Annual Review 2016Sustainable progress
2016 was a year of important progress for ArcelorMittal.
Action 2020 is ArcelorMittal's commitment to structurally improving profitability and cash flow generation.
Good corporate governance is about compliance, continuous stakeholder dialogue and being a good corporate citizen.
Details of our steel and mining operations, financials, production facilities and shareholder information.
Welcome to ArcelorMittal’s annual review. Last year we took our first step towards integrated reporting, combining our traditional annual review with our sustainable development report, to demonstrate not only the financial value we deliver but also the broader social and economic value a company of our size creates. We received encouraging feedback from stakeholders and I hope this year’s review demonstrates furthers progress in this regard.
2016 was a year of important progress for ArcelorMittal and it also saw us mark the ten-year anniversary of the company. Much of this decade has been tough for our industries, but it has also defined the spirit and culture of our company and showcased our resilience, our strength, our knowledge and our capability to respond swiftly. We have reshaped our asset base, we have improved our competitiveness, we have improved our safety performance, we have strengthened our balance sheet and we have invested in innovative products for the future. We have faced tough market conditions, but in many ways, we are a stronger company, better positioned for the future with world-class assets and a clear strategy that will enable us to outperform in all market conditions.
2016 saw us make further progress in this regard and I want to particularly highlight two actions which have supported the performance of the company and put us in a stronger position for the future. The first was the successful capital raise launched in February. The second was the launch of our new five-year strategic plan, Action 2020.
The US$3 billion capital raise was received very positively by investors and, combined with the proceeds of asset sales and the generation of positive free cash flow, enabled us to significantly improve our net debt position. Net debt at the end of 2016 was US$11.1 billion – US$4.6 billion lower than the previous year and the lowest level since the creation of the company. Net income for the year was a healthy US$1.8 billion.
Action 2020 contributed US$0.9 billion to Ebitda in its first year, through the successful implementation of strategic initiatives across all our business segments. Along with improved market conditions and the introduction of trade tariffs in our core markets, this supported a 20% improvement in Ebitda for the year to US$6.3 billion. Action 2020 is key to unlocking improved financial performance and delivering higher levels of Ebitda on a sustainable basis. The size and scale of our business makes this plan unique to ArcelorMittal, providing us with a genuine differentiator and competitive advantage. But size and scale by itself is not enough. We need to ensure that we lead in all areas, on cost performance, product quality, customer service and environmental performance. While Action 2020 is fundamentally focusing on three core areas – increasing volumes, structurally improving costs and increasing the proportion of higher-added value products we sell – the plan is ultimately about ensuring excellence in every aspect of our business. I am excited about its potential and am confident we will deliver on the full target of US$3 billion of additional structural Ebitda and US$2 billion dollars of annual free cash flow.
We therefore started 2017 in a much stronger position than at the beginning of 2016, supported by good momentum in our core markets. Although we have stopped giving annual guidance, this bodes well for 2017 performance. Apparent steel demand is expected to increase between 0.5 and 1.5% globally this year, with good levels of growth in our core markets. In the US. we expect demand growth of between 3 and 4%; in Europe demand will continue to be positive at between 0.5 and 1.5%, supported by the strength of the automotive end market; in Brazil we expect to see the economy starting to recover, albeit tentatively, supporting steel demand growth of between 3 and 4%.
Against this backdrop, a key priority for the year is to continue to implement Action 2020, and ensure we capture the full benefits of the plan. The entire organisation is now very well aligned to the plan and the targets, and leadership has been incentivised to deliver against a clear set of KPIs. I am confident we will deliver further progress in all segments across the year.
A second priority is to further deleverage, to ensure we are well positioned for all points of the cycle. In order to adapt to the downturn we had done an excellent job of reducing the cash requirements of the business to US$4.5 billion. As steel is a highly capital intensive business, a significant portion of our cash requirements is capital expenditure. We limited this in 2016, with the majority of capital expenditure focused on maintaining our asset base. As market conditions improve we need to invest appropriately to ensure we capture market share, continue to lead the industry in innovation and further develop the range of high-added value steel we produce. Therefore, we have allocated an additional US$0.5 billion of development capital expenditure for 2017. The target is to keep the cash requirements of the business, excluding working capital, at or below US$5 billion. In pursuit of improved credit ratios and ratings we will use surplus cash to reduce net debt.
While markets have improved and spreads are currently at a reasonably healthy level, we are cognisant of both the continued overcapacity that characterises the global steel industry and the geopolitical fragility caused by the waves of nationalist sentiment that is taking root in many countries.
On the topic of overcapacity, it is worth remembering that when ArcelorMittal was created China’s steel capacity was 560 million tonnes; today it is 1.2 billion tonnes. Overcapacity in China is estimated at around 300 million tonnes, nearly one-fifth of global steel production. The encouraging news is that the Chinese government has recognised the harm this can cause for their own economy, as well as the steel industry globally, and now has a clear plan to address it, targeting capacity cuts of 150 million tonnes in their most recent five-year plan. The early signs are they are on target, but we should not expect this to be addressed overnight. This is why we continue to call for a comprehensive trade solution to address any unfair trade practices.
Trade was a hot topic throughout 2016 and is even more in the spotlight following the election of Donald Trump as President of the United States. Much has been written about the return of protectionism and the economic consequences of reversing on free trade. ArcelorMittal’s position on trade is quite clear – we continue to believe in the benefits of globalisation, freedom of movement and global trade; it is the basis on which our company was built. We are therefore in favour of free trade, but it must be fair trade and the two are not necessarily always the same. International trade must take place in-line with internationally agreed WTO rules and regulations, otherwise the result is countries exporting their overcapacity, and the problems that accompany overcapacity, as exemplified by China.
