PROOF 8a – 16 MARCH 2009
ArcelorMittal South Africa Limited Annual Report 2008
ArcelorMittal South Africa Lim
ited Annual Report 2008The lifeblood of a developing nation
PROOF 8a – 16 MARCH 2009
The lifeblood of a developing nation
ArcelorMittal’s stated goal is to provide the leadership that will transform the future of the steel industry and societies around us.
It is our conviction that business growth, sustainable communities and the creation of value for our shareholders go hand-in-hand.
1 Financial features1 Vision and mission statement2 Our global presence2 Strategic goals2 Business objectives3 ArcelorMittal brand values6 Review at a glance
10 Board of directors12 Chairman and Chief Executive’s report20 Operational review and locations36 Finance report40 Corporate governance49 Supplementary information55 Annual financial statements
http://www.arcelormittal.com/southafrica
ArcelorMittalSouthAfrica 1 AnnualReport2008
Financial features
Revenue increased by 36% to R39.9 billion
Operating profit increased by 58% to R12.2 billion
Headline earnings increased by 65% to R9.5 billion
Total dividend 707 cents per share
Mission statementWeaimtoachieveourvisionby:➧Producingsafe,sustainablesteel➧Pursuingoperationalexcellenceinallbusinessprocesses➧Producinginnovativesteelsolutionsforourcustomers➧Caringforourenvironmentandthecommunitiesinwhichweoperate➧Strivingtobecomeanemployerofchoice➧Livingthebrandvaluesofsustainability,qualityandleadership
Vision TobethepreferredsupplierofsteelsolutionsforthedevelopmentofSub-SaharanAfrica.
Financial summaryYearended
31December2008
Yearended31December
2007
Physical(‘000tonnes)Liquidsteelproduction 5774 6375Domesticsales 4375 4422Exportsales 714 1397Financial(Rm)Revenue 39914 29301EBITDA 13602 8802Profitfromoperations 12159 7703–Flatcarbonsteelproducts 7007 4827–Longcarbonsteelproducts 3672 2652–CokeandChemicals 1743 727–Corporateandother (263) (503)Headlineearnings 9484 5741Netcashflowbeforefinanceactivitiesandcapitalreduction 3698 2871Totalassets 37435 28205Shareinformation(cents)Headlineearningspershare 2128 1288Dividendspershare(paidin2008/2009) 707 429Financialratios(%)Returnonshareholders'equity(headline) 39 26Netcashtoequity 30 19
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Strategic goalsThefollowingstrategicgoalshavebeendevelopedandapprovedbytheboard:
➧ Creatingindustryleadingvalueforourshareholders
–Positiveeconomicvalueadd(EVA)overthesteelpricecycle.
➧ Improvingoperatingcapabilities –Value-creatingthroughputincreases. –Substantialreductioninhotrolledcoil/billet
costsinrealterms.
➧ Buildingonourexistingperformanceculture
–Creatinganenvironmentthatgeneratestrueemployeeprideandattracts,developsandretainstop-performingpeople.
➧ Bearesponsiblecorporatecitizen
Code of conductThesearethebehaviouralcharacteristicsthatwillsupportourvalues:
➧ Integrity Allouractionswillbeguidedbygood
principlesandintentions,ensuringthatourneedsarealignedwithouractions.(Wewalkthetalk).
➧ Respect Wewillrecogniseandvaluethediversityofall
peopleandrespecttheirdignityinouractions.
➧ Fairness Wewilltreatpeopleinareasonable,equitable
andobjectivemannerandwillalwaysstrivetobefairandtotreateachandeverycaseonmerit.
➧ Accountability Wewillbeheldaccountableforallouractions
bothwithinthebusinessenvironmentandthecommunityinwhichweoperate.
➧ Trust Wetrustinourpeople’sabilitytoactin
thebestinterestofthecompanyandwillencouragetrustamongstcolleaguesandacrossorganisationallevels.
Our global presence➧ArcelorMittalistheworld’snumberonesteelcompany,withover316000employeesinmorethan
60countries.Ithasledtheconsolidationoftheworldsteelindustryandtodayranksastheonlytrulyglobalsteelmaker.
➧ArcelorMittalistheleaderinallmajorglobalmarkets,includingautomotive,construction,householdappliancesandpackaging.TheGroupleadsinR&Dandtechnology,holdssizeablecaptivesuppliesofrawmaterialsandoperatesextensivedistributionnetworks.
➧ItsindustrialpresenceinEurope,Asia,AfricaandAmericagivestheGroupexposuretoallthekeysteelmarkets,fromemergingtomature.ArcelorMittalwillbelookingtodeveloppositionsinthehigh-growthChineseandIndianmarkets.
➧ArcelorMittalkeyfinancialsfor2008showrevenuesofUSD124.9billionandcrudesteelproductionof103.3milliontonnes,representingapproximately10%ofworldsteeloutput.
Business objectivesfor ArcelorMittal South Africa
Returnonequity Competitiveness Cashgeneration Shareholdervaluerelease
Objectives
Atleastcostofcapital(currently16%)
Tobeoneofthelowestcostproducers
Positivecashflowbeforemajornewinvestmentsthroughoutcommoditycycle
Sharepricetoreflectatleastunderlyingnetequityvalue
Achievements 39%fortheyear OneofthelowestcostproducerswithanEBITDAmarginof34%
Cashflowpositive AveragesharepriceofR165.98washigherthantheaveragenetequityvalueofR62.80
Futureinitiatives ToexceedEVAbyimprovingearningsthrough:
•Costreductions
• Valueaddedproductsand
• Higherthroughput
Toretainourpositionasoneofthelowestcostproducersatallplantsthroughcostleadership
Tomaintainpositivefreecashflowthroughfocusingoncost,workingcapitalreductionandimprovementofmargins
Tomaximiseshareholder’svaluethroughcapitalproductivityandmargins,coupledwithstabilityinearningsoverthecycle,whichwilltranslateintoaddedwealthforourshareholders
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ArcelorMittal brand valuesOurgoalistoprovidetheleadershipthatwilltransformtomorrow’ssteelindustry.
Wehaveaclearvisionofthefuture,underpinnedbyaconsistent
setofvalues.
➧ Sustainability Weareguidingtheevolutionofsteeltosecurethebestfuture
fortheindustryandforgenerationstocome.Ourcommitmenttotheworldaroundusextendsbeyondthebottomline,toincludethepeopleinwhomweinvest,thecommunitieswesupportandtheworldinwhichweoperate.Thislong-term
approachiscentraltoourbusinessphilosophy.
➧ Quality Welookbeyondtodaytoenvisionthesteeloftomorrow. Becausequalityoutcomesdependonqualitypeople,weseek
toattractandnurturethebestpeopletodeliversuperior
solutionstoourcustomers.
➧ Leadership Wearevisionarythinkers,creatingopportunitieseveryday. Thisentrepreneurialspiritbroughtustotheforefrontofthe
steelindustry.Now,wearemovingbeyondwhattheworld
expectsofsteel.
Return on equity
0
8
16
24
32
40
2004 2005 2006 2007 2008
%
■ Return on equity
Sales breakdown in tonnes
0
20
40
60
80
100
2004 2005 2006 2007 2008
■ Local■ Export
%
Net asset value versus share price
0
2000
4000
6000
8000
10000
12000
14000
2004 2005 2006 2007 2008
■ Net asset value■ Share price (year-end)
cents
4 ArcelorMittalSouthAfrica AnnualReport2008
SaguntoNador
TirisZemmour
Saldanha
Vanderbijlpark;Vereeniging
Thabazimbi
Newcastle
JorfLasfar
ZaragozaSaint-Chély
Fos-sur-Mer
Rhineland
Lincolnshire
Sheffield
Bremen
Liège
Unterwellenborn
Eisenhüttenstadt
Tallinn
Sycow
Hochfeld;Ruhrort
Florange
Gueugnon
Avellino
Szengotthárd
Galati
Roman
Basse-Indre
Saint-Chamond&Châteauneuf
Montataire;Paris
Dunkerque
Desvres
LeCreusot
Avilés;Gijón
Madrid
Bilbao;Etxebarri
Bergara;Olaberría;Zumárraga
96
8
34
52
7
Africa7% liquid/crude steel production
Europe47% liquid/crude steel production
Monrovia, LiberiaIron Ore ResourceIn addition to supplementing iron ore availability, related investment includes port and road infrastructure, education and healthcare, enabling the sustainable development of the project and the community
Orissa and Jharkhand, IndiaIntegrated Steel PlantAlong with its investment in two Greenfield projects, ArcelorMittal seeks out social, economic and environmental ventures, leading to the simultaneous development of steel capabilities and local communities.
