Johannesburg , 8 February 2011

Salient features

Financial Review

ArcelorMittal South Africa (“ArcelorMittal” or “the company”) today announced attributable earnings of R1.3 billion for the year ended 31 December 2010, compared to a loss of R478 million for the corresponding period ended 31 December 2009. 

Headline earnings per share improved from a loss of 104 cents in 2009 to a profit of 343 cents per share in 2010, and the operating profit was R2.2 billion, compared to R229 million in the previous year.

The earnings increase was driven by a 13% rise in sales volumes to five million tonnes and a vastly improved performance from the coke and chemicals business.

Average net realised steel prices in rand terms increased by 3% over the previous year. On average, the rand strengthened 13% against the US dollar (R7.34 in 2010 compared to R8.44 in 2009). 

ArcelorMittal South Africa CEO, Ms Nonkululeko Nyembezi-Heita, commented: “ The overall result is pleasing, with a marked reversal in comparison to the previous twelve months.  But it was certainly a year of two distinct halves, with a strong first half when input costs were contained and there was significant re-stocking in the market. However, this was followed by rapid rises in raw material prices and deteriorating demand conditions which, along with a strengthening rand, contributed to a modest R68 million profit in the third quarter and headline loss of R495 million in the final quarter.

What we experienced in quarter four was the double-edged sword effect of an overvalued currency, namely damaging our prospects in both export markets where we lose business because we are uncompetitive and the domestic market because we can’t compete with cheaper imports. “

“It was encouraging that our full-year EBITDA margin doubled to 12% from 6% the previous year and our overall cost base was fairly well managed” she said. “The capacity utilisation improvement from 66% to 71% certainly helped keep costs under control. ”

Efforts to re-direct a larger proportion of steel sales to export markets resulted in an increase in steel inventory levels due to the longer sales cycle inherent in servicing those markets.

The cash cost of steel sales on a rand per tonne basis decreased by 2.5% over 2009 due to stock movements.    

The impact of the stronger rand on imported material and the increase in production volumes of hot rolled coil of 13% further contributed to the lower cost per tonne. However, this was partly offset by a significant increase in the price of iron ore, imported iron ore pellets, domestic coking coals, zinc, tin and ferro-alloys. 

Sishen iron ore prices were 119% higher compared to 2009 because of the contractual dispute with Kumba Iron Ore Limited over the supply of iron ore and the subsequent conclusion of an interim agreement pitched higher than the traditional ‘cost plus 3%’ agreement.

Domestic sales volumes for the last quarter of the year under review decreased by 22% compared to the third quarter and by 21% compared to the fourth quarter of the previous year. The significant decline could be attributed to a number of factors, principally uncertainty over steel supply as a consequence of the dispute with Kumba and the transport strike in the first half coupled with the appreciation of the rand. In particular, the latter made it difficult for local manufacturers to compete with imports which surged to the highest level in 30 years. The delay in the roll-out of infrastructural development projects also played a role and the relatively low level of consumer spending.

Average net realised prices achieved in the fourth quarter were 11% lower than third quarter and 2% down on the corresponding quarter in 2009.

Operations

The flat carbon steel products division’s operating profit of R347 million was 157% higher than the previous year, mainly due to a 17% increase in total sales volumes, from 2,9 million tonnes in 2009 to 3,3 million tonnes in 2010.  Export sales increased by 30% and domestic sales by 12% over 2009.  Sales prices were on average 1% higher in rand terms than the prices achieved in 2009.  Liquid steel production of 3,8 million tonnes increased by 11% over the previous year.  The cash cost of hot rolled coil increased by 4% compared to 2009.  Capacity utilisation increased to 67% from 61% at the end of 2009. 

The long carbon steel products division’s operating profit increased by 162% to R826 million compared to the previous year.  This was due to a 6% increase in average sales prices in rand terms compared to 2009. 

Total sales volumes increased by 5% over the previous year to 1,7 million tonnes, with an 8% increase in domestic sales and a 1% decrease in export sales volumes.  Liquid steel production declined by 1% to 1,9 million tonnes compared to 2009. The cash cost of billets increased by 5% compared to 2009. Capacity utilisation decreased marginally to 81% from 82% at the end of 2009.

The coke and chemicals division operating profit of R985 million was a substantial 119% higher than the R449 million achieved in 2009.  This is mainly due to a 45% increase in sales volumes of market coke from 433 000 tonnes in 2009 to 630 000 tonnes in 2010.  Sales prices for market coke increased by 7% compared to 2009.

