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Mittal Steel South Africa Limited Business Strategy

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Presentation on theme: "Mittal Steel South Africa Limited Business Strategy"— Presentation transcript:

1 Mittal Steel South Africa Limited Business Strategy
Presentation to GIBS Forum 30 March 2005 Strategy presentation to GIBS © Mittal Steel Company March, 2005

2 Index Company overview Global steel industry Business strategy
Stakeholder values creation strategies Conclusion Strategy presentation to GIBS © Mittal Steel Company March, 2005

3 Overview Record earnings in 2004 of R 4,5 bn
We employ ± people on a full time basis at an annual cost of R 2,2 bn and an additional ± 3500 full time equivalent people indirectly US$1.2bn gross export revenue. Making South Africa the 9th largest steel exporter in the world Gross contribution to state treasury of R4.5bnpa Direct rebates of R450m for promoting secondary exports & import substitutions Planned environmental spend of R964m All operations ISO certified ABE procurement of R1bn Strategy presentation to GIBS © Mittal Steel Company March, 2005

4 Shareholding In 2004 LNM Holdings increased it shareholding in Iscor Limited to +50% In December 2004 LNM Holdings and Ispat International merged to form “Mittal Steel Company NV” Listed on NYSE & Euronext Amsterdam Mittal Steel is acquiring the US-based International Steel Group (ISG) This imminent acquisition will make Mittal Steel the world’s largest and most global steel company 64 Mtpa steel capacity 14 operations on four continents 45 nationalities employees Ispat Iscor was renamed ‘Mittal Steel South Africa Limited’ on 14 March 2004 Strategy presentation to GIBS © Mittal Steel Company March, 2005

5 Mittal Steel global presents
Mittal Steel Gandrange (France) Mittal Steel Hamburg Mittal Steel Ruhrort Miattal Steel Hochfeld (Germany) Mittal Steel Poland (Poland) Mittal Steel Ostrava (Czech Republic) Mittal Steel Galati Mittal Steel Iasi Mittal Steel Hunedoara Mittal Steel Roman (Romania) Mittal Steel Zenica (Bosnia) Mittal Canada (Canada) Mittal Steel Skopje (Macedonia) Ispat Inland (USA) Mittal Steel Lazaro Cardenas (Mexico) Mittal Steel Point Lisas (Trinidad) Americas 12Mtpa Europe 18Mtpa Rest of the World 12Mtpa Mittal Steel Annaba (Algeria) Mittal Steel South Africa (South Africa) Mittal Steel Temirtau (Kazakhstan) Strategy presentation to GIBS © Mittal Steel Company March, 2005

6 Mittal Steel South Africa
Flat Steel Products Vanderbijlpark Steel – 3.4 Mtpa* Saldanha Steel – 1.3 Mtpa* Long Steel Products Newcastle Steel – 1.6 Mtpa* Vereeniging Steel – 0.4 Mtpa* Iron ore supply at cost + 3% 6.25 Mtpa from Sishen 2.5 Mtpa from Thabazimbi Thabazimbi Johannesburg Vanderbijlpark Vereeniging Sishen Newcastle South Africa Durban Saldanha Cape Town * Based on 2004 actual final product sales Strategy presentation to GIBS © Mittal Steel Company March, 2005

7 Index Company overview Global steel industry Business strategy
Stakeholder values creation strategies Conclusion Strategy presentation to GIBS © Mittal Steel Company March, 2005

8 Global steel market Consumption is highly cyclical
Annual consumption growth of 1-2% in the developed countries Slow growth in the major markets Construction Automobiles Mechanical engineering Annual consumption growth in China of >13% Representing 25% of world market Historical steel prices declined with 3% annually To remain competitive due to industry’s structural overcapacity Primary advantage is steel’s low cost Competition from substitute materials Aluminium Plastics Strategy presentation to GIBS © Mittal Steel Company March, 2005

9 Global Market Tonnes x 1 000 000 1 170 Supply Demand 1 120 1 070 1 020
970 920 870 820 2000 2001 2002 2003 2004 2005 2006 2007 Source: World Steel Dynamics/CRU Note: Apparent Steel Demand and Supply Strategy presentation to GIBS © Mittal Steel Company March, 2005

10 Industry challenges Low market growth, excluding China
Burdened with constant structural overcapacity Regionally focused producers, boosting capacity to improve competitiveness Highly fragmented production Top 10 producers accounts for 25% of world production Steelmakers often enjoy protection from their governments Faces powerful and consolidated clients and suppliers Industry is value destroying Declining steel price Increasing cost pressure Strategy presentation to GIBS © Mittal Steel Company March, 2005