Jubail Industrial City, Saudi ArabiaIron Ore FacilityWith the ground breaking in 2008, work on the finishing line and hot mills should commence in 2010. Using raw materials from the Czech Republic and Egypt, total investment is estimated at around 775 million US$.
Faleme Region, SenegalIron Ore Resource
El Agareb, MauritaniaIron Ore Resource
Jijel, AlgeriaProduction Unit
Northern Coast, EgyptSteel Plant
Calabar Free Trade Zone, Cross River, NigeriaLongitudinal SubmergedArc Welded Pipe Mill
ZenicaAnnaba
Ouenza
Boukhadra
Piombino
GhentGenk
RiedimInnkreis
Gemlik Skopje
IstanbulHunedoara
Iasi
Ostrava
Kraków
Warsaw KryviyRih
DąbrowaGórnicza;Świętochłowice;Sosnowiec
Omarska
Saarland
Luxembourg
Asia10% liquid/crude steel production
Charleroi;Châtelet
Hamburg
Mouzon
Isbergues
ArcelorMittal world
Pretoria
Shandong
HunanValin
Beijing
Temirtau
Maputo,Mozambique
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Americas36% liquid/crude steel production
Hibbing;Virginia,Minnesota
Detroit,Michigan
Montreal;ContrecoeurEast&West
Coatesville;Steelton;Conshohocken,Pennsylvania
Port-Cartier
Hamilton
Lackawanna,NewYork
Weirton,WestVirginia
Georgetown,SouthCarolina
Warren,Ohio
Riverdale,Illinois
Hennepin,Illinois
NewCarlisle,Indiana
Columbus,Ohio
Cleveland,Ohio
Guanajuato
SicartsaCaracas
SanJosé
Vespasiano
LaTablada
Contagem
Montevideo
Itaúna
VillaConstitución
Piracicaba
BuenosAires
FeiradeSantana
Vitória
Andrade
JuizdeFora
SãoPaulo
SãoFranciscodoSul
Tubarão
Timóteo;JoãoMonlevade
PointLisas
Peña
LázaroCárdenas
EurekaCounty,Nevada
Jackson,Mississippi
PineBluff,Arkansas
BurnsHarbor;EastChicago;Gary;IndianaHarbor,Indiana
Number of employees according to geographic location 1 EU15 74 548 24%
2 Rest of EU 54 383 17%
3 Other European countries 49 831 16%
4 North America 41 073 13%
5 South America 22 217 7%
6 Asia 49 619 16%
7 Middle East 78 1%
8 Africa 19 717 6%
Total 311 466 100%
Number of employees according to segments1 Flat Carbon Americas 35 491 11%
2 Flat Carbon Europe 68 000 22%
3 Long Carbon Americas & Europe 56 462 18%
4 Asia, Africa and CIS (AACIS) 123 526 40%
5 Stainless Steel 11 570 4%
6 Steel Solutions and Services 13 086 4%
7 Others 3 331 1%
Total 311 466 100%
KeyStock Exchange
The New York Stock Exchange
Euronext Amsterdam
Euronext Paris
Luxembourg Stock Exchange
Euronext Brussels
Spanish Stock Exchange (Madrid)
Spanish Stock Exchange (Barcelona)
Spanish Stock Exchange (Bilbao)
Spanish Stock Exchange (Valencia)
JSE Limited
1
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Review at a glance
Yearended31December
2008Rm
2007Rm
2006Rm
2005Rm
2004Rm
GROUPINCOMESTATEMENTRevenue 39914 29301 25350 23984 23053
ProfitfromoperationsFlatCarbonSteelProducts 7007 4827 3644 4518 5310LongCarbonSteelProducts 3672 2652 2111 2109 1783CokeandChemicals 1743 727 184 301 462Businessassistanceagreement remuneration (731)Corporateandother (263) (503) 143 (34) (97)
Total 12159 7703 6082 6894 6727
Gains/(losses)onchangesinforeign exchangeratesandfinancialinstruments 637 (131) 301 246 (52)Netinterestincome/(financecosts) 80 325 193 (29) (139)Incomefrominvestments 3 4 7 5 5Incomefromequityaccounted investments(netoftax) 331 270 135 277 258Incometaxexpense (3865) (2455) (2022) (2327) (2245)Impairmentreversal 36Minorityinterest (6)Adjustmentstoattributableincomefor headlineearnings 103 25 34 25 36
Headlineearnings 9484 5741 4730 5091 4584
Headlineearningspershare(cents) 2128 1288 1061 1139 1020Dividendspershare(cents) 707 429 347 380 400
STATEMENTOFCASHFLOWCashflowsfromoperations 5511 4623 3463 2616 5228Proceedsonsaleofassets 2 8 9 6 14Capitalexpenditure (1832) (1852) (1446) (1608) (1254)Investments (16) (5)Other 17 108 174 43 11
Netcashflowbeforefinanceactivities andcapitalreduction 3698 2871 2200 1057 3994
Cash flow from operations and Capex
0
3000
6000
9000
12000
2004 2005 2006 2007 2008
■ Cash flow from operations■ Capex
Rm
Cap
ex
Operating income and operating margin
0
2 500
5 000
7 500
10 000
12 500
0
15
20
25
30
35
2004 2005 2006 2007 2008
■ Operating income■ Operating margin
Rm %
Ope
ratin
g in
com
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Ope
ratin
g m
argi
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Yearended31December
2008Rm
2007Rm
2006Rm
2005Rm
2004Rm
GROUPSTATEMENTOFFINANCIALPOSITIONASSETSNon-currentassetsProperty,plantandequipment 15917 15525 14973 14260 12701
Intangibleassets 71 58 58 74 114
Goodwill 11
Unlistedequityaccountedinvestments 1968 1109 953 912 596
Otherfinancialassets 203 195 134 61
CurrentassetsCashandcashequivalents 8429 4034 7750 5219 4064
Other 10847 7284 7307 5811 6098
Totalassets 37435 28205 31175 26337 23584
EQUITYANDLIABILITIESCapitalandreservesTotalshareholders’equity 27995 20583 23260 19451 15895
Minorityinterest 7
Non-currentliabilitiesBorrowingsandotherpayables 46 52 61 71 81
Non-currentprovisions 1888 1290 1327 1288 1201
Financeleaseobligations 314 328 502 596
Deferredincometaxliability 2526 2603 2485 2007 1708
CurrentliabilitiesBorrowingsandotherpayables 33 10 10 10 10
Financeleaseobligations 40 88 93 89
Other 4593 3251 3437 2825 4682
Totalequityandliabilities 37435 28205 31175 26337 23584
Revenue and total assets
0
5000
10000
15000
20000
25000
30000
35000
40000
2004 2005 2006 2007 2008
■ Total assets■ Revenue
Rm
Net cash
0
1 700
3 400
5 100
6 800
8 500
2004 2005 2006 2007 2008
Rm
■ Net cash
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Review at a glance continued
Yearended31December
2008Rm
2007Rm
2006Rm
2005Rm
2004Rm
