Integrated Annual Report 2016
Together
creating value for all
  • Compare to last year

    Compare
  • View our reporting tools

    Report tools

Message from the chief financial officer

In a world that is awash with steel, we succeeded to a remarkable extent in not just navigating through a most challenging year but in boosting our competitiveness, significantly reducing losses and stabilising and improving most aspects of the business.

Dean Subramanian Chief financial officer

Overview

In 2016 the company made considerable progress towards achieving and ultimately maintaining financial sustainability despite an operating context which continued to be extremely adverse.

Around the world and in our key markets, including South Africa, there was no appreciable increase in steel demand with traditionally large domestic consumers experiencing zero or even negative growth. In South Africa large quantities of foreign government-subsidised steel continued to be imported despite the introduction, in late 2015 and early 2016, of 10% import duties. Imports reduced from 1.3Mt to 1.2Mt negated by the reduction in apparent steel consumption from approximately 5Mt to 4.1Mt. Elsewhere in our main export markets demand remained subdued.

Meanwhile global prices of our most important input raw materials increased dramatically – iron ore by 100% and coking coal by as much as 247%. On the back of these sharp cost increases, world steel prices rose towards the end of the year, hot rolled coil (HRC) price gaining 93% over a year previously and rebar ending 75% stronger.

In a year of substantial (and profoundly positive) corporate activity, ArcelorMittal South Africa voluntarily followed the terms of a fair pricing agreement for eight of the 12 months reviewed. This had the effect of capping the prices realised on flat products, the products that account for two-thirds of our revenue. Added to this, rand strength in 2016 limited the upside potential of stronger global steel prices reflecting the considerable foreign-exchange risks to which we are exposed.

In a world that was awash with steel (much of it for sale at prices below its actual cost of production and shipment) with the active support of investors, regulators, customers and employees, we succeeded to a remarkable extent in not just navigating through a most challenging year but in boosting our competitiveness, significantly reducing losses and stabilising and improving most aspects of the business.

Results for the year      
  2016
Rm
  2015
Rm
Revenue 32 737   31 141
Once-off items 227   2 558
Ebitda 190   (809)
Loss from operations (1 092)   (4 736)
Impairments (2 154)   (4 254)
Finance and investment income 176   175
Finance costs (876)   (1 208)
Equity earnings 129   195
B-BBEE charge (870)  
Headline loss (2 589)   (5 370)
Headline loss per share (cents) (244)   (1 338)

Results for the year

In 2016 revenue increased by 5% to R32 737 million after declining by some 11% the previous year. This was despite total shipments reducing by 44 000 tonnes, a small contraction relative to shrinking apparent and real domestic steel consumption, a 26% reduction in export sales and a 24% drop in revenue from the Coke and Chemicals division. Significantly, necessary planned maintenance programmes – the Saldanha campaign extension and repairs to our coke batteries – resulted in lost revenue opportunities for Saldanha of R700 million and lost revenue opportunities and increased cost for coke and chemicals of R400 million. The company increased its share of the South African market marginally, mostly the result of the closure of Evraz Highveld Steel and Vanadium.

With average net realised steel prices rising by 8% to R7 282/tonne and despite the impact of commercial coke and tar sales being respectively 19% and 22% lower, ebitda improved from 2015’s negative R809 million to a positive R190 million. The reduced headline loss stemmed from higher revenue, lower depreciation and once-off items that were markedly lower than those of 2015 when impairments amounted to R4 254 million (2016: R2 154 million).

This year once-off items amounted to R227 million. These included matters outstanding in the previous year including finalisation of the Competition Commission penalty provision, release of payments in advance and Thabazimbi closure costs. Ahead of our planned acquisition of the Thabazimbi mining right, this year we recognised an additional R380 million of rehabilitation costs.

Headline loss for 2016 fell sharply, from 2015’s R5 370 million to R2 589 million.

As we promised the market, a portion of the proceeds of our R4.5 billion January 2016 rights issue were mostly used to repay debt. As a result, financing costs were R332 million lower this year and the year-end net borrowing position fell from R2 865 million to R290 million. Despite these positives, the company’s operating context was such that generating cash remained a challenge and consequently, liquidity remained our biggest risk which is further impacted by an extremely volatile currency.

Operational results were mostly encouraging. Vanderbijlpark produced HRC at a record low cost of USD386/t, 12% better than the 2015 cost. Overall steel production increased with Saldanha and Vanderbijlpark improving their capacity utilisation. This was despite a mini-reline which will have the effect of extending Saldanha’s life by six years, as well as extensive, costly repairs to the coke batteries at Vanderbijlpark and Newcastle. The repair in the coke battery resulted in significant import of metallurgical coke and once-off costs to the business.

Cash flow      
  2016
Rm
  2015
Rm
Cash generated from operations before working capital 215   (1 911)
Working capital 658   1 647
Capex (2 008)   (1 256)
Net finance cost (451)   (537)
Investments (11)   (8)
Rights issue 4 500  
Tax (2)   (40)
Dividend received   114
Proceeds on scrapping of assets 67   2
Realised Forex (268)   (258)
(Decrease)/increase of borrowings and finance lease (3 141)   3 937
Transaction cost (B-BBEE) (55)  
Cash flow (496)   1 690
Effect of forex rate change on cash (8)   20
Net cash flow (504)   1 710
Cash and cash equivalents at the beginning of the year 2 164   454
Cash and cash equivalents at the end of the year 1 660   2 164
Short-term loans (1 950)   (5 029)
Net borrowings (290)   (2 865)

Key results drivers – ebita bridge (Rm)

Key results drivers – ebita bridge (Rm)

Costs

This year contractual arrangements succeeded in largely shielding the company from the effects of very sharp increases in the global prices of raw materials, being iron ore, coal and scrap (which in 2016 accounted for 44% of total costs). Whereas these key inputs increased during the year by the significant amounts detailed above, our cash cost per tonne of liquid steel produced rose by less than 5% to R6 544/t.

