Mittal Steels a Best Practice Strategy

7/27/2019 Mittal Steels a Best Practice Strategy

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Strategy presentation to GIBS Mittal Steel Company March, 2005 2

Company overview

Global steel industry

Business strategy

Stakeholder values creation strategies

Conclusion

Index


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Overview

Record earnings in 2004 of R 4,5 bn

We employ 11 400 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

largeststeel 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 14001 certified

ABE procurement of R1bn


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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 worlds largest

and most global steel company

64 Mtpa steel capacity

14 operations on four continents 45 nationalities

165 000 employees

Ispat Iscor was renamed Mittal Steel South Africa Limited on 14

March 2004


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Mittal Steel global presents

Mittal Steel Point Lisas

(Trinidad)

Mittal Steel Lazaro Cardenas

(Mexico)

Ispat Inland

(USA)

Mittal Canada

(Canada)

Mittal Steel Gandrange

(France)

Mittal Steel Hamburg

Mittal Steel Ruhrort

Miattal Steel Hochfeld(Germany)

Mittal Steel Temirtau(Kazakhstan)

Mittal Steel Galati

Mittal Steel Iasi

Mittal Steel HunedoaraMittal Steel Roman

(Romania)

Mittal Steel South Africa(South Africa)

Mittal Steel Ostrava

(Czech Republic)

Mittal Steel Zenica

(Bosnia)

Mittal Steel Skopje

(Macedonia)

Mittal Steel Poland

(Poland)

Mittal Steel Annaba(Algeria)

Americas 12MtpaEurope 18MtpaRest of the World 12Mtpa


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Vereeniging

Johannesburg

NewcastleSishen

Vanderbijlpark

Thabazimbi

Durban

SouthAfrica

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

Saldanha

Cape Town

* Based on 2004 actual final product sales


7/39Strategy presentation to GIBS Mittal Steel Company March, 2005 7

Company overview


Business strategy Stakeholder values creation strategies

Conclusion

Index



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 industrys structural overcapacity

Primary advantage is steels low cost

Competition from substitute materials

Aluminium

Plastics



Global Market

Source: World Steel Dynamics/CRU Note: Apparent Steel Demand and Supply

Tonnes x 1 000 000

820870

920970

1 020

1 0701 1201 170

2000 2001 2002 2003 2004 2005 2006 2007

Supply

Demand



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



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



Company overview



Conclusion

Index



A remarkable strategic journey

Rationalisation

Reengineering

Restructuring

Close non-profitablebusinesses e.g.,

Pretoria, VDB A + B,HSMs etc.

Newcastle breakthrough 40% cost reduction*

across the board Continuous

improvement

established

Kumba spin-off

(retained cost + ore) Saldanha integration &

turnaround Successful rights offer BAA agreement OICP**, centres of

excellence, shared

services LNM majorityshareholding

Mid 1990s

1997-2000

2001-2004

* On compressible cost base

** Organising for Improved Corporate Performance

What next?



Revenue, Rbn, nominal

12.117.5 18.5

23.0

2001 2002 2003 2004

23%CAGR

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

Net operating profit, Rbn, nominal

1.02.6 2.6

6.7

2001 2002 2003 2004

87%CAGR

ROIC (before tax), %

6.8%18.3% 17.8%

46.6%

2001 2002 2003 2004


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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 mayrapidly return us to a less attractive market

31%

13%17%

1%2001 2002 2003 2004


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International cost competitiveness

Source: Metal Bulletin Research

HRC operating cost US$/t FOB Q1/04

0

50

100

150

200

250

300

350

400

450

500

Vanderbijlpark

US$/t 256

Saldanha

US$/t 247

International HRC producers


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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

Coking coal Contract

Iron ore fines Contract

80

90

100

110

120

130

140

Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04

Based to 100

Coke

Freight rates

Scrap

0

100

200

300

400

500

600

700

Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04


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Raw material integration

Backwardintegrated Imported

Domesticsupplyagreement

s

Tonnes000

Other Coal - -100%1 754

Scrap 78% -22%1 818

Iron ore

- DRI

91%

99%

5%

-

4%

1%

9 470

1 401

Coke

- Coking Coal

96%

15%

1%

63%

3%

22%

2 184

2 673

Actual 2004


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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


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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


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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


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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

0% 10% 20% 30% 40% 50% 60% 70% 80%

Middle East

North America

European Union

Far East

Total Africa

Rest of Africa

South Africa

%

2003

2004


Geographic sales distribution 2004


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Business process

We stringently follow the following business process to ensure thesuccessful implementation of our strategy

