Integrated Annual Report 2014
Our operating context
Key to this report.

Our operating context

oc-image1

Steel prices are determined globally and are strongly influenced by the prices of raw materials, including energy inputs, and scrap. Steel is transacted in dollars, a fact that exposes ArcelorMittal South Africa to exchange rate fluctuations.

ArcelorMittal South Africa sells its steel within South Africa (71% of total sales) and overland to southern Africa (7%) with the balance of products being shipped to the rest of sub-Saharan Africa and the Middle East and a negligible percentage to other markets.

Coke and Chemical products are sold domestically.

Market overview

World steel markets were mixed this year with the US holding on to recent gains, manufacturing reaching a four-year high, demand for durable goods increasing and the housing market continuing to gain momentum. In Europe demand improved marginally, low inflation and low interest rates spurring consumer confidence.

Chinese steel consumption slowed but producers maintained output levels, the country this year exporting some 90mt of steel. Indications at year-end were that Indian demand was set to improve.

oc-graph1

oc-graph2

South Africa

The domestic market remained extremely challenging. Apparent steel consumption slumped by 9.31% and real steel consumption by 3.1%. Infrastructural spend was scant and overall economic activity marked time ahead of the May national election with GDP growth for the year amounting to just 1.4%. Industrial action negatively impacted both the platinum mining and steel fabrication sectors.

Sales in the first half of the year were weak but with some improvement being evident from August and more positive sentiment among customers returning towards the end of the year. Long product sales were negatively impacted by the Newcastle reline, even though we imported billets to roll into products for our long steel customers. However, this segment will enter the new year in a significantly more cost-competitive position.

Three-year wage agreements reached in the steel and mining industries augur well for improved investor sentiment as does the improved outlook for government infrastructural spend.

Market share improved despite the Newcastle reline with imports slowing, due in large part to ArcelorMittal South Africa’s efforts to combat subsidised imports. At year-end our share of the flat market stood at 65.5% and 55.1% for long – improvements of 4.5 and 2.9 percentage points respectively.

(Our commitment to our customers extended this year to importing some 350 000 tonnes of billets which translated into an approximate ebitda loss of R940 million – a major contributor to the R1.2 billion loss of ebitda ascribable to the Newcastle reline.)

African markets

The sub-Saharan and Africa overland markets performed well this year, all markets recording GDP growth of 5%+ despite resources companies (the main consumers of our products along with infrastructural development) continuing to experience generally weak commodity prices.

Long product sales to the sub-Saharan region were constrained by the decline in output related to the reline process but in 2015 shares of these markets are projected to return to pre-reline levels.

Global and domestic steel markets

oc-graph3

oc-graph4

oc-graph5      oc-pie1

oc-graph6 oc-pie2

 

Internationally, annual steel exports amount to some 370 million tonnes with African demand estimated at just 40 million tonnes. Only South Africa and Egypt have significant capacity – a combined 16 million tonnes. In 2014 our total export sales, including Asia and “other” markets, amounted to R6 870 million (2013: R4 823 million).

Product development and outlook

From July concerted efforts were made to fill all available production lines so as to secure a more robust order book, to drive profitability and to exploit improved prospects both in South Africa and Africa Overland.

This year we allocated some R75 million to strategic rebates, up 121% on 2013.

Particular prospects for 2015 include rail capital investment programmes previously announced by Transnet and the Passenger Rail Authority of SA, necessary investment in Eskom transmission infrastructure and new investments in alternative energy, notably wind and solar.

Over the medium term the development of Mozambique’s prodigious natural gas reserves will represent considerable opportunities in the Africa Overland segment.

The development of new products was accelerated in the second half of 2014. This was done in support of our increased focus on the needs of narrower market segments (understanding and anticipating customer requirements) and the strategic objective of embedding a high-performance culture within the company. In the case of sales and marketing, the high-performance imperative means meeting precise client expectations and improving on pricing, delivery and lead-time performance, all of which will be key performance indicators for 2015.

New and evolving customer requirements that are being proactively addressed include (for long products) more lightweight, high-strength products and lead-free free-cutting steels. In the automotive sector appropriate steel grades are being developed or improved to satisfy the trend from micro-alloy steels back to heat-treatable steels. We are actively anticipating, and addressing, the food and beverage industry’s growing requirement for lead-free steels.

Flat steel product innovation encompasses production of heavier plates of up to 11 tonnes for both wind energy and general engineering. Hot-rolled product development is focused on meeting new quality and size demands in the large-bore pipe industry as well as a number of new thin-gauge products. Thinner, stronger steels are being developed in consultation with automotive customers. In 2014, some 800 tonnes were produced for solar storage tanks while wind tower orders are expected to amount to 15 000 tonnes in H2 2015.

New long products developed and launched this year included 16mm rebar, 22mm mining bar and “green rebar”.

Coke production will begin to decline in 2015, ahead of the scheduled Newcastle battery repair which will reduce market availability by some 100kt in 2016. It is envisaged that, in 2015, ArcelorMittal South Africa will begin replacing lost metallurgical coke production with imports in order to maintain market share.

oc-graph7