Integrated Annual Report 2014
Message from the chief financial officer
Key to this report.

Message from the chief financial officer

matthias-wellhausen

At year-end our financial position was sound, positioning the company well for the future.

Overview

Global steel trading conditions during 2014 remained challenging in the extreme while South Africa, our key market, struggled to achieve economic growth of 2%.

The slowdown in Chinese demand for steel products prompted a heightened export focus by producers in that country on South Africa and other emerging markets. The result was a flood of Chinese statesubsidised flat and long products into a shrinking domestic market. Despite these conditions, ArcelorMittal South Africa’s export markets mostly remained buoyant although without any material improvement in demand.

Our financial performance this year reflected these mostly challenging marketplace realities and the necessarily negative impact of the Newcastle blast furnace reline.

LINK Click here for more on the Consolidated summarised financial statement.

Financial performance

Ebitda of R1 258 million represented a 29% decline on the prior year’s R1 768 million with the headline loss of R224 million from the previous year’s R227 million.

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This year’s ebitda performance was heavily skewed by the reline process – its effect being in the order of a loss of potential ebitda of approximately R1.2 billion. (This figure comprised some R260 million in lost opportunities and approximately R940 million in additional costs incurred by importing billets so as to keep our customers supplied.) Ebitda was, however, hardly impacted by the increase of 7% in average net realised prices due to average cash costs of liquid steel being up by the same percentage. Rand weakness had the effect of eroding what would have been a significantly beneficial impact from lower international raw material prices (primarily coal, international prices of which fell by almost a quarter).

This year, total ebitda per tonne was USD27 per tonne. Management actions represented an improvement of USD41 per tonne. This was ascribable to efforts to eliminate excessive raw material costs and improve supplier efficiencies, improved operational efficiencies and optimisation of our industrial footprint. Market factors reduced potential ebitda per tonne by some USD19 per tonne while the once-off Newcastle N5 reline had an impact in the order of USD26 per tonne.

From a market perspective, long steel shipments reduced by 14% as a result of Newcastle being largely idle for half of the year, while flat steel shipments rose 8%. Domestic prices increased 9% and export prices increased 5% with the higher export mix bringing the net increase in realised prices to 7%. Export shipments rose by 12% while local sales declined by 4%.

Flat and long steel price increases were 6% and 10% respectively. Revenue grew by 8% to R34.9 billion, reflecting the limited price improvement on sales volumes that were almost identical to those of 2013.

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Liquid steel production reduced by 578 000 tonnes to 4 518 million tonnes, a reduction of this order having been anticipated given the reline. Production capacity utilisation for flat products, however, showed a positive improvement towards the end of the year.

Revenue from our Coke and Chemicals business of R2.0 billion was 6% higher following a 9% increase in commercial coke prices and production rising by a third. Tar sales volumes remained flat while prices increased by 13%.

The operating loss of R301 million (2013: R47 million profit) included provisions for a restructuring of the company’s administrative cost base and the ongoing closure of the captive Tshikondeni coal mine amounting to R149 million. (The provision for Tshikondeni this year included in the R149 million was R50 million (2013: R158 million).)

LINK Click here for Summarised consolidated statement of comprehensive income.

Equity investments represented a R35 million loss in 2013 with this year, after much improved performances by Macsteel International Holdings BV and Coal of Africa Ltd, contributing an after-tax equity earnings of R191 million.

In 2014, a tax credit of R460 million (2013: R51 million credit) was recorded. This related mostly to a tax credit of R360 million in terms of section 12L of the South African Income Tax Act for energy-efficiency initiatives implemented at our plants. This is believed to be the first claim by an industrial listed company under this new legislation. No impairment costs were accounted for this year (2013: R1 950 million).

Capital expenditure was sharply higher at R2 798 million against R1 569 million of the previous year. Most of this related to the Newcastle blast furnace reline. (Capital expenditure this year was, in fact, the highest in living memory.) Financing costs were inevitably higher for the year: R608 million against R368 million the previous year.

