Integrated Annual Report 2016
creating value for all
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Our operating context

In recent years world and domestic steel markets have languished with a combination of weak demand and excess production capacity depressing prices. In South Africa a surge of imports has threatened both the primary and secondary steel sectors.

Market overview


In 2008 the global prices of hot rolled coil (HRC) and rebar both reached over USD1 000/t. Since 2015 the prices of these two key primary steel products have persistently been less than half that figure.

In 2016 there was a modest recovery in world steel demand, driven by a combination of factors including a better-than-expected Chinese economic performance, an anticipated increase in infrastructural spend following the US presidential election and a reduction in inventories in 2015. As a result, in 2016 global steel production rose by 0.8%, to 1 628 million tonnes (Mt) after contracting 3% the previous year.

In the second half of 2016 world steel prices recorded sizeable increases, the Chinese HRC FOB price gaining 53% at year-end over that of the average of the previous year, to USD501/t.

By year-end, the second-half price rally seemed likely to continue into the new year with the World Steel Association predicting a 0.5% rise in demand in 2017. While growth in demand remained limited and fragile, Chinese mills continued to export steel in large quantities – some 108Mt in 2016 – more than double that of the world’s second largest exporter, Japan.

This year South Africa continued to import 1.2 million tonnes of steel despite the imposition, in Q4 2015 and Q1 2016, of import duties on 10 products. In 2016 Chinese steel represented 52% (2015: 57.6%) of all South African steel imports, which declined by 17%. (In 2016 China decommissioned some 65mtpa of its approximately 200mtpa excess capacity, a development which reduced its amount available for exports.)

In recent years massive worldwide overproduction and the resulting surge in exports prompted almost all countries possessing a primary steel sector to impose trade restrictions (in some instances duties of over 200%) to prevent a flood of often unfairly subsidised steel into their markets. This trend focused exporters’ attention on South Africa where there was no such protection, a situation that has now been partially remedied.

World steel prices 2008 to 2016

Platts HRC and Rebar world price (USD/t)

Platts HRC and Rebar world price (USD/t)

South Africa  
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As is the case worldwide, South African steel consumption correlates closely to gross domestic product (GDP) growth (and investment) and overall economic activity. In 2016 most of the major steel-consuming sectors, including manufacturing, utilities and mining, contracted while the building and construction sectors (which consume approximately 60% of all steel sold in this country) recorded a decrease in demand of 3.9%.

In line with the country’s lacklustre economic performance and the slight reduction in imports in 2016, sales by domestic steel producers rose by just 0.3%, apparent steel consumption, which includes imports, showing a 2.5% (126 000t) decline. In real terms (local sales and imports less movements in stock), local consumption fell by 4.0%.

While the domestic steel market declined, ArcelorMittal South Africa’s domestic sales increased by 236 585t or 7.8% this year to 3.275Mt (2015: 3.039Mt). This was achieved through increased market share, largely the result of the closure of the country’s second largest producer, Evraz Highveld Steel, and a stronger customer focus click here.

South Africa: apparent steel consumption and ArcelorMittal South Africa market share

South Africa: apparent steel consumption and ArcelorMittal South Africa market share

Given that this year 1.201Mt of steel continued to be imported, much of it below its cost of production, it was apparent that import tariffs had had only a limited impact. This was a situation that had been foreseen by several industry players, including our company which applied for safeguard duties on five products, as well as seeking the designation of local steel in government infrastructure projects.

In January 2017 government approved the designation of local steel for state infrastructural construction projects while, in mid-2016, it issued notices that only local steel be used in tenders for the supply of five product categories. These decisions will, it is anticipated, have a significantly positive impact not only on primary steel producers such as ArcelorMittal South Africa but, especially, on the downstream consumers of our steel.

At the time of reporting, decisions on the imposition of safeguards (short-term import duties to prevent specific harm to local industries) on specific categories of steel were still being awaited.

In 2015 ArcelorMittal South Africa produced 82% of all primary steel made in South Africa; following the closure of Evraz Highveld, this grew to 88%, a development which only increased the importance of our company to the national economy.

In 2016 our domestic sales of flat products increased by 9.5% or 182 000t, achieved mostly through success in replacing imports, improved supplies to steel re-rollers and the closure of Evraz Highveld.

The company’s domestic long steel sales rose by 5% over the previous year, thanks largely to a good first half when some competitors were late in ramping up production after experiencing production difficulties.