RATIOSProfitabilityandassetmanagementReturnonnetassets(%)–annualised 43.2 30.3 24.3 33.9 38.8 Returnonordinaryshareholders’equity (%)–annualised –Attributableearnings(%) 38.6 26.1 22.0 28.7 33.8 –Headlineearnings(%) 39.0 26.2 22.1 28.8 31.8 Returnoninvestedcapital (%)–annualised 56.1 40.0 33.6 43.4 47.2 Operatingmargin(%) 30.5 26.3 24.0 28.7 29.2Netassetturn(times)–annualised 1.2 1.2 0.9 1.0 1.1SolvencyandliquidityFinancingcostcover(times) 237.7 48.4Currentratio(times) 4.1 3.4 4.3 3.8 2.1Netcashtoequityratio(%) 29.8 19.3 33.0 22.9 25.0Cashrealisationrate(%) 49.7 68.3 58.7 40.5 87.6Numberofyearstorepaynetdebt(years)ProductivityAveragenumberofemployees(‘000) 9.3 9.1 9.8 10.9 12.0–Steel 8.4 8.2 9.1 10.1 11.4–GroupHQ 0.9 0.9 0.7 0.8 0.6Revenueperaverageemployee(R’000) –annualised 4 293 3 217 2 594 2 195 1 925 Cashvalueadded(Rm) 13 672 11 163 8 695 10 627 9 440 Prices(actualinvoiced)USD/tC&FHot-rolledcoilexportprice 966 659 531 560 541 Lowcarbonwirerodexportprice 909 592 508 490 445
Four-yearannual
compoundgrowthrate Yearended31December
% 2008 2007 2006 2005 2004
SHAREPERFORMANCENumberofsharesin issue(million) 446 446 446 446 446Weightedaveragein issue(million) 446 446 446 446 446Earningsperordinaryshare–Basicearningsbasis(cents) 17.8 2104.5 1282.3 1053.5 1136.5 1094.3–Headlineearningsbasis(cents) 20.2 2127.6 1287.9 1061.1 1139.0 1020.3Dividendperordinary share(cents) 15.3 707.0 429.0 347.0 380.0 400.0Dividendcover(times) 3.0 3.0 3.1 3.0 2.6Netequityperordinary share(cents) 15.2 6280 4618 5218 4360 3567
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annualcompound
growthrate Yearended31December
% 2008 2007 2006 2005 2004 2003 2002
INTERNATIONALCRUDESTEELPRODUCTION(milliontonnes)Worldwide 6.5 1330 1322 1240 1129 1035 945 886Asia 12.3 771 734 666 584 485 436 391Europe 4.4 229 210 235 218 193 208 204NorthernAmerica (1.5) 125 132 131 127 133 123 124FormerUSSR 1.6 114 124 120 113 107 106 100Other (6.1) 91 122 88 87 117 72 67
Four-yearannual
compoundgrowth
rate Yearended31December
% 2008 2007 2006 2005 2004
STEELLiquidsteelproduction (‘000tonnes)
FlatCarbonSteelProducts (4.2) 4084 4231 4863 5067 4855
LongCarbonSteelProducts (6.1) 1690 2144 2192 2194 2178
Total (4.8) 5774 6375 7055 7261 7033
Sales
Local(‘000tonnes)
FlatCarbonSteelProducts 1.0 2835 2887 2968 2402 2728
LongCarbonSteelProducts 7.6 1540 1535 1432 1083 1151
Total 3.1 4375 4422 4400 3485 3879
SAcustomers(%) Ave 70.2 86 76 71 56 62
Export(‘000tonnes)
FlatCarbonSteelProducts (22.5) 577 1033 1300 1881 1601
LongCarbonSteelProducts (34.5) 137 364 494 864 743
Total (25.7) 714 1397 1794 2745 2344
Export(%) Ave 29.8 14 24 29 44 38
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Board of directorsKhotso Mokhele(53) Independent non-executive director and chairman ➧ BSc (Agric), MSc (Food Science), PhD (Microbiology)Independentnon-executivedirectorsinceFebruary1998andChairmanoftheBoardsince1January2007.ChairmanoftheTransformationCommitteeoftheBoardandMemberoftheSafety,HealthandEnvironmental(SHE)CommitteeaswellasoftheHumanResourcesandNominationsCommittee.Independentnon-executivedirectorofthefollowingcompanies:ImpalaPlatinumHoldings,AfricanOxygenandTigerBrands.Non-executivedirectorofZimplatsHoldingsandtrusteeoftheHansMerenskyFoundation.Vice-presidentforscientificplanningandreviewoftheInternationalCouncilforScience.
Johnson Njeke(50)Independent non-executive director➧ BCom, BCompt (Hons), CA(SA), HDip Tax LawAppointednon-executivedirectoron1January2002.ChairmanoftheAuditCommittee.DeputyChairmanofKagisoMedia.DirectorofnumerouscompaniesincludingNMRothschild(SA),CompassGroup(SA),KagisoTrustInvestments,FosterWheeler(SA),MetropolitanHoldingsandMTNGroup.
Thandi Orleyn(53) Independent non-executive director➧ BJuris; BProc LLB; Hon-PHDAppointednon-executivedirectoron1February2007.ChairmanoftheHumanResourcesandNominationsCommittee.DirectoroftheSouthAfricanReserveBank,ImpalaPlatinumHoldings,ToyotaSA,Reunert,FreeWorldCoatingsandCeramicIndustries.
Eric Diack(51)Independent non-executive director➧ BAcc, CA(SA), AMP (Harvard)Appointednon-executivedirectoron16March2007ChairmanoftheRiskCommittee.DirectorofAyavunaApplianceHoldings,DeplianInvestmentsandAyavunaApplianceInvestmentandnon-executivedirectorofAdcockIngramHoldings.PreviouslyChiefExecutiveDirectorofAngloAmericanFerrousMetals&Industriesdivision.
Chris Murray(64)Independent non-executive director➧BCom, CA(SA), MBLAppointednon-executivedirectoron11May2007.ChairmanoftheSafety,HealthandEnvironmentCommittee.PreviouslyChiefExecutiveDirectorofHaggieGroupofCompanies.SinceretirementfromHaggiein2004,hasactedforSteelandEngineeringIndustriesFederationofSouthAfrica(SEIFSA–anEmployers’association)inanumberofcapacities.
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Executive directorsNku Nyembezi-Heita (49)Chief Executive Officer ➧BSc (Hons)(Elec Eng), MSc (Elec Eng), MBAAppointedasChiefExecutiveOfficerandamemberoftheBoardon1March2008.Non-executivechairmanofthefollowingcompanies:Arivia.komandtheBondExchangeofSA.Non-executivedirectorofacsis,KalagadiManganeseandMacsteelInternationalHoldingsBV.PreviouslyChiefOfficer,mergersandacquisitions,atVodacomGroupandChiefExecutiveOfficer,AllianceCapital.
Luc Bonte(54)President ➧ MSc (Elec Eng), PhD (Applied Sciences), MBAAppointedon1March2008asPresidentresponsiblefortheoperationsandamemberoftheBoard.PreviouslyChiefExecutiveOfficerofArcelorMittalBelgiumandArcelorMittalGent.
Kobus Verster(42) Executive Director, Finance ➧ BCom (Hons), MBL, Executive Management Program (Darden Business School)AppointedExecutiveDirector,Financeon17February2006.PreviouslyGeneralManager,corporatetreasury,atMittalSteelNVinRotterdam.Non-executivedirectorofMacsteelInternationalHoldingsBV,Ferrosure(IsleofMan)InsuranceCompanyandotherArcelorMittalGroupcompanies.DirectoroftheNationalBusinessInitiative.
Resignations of directors Michel Wurth (53)MemberofArcelorMittalGroupManagementBoard.Resignedasnon-executivedirectoron30November2008.
Malay Mukherjee (61)MemberofArcelorMittalGroupManagementBoard.Resignedasnon-executivedirectoron13May2008.
Rick Reato (52)FormerChiefExecutiveOfficerArcelorMittalSouthAfrica.ResignedasChiefExecutiveOfficerandexecutivedirectoron29February2008.
