Integrated Annual Report 2014
Driving profitability
Key to this report.

Driving profitability

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Our ability to create financial value has considerable implications for our ability to create other forms of value. The financial value we create is influenced and determined by a number of our most material issues.

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LINK For more on 2014 highlights and 10-year performance review, click here.

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Operational efficiencies

The flat steel products division this year recorded ebitda of R535 million, a continuing improvement from the R135 million achieved in 2013 and the R266 million ebitda loss sustained in 2012. Net operating loss for flat products was R529 million (2013: R1.2 billion).

Long steel products’ financial performance was unavoidably impacted by the Newcastle blast furnace N5 reline project which ran from May to the first week of November 2014, an over-run, relative to plan, of 54 days. As a result, long steel returned ebitda of just R16 million (2013: R1.198 billion) and a net operating loss of R406 million (2013: R331 million profit).

Our Coke and Chemicals division recorded ebitda of R428 million (2013: R514 million), a performance that was negatively impacted by downward pressure on sales prices caused by an oversupply from Australia and Achieving our objectives ArcelorMittal South Africa Integrated Annual Report 2014 Our ability to create financial value has considerable implications for our ability to create other forms of value. The financial value we create is influenced and determined by a number of our most material issues. subdued demand from China’s soft steel market.

Domestic flat steel sales declined 3% for the year, representing 72% of total steel shipments while long steel sales to both the domestic and export markets reduced by 38% relative to the previous year. The decline in long sales, particularly to the Africa Overland segment of the market, was ascribable to the Newcastle reline project, which curtailed the availability of long products and increased penetration of these markets by cheap, governmentsubsidised Chinese exports. Domestic market share for long products was maintained by buffer billet stocks purchased before and during the reline.

This year we increased our domestic market share for flats by five percentage points and that of longs by three percentage points – a remarkable achievement given the impact of the Newcastle reline.

Domestic apparent steel consumption decreased to 4.9 million tonnes, impacted negatively by industrial action in the mining and steel sectors and the continued slow pace of infrastructural investment.

Such was the impact of subsidised Chinese imports that, in November, ArcelorMittal South Africa formally applied for the imposition of import duties on Chinese flat and long steel products, a move seeking a measure of protection similar to that sanctioned by the governments of other developing markets including Turkey, Egypt and Brazil.

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Industrial footprint

From Q3 a Production First strategy was implemented with the aim of running all plants at maximum capacity. Combined with improved analysis and prediction of plant downtime, this resulted in production capacity utilisation, excluding Newcastle, rising to 87% in Q4 this year.

Total steel production (both flat and long) amounted to 4 518 million tonnes, 11% lower than 2013 and largely the result of the Newcastle reline.

Vanderbijlpark Works

Safety performance at Vanderbijlpark this year was poor with three work-related deaths occurring at the plant, one an employee who was exposed to an unforeseen reaction in the Granulation Tank and two contractor employees, both of whom were involved in man-vehicle interactions. Decisive and far-reaching action has been taken to mitigate safety hazards associated with truck movements at the plant. Plant LTIFR was a disappointing 0.54 (2013: 0.24)

The Works’ environmental impact also deteriorated this year with the plant losing its zero effluent discharge (ZED) status following various discharges of process water through the storm water channels, an occurrence occasioned by unusually heavy rains. This status was subsequently reinstated with short-term remedial actions being implemented.

During the year Vanderbijlpark achieved very significant improvements in terms of capacity utilisation as well as reliability: average capacity utilisation increased from 79.9% in H1 to 89% in H2 although first-half performance was negatively impacted by a chilled hearth incident during December 2013 and refractory problems in the iron runners of one of the blast furnaces which resulted in lost production of 143kt.

Vanderbijlpark’s hot strip mill has traditionally been a major cause of downstream bottlenecks. Record levels of availability in H2 this year proved, however, that remedial action to improve the sustainable performance of the mill was bearing fruit. Improved root-cause analysis of breakdowns in the mill translated into an unplanned downtime rate of 24.4% for the second six months of the year, compared to recent historical levels (2011) of over 30%. Mean time between failure (MTBF) rates improved at most units, the galvanising lines reducing their MTBF on galvanising line number 4 from 23 hours in 2012 to 65 hours in 2014; galvanising line number 3 reduced its MTBF from nine hours to 26 hours over the same period; and galvanising line number 5 improved from 12 hours to 27 hours. In H2 this year implementation of a bespoke asset reliability programme was entrenched at the Works’ blast furnaces with cold rolling and hot rolling achieving considerable maturity in implementing these programmes and the blast furnace reliability programme being successfully bedded down a year after being commissioned.