Market Overview

Internationally , real demand for flat products in the US remained lacklustre during 2010, but a short-term surge was evident due to restocking. Many European Union economies were in serious difficulties and consumption was unlikely to grow to any great extent. European demand for long products was poor as the construction industry continued to languish. 

Prices for most products in China remained stable after rising earlier due to the production constraints imposed by the government in an effort to conserve energy. Chinese domestic demand had remained firm since quarter three 2010, and seasonal effects maintained a steady demand during the rest of quarter four.  Demand in the rest of the Asian region was steady.  In the Indian Ocean islands demand for flat products dropped somewhat while trading in the long products market remained unchanged. Demand for both flat and long steel products in the rest of Africa remained steady throughout fourth quarter 2010.

In South Africa,after the initial recovery in the manufacturing sector in the early part of the year, growth in the sector slumped in the third quarter. This was mirrored in the overall GDP growth rate which declined from 2.8% in second quarter to 2.6% in quarter three. The latest GDP figures show that notwithstanding this slowdown in overall economic growth, the momentum of consumer spending picked up in the latter part of the year, presumably as a result of the effect of lower interest rates. However, investment spending slowed, specifically in the public sector. The further strengthening of the rand against the US dollar was the major factor affecting performance in the second half, serving to weaken the competitiveness of South Africa’s export industries and the ability of domestic industry to compete with imports.

Safety, Health and Environment

ArcelorMittal South Africa’s health and safety initiatives continued to be an overriding priority.

“ For the first time in its history, ArcelorMittal South Africa achieved the goal of zero work related fatalities over a calendar year,” said Ms Nyembezi-Heita. “We remain determined to further improve our performance in this area through various efforts such as stringent implementation of our fatality prevention standards”.

The lost time injury frequency rate of 1.64 was a record for the company, marking the first time that this indicator dipped below 2.  The LTIFR for 2009 was 2,6.

During the year, the Saldanha, Vereeniging, Vanderbijlpark and Newcastle facilities all achieved the important milestone of one million man-hours worked without a lost time injury while the Vanderbilpark facility achieved over three million hours .

Ms Nyembezi-Heita said that the company had spent R1 070 million over the past five years in pursuit of compliance with environmental legislation.

One of the key projects for the year was the completion of the new waste disposal site at Vanderbijlpark Works in December.  All waste would now be disposed of on this site, which complies with all legal requirements.

Other important environmental projects currently underway are:

• Installation of a new emission abatement system for the Sinter Plant at Vanderbijlpark Works, scheduled for completion in the current quarter. This will reduce emissions from the plant by more than 70%;
• Installation of a new desulphurisation plant at Newcastle Works, scheduled for completion during the course of 2011.  This project will assist in mitigating visible roof emissions from the Basic Oxygen Furnace Melt Shop; and
• Work on the zero effluent discharge plant at Newcastle Works is ongoing with implementation due in 2013.

Significant investment would be required at the company’s coke production facilities to ensure compliance with the new Air Quality Act promulgated on 31 March 2010.  Project work has started and various alternatives were being investigated to integrate compliance requirements with long term coke and energy needs.

The Carbon Tax Discussion Paper published on 13 December 2010 could have a significant impact on the company’s financial performance.  The company was engaging with other industry groups and would submit its comments to Government in due course.

Other Events

• ArcelorMittal South Africa and Kumba are continuing the arbitration process to resolve the iron ore dispute.
• The company’s intention to conclude a Broad Based Black Economic Empowerment transaction remains firm. 
• The fulfilment of conditions precedent remains outstanding.  A further announcement will be made in due course.
• The satisfaction of the conditions precedent related to the acquisition of the shares of Imperial Crown Trading 289 (Proprietary) Limited (“ICT”), as announced on SENS on 10 August 2010, is outstanding.  The due diligence process is still underway
• There are currently ongoing cases at the Competition Tribunal as well as the Competition Commission and the company continues to co-operate fully with the authorities in these investigations. 
• While an interim cash dividend of 150 cents a share was declared at half year, , the Board of Directors has declared that no dividend at year-end.

Outlook

Ms Nyembezi-Heita concluded: “With the expected increase in demand for steel and higher international steel prices, a turnaround in earnings is anticipated for the first quarter 2011. We expect this will be partially offset by a rise in input prices, mainly of scrap. Changes in the rand/US dollar exchange rate will, as always, have an important impact on financial results”.
-ends-

For further details, contact :

Themba Hlengani: 0834400158

ArcelorMittal South Africa