Lumkile Mondi(46) Non-executive director ➧ BCom (Hons)(Economics), BCom (Advanced Corporate Finance and Value Creation), MA (Economics)Appointednon-executivedirectoron11May2007.Chiefeconomistandexecutivevice-presidentofprofessionalservicesattheIndustrialDevelopmentCorporation.
Arnaud Poupart-Lafarge (43)Non-executive director ➧ Graduate Engineer, MSc (Economics)Appointedalternatenon-executivedirectoron24July2008andnon-executivedirectoron30November2008.ExecutiveVice-presidentofArcelorMittalGroupandmemberoftheArcelorMittalGroupManagementBoardresponsibleforAfricaandCommonwealthofIndependentStates(CIS).
Christophe Cornier (56)Non-executive director ➧ MSc from Ecole Polytechnique and Ecole des MinesAppointednon-executivedirectoron14May2008.SeniorExecutiveVice-presidentandmemberoftheArcelorMittalGroupManagementBoardresponsibleforAsia,AfricaandIndia,steelgreenfieldprojects,equipmentmanufacturingandinvestmentsandallocations.HeisalsoArcelorMittal’sChiefTechnologyOfficer.Previouslyexecutivevice-presidentofFCSCommercialAutoandChiefExecutiveOfficerofSollacMediterranee.
Sudhir Maheshwari(45)Non-executive director ➧ BCom (Hons), CA CSAppointednon-executivedirectorinDecember2002.SeniorExecutiveVice-presidentofArcelorMittalGroupandmemberoftheArcelorMittalGroupManagementBoardresponsibleforbusinessdevelopmentandmergersandacquisitions.
Davinder Chugh(52)Non-executive director ➧ BSc, LLB, MBAAppointednon-executivedirectoron15September2006.AppointedSeniorExecutiveVice-presidentandmemberoftheGroupExecutiveCommitteeofArcelorMittalGroupinSeptember2006andmemberoftheGroupManagementBoard.PreviouslyChiefExecutiveOfficerofArcelorMittalSouthAfricafromSeptember2004toSeptember2006andExecutiveDirector,Commercial,sinceMay2002.
1. Khotso Mokhele, Nku Nyembezi-Heita 2. Johnson Njeke, Eric Diack, Chris Murray 3. Thandi Orleyn, Lumkile Mondi, Sudhir Maheshwari 4. Davinder Chugh, Luc Bonte, Arnaud Poupart-Lafarge 5. Kobus Verster, Christophe Cornier
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KhotsoMokhele(Chairman)NkuNyembezi-Heita(ChiefExecutiveOfficer)
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Chairman and Chief Executive’s reportDear Shareholders, Despitetheeventsofthelastquarteroftheyear,2008wasafinancialyearthatArcelorMittalSouthAfricacanberightlyproudof.Benefitingfromastrongdemandforsteelandhighpricesglobally,wereporteda65%riseinheadlineearningstoR9.5billion,arecordforthecompany.
Clearly,theglobalanddomesticcontexthaschangeddramaticallysinceSeptemberlastyear.Rarelyhasthereeverbeenthislevelofuncertaintyaboutmarkets,demand,pricingandthefutureeconomiclandscape.ArcelorMittalhasdemonstratedagility,anabilitytotakefastdecisionsandboldness,whichIbelievewillbethekeydifferentiatorsbetweenthewinnersandlosersinmanagingthesevolatiletimes.
Whilewemustacceptthat2009willbeachallengingyear,ArcelorMittalSouthAfricaisastrongcompanywithahealthybalancesheetandnegligibledebt.This,togetherwiththestepswehavealreadyimplemented,ensuresthatwearewellpositionedtotacklethisnewenvironment.
OverviewDuringthefirstthreequartersof2008,globalsteelmarketsenjoyedanunparalleledperiodofbuoyancy.LedbyChina,robustdemandforsteelproductsresultedinasteepriseinpricesinallmarketsinwhichsteelistraded.Withasuddennessandsharpnessthattooktheindustrybysurprise,thingstookaturnfortheworseinthelastquarteroftheyear.Worldwide,steelconsumptionslumpedbyover20%inthefourthquarterof2008.Thiswasfollowedinshortorderbyasubstantialdropinpricesandfurthercompoundedbytheonsetofafreezeincreditmarkets.
Thebenefitsoftherecentconsolidationinthesteelindustrywereevidentintheswiftnessoftheresponsetotheeconomicdownturn.ArcelorMittalannouncedproductioncutsofupto35%globallyinNovember2008tosupportthede-stockingprocess,followedbyothermajorsteelcompanies.Thismeasureofdisciplineandtheextentofproductioncutsarerelativelynewphenomenaforthesteelindustryandhavebeenmadepossiblebythesizeandscaleofthelargerproducerswithinthesector,suchastheArcelorMittalGroup.
Therereallyisnocountry,industryorcompanythatisnotaffectedinsomewaybytheglobaleconomiccrisis–theonlydifferenceisthedegree.Nevertheless,therecontinuestobewidespreadoptimismthattheSouthAfricaneconomywillnotbeashardhitbytheglobaleconomiccrisisasotherpartsoftheworld.ThisisfoundedprincipallyonthefactthatexportsaccountforasmallerproportionofSouthAfricanGDPcomparedtosay,thecountriesofSoutheastAsia.However,theworseningcurrentaccountdeficitincreasesthecountry’svulnerabilityasdoesdepressedconsumerspending.
Howevertheoveralleconomicsituationeventuallyplaysout,thereisnoescapingthefactthatsomesectorsofoureconomyareexperiencingdevastatingdeclines.Theminingandmetalssectorisonesuchindustry.Domesticsteeldemandsufferedasignificantcontractioninthefourthquarter,whichisnotexpectedtoreverseforatleastthegreaterpartof2009.Theconsumermarkethadbegunagradualdeclinemuchearlierandcontinuedtodosothroughout2008.Thisisnotsurprisingconsideringthehighinterestratesprevalentthroughmuchoftheperiod.
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Chairman and Chief Executive’s report continued
Onthepositiveside,thereisthegovernment’sinfrastructuredevelopmentprogramme.Althoughnonewspendingplanswereunveiled,thePresidentandsubsequentlytheMinisterofFinancereiteratedgovernment’scontinuedcommitmenttothepreviouslyannouncedprogrammewithatotalvalueofR790billionoverthenextfiveyears.Thishaspickedupspeedwitharangeofprojectscurrentlyonthego,suchastheestimatedR210billionbeingspentonEskom’stwonewpowerstations–MedupiandKusile.InfrastructurespendingwillactasabackstoptosteeldemandinSouthAfricaatatimewhenconsumerspendingisexpectedtoimproveonlytowardsthelatterpartof2009.
Consumerandbusinessconfidencelevelshavebeenthebiggestcasualtiesofthiscrisis.Amarkedimprovementinsentimentwillbeaprerequisiteforareturntonormalcyinfinancialmarketsandthewidereconomy.Inthisenvironment,ourmajorfocusistoconservecash,containcostsandretainourcustomersthroughconsistentqualityandservice.Thecompanyhastakenaproactiveapproachbytakingresponsibleandnecessaryinitiativestocushionusfromtheworstpossibleeffectsofthedownturn.
Whilethecrisisisforcingustoadoptmanagementstrategiesthatfocusonshort-termgoals,wearealsomindfulthatweneedtoprotectthecorevaluesofthecompany,namely:• Valuecreationforshareholders.• Reliableandqualitysteelsuppliestoour
customers.• Buildingacultureofperformancethrough
employeedevelopment.• Beingaresponsiblecorporatecitizen.
Group performanceArcelorMittalSouthAfricasetmanyfinancialrecordsduring2008.TurnoverreachedR40billion,headlineearningsroseby65%toarecordR9.5billionandattributableprofitswereupbythesamepercentagetoR21.28ashare.TheEBITDAmarginwasahealthy34%.Theseresultswereachieveddespitethesharpdeclineinearningsinthefourthquarter.
