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

Message from the chief executive officer

paul-oh-flaherty
 

If we as a company, and as a country, are to survive and thrive, we need to make tough choices and collaborate more closely with all stakeholders to achieve mutually beneficial outcomes.

Dear Stakeholders

Recently our employees were asked a number of questions about working at ArcelorMittal South Africa. One of the most revealing findings was that more than half (53%) were unsure about the direction our company was taking.

Since I became CEO in July 2014 I have interacted with a great many stakeholders including colleagues, suppliers, government, communities, media and customers. From these interactions it became abundantly clear that our employees’ uncertainty about our future was shared by many other stakeholders.

Allow me to state unequivocally the direction in which ArcelorMittal South Africa is now headed: we are going to transform our business, our culture and the way in which we create value for all stakeholders, including investors and employees.

We will fill our mills and sell products that are world class and that meet and exceed our customers’ expectations. We will operate safely and add value to the lives of our colleagues and our communities. We will capitalise on our many strengths and seize opportunities. We will empower our employees and give them greater accountability so that they all have the confidence to drive the future of this company.

We will work proactively and openly with government, regulators and civil society to address legacy issues that inhibit our ability to compete and to create value. We will move forward into an exciting future as a proudly South African company.

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Ensuring the health and safety of our people

Our safety performance this year has been profoundly disappointing. ArcelorMittal South Africa is not a company that pays mere lip service to safety. As the section in this report, “Protecting the health and safety of our people”, makes clear, the company has done a great deal of excellent, hard work in the recent past to protect our people, not just our employees, but everyone who interacts directly with us. Yet, this year, we suffered five fatalities at our premises, four of which were work related. Clearly we have become complacent. If we achieve nothing else this year, 2014 must be remembered as the year in which we pledged ourselves to greater, more constant safety vigilance and improvement.

The chairman, board and management join me in expressing our sincere regret to the families, friends and colleagues of those who died in work-related incidents this year: G Jochore, MA Hlongwane, R Dippenaar and KW Mkatshe.

Operating safely is not only about the wellbeing of employees, contractors and suppliers, but also a conscientious custodianship of the environmental capital at our disposal, a responsibility that the current management of ArcelorMittal South Africa takes extremely seriously.

LINK For more on how we protect the health and safety of our people, click here.

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Environmental responsibility

Our current financial constraints inhibit our ability to not only mitigate our environmental impacts immediately, but to meet our objective of being recognised as world-class in terms of how we meet our environmental responsibilities. Nevertheless, it bears stating that this year we managed to spend R63 million on meeting this responsibility and acted decisively and transparently whenever instances of non-legal compliance were detected. Over the past five years we have spent R945 million on environmental issues. Altogether, a commendable performance, I believe, achieved under very straitened financial and economic conditions.

One aspect of our financial – and especially our environmental – performance that should not be overlooked is our taking to account this year the amount of R360 million in so-called 12L tax benefits – granted in terms of the South African Income Tax Act for far-reaching energy efficiency improvements made at our plants in 2013. That ArcelorMittal South Africa would be the first company of any kind or size to be recognised by the Treasury for responsible, environmentally beneficial investments of this kind would represent a considerable achievement.

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Driving profitability

Without profits we cannot create sustainable value for stakeholders. Yet we have not been profitable since 2011. Since 2008 our ability to generate cash has reduced dramatically, to the extent that this year we were cash negative.

This unfortunate reality has many causes but we must accept that chief among these is the fact that our collective and individual performance has simply not been good enough. Our plants have underperformed, productivity has lagged and breakdowns have been tolerated as part of the steelmaking business, the norm rather than the rare exception.

As management we have committed ourselves to act with urgency to improve the performance of those areas under our control. This year we began to implement and commission far-reaching operational changes at our plants. We undertook a rebuild of our Newcastle blast furnace which will increase the capacity of the plant. We invested in systems, reconfiguration and equipment that will make our furnaces and our mills safer, more reliable and more productive.

Despite many disappointments and, we believe, avoidable setbacks, the Newcastle rebuild, undertaken at a cost of R1.8 billion, gives us a plant that will produce more steel at a lower cost. Also, every indication is that many of the most basic, most costly problems that have beset our underperforming flagship Vanderbijlpark plant in recent years have been addressed. Newcastle is expected to operate at full capacity in 2015.

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We have this year succeeded to a limited degree in reining in both fixed and variable cost increases. On cash costs, our most important inputs, iron ore and coal, showed modest increases. The impact of falling international metallurgical coal prices reflected a 9% decline in our cost of this commodity. Our total electricity bill was 2.9% lower than in 2013, due to lower production, related mostly to the Newcastle rebuild. We are confident that the greater discipline and improved oversight now being introduced into our logistics and procurement channels will translate into enhanced value for investors.

Capping and, wherever possible, reducing our costs is essential to our competitiveness in an environment of minimal growth and heightened competition. In this regard business unit managers have been empowered further in decision-making and given explicit new key performance indicators against which they will be precisely measured and rewarded.

In 2015 we aim to exceed 2013’s total production figure of 5.1 million tonnes of liquid steel. As hard as we work to produce steel and to produce it safely, we will work equally hard to sell our new expanded range of products in the South African and sub-Saharan African markets.

Despite a significant number of decisive interventions and a stronger, more determined focus on high performance in all operations, our financial performance continued to disappoint.

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The Newcastle reline had a profound impact on our 2014 results with an ebitda that reduced from R1 768 million to R1 258 million and an operating loss of R301 million against a profit of R47 million in 2013.

