Rebuilding profitability and mitigating risk - ArcelorMittal South Africa

ArcelorMittal South Africa
Rebuilding profitability and mitigating risk
Matthias Wellhausen, CFO 31 May 2013

Disclaimer
Forward-Looking Statements
This presentation may contain forward-looking information and statements about
ArcelorMittal South Africa and its subsidiaries. These statements include financial
projections and estimates and their underlying assumptions, statements regarding plans,
objectives and expectations with respect to future operations, products and services, and
statements regarding future performance. Forward-looking statements may be identified by
the words “believe,” “expect,” “anticipate,” “target” or similar expressions. Although
ArcelorMittal South Africa’s management believes that the expectations reflected in such
forward-looking statements are reasonable, investors and holders of ArcelorMittal South
Africa’s securities are cautioned that forward-looking information and statements are
subject to numerous risks and uncertainties, many of which are difficult to predict and
generally beyond the control of ArcelorMittal South Africa, that could cause actual results
and developments to differ materially and adversely from those expressed in, or implied or
projected by, the forward-looking information and statements. These risks and uncertainties
include those discussed or identified in the filings with the JSE made or to be made by
ArcelorMittal South Africa, including ArcelorMittal South Africa’s Annual Report for the year
ended December 31, 2012 filed with the JSE. These forward looking statements have not
been reviewed and reported on by ArcelorMittal South Africa’s auditors and apply only as of
the date they are made. ArcelorMittal South Africa undertakes no obligation to publicly
update its forward-looking statements, whether as a result of new information, future events,
or otherwise.
1

Agenda
• Financial performance
• Cost pressures impacting business
• Actions to improve margins
• Medium term profitability target of $100/t EBITDA
• Risk management processes
• Key messages
2

Financial performance
• Weak financial performance post crisis
• Volumes have remained stable
• Despite price recovery steel margins
deteriorating primarily due to higher
costs
Challenging costs
ArcelorMittal South Africa EBITDA ($/t)
93
53
41
31
2009 2010
2011
2012
EBITDA bridge between 2009-2012 ($m)
717
815
Productivity
198
24
19
143
EBITDA
2009
Vol
Price
Cost
Non
steel
EBITDA
2012
3

2000/01
2000/04
2001/03
2002/02
2003/01
2003/04
2004/03
2005/02
2006/01
2006/04
2007/03
2008/02
2009/01
2009/04
2010/03
2011/02
2012/01
2012/03
Strengthening currency and inflationary
pressures have impacted competitiveness
Unit labour cost increasing post crisis above
productivity
Strengthening exchange rate during 2010 and 2011
surge on electricity cost
200
190
180
170
160
150
140
130
120
110
100
90
Labour unit cost (Manufacturing)
Labour Productivity (Manufacturing)
Electricity price index
R/$ exchange rate index
340
130
320
300
125
280
260
120
240
220
115
200
180
110
160
140
105
120
100
100
2006 2007 2008 2009 2010 2011 2012
Source: Reservebank South Africa. Unit labor cost index in Rand
4

Raw material increases and incidents
have driven costs higher
Major incidents have increased fixed costs and reduced
efficiencies
6,400
6,200
6,000
5,800
5,600
5,400
Saldanha
Corex burn
Saldanha bin
collapse, BF
VDP &
Newcastle
Newcastle dust
catcher,
BF VDP &
Newcastle
Impact of major
incidents since 2009
cause lost opportunity
Newcastle
taphole repair,
VDP BF burn
through
VDP
BOF fire
140
120
100
80
60
Raw material benefit diluted with decreasing
international prices
240
220
200
180
160
5,200
40
140
5,000
20
120
0
2009 2010
Major incidents
Liquid steel production
Fixed cost $/t
2011
2012
2013F
0
100
2006 2007 2008 2009 2010 2011 2012 2013
YTD
AMSA RM index (Iron ore, coal, scrap) (Base 100 = 2006)
International RM basket index (Base = 100)
5

Improving performance challenges
remain at Vanderbijlpark
• Solid progress at Saldanha,
Newcastle and Vereeniging
• Reline of blast furnace 5 will further
improve efficiencies at Newcastle
• Ongoing Vanderbijlpark concerns:
‣ Exposure to escalating costs of
Thabazimbi ore & Tshikondeni
coal
‣ Efficiencies to be improved
‣ Underutilization of downstream
operations
‣ Off-gas utilization potential
‣ Weak domestic flat market
ArcelorMittal South Africa business units EBITDA ($/t)
Vdbp
Saldanha
Newcastle
Vereeniging
2008
2009
2010 2011 2012
6