We believe the successful financing of our very large capital funding requirement was a major achievement in 2014. The year-end net borrowing position of R546 million compared with a net cash position of R285 million at the end of 2013 which reflects the impact of the major capital investment funded in 2014. Our credit line facility with the ArcelorMittal group was successfully increased this year, from R2.7 billion to R3.2 billion, a sign of our majority shareholder’s continuing commitment to the South African operation.

Net working capital decreased by R1 019 million compared with an increase of R138 million in the corresponding period. This was achieved through decreased inventories, the impact of our ongoing sale Leadership reports ArcelorMittal South Africa Integrated Annual Report 2014 of receivables programme and improved payment terms for raw materials imported from ArcelorMittal Sourcing.

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Costs

Cash cost per tonne of liquid steel produced increased by 7% year-on-year. Raw materials, consisting of iron ore, coal and scrap, which together account for approximately 48% of costs, increased by 5%. Consumables and auxiliaries, which account for approximately 28% of costs, increased by 15%, while fixed costs per tonne increased by 3% despite being impacted by a volume decrease of 11% on liquid steel production. The new Kumba agreement had resulted in iron ore costs remaining constant in rand terms. Tshikondeni costs increased sharply as the mine neared the end of life, with production stopped at the end of Q3.

Cash costs of hot rolled coil and billets (the primary first-stage product for flat and long steel) increased 7% and 9% respectively. Local coking coal, scrap and electricity rose 3%, 6% and 8% respectively, while zinc and tin climbed 25% and 15%. The relatively modest increase in the cost of electricity was a reflection of reduced consumption related primarily to the Newcastle blast furnace reline.

Total iron ore costs rose 1%. The long-term cost-plus purchase agreement with Kumba Iron Ore, which came into effect on 1 January 2014, resulted in surety of long-term supply. Overall capacity utilisation improved from 76% to 86% if the Newcastle blast furnace reline is excluded. The Q4 ramp-up in production enabled the company to exploit, to a limited extent, continuing rand weakness.

Imported coking coal costs declined 7% and pellets by 4%. On a US dollar FOB basis, imported coking coal and pellets decreased 21% and 6%, the deterioration in the ZAR/ USD exchange rate precluding the company from the benefits of sharply reduced coal and other commodity prices.

Variable costs increased 7.1% per tonne of liquid steel overall while fixed cost increases were limited to 3.5% in total.

This year, both Vanderbijlpark and Newcastle lost some of their advantage to the international raw material basket – Vanderbijlpark slipping from 84% in 2013 to 86% while Newcastle’s advantage declined from 62% the previous year to 80%. These declines were related primarily to the slide in global iron ore prices – which did not benefit ArcelorMittal South Africa due to the cost-plus 20% pricing agreement.

Outlook

In the short term, the capital investments made this year to achieve operational efficiencies, combined with improved controls, specifically, fixed costs, are likely to translate into improved asset utilisation and to underpin our strategies to cement a high-performance culture and drive profitability.

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At year-end our financial position was sound, positioning the company well for the future. At the end of 2014 the extremely costly Tshikondeni coal mine was closed with all liabilities accounted for. The implementation of our cost-plus iron ore agreement with Kumba Iron Ore went well.

In particular, our performance on managing fixed costs was exemplary with the company making solid progress – in the order of USD20 million on achieving its short-term target of making operational efficiency improvements of USD70 million. Procurement showed similarly strong improvements.

Our progress towards reaching our target of USD100 per tonne ebitda is expected to be bolstered in the new year by a modest improvement in demand, by moderating cost increases and an improved product offering.

While our performance on profit disappointed, 2014 was a year of very significant financial achievements, achievements which bode well for the future of our company.

LINK Click here for Full financial statements and reports.

Matthias Wellhausen
Chief financial officer

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