We have been very active in working with our trade associations worldwide in calling for urgent attention to this matter, because it is critical to the health and sustainability of our industry. Considerable progress was made in 2016, with a significant trade policy reaction on both sides of the Atlantic to the dumping of steel; but there is still more to be done. This is why we welcome the approach of the Trump administration to take all the necessary steps to appropriately defend US manufacturing and ensure it can continue to thrive and flourish. In comparison Europe is still too slow to respond and we are disappointed by the recent decision not to implement provisional measures for hot rolled coil from five countries, despite injury being clearly proven. The steel industry creates considerable social and economic value for economies and plays an important role in the manufacturing supply chain – this needs to be fully appreciated.
The perceived negative consequences of globalisation are of course one of the main reasons for the recent geopolitical disturbances the world has experienced, notably in the UK and the US. When I wrote to you last year neither the Brexit vote nor the US election had taken place. The outcome of these two votes was a wake-up call to the world, and global leaders now need to do a much better job in balancing the net positives of globalisation with the domestic needs of their own voters. While the potential global economic implications of these two events remain unclear, what is apparent is that political uncertainty remains high. With several important general elections in European countries occurring in the near future, the risk of continuing geopolitical surprise and subsequent economic volatility remains high.
This is why we must continue to be rigorously focused on delivering against our own priorities. In addition to achieving our financial targets and making further progress with Action 2020, we have two other key priorities for 2017. The first is to improve safety performance; the second is to ensure we are well positioned for long-term success.
Safety has been the top priority for our company since our creation. It is why the first of our ten sustainable development outcomes is to ensure safe, healthy, quality working lives for our people. Our target is zero fatalities and zero injuries. We have made great progress over the past ten years with safety – reducing the lost-time injury frequency rate (LTIFR) by 70%. There are areas of real safety excellence within our business; there wasn’t a single fatality in either of our North or South American businesses, while our Brazil segment nearly halved its LTIFR to 0.37, the lowest level in the group. This gives me great optimism, and the belief that our journey to zero is possible. We have worked hard to make sure we have the right safety processes and procedures in place. What we must focus on – with absolute vigilance – is that they are steadfastly adhered to and a safety-first culture permeates the entire organisation. The Take Care campaign launched last year in Europe is an example of how we are achieving this.
Key to success is the implementation of our strategy; the development of a high-performing organisation, the need to understand and innovate for long-term customer needs; and to ensure we adapt appropriately to changing social and environmental trends. Perhaps the most important aspect of ensuring long-term success is satisfying our customers. We have seen a huge change in customer demands’ in recent years and this will continue. This relates not only to products, but also to increasing expectations on sustainability credentials.
On the product side I am very proud of the way our organisation has responded to this challenge. Our steels for the automotive sector are a good example. We have long been the world’s leading steel supplier to the automotive sector and we strengthened this position in 2016 by further improving our already best-in-class suite of automotive solutions, announcing new grades of advanced high-strength steels that will help our automotive customers to further reduce weight – and hence improve fuel efficiency – without compromising on safety.
Our customers’ expectations in terms of sustainability standards are also becoming more rigorous. In particularly they are becoming increasingly focused on the sustainability and transparency of the supply chain. We are playing a leading role in developing two new multi-stakeholder sustainability standards, ResponsibleSteel™ and IRMA (the Initiative for Responsible Mining Assurance). By showing such leadership, we hope to strengthen our position as our customers' supplier of choice.
Ensuring we adapt appropriately to environmental and social trends is an extension of the work we are doing on developing these standards. Our 10 sustainable development outcomes were designed to ensure we manage and stay ahead of expectations in this regard, and also demonstrate our understanding that long-term success lies not only in creating shareholder value but also in actively contributing to society’s needs.
On many – and particularly our contribution to sustainable lifestyles and sustainable infrastructure – we have a very positive story to tell. The biggest challenge remains carbon, but we have some very interesting initiatives under development, such as our partnership with LanzaTech to capture waste gases from the steel-making process and transform them into bio-ethanol. I am convinced that steel can make an important contribution to climate change, but I am concerned about some of the legislation that is being implemented, particularly in Europe. The Emissions Trading System does not fully take into account the realities of the global steel market, specifically that it is a globally traded material. The result is that European producers will be disadvantaged versus global competitors in markets with less stringent carbon legislation. Countries and regions should focus on reducing the carbon content of not just what they produce but also what they consume. This is how to effectively reduce global emissions. We will continue to play our part in moving towards a lower carbon economy, but this does not mean supporting legislation we believe is flawed in its design.
In conclusion, I am proud of the progress the organisation made in 2016 and am confident we will continue to build on this progress in 2017. This of course is ultimately only possible thanks to our nearly 200,000 employees across the world, who play a vital role in ensuring we deliver safe, sustainable steel to our valued customer base worldwide. I would like to thank them and also our executive management team for their dedication and commitment and of course my fellow Board Directors for their much valued wisdom and counsel. Special mentions go to Wilbur Ross, who resigned earlier this year to take up the position of Commerce Secretary in the new US Administration, Narayanan Vaghul and Lewis Kaden, who will both stand down from the Board following our upcoming AGM. Wilbur’s wit and keen business acumen will be missed, but I wish him every success in his new position and have no doubt he will have a positive impact, while Narayanan and Lewis have both been long-standing members of our Board, contributing significant value during their tenures.
Lakshmi N. MittalChairman and chief executive