Thesubstantialincreaseinannualearningswasdrivenprincipallybyhigherglobalsteelprices.Year-on-year,flatandlongsteelproductsrosebyanaverageof61%and63%respectively.OthercontributingfactorsweregainsonforeignexchangeandfinancialtransactionsandasignificantimprovementinthefinancialperformanceofourCokeandChemicalsbusiness.However,pricesofallsteelproductsfellsharplyinthefourthquarter.
Liquidsteelproductionwasdown9%fortheyearandanunprecedented54%inthefourthquartercomparedwiththepreviousquarter.Thelatterisastarkillustrationofthemeltdownthatbefellthesteelindustry.
Totalsalesvolumeswere37%lowerduringthefourthquarterand13%downforthe2008financialyear.Nevertheless,revenuefortheyearwasup36%toalmostR40billion,reflectingthestrongperformanceinthefirstthreequarters.
Exportvolumesdeclinedby49%asweprioritisedmeetingstrongdomesticdemandamidashortageofsteelduringthefirsthalfoftheyear.ExportstoregionsoutsidetheAfricancontinentfellto6%oftotalsteelproductsalesfrom12%in2007,emphasisingourstrategytofocussalesonsub-SaharanAfrica.
Productioncostspertonnerosedramaticallylastyear.Hotrolledcoilcostswereupby59%year-on-yearandbilletsby65%.Thisreflectedsurgingrawmaterialpriceswithaveragecokingcoalpricesupby102%year-on-year,non-cokingcoalby86%,scrapby125%andironorepelletsby84%.Thoughspotpricesofthesecommoditiesstartedtoinchlowerbythefourthquarter,manyofourcontractpricesforrawmaterialswillonlystarteasingbymid-2009.
DividendTheboardretaineditsdividendpolicyofdistributingonethirdofheadlineearnings.Thus,afinaldividendof365cpersharewasdeclared,resultingina2008fullyeardividendof707centspershare.
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Managing the downturnAstheearlysignsofmarketturmoilbecameevident,weannouncedarangeofstrategiestocurtailcostsandpreservecash.Productionwascutbyanunprecedented54%inthefourthquarterof2008althoughsteeldemandhadnotactuallyfallenbythatmagnitude.Inventorybuild-upwassuchthatlargeproductioncutswerenecessarytoenablede-stockingtotakeplace.Wehavemaintainedproductioncutsforthefirstquarterof2009−albeitatamoremodestlevel−toenablethisde-stockingtocontinue.Inventorylevelsdoappeartobereducing;astheycontinuetodeclinefurther,wewillstarttoseeatechnicalrecoveryinproductdemand.
ArcelorMittalSouthAfricahasmovedswiftlytoalignproductionwithchangingdemandpatterns.Thislevelofflexibilityisparticularlyimportantinlightofexceptionallypoormarketvisibility,makingforwardplanningverychallenging.
Atightfocusoncostswillcontinuetobethemainthemein2009andthereforethecostsavingmeasuresintroducedinOctober2008willcontinuetobeimplementedandexpandedupon.Amongtheseareurgentstepstakentoreducelabourcostsbydrasticallycuttingovertimeworkandreducingourtemporaryandhiredlabourforce.Fixedcostsandgeneralexpenseshavealsobeensignificantlycut.Amaterialbenefitwillflowfromlowerrawmaterialpricesmidwaythrough2009.
Giventhelevelofuncertainty,wealsodeemeditprudenttoreviseourgrowthplanandconsequently,ourcapitalexpenditureprogramme.
Therearecertainareasofouroperation,though,thatwillnotbecompromisedbythespendingcutbacks.Thesafetyandhealthofouremployeesandcontractorsremainmanagement’stoppriorityandwewillcontinuetoinvestinprojectsthatmakeitsafertoworkatourfacilities.
Inaddition,whilefinancialconstraintsmaycausesomereschedulingandpostponements,noneofourenvironmentalprojectshasbeenterminated.Wearecommittedtomeetingallourlegalobligationsandenvironmentalresponsibilities.
Finally,ArcelorMittal’sbusinessreliesheavilyontheskillsandexpertiseofitsemployees.Forthisreason,wehaveprioritisedtheretentionofcriticalskillsandprotectionofpermanentjobs.Clearly,ouractionswillbedictatedbythedegreetowhichthedownturniseitherprolongedorindeedworsens.Similarly,wehavenotreducedourskillsdevelopmentprogrammesandcontinuetotrain
moreartisans,techniciansandengineersthanwerequireforourownpurposesinlinewithacommitmentwemadetogovernmentin2007.
Pricing and competitionInJanuary2006,ArcelorMittalSouthAfricachangeditspricingmodelfromimportparitypricingtoasystembasedonabasketofdomesticpricesfromarangeofinternationalmarkets.ThebasketpricingmodeltakesglobalsteelpricesintoaccountandreflectstheexpertiseembodiedinArcelorMittalSouthAfrica’svalue-addedproducts.Ontopofthat,wealteredcertaintermsoftrade,suchasthevolumediscountstructure,tobetteraccommodatesmallandmedium-sizedsteelmanufacturers.
ThismodelhasproducedasoundandrealisticbasisforsupportingthedevelopmentofthesteelmanufacturingindustryinSouthAfricaandunderpinsthecurrentgovernment-ledinfrastructureexpansionprogramme.
WehavesharedourpricinginformationwiththeDepartmentofTradeandIndustryonanongoingbasistoenablethegovernmenttomonitortheevolutionofsteelpricingovertime.Wewillcontinuetoengagewiththedepartmentoftradeandindustry(dti)onthisissue.
Broad-based black economic empowermentInDecember2008,theArcelorMittalGroupterminatednegotiationstointroduceBEEshareholdersintoArcelorMittalSouthAfrica.Amidthewideningfinancialcrisisandthereluctancebybankstoprovidecredit,concludingthistransactionbecameimpossible.Negotiationswillberesumedoncenormalcreditconditionsreturntoglobalfinancialmarkets.
Effortstotransformthecompanyandimproveitsbroad-basedempowermentstatusonalltheothersixelementsoftheB-BBEEscorecardcontinueassetoutindetailintheSustainabilityReport.
Steel market reviewTheimpactofthemeltdownintheworld’sfinancialsystemandtheglobaleconomyonthesteelsectorhasbeensevere.Demandforsteeldroppedquicklyandsharply,reversingfouryearsofsteadygrowth.WorldSteelAssociationfiguresshowthatsteeldemandinthefourthquarterslumpedby20.3%comparedwiththethirdquarter.Thecontractionindemandwaswidespreadacrossallregions,thoughitwasmorepronouncedintheadvancedeconomiesofEurope,NorthAmericaandJapanandsomewhatlesssoinemergingmarkets.Amongindustrial
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sectors,thefallinsteeldemandwasparticularlysevereintheautomotive,shipbuildingandconstructionindustries.
Globalsteelconsumptionfell0.6%fortheyearasawholeincontrastwitha7.5%increasein2007and4.6%inthefirstthreequartersof2008.ExceptionallystrongglobaldemandduringthefirsteightmonthsoftheyearledtoasharphikeinbenchmarkhotrolledcoilpricestorecordhighsofoverUSD1200pertonneonaverageinJuly.Byyear-endthough,priceshaddroppedmorethan50%fromtheirmid-yearhighs.
Theindustryrespondedtotheslumpindemandwithsignificantproductioncuts.GlobalsteeloutputinSeptemberdeclinedby3.6%year-on-year,withproductioncutbacksgraduallyacceleratingto24%byDecember.Inmid-October,theArcelorMittalGroupannouncedproductioncutbacksofover30%acrossitsworldwideoperations,whichwerealsoimplementedinSouthAfrica.ByendDecember,thedeclineinglobaloutputhadreached33%.