The cost of the rebuild further eroded our financial bottom line with capital expenditure for the year reaching R2.798 million (2013: R1.107 million) and a headline loss that was largely unchanged from the previous year.

In an environment in which ebitda margins were at their lowest for a decade and overall South African steel consumption fell by almost 500 000 tonnes in one year to approximately 4.9 million tonnes, the need to focus on operational excellence and on differentiating ourselves in highly competitive markets are readily apparent.

There were, however, some fundamental, positive developments. This year we increased our share of the domestic markets for both flat and long steel – the latter a remarkable achievement considering the Newcastle shutdown. Excluding Newcastle, our capacity utilisation improved to 86% and our penetration of export markets for flat steel rose by more than a third.

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Engaging with stakeholders

In recent years our company has succeeded in forging solid partnerships and trust out of relationships with our local communities and local governments that were previously characterised mostly by enmity and discord. Today the people living near our plants in Vanderbijlpark, Vereeniging, Saldanha and Newcastle for the most part appreciate the value we impart to their lives and societies.

In November of this year, judgment in the Supreme Court of Appeal regarding the Vanderbijlpark environmental risk assessment report was given against ArcelorMittal South Africa. The judgment had the effect of negatively impacting perceptions of our relationships with communities and other stakeholders. Upon receiving the judgment, we decided to not appeal the matter to the Constitutional Court and to hand over the documents in question while engaging in an open and, we trust, constructive dialogue with the plaintiffs and other parties over the issues that lay at the heart of this court action. The major lesson taken to heart was the need for greater engagement and openness with stakeholders.

Whereas, in the past, ArcelorMittal South Africa might have been considered somewhat opaque, starting now we intend to become known for transparency.

This unfortunate legal action and its ramifications stood in stark contrast to the overwhelming majority of our relations with local communities which have improved beyond recognition in recent years. Regrettably, the same cannot be said for our interactions with national government.

LINKFor more on how engage our stakeholders, click here.

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Since becoming CEO I have made mending fences with national government a key priority. I believe that we and the authorities are now approaching a new, more considered and better informed understanding of the many challenges each party faces, and that we are slowly beginning to feel our way towards a meeting of minds, in pursuit of our common objective to make South Africa a much better home for all its citizens.

In the second half of the year, we began a process of engaging key government stakeholders and have set up working groups with the Industrial Development Corporation, the Department of Trade and Industry and the Economic Development Department in a bid to clear mistrust and to jointly explore ways to unlock the potential of the domestic steel and beneficiation industry. Once we achieve such an understanding we will be able to start creating jobs – jobs that are sustained by profitability.

Of no less importance to our sustainability – and our ability to achieve this vision of a better, more prosperous South Africa – is the performance of those providing our key bulk services and raw materials, among them Eskom, Transnet, Kumba, various water authorities, coal providers, Sasol and Afrox.

Transnet, which rails approximately 10 million tonnes of raw materials to our plants, disappointed against its own rail delivery projections and undertakings with just 50% of deliveries being on time. This year we intensified our interaction with Transnet management to explore solutions that will meet our rail needs arising from ramped-up production. Similarly, we liaised closely with state-owned electricity utility Eskom on ways to reduce our considerable grid off-take (and costs) and to help address the severe pressures they face during periods of peak demand.

To survive and grow, we rely on many stakeholders including state-owned enterprises, suppliers, government and labour. We are acutely aware of the extent to which we depend on the performance of these many varied stakeholder groups for our sustainability and are working hard to forge new, mutually beneficial, partnerships with them.

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High-performance culture

More than ever, ArcelorMittal South Africa needs engaged employees who are motivated to do their utmost for the company. By almost every important metric, our business compares unfavourably with other global primary steelmakers in terms of ebitda, profitability and productivity. Our total headcount has come down recently, but our personnel cost has gone up, along with most other costs, while our output and sales have been stagnant or diminishing.

We simply can no longer afford business as usual. Earlier in the year we implemented freezes on overtime, hired and service-contract labour and non-essential employment. And then, in Q4, we began a difficult, frequently painful, journey: optimising and reorganising the corporate service departments. This process entailed decentralising some functions to give business units more accountability, to move corporate service functions towards a more strategic monitoring function, while reducing our headcount within these departments. To minimise forced retrenchments, we offered voluntary severance and early retirement packages to employees in affected areas.

One of the fundamental strategic objectives formulated in H2 of 2014 was the achievement of a high-performance culture. The spirit with which our employees at all levels have embraced and committed themselves to this objective has been pleasing.

In practice, a high-performance culture means individuals and teams taking responsibility for everyday safety, effective planning, optimal productivity and customer satisfaction. By consistently achieving high performance we will keep our plants safe, we will optimise our operations and our return to profitability will ultimately justify the continued provision of financial capital. In 2015 we will focus on developing and implementing an employee value proposition in order to rebuild morale and focus our employees on common goals.

LINK For more on creating a high performance culture, click here.

Outlook

We expect higher production and sales volumes following the completion of the reline of the blast furnace at Newcastle and the seasonal slow-down in the fourth quarter of 2014. Although we expect international steel prices to remain low for the first half of the year, these factors, together with ArcelorMittal producing to full capacity and reducing costs should contribute positively to the results.

These are challenging times for ArcelorMittal South Africa, for the South African steel industry and for the country as a whole. If we as a company, and as a country, are to survive and thrive, we need to make tough choices and collaborate more closely with all stakeholders to achieve mutually beneficial outcomes. We will and already are transforming ArcelorMittal South Africa to the betterment of all stakeholders.

Paul O’Flaherty
Chief executive officer