Integrated Annual Report 2016
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creating value for all
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Message from the chief executive officer

The steel downstream is at the heart of our business model and our creation of value. Tens of thousands of jobs depend on ArcelorMittal South Africa and its competitors, and tens of thousands more depend on the businesses to which we supply.

Wim de Klerk Chief executive officer


Dear stakeholders

Readers of this report, especially those who take a close interest in our business, will notice a subtle shift in our presentation of information this year.

In the recent past much of the information conveyed in our integrated annual reports has had to do with survival, about staunching losses while fixing broken processes and, especially, broken relationships. In this narrative there was relatively little about the customer, about the people who, in buying and using our steel, create economic activity, infrastructure, jobs and wealth.

Getting back to basics

The reason for this is simple: in recent years the issues that were most material to our survival were so daunting, so numerous and so complex that management’s attention was not always focused – to the degree that it should have been – on that which is most fundamental to our business model. By that I mean the business of consistently getting better at making great steel safely and efficiently, selling it to customers in the quantities, quality and to the specifications that they want at world-class prices.

In November the Competition Tribunal ratified our settlement agreement with the Competition Commission, which agreement ArcelorMittal South Africa has to date complied with in all material respects. Shortly after the Tribunal confirmed the settlement agreement, I communicated in a memorandum to my colleagues that, having put our legacy behaviours behind us, our management team could now focus on returning the company to sustained profitability in compliance with law. Six weeks later I wrote to my colleagues: “To improve profitability and ensure sustained growth, the quality of our product, delivery, and excellent customer service are important. We really need to deliver on our budget to produce tonnes of world-class steel products that meet our customers’ needs.”

By its very nature a report such as this, about a company as large and complex as ArcelorMittal South Africa, talks about millions of tonnes of steel and commercial coke but our customers do not buy millions of tonnes; they and the steel they buy from us, not in millions of tonnes but perhaps hundreds of tonnes at a time, are not commodities. In 2016, as we finally cut the Gordian knots that have tied up so much of our leadership’s attention for too long, we renewed our focus on our customers, together creating value for all.

Inevitably the financial health of a primary steel producer such as ourselves is tied to the health of the economy in which it operates. Reputable research proves that when there is zero or near-zero growth, steel markets contract. This is the situation in which South Africa regrettably found itself in 2016. With almost non-existent GDP growth, domestic steel shipments contracted while in some of the African markets to which we export, infrastructural investment faltered.

As the financial and operational discussions in this report make clear, this year our company succeeded in increasing sales. This was largely ascribable to developments affecting our competitors, to a limited extent to a slowdown in imports but also to our renewed focus on the customers who keep us in business. Despite all of this, for much of the year we were selling our steel at prices that were at the lowest levels seen for many years.

The steel downstream is at the heart of our business model and our value creation. Tens of thousands of jobs depend on ArcelorMittal South Africa and its competitors, and tens of thousands more depend on the businesses to which we supply. Whereas we are simply unable to compete against imported steel that has been produced with foreign government subsidies, the South African authorities appreciate only too well the importance of ensuring the health of the downstream sectors.

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This year import tariffs on 10 product ranges were in force and, in the third week of January 2017 government announced its decision to designate locally produced and manufactured steel products and components for state construction projects.

It was in light of this announcement that I issued my internal communication (referred to above) about the need for us to consistently achieve quality, delivery and service to meet our customers’ needs.

In February 2017 government, through the Department of Trade and Industry, formally endorsed the fair pricing agreement (click here) which we had applied since April. Throughout our recent interactions and negotiations with government both parties have been motivated by an open, honest desire to ensure not only that all elements of the steel sector can survive but that everything possible is done to ensure their ability to thrive, invest and create new jobs.

The requirement that public sector construction must use 100% locally made steel is tremendously good news for ArcelorMittal South Africa but it is especially good news for the downstream, for our customers. This requirement will in time help to divert import orders back to the factories of local manufacturers and producers, creating new opportunities and employment for hundreds of businesses and thousands of people. In assisting our customers to take full advantage of these new opportunities, our company has already signalled its commitment in a number of concrete ways to create considerable social value.

At the time of reporting, the International Trade Administration Commission (ITAC) had yet to make a final decision on whether to implement safeguard duties on HRC and cold rolled coil. Safeguards are of the utmost importance to the sustainability not only of our company but to that of thousands of downstream businesses. In 2017 we will work closely with these same customers – and the authorities, including ITAC – on together creating solutions that are to the benefit of all stakeholders.

Ensuring the safety of our people

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A task that occupied a great deal of management’s time and attention this year, as it does every year, was our safety record and safety culture. We have reason to believe that a deep-rooted safety culture is indeed finally taking root at ArcelorMittal South Africa – a belief that would appear to be borne out by at least one key safety indicator – our total injury frequency rate.

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This year management at all levels, as well as our dedicated health and safety professionals, worked with diligence and considerable creativity to engender a 24/7 safety ethos (click here). Yet, as readers of this report are repeatedly reminded, we suffered three deaths at our premises, all of them contractor employees. Also, most disappointingly, our lost time injury frequency rate worsened from 0.48 to 0.62. As much as our safety drive in 2016 used imaginative means to bring home safety awareness, we have begun to act with the most extreme rigour against unsafe acts and unsafe mindsets. Contractors are essential to our production of quality steel but any supplier who does not live up to our high expectations on keeping everyone safe will simply not be allowed to do business with us.