Liquid steel production for November and December, when the mills operated at full capacity despite the traditional festive season slowdown, averaged 212 000 tonnes per month, vindicating management’s projection that Vanderbijlpark will, over the short term, achieve annual production of 2.7Mtpa.

A number of significant plant enhancements were carried out to improve and enlarge our product offering and marketplace competitiveness. These included increasing the maximum width of hot strip mill output from 1.820 metres to 1.930 metres and raising the maximum weight produced by our heavy plate mill (with a particular focus on the wind tower market) from 7.5 tonnes to 11.7 tonnes per piece (an investment of R24.3 million).

Saldanha Works

Production of flat steel products at Saldanha rose 1.4% this year to reach 1.135 million tonnes.

Saldanha recorded pleasing results in terms of cost containment, reducing fixed costs by 1.8% and limiting variable cost increases to just 8.3%, the Works’ implementation of the World Class Manufacturing system achieving sustainable, rewarding results.

Capacity utilisation remained high, at 85%, underlining the high level of reliability and operational excellence at Saldanha. Over the past two years Saldanha’s results have been supported by the switching of production to that plant following the 2013 Vanderbijlpark blast furnace fire and, this year, by the Newcastle reline. In 2015 production at Saldanha will, it is envisaged, be increasingly driven by export demand. Saldanha Works’ iron making equipment is scheduled for a major reline in 2016.

Saldanha continued to improve on safety by successfully reducing its LTIFR from 1.51 to 0.59 in 2013.

Vereeniging Works

Overall performance was positive. Production rose 8% and capacity utilisation reached 81%. Vereeniging downstream plant production reduced relative to 2013 due to weaker market conditions. Excess crude steel production was taken up by Newcastle. Cost management was effectively applied, particularly during H2.

Total crude steel production for the year amounted to 323kt while a targeted increase, in 2015, of the number of heats per day, from 16 to 21, and the development of various new profiles to meet customer requirements and exploit niche markets, will drive output.

Newcastle Works

During the reline process we successfully mitigated the possible negative impacts on our customers’ business by importing around 180 000 tonnes of steel and shipping 52 000 tonnes from Vanderbijlpark and 179 000 tonnes from Vereeniging Works to Newcastle for rolling.

The impact of the reline on company ebitda amounted to some R1.2 billion.

Special equipment had to be manufactured to slit the slabs received from Vanderbijlpark into usable blooms at Newcastle. Under the circumstances the rolling mills performed adequately. Coke making also maintained stable operations.

Newcastle suffered a fatal injury during the rebuild process. The LTIFR improved slightly, from 0.64 in 2013 to 0.60, safety performance returning to more acceptable levels after the reline process.

Coke and Chemicals

Revenue from the Coke and Chemicals division amounted to R2.0 billion (2013: R1.9 billion) and ebitda of R428 million. The business was severely impacted this year by imports of extremely cheap Chinese coke and, in Q2, by coal sorting challenges encountered at Newcastle. This year we implemented import parity pricing for market coke, a step that allowed us to achieve more realistic pricing levels. Metallurgical coke prices remained under pressure although other products (including slag and tar) experienced some limited upside.

Top asset risks

The top asset risks ArcelorMittal South Africa was exposed to as at January 2015 (by operation) are as follows (residual risk count ranked per site):

Vanderbijlpark

  • Failure of spindle shaft at roughing mill motor at hot strip mill;
  • Freelance server equipment on the hot strip mill furnaces is obsolete;
  • Fire on blast furnace D top;
  • Electrical failure of R2 drive motor at hot strip mill.

Newcastle

  • Poor condition of basic oxygen furnace (BOF) filter presses causing sludge to be pumped back into the BOF off-gas water system;
  • Failure of blast furnace stoves refractory insulation resulting in two stove operation.

Saldanha

  • D01 tube bundles failure;
  • Seizing of stacker slew bearing;
  • Corex flexowell conveyor failure.

Each risk was evaluated in terms of maximum impact (in monetary terms) and overall risk rating. Various mitigation plans were drawn up for action in 2015.