In 2016 mitigating potential input price shocks was achieved by increasing the percentage of rand-denominated iron ore received by our business units to 50% while also consuming previously stockpiled material. In addition, imported coking coal was, as was previously the case, received via the ArcelorMittal group’s sourcing structure which benefits from being one of the world’s largest buyers of the commodity. Whereas the abovementioned coal price increase (247%) reflected spot prices, ArcelorMittal Sourcing negotiates contracts on a quarterly basis. This year our company also continued to enjoy the benefit of advantageous terms received from local suppliers of coking and non-coking coal. The higher price of the RMB will impact the business in Q1 2017 due to three months’ stockholding.

Consumables and auxiliaries (31% of costs) rose this year by 9%, electricity by 2% and fixed costs by only 3%. At USD73/t of liquid steel produced, our total cost of employment, measured in dollar, declined for the second consecutive year, meaning that our human cost of producing steel has fallen by almost a quarter in two years. In 2016, however, the performance of Transnet Freight Rail deteriorated, performance falling from 86% to 78% and necessitating additional road transport costs of R535 million.

Despite these challenges, great success was achieved this year on managing down variable costs, savings net of production, exchange rate and market influences amounting to R860 million being achieved on the procurement of goods and services. Of particular note, in 2016 a business improvement drive at Vanderbijlpark Works alone recorded savings of R754 million. In 2017 the lessons learnt from this process will, it is envisaged, be rolled out to other plants.

Cash and debt

This year cash generated from operations amounted to R873 million (2015: a negative R264 million), reflecting mainly a decrease in net working capital of R658 million. This in turn derived largely from a R2 958 million increase in accounts payable which in turn was partly offset by an increase in inventories of R1 830 million.

Excluding the effects of the January 2016 rights issue and borrowings, we had a net decrease in cash this year amounting to R1 855 million, the bulk of which consisted of a financing cost of R451 million and R2 008 million in necessary capital expenditure. Also encouraging this year was the repaying of more than R3 billion in debt: R2 000 million of group debt and R1 141 million of other debt (payments which were made possible by the rights issue).

In ensuring that we remained a going concern in 2016 it is important to stress the vital support received from the ArcelorMittal group. Over and above extending to the company a facility of R2 700 million, the group underwrote and fully followed its rights in January.

At the time of reporting, other than the group’s loan, the company’s only access to credit consisted of overnight facilities with a variety of local banks, clearly an untenable situation. In 2016 the company therefore embarked on a process to match the tenor of its borrowings to its cash requirement, mainly capital expenditure and working capital. To this end, in February 2017 we launched a R3.5 billion borrowing-based facility, which amount will, we believe, be adequate to fund the company for the medium term.

Main steel cost drivers (R/t liquid steel)                
  2016   2015   Change on
2015
%
  2016
weight
 
Iron ore and pellets 1 378   1 417   -2.8      
Scrap/DRI/HBI 98   129   -24.2   Raw material  
Coal (imported and domestically sourced) 1 387   1 241   +11.8   basket 44%  
Electricity 517   505   +2.4   Auxiliaries  
Other energy and utilities 306   271   +13.0   and  
Alloys, fluxes and coating materials 769   696   +10.5   consumables  
Refractories, electrodes and consumables 420   382   +10.0   31%  
Manpower 732   679   +7.8      
Maintenance 365   315   +15.9   Fixed cost  
Other* 572   629   -9.2   25%  
Total 6 544   6 264   4.5   100%  
Liquid steel (000t) 4 771   4 839   1.4      
Average exchange rate (R) 14.72   12.76   +15.4      

* General expenses, outside services, expert fees, IS/IT and insurance premiums.

Share price

After losing 83% in value in 2015, our share price recovered strongly this year, adding 156% to finish the year at 1 150 cents. The improvement in the value of our equities was particularly pronounced in the lead-up to our B-BBEE transaction, an improvement which was maintained up to the time of reporting. The board and management have been extremely gratified by this vote of confidence in the company’s future, a confidence which they fully intend to repay.

Outlook

Should the borrowing-based facility be secured and suitable safeguards be implemented to effectively curb imports, we are confident that the business will have been largely derisked, positioning it to exploit any upturn in demand and improvement in pricing, to the benefit of all stakeholders. The imperative of addressing our cash challenges will, however, remain a key management task as we work to put in place optimal working capital structures.

As noted, in 2016 impairments of R1 721 million and R420 million were raised against our Vanderbijlpark and Saldanha operations, the impairments deriving from continuing rand strength, and further volatility will have a significant impact on the business.

In 2016 we spent a great deal on maintaining and improving Vanderbijlpark and Saldanha and on equipping those plants’ people with the skills to produce steel safely, efficiently and at a world-class cost. This year, in reaching a long-awaited settlement with the Competition Commission (click here), we committed to continue investing considerable sums in our plants and facilities, much of which will necessarily be devoted to our two flat steel works.

Were it not for the continuing import of approximately 1.2Mt of steel and the strong rand, much of it at unfairly subsidised prices, Vanderbijlpark in particular would not have incurred the unwelcome impairment recorded this year. We remain confident, however, that the relevant authorities will, in 2017, take the requisite action needed to ensure the survival and growth of Vanderbijlpark and South Africa’s primary steel sector. To this end, we look forward to the imposition of much needed additional trade remedies and to reporting in a year’s time on a further improved financial position and a substantially reduced financial risk.

Dean Subramanian
Chief financial officer


© ArcelorMittal 2017