel would be subdued, prompting the division to focus on blue water exports, local demand (influenced largely by output challenges faced by competitors) was unexpectedly robust in H1, resulting in a focus on meeting domestic requirements. By the end of the year, order backlogs in both domestic and foreign markets had been met.

As was the case at other plants, in 2016 blast furnace productivity was negatively impacted by the quality of iron ore. In April Newcastle’s coke battery 2 was halted for critical repairs with coke having to be imported for the remainder of the year, entailing costs which had a significant effect on the financial performance of the long steel products business. Reliability issues with off-gas equipment at the steel plant, basic oxygen furnace burn-throughs and challenges relating to the making of more complex steel grades contributed to the loss of 220 000t of crude steel production.

Coke battery 2 is only scheduled to begin production in May 2017, at which time supplies for both Newcastle and Vanderbijlpark, and for commercial coke sales, will return to normal levels. Newcastle long steel production costs reduced by 3%, from USD444/t to USD429/t, with the dollar strengthening by 15% against the rand.

In terms of an agreement reached in November, the company will ship 21 000t of product per month from Newcastle and Vanderbijlpark to a new entity, Evraz Highveld Newco’s heavy structural mill for processing into some 18 000t of heavy sections and rails for domestic sales. At present these products are all imported. The products will at all stages remain the property of ArcelorMittal South Africa, with Newco earning a tolling fee. The announcement that local steel had been designated for all public sector construction projects, in January 2017, was especially propitious for the prospects of this new venture.

Long steel products key performance indicators

Blast furnace fuel rate (kg/t)            
  2014   2015   2016  
  541   517   517  

Bar mill delay ratio (%)            
  2014   2015   2016  
  16.57   15.58   16.62  

Coke and Chemicals

The division was heavily impacted this year by necessary, planned repairs to coke batteries at both Vanderbijlpark and Newcastle. The repairs which will continue into 2017 were essential to ensure the sustainability of a part of our business that has traditionally been strongly ebitda-positive. For the year commercial coke and tar sales volumes were 19% and 22% lower respectively while sales prices of both commodities were some 5% softer. (Commercial coke should not be confused with coking coal whose prices, as related, increased sharply in 2016.) Profitability was further impacted (R268 million) by the need to purchase and import coking coal for sale to existing customers.

Coke and Chemicals key performance indicator

Solvent plant availability (%)            
  2014   2015   2016  
  87   92   92  

Capital expenditure
  • Risk
  • Risk

Total capital expenditure to drive profitability (capital expenditure less environmental spend) for the year was R2 018 million, more than 75% higher than the R1 153 million of 2015.

The main production capital items and their costs were:

  • Newcastle – coke oven battery N2 repair (R276 million),ongoing to 2017
  • Vanderbijlpark – coke oven battery V4 repair (R135 million),ongoing to 2017
  • Vanderbijlpark – standalone gas-fired boiler (R138 million)
  • Saldanha – Midrex D01 tube bundle replacement and installation (R112 million)
  • Saldanha – Corex campaign extension (R75 million).

Other significant capital projects undertaken this year were:


  • Methane sulphonic acid (MSA) conversion of the electrolytic tinning line (ETL) (R35 million)
  • Replace BOF off-gas coolers (R26 million)
  • Battery V8 waste gas ducting (R14 million)
  • Blast furnace C and D bunker structural repairs (R13 million).


  • Rebuild boiler 3 – phase 2 (R17 million)
  • Replace rod mill obsolete strand 3 reducing mill drive (R17 million)
  • Replace 33kV breakers and panels at service substation (R11 million)
  • Replace main coke oven gas pipeline (R10 million).


  • Roller hearth furnace hard and fibre refractory replacement (R16 million)
  • Midrex campaign extension repair (R14 million)
  • Air separation unit reline projects (R12 million)
  • Corex dust recycling system coarse particle separator (R12 million).

Coke and Chemicals

  • Tar plant environmental compliance (R14 million)
  • End flue rebuild of ovens 205 to 208 (R10 million).