11 Industry strategies Pursuit of constant restructuring and cost-cutting
Moving away from commodity steel production Specialisation Higher value added production Growth strategies are the most promising, but the most difficult to implement Growing market required Sufficient cost advantage New technologies Changing mindsets from regional to global Mergers resulting in major industrial rationalisation Strategy presentation to GIBS © Mittal Steel Company March, 2005

12 Index Company overview Global steel industry Business strategy
Stakeholder values creation strategies Conclusion Strategy presentation to GIBS © Mittal Steel Company March, 2005

13 A remarkable strategic journey
Over the last 8-10 years Ispat Iscor has undergone a remarkable journey from being a state-owned enterprise to becoming an efficient public company. While this process has resulted in dramatic change, not least of which a reduction in employees from ~ to ~12000, it has also created a strongly performing organisation generating market leading shareholder returns. What next? Restructuring Mid 1990s Kumba spin-off (retained cost + ore) Saldanha integration & turnaround Successful rights offer BAA agreement OICP**, centres of excellence, shared services LNM majority shareholding Reengineering Newcastle breakthrough 40% cost reduction* across the board Continuous improvement established Rationalisation Close non-profitable businesses – e.g., Pretoria, VDB A + B, HSMs etc. * On compressible cost base ** Organising for Improved Corporate Performance Strategy presentation to GIBS © Mittal Steel Company March, 2005

14 Strong financial results
We have delivered strong financial performance Recent performance has been achieved with the help of International steel prices attain all time high levels Strong domestic demand growth Cost escalations successfully contained Revenue, Rbn, nominal Net operating profit, Rbn, nominal ROIC (before tax), % 23% CAGR 87% CAGR 6.7 46.6% 23.0 17.5 18.5 12.1 2.6 2.6 18.3% 17.8% 1.0 6.8% 2001 2002 2003 2004 2001 2002 2003 2004 2001 2002 2003 2004 Strategy presentation to GIBS © Mittal Steel Company March, 2005

15 Total return to shareholders
A 30 percentage points increase in total return to shareholders since unbundling Historically the global steel industry has been fundamentally value destroying over the business cycle The threat of reduced growth/increased production in China may rapidly return us to a less attractive market 31% 17% 13% 1% 2001 2002 2003 2004 Strategy presentation to GIBS © Mittal Steel Company March, 2005

16 International cost competitiveness
HRC operating cost US$/t FOB – Q1/04 500 450 400 Vanderbijlpark US$/t 256 350 300 Saldanha US$/t 247 250 200 150 100 50 International HRC producers Source: Metal Bulletin Research Strategy presentation to GIBS © Mittal Steel Company March, 2005

17 Competitiveness under pressure
Strong rand Escalating global input costs Iron ore increased around 70% in 2005 Metallurgical coking coal contracts settled at approx +125% Freight rates more stable, but at high levels Coke stabilising around $250/t after peaking at > $400/t in 2004 Scrap prices expected to remain firm in 2005 Based to 100 Based to 100 140 700 Coking coal – Contract Freight rates Iron ore fines – Contract Coke 600 130 Scrap 500 120 400 110 300 100 200 90 100 80 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Strategy presentation to GIBS © Mittal Steel Company March, 2005

18 Raw material integration
Domestic supply agreements Imported Tonnes ’000 Backward integrated Iron ore 9 470 91% 4% 5% - DRI 1 401 99% 1% - Scrap 1 818 78% 22% - Coke 2 184 96% 3% 1% - Coking Coal 2 673 15% 22% 63% Other Coal 1 754 - 100% - Actual 2004 Strategy presentation to GIBS © Mittal Steel Company March, 2005

19 Strategic Goals Industry leading value-creation for our shareholders
Positive EVA over the cycle Improve operating capabilities 20% reduction in HRC/billet cash cost by 2007 Value-creating throughput increases of 2 Mtpa Build a high performance culture Create an environment that generates true employee pride & attracts, develops & retains top-performing people Be a responsible corporate citizen Strategy presentation to GIBS © Mittal Steel Company March, 2005

20 Cost Reduction Strategy
To maintain our position in the lowest cost quartile Initiatives aimed at around 50 US$/t HRC/billet cash cost reduction by 2007, through Operating efficiency improvements Raw materials & procurement initiatives Increased labour productivity Newcastle PCI project Strategy presentation to GIBS © Mittal Steel Company March, 2005

21 Growth Strategy Increase production by ~1Mtpa by end 2007 with modest capex 2 new DRI kilns at Vanderbijlpark by 1H/06 Efficiency improvements by 2H/06 Utilise opportunities to increase throughput by further ~1Mtpa with capital expenditure Expand sinter capacity at Vanderbijlpark by 2H/06 Blast furnace D reline at Vanderbijlpark by 2H/06 Additional DRI kilns at Vanderbijlpark Blast furnace C reline at Vanderbijlpark by 2009 Rationalisation of other facilities to follow Strategy presentation to GIBS © Mittal Steel Company March, 2005