Site vulnerability indices

Loss surveys, conducted by Axa-Matrix in 2014, disclosed the following vulnerability reductions achieved for the three sites surveyed:

  • Newcastle: Improved by 2.1% mainly due to the blast furnace rebuild; sinter plant refurbishment; new electrical room with fire detection and suppression; blast furnace flare stack risk reduction actions and various other items of risk-reduction capital expenditure;
  • Vanderbijlpark: Improved by 1.0% mainly due to smaller improvements on fire systems in various areas;
  • Coke and Chemicals: Improved by 5.0% mainly due to fire suppression systems installed in various critical rooms; monitor nozzles installed on tanks, distillation towers and truck load facilities; vibration monitoring installed for the exhauster frame; foam fire suppression extended to new tanks at benzoyl loading.

Outlook for business units

In 2015 all plants will continue to strive for maximum capacity utilisation with plant general managers and their reporting structures being held responsible for ensuring that production targets are consistently met. An overall utilisation rate of 90% is projected.

Reliability measures implemented and entrenched during 2014 are expected to underpin performance against the “Production First” strategy with Vanderbijlpark achieving its turnaround targets by mid-2015.

Increased production of flat and long products, coupled with an expanded product line and a keener focus on customer needs and expectations, as well as a sharper focus on on-time delivery, will improve ArcelorMittal South Africa’s ability to compete effectively in the domestic, Africa Overland and export markets.

Variable cost targets and new, more robust sourcing and supply arrangements implemented in H2 2014 will, it is anticipated, translate into sub-CPI inflation increases.

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Customer focus

Extensive interaction with customers this year disclosed a disconcerting level of dissatisfaction with our service levels. This is now being actively addressed with sales staff receiving more explicit KPIs (key performance indicators), for performance against which they will be measured. In particular, managers and employees will be held accountable for ensuring on-time delivery, an area in which ArcelorMittal South Africa has, in recent years, underperformed. This year just 58% of deliveries to domestic customers were on time against a target of 82.5% while customer complaints for which credits were issued, measured against total sales revenue, declined from 0.55% to 0.39%.

In 2014 our product offering was expanded with the introduction of at least 14 new products for various applications which are not, at present, being adequately supplied by local manufacturers and for which our market analysis indicates considerable future demand. Product enhancement will not only give customers greater choice but will also deliver improved strength, durability and cost. While giving the market greater choice we have also made concrete strides in improving the quality of all of our products, a key competitive strength relative to other domestic producers and cheap, subsidised, imports. ArcelorMittal South Africa ended 2014 better equipped than in several years to compete aggressively against local and foreign competitors in terms of cost, variety of product, service and reliability of supply.

This year independent customer research, conducted by CDResearch, disclosed that 67% of customers considered product quality the most important criteria when deciding from which supplier to source steel (with an average score of 9.3 out of 10). The second most important consideration was product availability (reliability of supply followed by lead time/on time delivery).

According to the survey findings, most customers believed that ArcelorMittal South Africa’s product quality was comparable to the best in the world. We also fared well in terms of ordering processes, administration, documentation and packaging, tolerances and test certificates.

Areas for improvement identified included claims handling, on time delivery, handling of backlogs, flexibility, product availability and production lead times.

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Raw material costs

The raw material basket for flat steel (which had a 48% weighting in terms of total costs) rose by 6.7% per tonne of liquid steel while fixed costs (a 23% weighting) declined by 3%. For long products, the raw materials basket (50.4% of total costs) increased by 17.4% per tonne and fixed costs increased sharply, by 21%.

Long steel performance was negatively affected by the Newcastle reline. The 2015 cost of production is expected to revert to more acceptable levels.

The new Sishen supply agreement with Kumba, which became effective on 1 January 2014, secured certainty of supply of up to 6.25Mtpa of iron ore per year. From 2015 the company will not be exposed to the soaring costs that had come to be associated with the Thabazimbi mine, which ceased production at the end of December 2014.

This year international coke and coking coal prices fell by 26% as Chinese economic growth slowed and production capacity was maintained in that country and Australia. However, this trend had no significant effect on our coke and coal costs as movements in the ZAR/USD exchange rate absorbed much of these commodities’ price weakness.

The closure of Exxaro’s Tshikondeni coal mine this year will have a materially beneficial impact on our raw material costs from 2015 as the costs of our contracted off-take from the mine rose steeply with it approaching the end of life. The closure did not, however, have any significant impact on coal prices this year, savings being achieved by importing coal largely from Mozambique.

With the closure of Tshikondeni and the group-negotiated arrangement with Mozambican producers, the outlook for coal cost increases is favourable over at least the short term.

