Arcelor Mittal Activity Report 2006 - paperJam

Arcelor Mittal Activity Report 2006 41Overview of operationsIn Canada and the US, where growth ratesare modest, major opportunities existfor differentiation with sophisticated usersof value-added products. End-user demandin these markets has been both robustand stable since the 2004 recovery.Arcelor Mittal is the leading North Americansupplier to these sophisticated customers.Arcelor Mittal is the number one steelproducer in both Brazil and Mexico,the two largest steel markets in LatinAmerica, and is remarkably well positionedto capture the growth opportunitiesin both markets. In Brazil, a morefavourable political environment and astronger commitment to infrastructureinvestments is pushing annual steelconsumption growth towards the 5% level.CST and Vega do Sul are already leadingsuppliers to sophisticated South Americanend-users, such as the automotive sector,and have ample opportunity to expandcapacity to meet growing regional demand.In Mexico, the acquisition of Sicartsa willprovide significant synergies in steelmakingoperations. Through its partnership withAceros Planos Mexico, Lázaro Cárdenasis already a major sheet supplier in Mexicoand continues to explore opportunitiesfor expanding its downstream presence.Through its CST and Lázaro Cárdenasoperations, Flat Carbon Americas isthe largest global supplier of slabs.With the ability to produce large volumesof special quality grades – API, IF steel,tin-mill substrate – these operations aremuch less susceptible to the volatilitythat affects commodity grades.Performance in 2006The year 2006 was a solid onefor Flat Carbon Americas, with shipmentsof around 30 million tonnes,revenues of US$21.9 billion, EBITDAof US$3.6 billion, and operating incomeof US$2.6 billion. Comparable figuresfor 2005 were 28 million tonnes,US$20.9 billion, US$3.6 billionand US$2.7 billion, respectively 1 .The Brazilian and Mexican operationsenjoyed strong and stable marketsin 2006, with those in Brazil achievingrecord output. In North America,markets tightened in the first threequarters of the year and then weakeneddue to high imports and resulting excessinventories, particularly in the distributionsector. This had a dampening effecton the seasonally weak fourth quarter.InvestmentsA major expansion at CST, which willbe commissioned in the second quarterof 2007, will boost its slab-makingcapacity from 5 million tonnes to 7.5million tonnes. The project, which is setto cost a total of US$1.2 billion, will provideCST with a large, environmentally-friendlycoke complex, a new blast furnace,new steelmaking and continuous castingcapacity, and ancillary improvementsin infrastructure. It will begin toproduce substantial additional volumesin the second quarter of 2007.The Mexican slab operations arefocused on three main goals: maintainingand extending their global leadershipin more sophisticated slabs; movingdownstream to capture domestic marketopportunities; and investing in rawmaterials. Current investments at LázaroCárdenas are targeting quality upgradesand the acquisition and expansion ofiron ore mining. The first of these miningprojects will begin production in 2007.In addition, Mexican operations willexpand by over 2 million tonnes withthe conclusion of the Sicartsa acquisitionin the second quarter of 2007.Through this acquisition, Arcelor Mittalwill become the largest steel producerin Mexico, adding to its current slabportfolio an extensive network of low-costbar capacity. In addition to the synergiesrelated to integrating primary operationswith the adjacent Lázaro Cárdenasoperations and to integrating long-productoperations into the regional long-productsgroup, it is expected to greatly increaseoutput at the Sicartsa facilities, reducingan already low-cost base.Current priorities in the US are toimprove plant performance. While morethan US$200 million of targetedsynergies announced with the acquisitionof ISG in 2005 have been realised, majoropportunities to optimise plant operationsand streamline production remain.Most of the US$450 million, now beinginvested annually, supports these objectivesby upgrading primary (iron and steelmaking)assets. In addition, significant additionalsynergy opportunities are being realisedthrough operational benchmarking withEuropean and Brazilian operations.At the same time, the US operationsare investing heavily to meet customers’evolving product needs. A prime exampleis the 650,000 tonne galvanizing linein Cleveland that was commissioned lastyear. All of these projects are being pursuedthrough Flat Carbon Americas’ closepartnership with the United Steelworkers,which benefits not only the companybut also its employees.Dofasco, the Canadian market leaderin terms of quality and value added,represents the fourth major componentin the Flat Carbon Americas portfolio.As a result of Arcelor Mittal’s consentdecree with the US Departmentof Justice, Dofasco operated undera hold-separate arrangement fromAugust 2006 until February 2007.During 2006 – benefiting frombenchmarking and synergy identificationwith the former Arcelor – Dofasco realisedmanagement gains of C$75 million,well beyond its planned targets. Integrationwith the USA now offers the opportunityto capture substantial additional synergies,particularly in terms of commercial activitiesand plant optimisation. Such synergieswill enable the Canadian operationsto strengthen their position in valueadded markets while also dealing withthe cost pressures generated by thestrong Canadian dollar.Product developmentFlat Carbon Americas’ R&D complexin East Chicago, Indiana, is pursuing themost aggressive product developmentprogramme in the company’s history.In 2006, it successfully introduced multiplenew products, particularly AdvancedHigh Strength Steel that allows automakersto produce safer, more fuel-efficientvehicles with a highly cost-competitivesteel product. The 2007 productdevelopment goals are just as aggressive.With the integration of Dofasco,this R&D group will number over 200 staff.The futureIn North America, the inventoryadjustment experienced late last yearis expected to be complete by thesecond quarter of 2007, when still-strongend-user demand – particularly inindustries such as energy, capital goodsand non-residential construction –will drive a full recovery. The criticalautomotive sector is expected to consumesteel at rates comparable to 2006.In Latin America, the strong local demandfor CST’s products experienced in2006 is expected to continue in 2007.Finally, the market for slabs is expectedto maintain its momentum.The businesses of Flat Carbon Americasare well positioned to realise theirtarget of achieving value enhancementsand synergies. Just as importantly,they are committed to remainingleading corporate citizens in termsof environmental, community andsocial impact.1 Figures for both years are pro forma,reflecting the acquisitions of ISG in 2005 andDofasco in 2006 as well as the2006 integration of South Americanoperations into Arcelor Brasil.