SteeldemandinSouthAfricaremainedrobustinthefirsteightmonthsof2008notwithstandingtheadverseimpactofpoweroutagesinthefirstquarter.Alongwiththerestoftheworld,domesticdemanddroppedsignificantlyinthefourthquarter.
FiguresbytheSouthAfricanIronandSteelInstituteshowthatsteelconsumptioninSouthAfricadeclinedmoderatelyfrom5.9milliontonnesin2007toanestimated5.6milliontonneslastyear.Butfourthquartershipmentsplummetedby40%totheirlowestlevelsince2003.Thedropwasparticularlyevidentintheconsumermarketsegment,whichweestimateaccountsforaboutone-thirdofthetotalSouthAfricansteelmarket.ConsumerspendinginSouthAfricahadalreadybeenonthewanesince2007amidrisingconsumerpricesandthesubsequenttighteningofmonetarypolicy.Vehiclesaleshavebeentheworstaffected,butreducedspendingondomesticappliancesandresidentialbuildingactivityhasalsobeenevident.
Demandheldupwellintheinfrastructuresector,asthepublicsector’sR790billioninvestmentprogrammepickedupconsiderablemomentum.Thebuild-uptothe2010FIFAWorldCupSouthAfricahasspawnedamultitudeoffixedinvestmentprojects,includingnewstadiums,improvementstothecountry’stransportnetworkandanaccelerationofEskom’sdrivetoboostitsgeneratingcapacity.ThisisthemostambitiouspublicsectorspendingprogrammeinSouthAfricafor30yearsandwillprovidemuch-neededstimulussupporttoindustrialactivityinSouthAfricaforsometime.
Thesteepdeclineineconomicactivityexperiencedinthefourthquarterresultedina37%slumpinthevolumeofArcelorMittalSouthAfrica’ssales.Fortheyearasawhole,dispatchesat5.1milliontonneswere13%lowerthanin2007.Acriticalfactorinthesalesoutlookfor2009isthelevelofinventoriesintheSouthAfricanmarket.InventoriesrosesharplyduringthefourthquarterandstocklevelsattheendofDecemberwereestimatedatwellover1milliontonnes,equivalentto12weeksofshipments.Attheendof2007,stockswerelessthan500000tonnesorsevenweeksofshipments.De-stockingistakingplace,albeitataslowpace.Furtherreductionininventorieswillbeessentialbeforeatechnicalrecoveryindemandisestablished.
ImportsofprimarysteelproductsintoSouthAfricafellslightlyfrom567400tonnesin2007to566800tonnesin2008.Thelevelofimportsasapercentageoftotalvolumeshasheldsteadyatanaverageof10%overthepastthreeyears,asimporterslargelysupplysteelgradesnotproduceddomestically.
Capital expenditureAtotalR1.8billionwasspentoncapitalprojectslastyear,similartotheamountspentin2007.Themostsignificantamongthesewere:• TherelinesoftheCorexandMidrexplantsat
SaldhanhaWorks;• Themini-relineofBlastFurnaceN5atNewcastle
Works;• Theconstructionoftwonewdirectreduction
kilnsatVanderbijlparkWorks,whichisnearingcompletion.
Resourcesandfundswerealsodedicatedtoanumberofongoingprojectsthat,oncecompleted,willimproveoursafetyandenvironmentalperformance.
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Duetotheseverityoftheeconomicslowdownandtheglobalnatureofthecrisis,ArcelorMittalSouthAfricatookthedecisiontoplaceallgrowthprojectsonhold.Wedobelieveinthemeritsofourlong-termgrowthplan;however,thereislittlesenseinproceedingunderconditionsofsuchextremeuncertainty.Wearecontinuallyevaluatingourstrategybutwestillbelievethatinthelongterm,sub-SaharanAfricawilldemonstrateanincreaseddemandforsteelastheglobaleconomyimproves.
OperationsOurfocusgoinginto2008wastobuildupontheimprovedproductionplatformresultingfromtherebuildofBlastFurnaceDatVanderbijlparkWorksin2007.ThiswasfollowedbytherelinesoftheCorexandMidrexplantsatSaldanhaWorksandthemini-relineofBlastFurnaceN5atNewcastleWorksin2008.Theseproductionimprovementsaddressedmanyofthesupplyproblemsthathavebesetouroperationsoverthepastfewyears.
DespitesomeproductioncutbacksduetothepoweroutagesandsupplyrestrictionsintroducedbyEskom,wereachedourmaximumliquidsteelcapacitylevelsbymid-2008.Bythelatterpartofthethirdquarter,theeconomiccrisishadstartedtospreadtothesteelindustryandwewereforcedtoimplementproductioncutbacks.
TheelectricarcfurnacesinVanderbijlparkaswellastheDRIkilnswerestoppedinOctober.BlastFurnaceDwasstoppedinlateNovember2008.AtVereenigingWorks,themelt-shopwasstoppedfromthemiddleofNovember2008tillearlyJanuary,whilsttheDRIkilnatDunswartinBenoniwasmothballeduntilfurthernotice.BlastFurnaceN5inNewcastlewasshutformostofDecember.ThoughoperationsatSaldanhaWorkswerenotcompletelyhalted,thetempoofproductionwasreduceddrasticallyandfrequentshortstopsweretakenontheCorexandMidrexplantstomatchproductionlevelswithdemand.ThesmallrollingmillinMaputowasalsotemporarilycloseduntilmarketconditionsimprove.
Someofthesefacilitieshavebeenfiredupagainsincedemandpickedupinthefirsttwomonthsof2009.Butflexibilityremainsthewatchword.Operationalmanagementisspendingalotoftimetoensurethatouroperationscanquicklyrespondtochangesindemand.Similarly,wearelookingatvariousrawmaterialandfurnacepermutationstooptimisethecostofourproductionprocesses.
Health and safetyEnsuringthehigheststandardsofhealthandsafetyisourfirstpriority,overridinganyotherbusinessgoal.Despiteoperatinginahighpotentialhazardindustry,weareconvincedthatachievingafatalityandinjuryfreeworkplaceisachievable.Itisthisconvictionthatledtothelaunchofthegroup-wide“JourneytoZero”programmelatein2008,withastatedgoalofachievingzerofatalitiesandinjuriesamongouremployeesandcontractors.
Furnace relinesReliningafurnaceisnormallydoneonlyonceevery12to15years.Itentailsareplacementofcarbonblocksandrefractorymaterialinthefurnace,whiletheoutagesarealsousedtorepairorreplaceequipmentsuchasthefurnaceshell,gearboxandchargingequipmentaswellasthematerialhandlingsystem.Newtechnologiesareintroducedtoimprovetheperformanceofthefurnacesandreducefuturestoppages.
LastyearArcelorMittalSouthAfricacompletedtherelinesoftheMidrexandCorexplantsatSaldanhaWorksandthemini-relineofBlastFurnaceN5atNewcastleWorksatatotalcostofaboutR310million.Whereasittookonly45daystocompletethemini-relineatN5themorecomplexworkinvolvedattheCorexandMidrexplantsrequireda78-dayshutdown.
ThefurnacessufferedfromreducedoutputbeforetherelinesduetoseveralstavewaterleaksattheCorexandhotspotsatN5.Thesefailureswererepairedduringtherelines,whichmeansthatthefurnacesarenowcapableofoperatingattheirdesigncapacitylevels,andevenhigherattheCorex,duetodesignchangestothedustrecyclingsystem.
ThesuccessfulrelinescoupledwiththerebuildofBlastFurnaceDatVanderbijlparkWorksenabledthecompanytoreachourmaximumliquidsteelcapacitybymid-2008.
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Tragically,afatalincidentatSaldanhaWorkson22September2008ledtothelossoflifeofanemployeeandacontractor,whodiedfromexposuretocarbonmonoxidegas.Aprojectteamestablishedthecausesoftheaccidentandsetupmechanismssothatalloperationscanlearnfromthisregrettableincident.Furthermore,wehaverevisitedallaspectsofemployeeandcontractoradherencetothecompany’sfatalitypreventionstandardscoveringprotocolsforworkingatheights,isolationprocedures,workinginconfinedspacesandrailway-relatedprocedures.