22 Marketing strategy Current sales distribution 60% local and 40% export
Buoyant domestic growth expected in the next few years Africa strategy Total imports into Africa ~6.2 mtpa Mittal Steel South Africa – Geographic sales distribution 2004 South Africa Rest of Africa Total Africa Far East European Union North America 2003 Middle East 2004 % 0% 10% 20% 30% 40% 50% 60% 70% 80% Strategy presentation to GIBS © Mittal Steel Company March, 2005

23 Business process We stringently follow the following business process to ensure the successful implementation of our strategy Benchmarking Closing the gap / Strategy Budgeting / target setting Operational tracking / quarterly reviews Continuous improvement Knowledge management programme Rewarding Strategy presentation to GIBS © Mittal Steel Company March, 2005

24 Index Company overview Global steel industry Business strategy
Stakeholder values creation strategies Conclusion Strategy presentation to GIBS © Mittal Steel Company March, 2005

25 Corporate governance We comply with all material aspects of the Code of Corporate Practices and Conduct as contained in the King Report on Corporate Governance for South Africa 2002, as a minimum standard The board, 100% Employment equity, meets regularly and retains full control over our company. It monitors management in implementing board plans and strategies The executive committee, 45% Employment Equity, and its members are individually mandated, empowered and held accountable for Implementing the strategies and key policies determined by the board Managing and monitoring the business and affairs of the organisation in accordance with approved business plans and budgets Prioritising the allocation of capital and other resources Establishing best management and operating practices Strategy presentation to GIBS © Mittal Steel Company March, 2005

26 Corporate governance The board acknowledges its responsibility for ensuring the preparation of annual financial statements in accordance with South African Statements of General Accepted Accounting Practice (SAGAAP) International Financial Reporting Standards (IFRS) As a subsidiary of Mittal Steel, which is listed on the New York Stock Exchange, we are expected to comply with the requirements of Serbanes-Oxley Act [SOX] 404 by the end of 2005 We compliance with JSE securities exchange regulations Strategy presentation to GIBS © Mittal Steel Company March, 2005

27 Share performance Liquidity of our shares remains high with 67% of the total issued shares being traded per year for the past 24 months Our average market capitalisation for 2004 was R 29.2 million We have been ranked number 20 for total market capitalisation on the Top 40 index* Our share price improved by 127% during 2004 compared to the all share index on the JSE increasing by 26% % Movement 140 Mittal Steel South Africa 120 All shares 100 Top 40 80 60 40 20 * As on 31 December 2004 -20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Strategy presentation to GIBS © Mittal Steel Company March, 2005

28 Our employees We employ ± people on a full time basis at an annual cost of R 2,2 bn and an additional ± 3500 full time equivalent people indirectly We entered into a historic three-year wage agreement with our three recognized trade unions, guaranteeing annual increases of CPIX plus an improvement factor (variable pay) that is linked to the value created by the company We are committed to the principle of improving labour productivity through voluntary separation and natural attrition To this end, we have entered into a 2 year no forced retrenchment agreement with our three recognized trade unions, representing 79% of our workforce We have adopted a ‘one company philosophy’, which aims to break down the barriers between different parts of our business and improve coordination and efficiency Strategy presentation to GIBS © Mittal Steel Company March, 2005

29 Employment equity Our employment equity ratio’s of 45% in top management and 41% in the professionally qualified groups exceeds the set targets Slow progress has unfortunately been made with employment equity ratio’s for the senior management of 16%, middle management of 20% and skilled/specialist groups 36% Our semi skilled (83% equity) and unskilled groups (96% equity) far exceeds their targets A number of aggressive initiatives aimed at reinforcing the EE pipe-line and to open up job opportunities for the advancement of EE candidates have been implemented to ensure positive movement 67% of the 85 graduate-in-training positions are held by EE candidates. 70% will in future be reserved for EE 67% of the 454 bursary students are EE candidates. 77% of 2005 bursary student intake is reserved for EE Other initiatives include fast tracking, space creation and multi-grade positions Strategy presentation to GIBS © Mittal Steel Company March, 2005

30 Black economic empowerment
We believe that promoting and supporting affirmative business enterprises (ABE) is essential for achieving broad-based sustainable economic growth and job creation in South Africa Our ABE programme is aimed at creating opportunities for access to procurement processes, promote the development of skills levels and encourage entrepreneurial talent for historically disadvantaged South Africans In 2004 we exceeded our ABE target by procuring services and goods to the value of R1 024 million from affirmative business enterprises, 137% of our target. We are currently aligning our internal ABE policy to comply fully with the draft BEE framework that is only in the proposed stage by the DTI. This includes the proposed balanced scorecard and managing suppliers to become BEE compliant. Strategy presentation to GIBS © Mittal Steel Company March, 2005

