Salient features

• Sales volumes increase by 31% to 2.7 million tonnes
• Operating profit of R2,3 billion (H1 2009: R322 million – loss)
• Headline earnings of R1,8 billion (H1 2009: R844 million – loss)
• Interim pricing agreement reached

Financial Review

ArcelorMittal South Africa (“ArcelorMittal” or “the company”) has today announced headline earnings of R1 804 million for the first six months of 2010, compared to a loss of R844 million during the corresponding period last year and a profit of R404 million in the preceding six months.

Commenting on the results, ArcelorMittal CEO, Ms Nonkululeko Nyembezi-Heita, said: "The turnaround in sales volumes and prices was achieved on the back of an improvement in market conditions and I am pleased that this, together with better operating efficiencies, has translated back to our bottom line”.

The company’s total steel sales for the first half 2010 were 2.7 million tonnes, which was 31% higher than the corresponding period last year and 12% higher than the preceding six months.

Net realised prices were on average 8% higher than the preceding six months and remained at much the same levels as the corresponding period last year. In US Dollar terms, however, prices were up 22% compared to the first six months last year, due largely to the strength of the Rand that moved from an average Rand/US Dollar exchange rate of R9,22 to R7,54.

The cash cost pertaining to steel sales for the first half 2010 decreased by 15% compared to this time last year, driven largely by the lower cost of coking coal as well as the higher production volumes. Compared to the preceding six months, the cash cost decreased by 7%.

Ms Nyembezi-Heita added, “The positive growth in sales was boosted by the 2010 FIFA World Cup with increased consumer spending and the infrastructural development initiatives that took effect. Merchants are now, however, experiencing a slowdown in activities and we expect a decline during the second half of this year”.

Operations

The flat products business posted an operating profit of R1 157 million, compared to a loss of R577 million during the corresponding period last year and a loss of R37 million during the preceding six months. Sales increased by 32% from a year ago to 1.77 million tonnes, up 17% on the previous six months.

Liquid steel production increased by 34% compared to the corresponding period last year, up 7% on the previous six months.

“Production levels” said Ms Nyembezi-Heita, “increased to approximately 72% of capacity compared to 54% a year ago, while the cash cost of production for hot rolled coil decreased by 11% compared to the corresponding period last year”.

The long products business posted an operating profit of R712 million, compared to a loss of R12 million during the corresponding period in 2009, and a profit of R327 million during the preceding six months.

Sales increased by 29% to 928 000 tonnes compared to the same period last year and 4% compared to the preceding six months. Liquid steel production increased by 18% compared to the corresponding period last year and was 2% down on the previous six months.

Production levels increased to approximately 87% of capacity compared to 74% a year ago. The cash cost of production for billets decreased by 14% compared to the corresponding period.

The Coke and Chemicals business posted an operating profit of R481 million, compared to R95 million during the corresponding period last year and a profit of R354 million during the preceding six months. Sales of over 300 000 tonnes increased by 300% from a year ago, due to a sharp rise in demand from the ferro-alloy industry. Compared to the preceding six months, sales dropped slightly by 31 000 tonnes.

Market Overview

Internationally, steel demand has increased above the levels supported by restocking (outside China) and rapidly rising steel prices in almost all regions, which was largely driven by increasing raw materials costs. However, during the second quarter, markets in almost all regions started to soften:

• In EU countries, economic instability emanating from renewed financial turmoil had a negative effect on market confidence;
• In Asia, prices for finished steel products started to fall, especially in the case of flat products; and
• Demand for both flat and long steel products in Africa remained relatively stable.

Demand in China, however, remains strong on the back of an expected real GDP growth rate of 10% for 2010, up from an already impressive 9% in 2009.

The company’s exports increased by 10% compared to the preceding six months, and by 17% compared to a year ago.

Domestically, growth in real GDP accelerated to an annualised rate of 4.6% in the first quarter, the highest level in seven quarters, following an increase of 3.2% in the fourth quarter of 2009 and a low of -7.4% in the first quarter of 2009. Sales to the domestic market during the first half of 2010 increased by 37%, compared to a year ago and by 13% compared to the second half of 2009.

Safety, Health and Environment

As a result of a number of material measures taken to reinforce adherence to safety standards and entrench a positive safety culture, the company’s lost time injury frequency rate, measured over a million man hours, improved impressively to 1.4 at the end of June 2010, from 1.7 at 30 June 2009 and from 2.6 as at the end of December 2009.

The implementation of the company’s environmental program to improve emissions to air, waste management and water management is gaining momentum and will add to the significant successes achieved thus far. Progress has also been made in preparing the company to comply with the new Air Quality Act.

Other Events

• ArcelorMittal received a notice from Sishen Iron Ore Company (Pty) Limited (SIOC), a Kumba Iron Ore Limited subsidiary, on 5 February 2010, asserting that with effect from 1 March 2010, it will no longer supply iron ore to ArcelorMittal on a cost plus 3% basis as provided for in the supply agreement concluded between the parties in 2001, on the grounds that ArcelorMittal has lost its 21.4% undivided share in the mineral rights at the Sishen mine. 

• ArcelorMittal has rejected this assertion and is of the firm opinion that Kumba is obliged to continue to supply iron ore to ArcelorMittal at cost plus 3%. The parties have commenced arbitration proceedings to resolve the abovementioned dispute. 

• In terms of an interim pricing agreement between the companies, ArcelorMittal will continue to purchase the annual 6.25 million tonnes of iron ore under the standard payment terms, in accordance with the disputed supply agreement. ArcelorMittal and Kumba have agreed a fixed price, ex mine, of $50 per ton of iron ore for lump material supplied to the Saldanha plant, and $70 per ton of iron ore for both lump and fine material delivered to ArcelorMittal’s inland plants. Importantly, there will be no escalation in the prices agreed for the duration of the interim period, which commenced from 1 March 2010 and will expire on 31 July 2011. 

• As announced previously, ArcelorMittal imposed a surcharge on domestic sales to compensate for the iron ore cost increases. In view of the interim agreement being settled, changes will now be effected to ArcelorMittal’s commercial policy, which will result in a single all-in price being invoiced, reflecting the higher cost of iron ore rather than a separate surcharge. The company’s customers have been informed that the surcharge will be dropped with effect from 1 August 2010, and the new pricing structure has also been announced. The extra amount that is now due and payable to Kumba exceeds the funds that were raised as a surcharge over the last few months and, therefore, these accumulated surcharge funds and the shortfall will be paid over to Kumba.  

• This interim price agreement has no bearing on the arbitration process currently underway or ArcelorMittal South Africa’s conviction that the supply agreement remains legally valid and binding on the parties.

• There are currently two cases that were previously referred to the Competition Tribunal, which relate to alleged price fixing and market division. The Competition Commission is also formally investigating four cases against ArcelorMittal. None of these have been referred by the Commission to the Tribunal. The company is co-operating fully with the Commission in these investigations.

• The Board of Directors has declared an interim cash dividend of 150 cents a share.

Outlook

Commenting on the outlook for the next quarter, Ms Nyembezi-Heita concluded: “The earnings for the third quarter are expected to decline compared to the previous quarter due to lower international steel prices and demand together with input material costs that still remain at high levels”.

-Ends-

For further information contact:

Themba Hlengani: 0834400158

ArcelorMittal South Africa