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Supplier efficiencies

A reorganised, appropriately staffed, procurement and logistics department this year took overall responsibility for ArcelorMittal South Africa’s entire supply chain, including raw materials, spares, services and consumables as well as inbound and outbound logistics. A shared services centre, management of which will report to the head of Procurement and Services, will oversee all non-essential procurement excluding raw materials. The effects of the reorganisation will include a greater focus on preferential procurement and the development of emerging suppliers. Tighter management of outbound logistics will, it is envisaged, produce cost savings of R200 million annually while improving customer service.

A newly established tender review committee reviews contracts worth more than R20 million and, this year, specialist committees were appointed to interrogate and approve tender awards below this threshold.

Another organisational enhancement effected this year was the creation of a dedicated high-level team to interrogate supplier efficiencies. In light of the unsatisfactory Newcastle rebuild experience, it was decided this year that essential services, including critical refractory work, would be opened to international contractors.

Transnet is contracted to transport approximately 10 million tonnes of our raw material requirements from source or port to our operations.

This year Transnet Freight Rail’s performance disappointed. Whereas on-time deliveries reached 81% in 2012 and 77% in 2013, this figure declined to just 50% this year. Our plants are designed to receive raw materials by rail. Materials that arrive by road incur double-handling labour, time and equipment costs and increase our safety risks.

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Road transport is considerably more expensive than rail. In 2014 some 1.5mt of raw materials had to be brought to our plants by road, entailing an additional cost of R261 million. In addition to this, almost all of our finished products left our plants by road because of Transnet’s persistent inability to deliver reliably timeous rail services.

Transnet’s consistently poor service standards – largely the result of its failure to invest in internal rail infrastructure and rolling stock despite annual above-inflation tariff increases averaging 10% – is regrettable, particularly given the size of our business with the rail parastatal (in excess of R4.5 billion pa) and the national imperative to foster job-creating manufacturing.

This year management engaged with Transnet at the highest levels while a joint task team was set up to find solutions to the rail service provider’s sub-optimal performance. There is a concern that, as Transnet’s payment is executing upon the loading of trains there is no incentive to deliver on time.

The procurement and logistics function has assumed responsibility for enterprise and supplier development, as outlined in the B-BBEE codes. It is strategically important that we quickly and conclusively improve our performance. At the end of 2014, the company had some 3 500 active vendors. In 2015, our intent is that the number of qualifying small enterprises and exempted micro enterprises (QSEs and EMEs) we place business with will double as we actively seek to source work and supplies from businesses that are at least 51% black-owned or 30% black female-owned. Whereas, at present, approximately R2.5 billion of our procurement spend is with qualifying small and exempt micro enterprises, this figure is targeted to increase to R7.2 billion, 27% of total procurement.

LINK For more on our enterprise and supplier development strategy, click here.

Energy costs

Energy costs – a major driver of the cost of steel production – are rising at unprecedented rates.

The incidence of load shedding has a potentially profound impact on our ability to drive profitability and to optimise our operations. Risks associated with load shedding became particularly pronounced when, post year-end, the national utility Eskom began scheduling regular, daily, load shedding, often with minimal forewarning. The cost impact of load shedding on our production facilities is in the order of some R1.5 million per hour.

The external verification this year of our application for 12L tax incentives amounting to R360 million for various energy efficiency improvements achieved in 2013 demonstrated the efficacy of our ongoing commitment to improve on the efficient use of all our energy sources (coal, gas and electricity). Energy efficiency projects to be considered in 2015 include a new boiler at Vanderbijlpark to supply steam to the company’s underutilised 40MW power plant. If implemented, this will make a further 12MW available. Alternative funding options for off-gas recovery for generating power at both Vanderbijlpark and Newcastle will also be considered.

Labour productivity

This year considerable progress was made on managing increases in fixed costs, chief amongst which is our cost of employment.

We seek greater output from our employees while keeping a tight control on labour costs. However, management is fully cognisant of the fact that our investments in optimising our operations, fully and reliably utilising our assets and increasing sales at optimal prices will only be achieved if we have a workforce that is fully committed to living a high- performance culture.

In containing costs and improving operational efficiencies, this year we restructured and reduced headcount within some corporate services functions following a rigorous consultation process undertaken in strict accordance with the Labour Relations Act (LRA). Some employees within the corporate services department were identified for transfer to operational units, others chose termination through early retirement or voluntary severance, and there were a minimal number of forced retrenchments.

Also this year we implemented a programme to better manage full-time equivalent positions amongst hired labour and overtime work by implementing electronic clocking systems and enhanced decision-making. Plans were put in place this year to manage, from 2015, the impact of the new LRA amendment relating to the recognition of certain hired personnel as permanent employees.