31 Sustainable development
Our sustainable development objectives are aimed at improving the quality of life for everyone, today and for generations to come We participated in the working group of the International Iron and Steel Institute (IISI) responsible for developing a systematic approach to sustainable development Although we track and improve on all measures, we have identified the following three as critical for sustainability of our business Greenhouse gas emissions, caused by direct and indirect steel manufacturing. As identified in the Kyoto Protocol as, carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (CF6) Material efficiency, defined as the ratio of material waste and by product output. Waste includes those materials that ultimately end up in a landfill Energy intensity, defined as the ratio of energy consumption and production output Strategy presentation to GIBS © Mittal Steel Company March, 2005

32 Environmental We are committed to excellent environmental performance by implementing comprehensive environmental plans commissioned by independent specialists. These plans are based on internationally accepted standards and best available technology without entailing excessive cost (BATNEEC) All our operations have achieved ISO environmental management system certification. This accomplishment places us amongst the leaders but also raises our responsibility towards sound environmental management. In line with the ISO certification requirements, we embrace environmental sustainability as a core business imperative by continuously improving our conservation efforts in mitigating the potential impacts of solid waste, air emissions, water consumption and limiting the use of natural resources. We are currently in the process of implementing environmental projects to the value of approximately R 960 million. Strategy presentation to GIBS © Mittal Steel Company March, 2005

33 Environmental capital projects
Vanderbijlpark* Cleaning of coke ovens gas H’06 Improving gas utilization thus reducing energy consumption and emissions by more than 50% Main water treatment plant H’05 Achieving zero effluent release and reducing water consumption by at least 30% New sinter plant off-gas system H’07 Reducing stack emissions by at least 80% Blast Furnace D Tap floor de-dusting H’05 Minimising emissions thus improving the quality of the working environment for our employees Planned Completion R’m * List do not represent all capital projects Strategy presentation to GIBS © Mittal Steel Company March, 2005

34 Environmental capital projects
Newcastle* Coke oven repair project completed Reducing emissions by lowering opacity from 50% to 20% Reverse osmosis water treatment plant 50 1H’06 Further enhancing water recycling capabilities to achieve zero effluent Reducing water consumption by 17% Planned Completion R’m * List do not represent all capital projects Strategy presentation to GIBS © Mittal Steel Company March, 2005

35 Safety and Occupational Health
Our Safety and Occupational Health performance compares favourably with both national and international industry peers. Occupational Health & Hygiene is closely monitored by periodical medical surveillances and legislative survey’s. All our operations have attained NOSA 4 Star or higher safety ratings. Saldanha Steel achieved a NOSA platinum five star rating with a score of 95% - the highest score ever in the steel industry in Africa. We are well positioned for OHSAS safety and health management system certification by December 2005. Notwithstanding our comprehensive collective effort in aspiring for safety excellence, it is with regret that we experienced two employees and three contractor fatalities at our Vanderbijlpark Steel operations during 2004. To further improve our safety performance, all our operations are in the process of implementing Behaviour Based Safety (BBS). Strategy presentation to GIBS © Mittal Steel Company March, 2005

36 Corporate social investment
Our social investment programmes aim to impart sustainable expertise among South Africans through the provision of vital technical and related skills development This approach has, since 1994, seen us donate over R 56 million specifically towards educational initiatives. In addition, we have opened our own in-house, state-of-the-art training and research facilities, worth R 98 million, located in Newcastle and Pretoria, for use by the broader community Our single biggest social investment was a donation of R 50 million in high technology research instrumentation and equipment to the University of Pretoria, enabling the university to establish a state-of-the-art research institute. By creating a sophisticated research environment at tertiary level Mittal Steel SA is equipping future engineers with skills they would otherwise only become exposed to later in their careers. Strategy presentation to GIBS © Mittal Steel Company March, 2005

37 Corporate social investment
We have donated ±R 30 million specifically towards community & welfare support initiatives. We have already invested over R184.7 million on social development programmes, over the past twelve years. Our Corporate Social Investment programme continue to focus on the up-liftment of the communities in the areas in which we operate by supporting sustainable projects, promoting education and job creation. An exciting challenge for 2005 is to make a profound difference in the teaching of Maths and Science in our schools. Strategy presentation to GIBS © Mittal Steel Company March, 2005

38 Index Company overview Global steel industry Business strategy
Stakeholder values creation strategies Conclusion Strategy presentation to GIBS © Mittal Steel Company March, 2005

39 Conclusion Our strategy is aimed at creating value through the steel cycle Improving our operating capabilities Improving our cost competitiveness Growth through optimal capital expenditure Focusing our marketing efforts on Africa Creating an environment that builds a high performance culture Be a responsible corporate citizen Strategy presentation to GIBS © Mittal Steel Company March, 2005


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