Benchmarking

Closing the gap / Strategy

Budgeting / target setting

Operational tracking / quarterly reviews

Continuous improvement

Knowledge management programme

Rewarding


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Company overview



Conclusion

Index


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We comply with all material aspects of the Code of Corporate

Practices and Conduct as contained in the King Report on CorporateGovernance for South Africa 2002, as a minimum standard

The board, 100% Employment equity, meets regularly and retains fullcontrol over our company. It monitors management in implementingboard plans and strategies

The executive committee, 45% Employment Equity, and its membersare 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

Corporate governance


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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 StockExchange, we are expected to comply with the requirements ofSerbanes-Oxley Act [SOX] 404 by the end of 2005

We compliance with JSE securities exchange regulations

Corporate governance


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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 onthe Top 40 index*

Our share price improved by 127% during 2004 compared to the allshare index on the JSE increasing by 26%

Share performance

-20

0

20

40

60

80

100

120

140

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


All shares

Top 40

% Movement

* As on 31 December 2004


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We employ 11 400 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

Our employees


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Our employment equity ratios 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

ratios 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 EEcandidates 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

Employment equity


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We believe that promoting and supporting affirmative business

enterprises (ABE) is essential for achieving broad-based sustainableeconomic growth and job creation in South Africa

Our ABE programme is aimed at creating opportunities for access toprocurement processes, promote the development of skills levels andencourage 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 suppliersto become BEE compliant.

Black economic empowerment


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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 approachto 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

Sustainable development


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We are committed to excellent environmental performance by

implementing comprehensive environmental plans commissioned byindependent specialists. These plans are based on internationallyaccepted standards and best available technology without entailingexcessive cost (BATNEEC)

All our operations have achieved ISO 14001 environmental

management system certification. This accomplishment places usamongst the leaders but also raises our responsibility towards soundenvironmental management.

In line with the ISO 14001 certification requirements, we embraceenvironmental sustainability as a core business imperative by

continuously improving our conservation efforts in mitigating thepotential impacts of solid waste, air emissions, water consumptionand limiting the use of natural resources.

We are currently in the process of implementing environmentalprojects to the value of approximately R 960 million.

Environmental


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Vanderbijlpark*

Cleaning of coke ovens gas 310 2H06

Improving gas utilization thus reducing energy

consumption and emissions by more than 50%

Main water treatment plant 220 2H05 Achieving zero effluent release and reducing

water consumption by at least 30%

New sinter plant off-gas system 210 2H07

Reducing stack emissions by at least 80%

Blast Furnace D Tap floor de-dusting 40 1H05

Minimising emissions thus improving the

quality of the working environment for our

employees

Environmental capital projects

Planned

CompletionRm

* List do not represent all capital projects


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Newcastle*

Coke oven repair project 230 completed

Reducing emissions by lowering opacity from

50% to 20%

Reverse osmosis water treatment plant 50 1H06 Further enhancing water recycling capabilities

to achieve zero effluent

Reducing water consumption by 17%

Environmental capital projects

Planned

CompletionRm

* List do not represent all capital projects


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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 surveys.

All our operations have attained NOSA 4 Star or higher safety ratings.

Saldanha Steel achieved a NOSA platinum five star rating with a scoreof 95% - the highest score ever in the steel industry in Africa.

We are well positioned for OHSAS 18001 safety and healthmanagement system certification by December 2005.

Notwithstanding our comprehensive collective effort in aspiring for

safety excellence, it is with regret that we experienced twoemployees and three contractor fatalities at our Vanderbijlpark Steeloperations during 2004.

To further improve our safety performance, all our operations are inthe process of implementing Behaviour Based Safety (BBS).

Safety and Occupational Health


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Our social investment programmes aim to impart sustainable

expertise among South Africans through the provision of vitaltechnical and related skills development

This approach has, since 1994, seen us donate over R 56 millionspecifically 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 inNewcastle and Pretoria, for use by the broader community

Our single biggest social investment was a donation of R 50 million inhigh technology research instrumentation and equipment to theUniversity of Pretoria, enabling the university to establish a state-of-

the-art research institute. By creating a sophisticated researchenvironment at tertiary level Mittal Steel SA is equipping futureengineers with skills they would otherwise only become exposed tolater in their careers.

Corporate social investment


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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 theup-liftment of the communities in the areas in which we operate by

supporting sustainable projects, promoting education and jobcreation.

An exciting challenge for 2005 is to make a profound difference in theteaching of Maths and Science in our schools.

Corporate social investment


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Company overview



Conclusion

Index


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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

Mittal Steels a Best Practice Strategy

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