Export markets
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Overall demand in our Africa Overland markets remained little changed from that of 2015. Blue Water exports were impacted, however, by a drop in demand from, in particular, West Africa where a languishing oil price restricted the availability of foreign exchange which, in turn, limited imports. A drop-off in export sales to West Africa (86 000t down on 2015) was partly offset by rising demand in East Africa, notably Kenya.

This year Saldanha succeeded in securing orders for some 78 000t of steel which had previously been imported. In 2016 55% of Saldanha’s output was exported (2015: 64%).

This year Blue Water exports represented 15% of our sales (2015: 21%) and Africa Overland 5% (2015: 6%).

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From April 2016 ArcelorMittal South Africa has committed itself to an agreement with key stakeholders (which, in February 2017, was ratified by government) to not price its flat steel products above an agreed import weighted basket price click here. Also, in terms of an agreement reached with the Competition Commission in August 2016, the company will not earn an earnings before interest and tax (ebit) margin of more than 10% on flat products. (Under certain circumstances this may increase to 15%.)

The flat basket comprises 50% European prices, 20% prices within the North Atlantic Free Trade Agreement area and 30% prices in the Far East. German steel prices account for half of the 50% European share of the basket. As such, any deterioration in the value of the euro against the dollar has a negative impact on our profitability.

In 2016 the HRC basket price averaged USD508/t while ArcelorMittal South Africa’s HRC prices were USD509/t relative to the basket, on average for this period. Persistent rand strength against the US currency during the year (with our selling prices denominated mostly in the local currency) translated into higher USD equivalents. Average net long domestic prices realised were USD435/t (2015: USD446/t).

Rand performance against the US dollar has a substantial impact on our profitability; whereas the ZAR/USD exchange rate at the beginning of the year was 16.60, by the end of the year the rand had strengthened to 13.50 against the US currency. ArcelorMittal predominantly sells to the domestic South African market, generating ZAR receivables. However, sales prices are set, on a monthly basis, in USD which are subsequently converted to ZAR. A large proportion of raw materials are imported (predominantly coal, in USD) while iron ore purchases from the Sishen Iron Ore Company are also denominated in USD. Approximately 60% of costs are ZAR denominated (local raw materials, labour, utilities, services and debt, etc). This fact provides, to a substantial degree, a natural foreign-exchange hedge. Exports, approximately a quarter of sales, are all in USD. The company is therefore exposed to significant movement in, especially, the ZAR/USD exchange rate on both a sales and cost level.

For both flat and long, we were, in every sense, a price taker with duties only determining the prices of imported steel and having no bearing on our flat prices. In agreeing to impose import tariffs, the International Trade Administration Commission has acknowledged that conditions prevailing within the global steel industry require South Africa to take reasonable and appropriate steps to protect the national economy in light of the surge in imports.

In essence, this means that our prices are regulated by agreements with key stakeholders, agreements which are aimed at deriving maximum long-term, sustainable social value from our investments and our production and distribution processes. In agreeing to impose import tariffs, the authorities have accepted that the long-term benefits of having a primary steel sector are being threatened by short-term benefits (cheap, subsidised imports).

In return for vitally important regulated protection against unfair imports, we accept that our ability to create financial value will be limited by the need (which we wholeheartedly endorse) to create value for customers, employees, communities and suppliers. These agreements on pricing are a reflection of the very great extent to which our interests and those of society are integrated.

Not only are prices of our flat steel products (64% of domestic sales) now capped, we are also committed by our agreements to invest an agreed amount of capital expenditure – R4.6 billion – in the creation of manufactured capital over the next five years (subject to our ability to afford such investments).

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In ensuring our survival, especially in a price-regulated environment, it is essential that we do everything possible to reduce our costs of inputs and of production.

While striving to improve the terms of our key inputs, including iron ore, coke and coal, the raw material basket (RMB) and the spread between the basket and realised prices has a fundamental influence on our profitability and sustainability.

In 2016 our RMB cost rose by 6% despite the international prices of key inputs, especially coking coal and iron ore rising in the latter part of the year by 247% and 93% respectively. With HRC prices improving by 11%, the spread between the RMB and prices realised improved from R2 632/t at the beginning of the year to R3 883/t by year-end.

For details on the success of our strategy to derisk our exposure to commodity price increases click here. Our performance on operational efficiencies is explained here.

Our raw material basket, HRC prices and spread

Our raw material basket, HRC prices and spread

© ArcelorMittal 2017