The company recently reported a headline loss of R237 million for the first quarter of 2009, down from a R1.06 billion profit for the fourth quarter last year, as a result of a sharp decline in demand and prices of steel and the persistence of high contract prices for raw material inputs, particularly coking coal. 

As expected, worsening economic conditions had a substantial negative impact on sales and income . Revenue for the quarter decreased by 24% to R6.17 billion compared to the previous quarter. At the operating level the loss was R145 million from a profit of R1.61 billion in the fourth quarter of 2008.

The decline in earnings was further aggravated by lower income from the Coke & Chemicals business amid a slump in demand for market coke from the ferro-alloy industry. The company also made losses on foreign currency transactions as the Rand strengthened against the US dollar during the first quarter of this year.

Commenting on the results, ArcelorMittal South Africa CEO Nonkululeko Nyembezi-Heita said: “As anticipated, our performance was lower for the quarter due to the global financial and economic crisis. Several factors contributed to the weaker results including; the sharp decline in steel prices; continued weak demand; and the slower than expected pace of de-stocking by steel merchants. The outlook for global steel production has not improved significantly and it now appears that the second quarter will be extremely challenging.

“In the light of the deepening crisis, we have proactively and prudently implemented additional cost savings measures in the first quarter. Given that prices have continued to decline in April we are looking at further actions to reduce the cost of production.”

Market Review
The global steel industry has been particularly hard hit by the severe downturn of the world economy. Steel export prices are falling below the operating cost level of many steel mills and, in some cases, even below their marginal costs. Latest Worldsteel figures show that steel ouput declined by 24% in the first quarter of this year compared with the first quarter of 2008.

In view of the downbeat performance of the global steel industry, the company’s domestic steel sales for the quarter were resilient at 686 000 tonnes, 4% down on the previous quarter, but still 43% lower than the corresponding period last year. This was mainly due to a 22% quarter-on-quarter decline in manufacturing activities, the negative impact of tight credit conditions on demand, especially from the building and construction industry, and higher inventory levels in the downstream industry. On a positive note, the public sector’s infrastructure programme continues to underpin domestic demand, with steel sales to Eskom’s new power stations starting to take off.

Operations
The results indicate an underlying resilience in ArcelorMittal South Africa’s performance. Despite the tremendous economic challenges, the companyraised liquid steel production for the first quarter of this year by 38% compared to the fourth quarter, although this is still 26% lower than output in the first quarter of 2008. Production levels fell from around 80% of capacity in the first quarter last year to a low of below 50% in the fourth quarter as the company aligned the supply of steel to reduced demand levels. Production has picked up to levels of around 60% of capacity in the first quarter of this year as the loss in sales on the domestic market was shifted to export orders. Export sales comprised a third of total sales in the quarter compared with 22% in the fourth quarter. Sales to the rest of Africa dominated the export order book.

The company is focused on continuing to match production output with demand for steel products.

Outlook
Looking ahead Nyembezi-Heitasaid: “Results for the second quarter are expected to improve marginally as coking coal input prices are set to come down during the quarter, when the current contracts expire. While steel prices are expected to remain weak, domestic sales volumes should increase slightly during the second quarter as the de-stocking process nears its end. 
“A decline in inflation, further likely interest rate cuts and Government’s commitment to continue with its infrastructure programme, should also improve consumer and investment spending as the year progresses. ”

Share buy-back
The company is proposing to return about R4 billion to shareholders via a share buy-back of about 10% of issued ArcelorMittal South Africa shares. The shares will be bought at a price of R87.64 a share, which is based on the 5-day volume weighted average traded price at close of business on April 20, 2009.

“We currently have excess free cash of more than R5 billion above our operational requirements and, given current share price levels, a buy-back is an appropriate mechanism to return excess equity to shareholders,” Nyembezi-Heita explained.

Details of the scheme will be released on SENS on or about May 5, 2009.

The transaction will secure part of ArcelorMittal South Africa`s future coal needs, mitigating one of the company`s key variable input costs. As part of the transaction, ArcelorMittal South Africa has secured an option to enter into an off-take agreement with CoAL for the supply of 2.5 million tonnes of metallurgical (coking) coal annually, with an option to raise this further in future.

