ARCELORMITTAL SOUTH AFRICA – RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2016 AS REPORTED ON JULY 29

Constrained global steel markets, due to the lack of demand and an oversupply of steel from China, resulted in ArcelorMittal South Africa reporting a headline loss of R458 million, compared to a headline loss of R109 million in the first six months of 2015.

EBITDA decreased by R359 million to R282 million from R641 million in the comparable period. A loss of R275 million before interest and tax is R302 million lower than the profit of R27 million reported in the first half of 2015, driven mainly by the lower steel prices. The net loss of
R450 million is R339 million more than the net loss of R111 million in H1 2015.

“Although global steel prices increased in the first half of 2016, they were still below prices of the first half of 2015,” said Mr Wim de Klerk, Chief Executive Officer of ArcelorMittal South Africa. Liquid steel production for the first six months of the year was 2.5 million tonnes, a decrease of 43 000 tonnes compared to the first six months of 2015 as a result of the closure of the Vaal Meltshop at the Vereeniging Works. Capacity utilisation improved from 80% to 83%.  Total sales volumes were up by 10% (210 000 tonnes) against the comparative period in 2015, primarily due to the 10% import duties, market restocking and the closure of Evraz Highveld Steel, which increased local sales by 15%. This was partially offset by a 5% decrease in export sales.   The decrease in the net borrowing position from R2 522 million to a net cash position of R1 010 million was due to the successful Rights Issue, which resulted in a cash injection of R4 500 million in January 2016. This was used to repay the ArcelorMittal Holdings AG loan and for capital expenditure to maintain operations.

ArcelorMittal South Africa has initiated a number of strategic initiatives across the operations aimed at improving efficiencies and optimising costs. The time management system introduced at all ArcelorMittal South Africa operations together with a strategic initiative at the Vanderbijlpark Works are expected to yield material savings over the next 18 months.  “We continue to investigate initiatives which will improve efficiencies, optimise costs and ensure the sustainability of our operations,” added De Klerk. Governments of other primary steel producing countries have responded to the oversupply in the global steel market by providing import protection to ensure the survival of their local steel industries. The South African government has also offered its support to ensure a viable local steel sector. In particular, 10% import tariffs have been implemented on 10 locally produced products and instruction notes prescribing minimum thresholds of local content in respect of a number of products have been issued by National Treasury. However, the South African steel sector remains vulnerable and the other protection measures, such as safeguard duties, a fair pricing mechanism and the designation of local steel are all still critical.

De Klerk noted: “Finalisation of these initiatives will go a long way towards ensuring the sustainability of the South African steel sector.” ArcelorMittal South Africa and the Industrial Development Corporation (IDC) are investigating options, together with the business rescue practitioner of Evraz Highveld Steel and Vanadium Limited (Highveld), to supply blooms and slabs to Highveld for processing into heavy structural steel. If successful, this could result in the re-opening of the heavy section mill at Highveld, making a supply of heavy structural products available to the South African market.  It is anticipated that the blooms and slabs would be processed by the heavy section mill into heavy structural steel initially in terms of a one-year agreement. The possibility of ArcelorMittal South Africa and the IDC having the option to acquire the heavy section mill after a period of one year is also being considered. If the agreement for the supply of blooms and slabs is implemented, this could have a positive impact on the revenue of ArcelorMittal South Africa as a result of increased volumes.

While safety remains its number one priority, ArcelorMittal South Africa, unfortunately suffered two fatal incidents at its Newcastle operation. “This is unacceptable and we are intensifying our efforts to ensure the safety of our employees and contractors and re-enforcing our commitment to Zero Harm,” said De Klerk. Despite the tough economic conditions under which the company operates, key environmental projects remain a focus area to ensure environmental compliance. The Newcastle zero effluent discharge facility is now operational, and the effluent recovery and treatment systems at the Vanderbijlpark Works are being improved at a cost of R88 million. It is expected that this project will be completed by the end of Q3 2016. The proposed implementation of a carbon tax bill by the National Treasury remains a concern as the company’s financial recovery and competitiveness will be affected. The Carbon Tax Bill – as published in November 2015 – forms the basis of further engagement with the National Treasury. The outlook for the second half of 2016 remains depressed. Although the average net realisable steel price is expected to improve, costs are also expected to increase in H2 2016. Under the current trading conditions, shipments are expected to remain flat.

“As a management team we remain overwhelmingly focused on enhancing our production efficiencies, containing our costs and preserving cash during these challenging times,” concluded De Klerk. “We also look forward to the ongoing support and positive interventions by government, which will ultimately ensure the long-term sustainability of the South African steel sector.”