Cost containment
  • Risk

In 2016 we achieved considerable success in reducing variable costs. Excluding the effects of production volumes, exchange rate and market movements, the cost of raw materials, goods and services was reduced by approximately R860 million. These savings mitigated to an important degree, the impact of a weaker rand and higher raw material costs.

The depreciation of the rand, coupled with a sharp increase in iron ore and coal prices, resulted in a significant increase in input costs. Iron ore prices traded within a wide range of USD39/t to USD83.95/t, averaging USD59.80/t over the year. A combination of reduced Chinese mine production and increased demand in that country impacted international coking coal prices which increased by 322% from January 2016. Import coking coal from Mozambique and Australia was subject to supply disruptions but we remained committed to diversifying our sources of supply, particularly from Mozambique and despite the logistics difficulties inherent in sourcing from that country. Import coal prices remained volatile, rising from a low of USD73.90 in January to a high of USD311.50 in November. For the year import coal prices averaged USD149.54.

In November the company finalised an agreement for the takeover of Thabazimbi mine from Sishen Iron Ore, which is subject to the suspensive condition relating to the conclusion of a satisfactory due diligence. The mine is in the process of being closed and the primary purpose of the takeover is to manage its rehabilitation (for which costs we are contractually liable) in a prudent manner. The agreement is for the purchase of the mine for a nominal consideration of R1. In terms of the agreement, ArcelorMittal South Africa will acquire all of Thabazimbi’s assets while assuming all liabilities. Should we be successful in acquiring the mine, investigations will be conducted to determine whether and to what extent the mine could in future be operated in a viable manner.

Logistics continued to be a major challenge during the year with Transnet Freight Rail’s performance deteriorating relative to previous years.

TFR performance (on-time deliveries) (%)            
  2014   2015   2016  
  51   50   48  

The poor Transnet performance was mitigated by the transportation of 1.2 million tonnes of iron ore, coal and import coke by road, which resulted in additional costs amounting to R535 million.

In February 2017 we, and project partners including Transnet Freight Rail, announced the reopening of the Elandsfontein Intermodel Terminal in Germiston after almost four years of inactivity. It is expected that, as a result of the terminal being reopened, some 700 000 tonnes of product coming from Newcastle and Saldanha and destined for customers in Gauteng will be shifted from road to rail. As a result, the number of long-haul road vehicle movements will reduce by more than 40 000 per year.

We remain committed to building lasting, sustainable relationships with suppliers, believing that they are an indispensable part of the greater steel value chain and that their wellbeing (and ability to generate and sustain quality jobs) is a key part of our social licence to operate. As such, in-depth discussions with various strategic suppliers were initiated with the purpose of securing sustainable savings through collaborative efficiency improvements.

Customer focus
  • Risk
  • Risk

This year more than 60 new product lines were being actively developed. Of this total, 43 were under development by the long steel products division. These products include new specifications on widths, lengths, thicknesses and strength. Sectors and market segments for which new products were developed included automotive, construction, engineering, mining, energy, chemicals and water. Particular focus was on developing products in conjunction with customers for the renewable energy sector and on designing and producing innovative products for construction and low-cost housing. While improving customer satisfaction, making these new products translated into additional sales worth some R50 million, most of which was sold at above-average margins.

Total capital expenditure on new product development in 2016 was R335 million (2015: R92 million).

This year a large, internally developed and therefore unaudited amount was invested in improving customer service, in particular the handling of complaints and claims. (An online claims tracking system was piloted this year and was due for a full rollout in Q1 2017.) In 2016 customer complaints as a percentage of sales value declined from 1.24% to 0.74%.

Authoritative research has shown that product availability is a greater concern of steel customers than price. We acknowledge that we have considerable room for improvement in terms of lead times and in making on-time deliveries. This year 64% of our steel deliveries were on time (2015: 62%) with Vanderbijlpark in particular underperforming, its on-time delivery performance being just above 50%.

Labour productivity

Our two key productivity measures this year were little changed from 2015. Tonnes of liquid steel to full-time (job) equivalent, expressed as HRCe/FTE, decreased to 471 (2015: 472, 2014: 418). Total cost of employment per tonne of liquid steel, measured in USD, fell from USD77/t to USD72/t. (In rand terms TCOE/t increased from R979 to R1 062.)

