BROADENING OUR HORIZONS - Arrium

OneSteel Annual Report 2011REVIEW OF OPERATIONSAt A Glance16Iron OreReCYCLINGMINING CONSUMABLESYear ended 30 June2011$M2010$M%ChangeTotal Revenue/Income 948.4 782.3 21.2EBITDA – Underlying 554.2 361.2 53.4EBIT – Underlying 523.5 333.4 57.0Sales Margin (EBIT) 55.2% 42.6% 12.6ptsAssets 948.4 816.7 16.1Funds Employed 776.3 717.4 8.2Return on Funds Employed (%) 70.1% 47.4% 22.7ptsEmployees (number) 367 339 8.3Year ended 30 June2011$M2010$M%ChangeTotal Revenue/Income 1,507.2 1,123.7 34.1EBITDA – Underlying 37.6 22.9 64.2EBIT – Underlying 20.9 7.7 171.4Sales Margin (EBIT) 1.4% 0.7% 0.7ptsAssets 652.5 710.7 (8.2)Funds Employed 554.3 618.4 (10.4)Return on Funds Employed (%) 3.6% 1.3% 2.3ptsEmployees (number) 1,033 1,019 1.4Year ended 30 June2011$M2010$M%ChangeTotal Revenue/Income 1,079.3 680.1 58.7EBITDA – Underlying 97.7 83.2 17.4EBIT – Underlying 65.3 62.3 4.8Sales Margin (EBIT) 6.1% 9.2% (3.1pts)Assets 2,262.4 1,158.5 95.3Funds Employed 1,945.7 1,053.6 84.7Return on Funds Employed (%) 4.4% 6.0% (1.6pts)Employees (number) 1,864 924 101.7Market conditionsChinese demand for iron ore remained verystrong during the year. While there weresome periods of lower demand and prices,these tended to be influenced by externalfactors such as Chinese power restrictionsor lower credit availability due to Europeandebt concerns. The strength in demand isevidenced by record Chinese steel productionduring the year.PerformanceThe Iron Ore business achieved sales volumesof 6.04 million tonnes despite significantdelays due to abnormally adverse weatherduring the year. This not only limited loadingof ships but also affected access to mineswhich resulted in slow processing andloading times.InitiativesThe business continues to identify andincrease iron ore reserves and resourcesunder Project Magnet Phase 2 as well as focuson work to identify non-ferrous opportunities.The business is continuing to invest to developits mines as well as adding an additionalore beneficiation plant. The companyrecently announced its intention to expandiron ore sales to 9-10 million tonnes perannum through expansion of the company’sWhyalla port facilities, underpinned by anagreement to purchase iron ore assets fromWPG Resources.OutlookDemand from China is expected to remainstrong. The Chinese Government’s currentoutlook combined with higher operating/capital costs across most supply regions,grade reductions in China and other majorsuppliers and a longer forecasted timeframeto deliver increased supply is expected to keepmarket pricing above historical averages.For more information on Iron Ore, refer topage 18.Market conditionsInternational demand for scrap metal trendedup during the year, helping to lift US dollarsales prices in both ferrous and non-ferrousmarkets. However, the Australian ferrousmarket remained challenging during the year,as weak industrial and construction activitycontinued to affect the availability of scraparisings, with competition for the short supplyleading to high purchase prices and continuedmargin pressure.PerformancePerformance improved significantlycompared to the prior year with the largestcontributor being the US business despiteforeign currency translation losses. Both theAustralian and Asian businesses have shownimprovements largely related to operationalefficiencies and through increased volumesof non-ferrous sales.InitiativesThe segment continues to deliver onits trading strategy for the non-ferrousbusinesses in Asia and Australia and itsgrowth strategy for the US business.The Australian business consolidated theprior year acquisitions, delivering expectedsynergy benefits while also delivering furtheroperating and cost improvements.OutlookWe expect overseas operations to build oncurrent year performance, while conditions inthe Australian market will remain challengingin the short term with strong competitionfor the short supply of scrap arisings. Weanticipate USD pricing to remain relativelystable in the short to medium term.For more information on Recycling, refer topage 20.Market conditionsMining activity in our key markets ofAustralasia, North and South America remainstrong as high metal prices continue toinfluence existing mines to maximise mineralextraction and processing. Demand for otherMining Consumables products, mining ropesand rail wheels, are driven by coal and iron oreproduction which also remain strong.PerformanceThe newly acquired Moly-Cop and existinggrinding media businesses in the UnitedStates and Australasia, as well as theAustralian ropes business performed well,all underpinned by strong levels of miningactivity. In the Australian rail wheels business,prices and sales volumes were significantlyadversely impacted by the strongerAustralian dollar.InitiativesOneSteel acquired the Moly-Cop Group duringthe year and the new Mining Consumablessegment was formed from 1 January 2011. Theintegration of the new businesses has gonevery well and was substantially completed bythe end of April.OutlookLooking ahead, we expect demand forgrinding media to remain strong in the shortto medium term driven by copper, goldand iron ore demand in our key markets ofNorth and South America and Australasia,as existing and new mines look to maximisemineral extraction and processing in responseto record prices for these commodities. Weexpect to see continued price pressure for railproducts due to the strength of the Australiandollar; however, demand for mining ropes andrail wheels is expected to remain strong in theshort to medium term.For more information on MiningConsumables, refer to page 22.1 The FY10 results for the Manufacturing segment have been restated to reflect changes in organisation structure following the formation of the newMining Consumables segment as a result of the acquisition of the Moly-Cop Group. OneSteel’s existing Waratah, Newcastle facilities, which include thegrinding media and rail wheel businesses, OneSteel’s grinding media businesses in the United States and Indonesia, and the wire ropery business atNewcastle previously reported as part of the Manufacturing segment now form part of the Mining Consumables segment.