Leading cost position for Saldanha while
Vanderbijlpark lost competitiveness
• Since 2011, world cost curve has
declined 19% ($130/t) for median
cost steel producers
• Vanderbijlpark moved from 1st to 4th
quartile due to low exposure to
international raw material prices
• Fixed price iron ore from Sishen
• Increasing cost of captive mines
• Domestic non-coking coal price
not linked to international prices
• Saldanha remained solid in 1st
quartile from 2011-2013 due in part
to significant efficiency
improvements and higher exposure
to international raw material prices
• Imported pellets
• Metallurgical coke
Source: WSD April 2013
7

Medium term $100/t EBITDA target
Target market
approach
Energy
efficiencies
Asset
optimisation
Improved
operations
2012 EBITDA/t
$100/t
$31/t
• Objective to reach improvements of
$70/t over 2012 mainly through internal
cost measures
• At 2012 price levels this will translate
into $100/t in the year 2016
• Market normalization will provide further
opportunities to increase the EBITDA up
to $150/t while volume growth will add
to results
• The improvement objective of 70$/t
provides for $12/t unfavorable carbon
tax impact. The South African policy
decisions, exchange rate movements
and international price trends may affect
favorably or unfavorably.
8

1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
A sound balance sheet with focus on
working capital management
Strong balance sheet
• Net cash 1Q13 improved by USD26m
• Intra-month borrowing (peak-demands)
• Sufficient /unutilized short term lines
• Very low financial leverage
• Non-core assets
Optimizing working capital
• 4Q12: Lower raw material stocks from improved
logistics in cooperation with Transnet
• 1Q13: Successful preservation during fire incident
• Commercial terms and cycle time management
provide opportunities
OWCR, rotation days and cash balances ($m)
Target 80
1,200
1,000
800
600
400
200
0
140
120
100
80
60
40
20
0
80
days rotation
days
Working capital ($millions)
Rotation days*
Net cash ($millions)
*Rotation days are defined as days of accounts receivable plus days of inventory minus days of accounts payable. Days of accounts payable and inventory are a function of cost of
goods sold of the quarter on an annualized basis. Days of accounts receivable are a function of sales of the quarter on an annualized basis.
9

A systematic and robust risk management
process is in place
Top 10 Risk Register
Mitigation actions
• Robust legal process
• Competitive watch and pricing
• Implement software solutions
(SAP)
• Benchmarking, reducing gaps
• Business improvement
• Blast furnace reline
• Logistics organisation and
cooperation
• Power generation
• Renegotiation of collective labour
agreement
10

Technology – Asset Risk Management.
Confidential – for internal use only
Vulnerability index improvement to be
maintained
• ArcelorMittal South Africa systematically and
continuously works to eliminate major failures
• Structured approach to pro-actively identify, analyse
and mitigate exposures
• Action ongoing to reduce exposure:
– Fire detection and protection projects
Gas tanks and coke and chemicals building
in Vanderbijlpark completed
Boilers in Newcastle completed
Passive protection on cables ongoing
– Structural repairs
Caster spray chamber and basic oxygen
furnace flare stack completed
Blast furnace N5 in progress
– Relines/repairs of blast furnaces and Corex -
Blast furnace C completed
Blast furnace N5 planned
– Maintenance contracts for fire detection and
suppression systems
• Saldanha in place, contract scope drafted for
Newcastle
– Special action after BOF incident:
• “Industrial audit” (all sites, review additional
exposures and control effectiveness)
62
ArcelorMittal South Africa
vulnerability index 5-year target
54
47
46
43
42
40
38
2008 2009 2010 2011 2012 2013 2014 2015
Vulnerability index reduced from
62% in 2008 to 43% in 2012
ArcelorMittal Group target 38% in
2015
11

Insurance will remain in place
• Insurance against property
damage and business interruption
will remain intact
• Stack up of insurance:
– deductible
– captive
– external
• Claims in excess of premiums
paid over past years
• Recent incident will lead to modest
increase in premiums between
10%-20% for over the next 3 to 5
years
• No increase in deductible
expected
Deductible details
Vdbp + New Saldanha Other
75
45 45
20
20
25 30 10
10
2011 2012 2011
Premium and claims (Rm)
Premium paid
Claims paid
Operational deductible
Captive deductible
30
20 20
20
15 15
10 5 5
2012 2011 2012
489
433
144
216
144
127
151 132 128
72 82 93
0
0
2006
2007 2008 2009 2010 2011 2012
12

Key takeaways
• The actions we are taking will drive medium term EBITDA of $100/t
– Increase operational efficiencies
– Energy efficiency gains
– Eliminate excessive costs in raw materials
– Improve supplier efficiencies
– Increase capacity utilization / optimisation footprint
– Target market approach
• Robust risk management processes have been implemented
• We will continue to maintain a sound balance sheet
Zero fatalities with record LTIFRs
13

Thank you
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