Ouroverallsafetyperformanceintermsoflosttimeinjurieswasrelativelygood.However,thepositivetrendestablishedoverthepreviousfouryearsturnedslightlynegative,whichwasdisappointing.Thelosttimeinjuryfrequencyrateperonemillionman-hoursworkedincreasedto2.4lastyearfrom2.1in2007.Managementhastakenstepstoaddressthisinourdeterminationtorestorethegradualdeclineoflost-timeinjuriestowardsourzerotarget.
Healthandsafetyperformancehasnowbeenfullyintegratedintotheperformanceappraisalsystemsofallmanagersandothersupervisorystaff,underscoringtheresponsibilityweplaceonthesafetyandhealthofouremployeesandcontractors.Shopfloorsafetyauditsarearegularfeatureofoursafetypracticesandinvolveauditsconductedbyalllevelsofmanagement,fromfirstlinetoseniorcorporatemanagers.
EnvironmentDemandforsteelisinextricablylinkedtoeconomicgrowth.Thereisnosubstituteforsteelinkeyareasofinfrastructureandconstruction.Steelproductionhoweverhassignificantenvironmentalimpacts.Thechallengeisnottofindwaysofreducingsteelusage,buttodeveloptechnologiesandmethodsthatwillmitigatetheimpactsteelmakinghasontheenvironment.Torespondtothischallenge,ArcelorMittalGrouphasdefinedpoliciesandprinciplestoguideourenvironmentalpracticesworldwide.
Overthepastyear,wehavemadegoodprogressonsomeofourmostimportantenvironmentalprojects,particularlythoserelatingtoissuesoflegalcompliance.TheseincludetheinstallationofdustextractionsystemsatVereenigingWorks’steelmakingplant,whichisontrackforcompletionin2010.Dueforcompletionlaterthisyear,thecokegasandwatercleaningprojectatVanderbijlparkWorkswillleadtoa40%reductioninsulphurdioxideemissions.Additionally,steadyprogresswasmadeinachievingazeroeffluentdischargestatusatNewcastleWorks.
SubstantialprogresshasbeenmadetocomplywithdirectivesissuedbytheGreenScorpionsrelatingtowastedisposalpracticesatVereenigingWorksin2007.TheVaalwastedisposalsitehasbeenclosedandthebulkofmagnetitestockpiledatthatsitehasbeenremoved.WeareinthefinalstagesoffinalisingtherehabilitationplaninconjunctionwiththeGautengDepartmentofAgriculture,EnvironmentandConservation.
Werecognisethatasalargesteelcompany,wehaveaconsiderableenvironmentalfootprint.Weareaimingbeyondregulatorycompliance,workingtowardsoperationalexcellencethroughsignificantinvestmentandcontinualmanagementimprovements.Currenteconomicconditionswillinevitablyleadtoarevisionofprojecttimetables,buttheendresultwillnotchange,namely:comprehensivecompliancewithenvironmentallaws.Theverynatureofourbusinessbringsmanychallengesandconstraints,buthavinganendproductthatis100%recyclableputsusinanidealpositiontomeetthesechallenges.
CSIWehaveidentifiedthedevelopmentofstrongandsustainablecommunitieswhereverweoperateasanimportantpillarofthecompany’soverallcorporateresponsibilityframework.Thisisanambitiousgoalbutonethatwebelieveisachievableintime.Bybeingmoresensitivetolocalneedsandpriorities,weseektoensurethatwefocusontangibleactivitiesthatdeliversocialandeconomicvalueinArcelorMittal’sfootprintareas.
TheArcelorMittalSouthAfricaFoundationhasidentifiedhealth,education,socialinclusionandinfrastructuredevelopmentastheprerequisitestobuildingsustainablecommunities.Ourcorporatesocialinvestmentbudgetisthusfocusedontheseareas.
In2008,ArcelorMittalSouthAfricasupported20socialprojectswithatotalmonetaryvalueofR21million.WorkingwiththeGautengDepartmentofEducation,ArcelorMittalembarkedonamajorinitiativein2006toimprovelocalmathematicsandscienceeducation.Approximately1900learnersandteachersattendedclassesfromhighlytrainedmathematicsandscienceteachersattheArcelorMittalScienceCentreinSebokenglastyear.The2008classwasthefirstgroupofGrade12learnerstowritethematricexaminations.Theschoolsthatparticipateinthisinitiativeachievedanaboveaveragepassrateintheexaminations,givingusthefirsttangibleindicationoftheeffectivenessofthisintervention.ThemodelhasnowbeenreplicatedintheWesternCape,withtheopeningoftheSaldanhaScienceCentreinDecember2008.
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InFebruary2009,weformallyannouncedaR250millionpartnershipwiththenationalDepartmentofEducationtobuild10schoolsinallnineprovincesofSouthAfricaoverthenextsevenyearsusingmodernsteelconstructiontechnologies.Thesodturningceremonyforthefirstoftheseschools,MetsiaBopheloPrimaryinMamelodi,Tshwane,washeldearlierthisyearandshouldbecompletedbytheendof2009.
ThefoundationalsoencouragestheinvolvementofArcelorMittalemployeesthroughthepromotionofvolunteeringopportunities.ThegrouptookpartinvolunteeringactivitiesonInternationalVolunteerDaylastDecember.
Moredetailsofourcorporatesocialresponsibilityprogrammecanbefoundinthe2008SustainabilityReport.
Corporate governanceArcelorMittalSouthAfrica’sbusinesspracticeisunderpinnedbystrictadherencetocorporategovernancestandardsasreflectedinthecompany’sCodeofBusinessConduct.Thecodeaimstoengenderacultureofadherenceandprovidesguidelinesontheprinciplesandpracticestowhichwearecommitted.Theboardofdirectorstakesultimateresponsibilityforthecompany’sadherencetosoundcorporategovernancestandardsandseestoitthatallbusinessjudgementsaremadewithreasonablecare,skillanddiligence.
Duringtheyear,thecompositionoftheboardwaschangedwiththeintroductionofnewexecutivemanagementtothecompany.ChiefExecutiveOfficerNonkululekoNyembezi-HeitaandPresidentLucBontejoinedtheboardinMarch2008,whileChristopheCornierandArnaudPoupart-Lafargewereappointednon-executivedirectorsinMayandJulyrespectively.WebadefarewelltoRickReato,MalayMukharjeeandMichelWurthwhosteppeddownduringthereportingperiod.
Theboardundertookavigorousexternalevaluationduringtheyearwhichassessedtheeffectivenessoftheboardandeachofitscommittees.Thereportrevealedthattheboardcompositioncontainedthecorrectmixofskillsandexperiencerequiredbythecompanyandmoreover,theboardandthecommitteeswerefoundtobefunctioningeffectively.Theboardwillcontinuetoconducttheevaluationexerciseonanannualbasis.
TheboardwelcomesthecomprehensivechangesbeingintroducedtotheSouthAfricangovernance
frameworkbythenewCompaniesActandtheKingIIIcodeandisintheprocessofreviewingthecompany’sinternalsystems,policiesandprocedurestoensurefullcompliancewiththeActandcodewhentheycomeintoforcein2010.
Theboardremainsfirmlycommittedtoensuringcompliancewithallrelevantlaws,regulationsandtothehigheststandardsofethicalconductbyconstantlystrivingtoimprovethecompany’sgovernancemodel.AccountabilityandresponsibilitytoallstakeholdersrankamongthemostcherishedprinciplesheldbytheArcelorMittalboardasaretransparency,qualityofdisclosureandclearcommunicationwithshareholders.