ArcelorMittal South Africa last year purchased 5.2 million tonnes of coal. This makes coal one of the largest input raw materials for the company. 

In addition to securing future coal supplies, ArcelorMittal South Africa believes that the quality of the coal it will procure from CoAL`s Vele Colliery Project will enable the company to increase the quantity of local coal in its overall coal mix to feed its furnaces, further enhancing management of input costs.

Commenting on the transaction Nku Nyembezi-Heita, ArcelorMittal South Africa CEO said: “This transaction ensures secure supplies of a key input material for the steelmaking process and is an important step in our strategy to pursue raw material backward integration.”

CoAL is focused on the acquisition, exploration and development of thermal and metallurgical coal projects in South Africa. Listed on the Australian Stock Exchange (“ASX”), London`s Alternative Investment Market (“AIM”) and the JSE, the company currently has three coal projects in various stages of development 
namely:                                                                        
*    Mooiplaats Thermal Coal Project;                                          
*    Vele Coking Coal Project (74% ownership); and                             
*    Makhado Coking Coal Project

CoAL also owns NiMag, an alloy processing company, and Holfontein, a small coal project which is non core to the operations of the company.

The 16.3% stake makes ArcelorMittal South Africa CoAL`s second largest shareholder after the 17.3% owned by Africa Management Limited, a black economic empowerment company associated with the Mvelaphanda Group.

CoAL Managing Director Simon Farrell commented: “We welcome ArcelorMittal South Africa as major shareholders and first customer for our coking coal products.”

Mamelodi Primary is scheduled for completion by the end of the year. The remaining nine schools, one school scheduled for each province and two in the Eastern Cape, will be built over the next seven years depending on guidelines provided by the department of education and economic circumstances. The total value of the schools programme is estimated at R250 million with Mamelodi primary projected to cost R39 million. The schools will be built using steel supplied by ArcelorMittal South Africa.

For ArcelorMittal the Mamelodi project is another crucial pillar in its strategy of investing heavily in skills development, training and education. This strategy includes promoting maths and science skills at high schools; an extensive bursary programme for artisans, engineers and other technical skills; and, upgrading the skills of its own employees.

This investment not only ensures that the company has a pool of skilled resources for its own operations, but also contributes towards addressing the skills shortage in the country in general. Under government’s Jipsa programme ArcelorMittal is one of the companies that has committed itself to producing more artisans than it needs for its own businesses.

The company’s CEO, Nonkululeko Nyembezi-Heita explains:

“Our core business relies heavily the availability of skilled people in the scientific, engineering and  technological sectors as well as artisans. The key pillar of our skills policy – and that of JIPSA – is to align tertiary education and other institutional training with the actual skills required by both the public and private sectors.”

The company’s multi-million rand investment strategy to date has been a successful one and ArcelorMittal South Africa has been recognised as a corporate leader in the field of skills development and training.

The company is particularly proud of its R28 million investment in Science Centres in Sebokeng and Saldanha, adjacent to its Vanderbijlpark and Saldanha operations respectively. The Science Centre in Sebokeng, opened in 2006, has uplifted the level of science, mathematics and English education for over 2000 pupils at 43 schools in Sebokeng. The centre offers pupils access to classrooms, science laboratories, state-of-the-art computer centres and interactive science exhibitions and offers curriculum-linked science and mathematics instruction. It contributed towards a higher-than-average pass rate among matriculants in the area last year. Fifteen successful matriculants have received ArcelorMittal bursaries, including five bursars studying engineering at universities. The Saldanha centre was only opened in December 2008.

Says Nyembezi-Heita: “ArcelorMittal is focused on developing a strong mathematics, science and technology culture amongst schools. The company’s array of education initiatives is geared towards improving education within targeted communities, promoting scientific literacy and enhancing performance at secondary school level in order to benefit the wider economy.

“This investment in primary education in a way completes the circle and we now have a fully integrated education and skills strategy in place upon which we can structure future investments.”

In a first for South Africa, Mamelodi Primary School will be built using insulated panels technology, which relies heavily on steel as a building material.  It can withstand extreme weather conditions, is fire resistant and ten times faster to erect than using conventional building technologies.