Driving profitability

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A fundamental upshot of the new steel order is that we now have less control over the domestic prices we receive for our products (click here). This year, in line with international developments (which stemmed largely from sharp rises in the prices of iron ore and, especially coking coal), our average net realised price rose by 8%. This increase had no relation to import tariffs, was lower than international price rises and entirely in keeping with the undertakings we have made in terms of our fair pricing agreements.

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While our room to manoeuvre on pricing has been limited, we do have the means to optimise our footprint to produce our steel more efficiently and, from this year, have had a greater measure of control over our raw material costs.

We are still some way off achieving sustainable profitability but our operational and financial performance speaks volumes about the strides we have made on driving profitability. Excluding the impact of once-off items our, ebitda performance this year was R1 billion better than the previous year while we produced steel at prices that often compared with the best in the world.

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Of particular note, I believe, was the performance this year of our flagship Vanderbijlpark Works. Running at 81% capacity despite a Q4 rupture of the stove at blast furnace C which deprived us of 54 000t of production, Vanderbijlpark achieved enormous success in terms of reliability and cost. At all of our plants we invested a great deal in capital expenditure (75% more than in 2015), in improving the reliability and efficiency of our operations. While this large outlay had a material impact on our profitability performance this year, this investment will have a significant short and medium-term effect on our ability to generate sustainable profits.

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It was thanks to such much improved performances that this year we were able to more than triple, to R479 million, the value of rebates given to our customers, a very real way in which we create social value. As much as we value customers as partners, we rely on our supplier partners to support us in creating sustainable value. Regrettably, just one part of our supply chain – transport – proved to be a stubbornly conspicuous area of underperformance. Because of consistently poor service from our rail partner, we had to bring very large amounts of material to our plants by truck, translating into added, unnecessary costs of R535 million. The impact of such a single cost item on our overall performance will be readily apparent.

Encouragingly, towards the end of the year the quality of our dialogue with Transnet management improved considerably and we are confident that undertakings they have made, to improve their service levels, will bear fruit in 2017. Of particular note was the reopening – in February 2017 – of the Elandsfontein Intermodal Terminal in Germiston which will, we envisage, result in the shipping of some 700 000 tonnes of finished product being migrated from road to rail.

In similar vein, we are encouraged by a greater willingness from the management of Eskom to work with us on ways to unlock mutual benefits.

Also encouragingly, we are able to report a substantial improvement in the quality of the dialogue we today have with our local communities on our environmental impacts, a dialogue that is now characterised by openness and empathy. Equally constructive is the engagement we have with our trade unions. As the chairman mentions, we are delighted that our employees and soon the people living near our plants will have substantial stakes in our company.

Not the least of our achievements in 2016 was the tolling agreement we were able to reach with Evraz Highveld Steel to produce heavy structural products (click here) at their facilities in Mpumalanga. Not only will this exciting new arrangement contribute towards returning ArcelorMittal South Africa to profitability, it will secure hundreds of jobs and boost economic activity in an area in which it is sorely needed. Reviving employment was also a key consideration in our acquisition of the Thabazimbi mine assets (click here).

Creating a high-performance culture

We are unusual in reporting (as we have done since 2014) on so-called human resources issues with such prominence. There is good reason for this: we are convinced that building a high-performance culture is of the utmost importance to our financial sustainability and we believe that a high-performance culture is only possible with a truly transformed and truly empowered workforce. This is why I believe that one of our greatest achievements this year was the large investment we once again made in the skills of our people.

This year we record, with great satisfaction, the fact that our engineering academy at Vanderbijlpark – which offers all of the traditional trades – had an average pass mark of 87%, against a national average of between 45% and 54%.

Most unusually, this report begins to give an indication of the financial return we derived from this investment in human capital (click here and here).

At all of our plants and among all of our customer-facing teams, tangible benefits amounting to several hundred million rand flowed from the inspiration and application demonstrated this year by highly motivated people.

Outlook

The prospects for a strong economic rebound in 2017 remain limited and we believe that the low-growth, stagnant steel consumption context of recent years will continue to prevail for at least the foreseeable future.

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In the new year we do predict with some confidence, however, a modest improvement in our export markets (representing opportunities which we will pursue with determination) and a return to more normal levels of profitability by Coke and Chemicals. On sales of long steel products in particular, high levels of competition and dampened demand from key customer sectors are likely to persist for much of 2017 with an upturn only likely in the second half of the year.

So-called carbon taxes, on which we have engaged with multiple stakeholders for some years, may have a negative impact on our profitability in 2017. As we have done in the past, we will continue to vigorously argue the position that, unless implemented and applied in ways that support the achievement of desired outcomes, such taxes can have extremely negative impacts on investment and job creation.

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In the new year the prices of our key inputs will have a very substantial, very direct bearing on the spread between the raw material basket and our steel prices, and therefore on our profitability. It is our view that market fundamentals do not justify the raw material price hikes witnessed in 2016 and that these will return to more normal levels in the new year. Currency movements, which are similarly beyond our control, will have a material impact on our raw material baskets and our prices.

While 2016 was a year of profound challenges it was also a year of profound achievements. In the year reported we achieved a great deal in terms of our ability to create human, manufactured, social and ultimately financial value. We will build on these achievements at our plants, in our communities, on our customers’ shop floors and in our relations with all stakeholders to, together, create new value in 2017.

Wim de Klerk
Chief executive officer


© ArcelorMittal 2017