Energy efficiency
  • Risk

This year we reduced our electricity consumption per tonne of liquid steel by 7%, thereby limiting our electricity cost increase per tonne to just 2.4%, well below tariff rises implemented by the national utility, Eskom.

In 2016 the mix of processes and technologies we used to produce liquid steel was markedly different to the mix employed in 2015. Changes included the mothballing of the electric arc furnace in Vereeniging and relining Saldanha’s Corex furnace. To compensate for these changes, Vanderbijlpark and Newcastle increased their blast furnace production of liquid steel. The net result was that our energy consumption per tonne, including electricity, natural gas, coal and industrial gases increased by 3.8%, and our CO2 emissions per tonne by 8.9%.

Energy-efficiency measures implemented this year included a so-called demand side management project at the main air compressor plant at Vanderbijlpark, aimed at shifting electricity demand out of the daily peak periods. Also in 2016 control specialists succeeded in controlling gas pressures in Vanderbijlpark’s main gas distribution system by utilising a generator as a variable load, thus reducing the flaring of gas and increasing electricity generation.

Most significantly, in 2016 we invested R138 million in a 50 tonne per hour high-pressure steam boiler at Vanderbijlpark’s direct reduction kilns to supplement the existing waste-heat steam-generating units by using off-gases. The steam generated by this boiler (which is scheduled for commissioning in March 2017) will increase our co-generation of electricity by at least 10MW in 2017 from the current average level of 24MW. In 2016 we generated a total of 209 632MWh.

Our dependence on increasingly expensive electricity supplies from the national grid has underpinned our close involvement in a project to generate power using imported liquefied natural gas in Saldanha. If implemented, this project, which is being developed by third parties, would make our Saldanha Works independent of Eskom electricity supplies, leading to lower, more predictable prices. This year the key environmental impact assessment process for the power plant commenced.

During 2016 ArcelorMittal South Africa improved energy reporting at a corporate level with refinement of this system continuing in 2017. The distorting effect of production level changes on energy efficiency performance was eliminated and energy performance is now measured against these standards. Reporting of CO2 emissions related to energy consumption has also been included into this monthly reporting using internally developed factors multiplied by production tonnes.

The company is exploring a number of projects which may have the ability to sequestrate some CO2 emissions. These are still at an early stage of development.


In 2017 footprint optimisation measures implemented at Vanderbijlpark and Saldanha this year will be extended while Saldanha’s mini-reline will equip the plant to compete more effectively at prevailing prices, in both its traditional export and domestic markets. Coke and Chemicals production levels are expected to return to historically more normal levels in Q2, improved efficiencies.

We are confident that procurement improvements can be further advanced in 2017 and expect that the outsourcing of overall logistics management will result in significant cost savings.

Having bedded down the wide-ranging restructuring of long steel products, and having invested considerable amounts in modernising and improving the reliability of our Newcastle operation, the division will be well positioned to exploit new opportunities in both domestic and export markets.

A lower raw material basket cost, relative to that at the end of 2016, is anticipated. The recovery in international steel prices witnessed from H2 2016 is expected to persist for much of 2017.

The problems with iron-ore quality encountered in 2016 are expected to represent a long-term challenge, which will require substantial ongoing intervention. Process optimisation to accommodate this new reality began in 2016 and will continue in 2017.

In 2017, procurement management will focus on:

  • Reducing road transport by 300 000t
  • A 15% reduction in controllable costs of R5.3 billion
  • A 10% reduction in inventories.

A major sales focus in 2017 will be on the Africa Overland market where we believe it is possible for us to acquire a 40% market share. By identifying, and supplying to strategic customers in key locations who will effectively serve as distribution points into local markets, we envisage overcoming many of the logistical difficulties attendant on supplying mostly smaller national markets. Relative to our performance this year, we project a 15% increase in the Africa Overland segment in 2017, at prices which we anticipate will improve over those of 2016.

© ArcelorMittal 2017