Appreciation IwouldliketoextendmydeepestappreciationtoallArcelorMittalSouthAfricaemployeesfortheirinvaluablecontributiontothesuccessoftheorganisationoverthepastyearandtotheconsiderablesacrificestheyhavehadtomakeoverthelastfewmonths.Inthisregard,Iespeciallywishtoacknowledgemembersoftheseniormanagementteamfortheirsupport,guidanceandunstintingsharingoftheirknowledgeandexperience.Wearegratefultoourboardmembersfortheirstrongsupportandongoingadviceandguidance.
ConclusionDespiteseverebusinesschallenges,ArcelorMittalSouthAfricaemergedfrom2008asastrongercompany,bothoperationallyandfinancially.Wehaveastrongbalancesheetandnegligibledebt.Investmentinouroperationshasensuredthatwecanswiftlyadjustourproductionlevelstovaryingdemandpatterns.Weremainhometosomeofthebesttechnicalskillsinthecountryandhavedevelopedatrainingpipelinethatwillensurewehaveanamplesupplyofskillsonwhichwecandrawforourfutureexpansion.
Wearecommittedtothehigheststandardsofcorporateresponsibilityingoodandbadtimes.Asaglobalgroup,ourstatedgoalistoprovidetheleadershipthatwilltransformthefutureofthesteelindustryandsocietiesaroundus.Tosucceed,wemustdemonstratetwoattributes,namely:sustainedfinancialperformancethroughtheeconomiccycleofsteelandawillingnesstoaddresstheenvironmental,socialandwidereconomicchallengesofourtimeinanopenandtransparentmanner.Itisourconvictionthatbusinessgrowth,sustainablecommunitiesandthecreationofvalueforourshareholdersgohand-in-hand.
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Operational review and locations
Flat steel products ArcelorMittal South Africa produces flat steel products at its Vanderbijlpark and Saldanha operations. Vanderbijlpark is the largest supplier of flat steel products in sub-Saharan Africa.
Long steel products The long steel products division produces a range of long steel products at the integrated steel works at Newcastle and the electric arc furnace-based facility at Vereeniging Works. These products include bar, billets, blooms, hot-finished and cold-draw seamless tubes, window and fencing profiles, rod and light, medium and heavy sections.
Coke and Chemicals Coke and Chemicals’ core business is the production of market coke for the ferro-alloy industry from coke batteries located in Pretoria, Newcastle and Vanderbijlpark. The business also processes and beneficiates metallurgical and steel by-products, including coal tar pitch.
DivisionVanderbijlpark Works
isthelargestinlandsteelmillinsub-SaharanAfrica,withtwoBlastFurnaces,threeelectricarcfurnacesandthreebasicoxygenfurnaces.Ithasacapacityof4.4milliontonnesofliquidsteelperannum,whichisconvertedintoarangeofsteelsheetingandplates.Thisoutputconstitutesaround82%ofthecompany’sflatsteelproduction.VanderbijlparkWorksemploys4723people.
Saldanha Works
hasacapacityof1.2milliontonnesofliquidsteelperannum,mostofwhichisdestinedfortheexportmarket.Italsoproduceshighqualityultrathinhotrolledcoil.ItistheonlysteelmillintheworldtohavesuccessfullycombinedtheCorexandMidrexprocessintoacontinuouschain.ThisreplacestheneedforcokeovensandBlastFurnaces,andcontributestomakingSaldanhaWorksaworldleaderinemissioncontrolandenvironmentalmanagement.Itemploys557people.
Vereeniging Works
whichemploysaround954people,isSouthAfrica’smajorsupplierofspecialitysteelproducts,seamlesstubeandforgeproducts.Atfullcapacityitdeliversaround0.4milliontonnesoffinalproductperannum,ofwhicharound18%wasexportedlastyear.
Newcastle Works
isratedamongtheworld’slowestbilletcash-costproducers,afteranintensivere-engineeringprogramme.WithoneBlastFurnace,threebasicoxygenfurnacesandfourrollingmills,thisoperationhasacapacityof1.8milliontonnesofliquidsteelannually.Productsincludelow,mediumandhighcarbonsteels,alloysteels,bar,structuralsectionsandrails.Over1950peopleworkatNewcastle.
The Coke and Chemicals
operationcomprisesthreecokebatteriesinNewcastle,VanderbijlparkandPretoria.Theyproducecommercialcokefortheferro-alloyindustry,supplyingmorethanhalfofSouthAfrica’srequirements.Inaddition,CokeandChemicalsproducesmetallurgicalby-products,includingcoaltarpitch.
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Contributiontooperatingincome
Operatingresults
56%
2008 2007
Revenue(Rm) 25513 19240
Netoperatingincome(Rm) 7007 4827
Employees 5280 5119
2008 2007
Revenue(Rm) 12950 9238
Netoperatingincome(Rm) 3672 2652
Employees 3008 2868
2008 2007
Revenue(Rm) 3563 2065
Netoperatingincome(Rm) 1743 727
Employees 273 265
14%
30%
22 ArcelorMittalSouthAfrica AnnualReport2008
ArcelorMittal South Africa produces flat steel products at its Vanderbijlpark and Saldanha operations. Vanderbijlpark is the largest supplier of flat steel products in sub-Saharan Africa. It has the capacity to produce 4.4 million tonnes of liquid steel each year, which is cast into slabs and hot rolled into heavy plate or coils. These are sold as hot rolled strip or, through further processing, into cold rolled and coated products such as tinplate and hot dip galvanised, electro-galvanised and pre-painted sheet. Vanderbijlpark Works meets more than three-quarters of South Africa’s flat steel requirements.
Saldanha, which produces thin and ultra thin gauge hot rolled coil for domestic and export markets, is the only steel mill in the world to have a continuous production chain that obviates the need for coke ovens and Blast Furnaces. Together with Vanderbijlpark Works, its 1.2 million tonnes of liquid steel per annum amount to a combined capacity of 5.6 million tonnes.
Flat steel products
Operational results for the year ended 31 December 2008 2007
Revenue(Rm) 25513 19240
Netoperatingincome(Rm) 7007 4827
Liquidsteelproduction(’000t) 4084 4231
Salesvolumes(’000t) 3412 3928
–Domestic 2835 2886
–Export 577 1042
Domesticsales(%) 83 73
Capitalexpenditure(Rm) 1035 1443
Hot-rolledcoil(HRC)exportprice–USD/t(c&f) 966 659
Numberofemployees 5280 5119
TotalHRCcashcostRandpertonne 4032 2538
TotalHRCcashcostUSDollarpertonne 491 360
Operating profile –Flat steel products
0
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3 200
4 800
6 400
8 000
2004 2005 2006 2007 2008
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PIC TO COMEPIC TO COME
COPY TO COME2010 FiFa Soccer World Cup
Supporting africa’s showcase sporting event
The 2010 FiFa World Cup has become the focus of the infrastructure investment drive currently taking place in South africa. Ten stadiums in nine cities have been selected to host the event which kicks off in June 2010. Five new stadiums are being built, including Port Elizabeth’s Nelson Mandela stadium, pictured here, while five existing stadiums are being refurbished and upgraded. Both long and flat steel products are being utilised in the construction programme. The company’s products are being used, amongst other venues, in Johannesburg’s spectacular Soccer City stadium as well as the new Orlando stadium in Soweto, home to the Orlando Pirates football club and one of the training facilities for 2010.
26 ArcelorMittal South Africa annual Report 2008
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Markets DomesticTotal dispatches of flat steel products in 2008 were 2% lower than 2007. Fourth quarter sales slumped by 45% (compared with the third quarter) and more than offset a year-on-year increase of 9% for the first three quarters of the year. Sales were also affected by a slowdown in production in the first half of the year as a result of electricity outages. in expectation of further price rises many arcelorMittal South africa customers also built up stock in the second and third quarters. However high inventory levels remained in the fourth quarter as the lagged effect of interest rate increases and high inflation on consumers’ disposable incomes, as well as a decline in business emanating from the global financial crisis, depressed sales. Only the construction sector managed to maintain a relatively high rate of steel consumption.
as a result of steel shortages, especially in the first half of 2008, we serviced our demand from the domestic market first – 83% of total flat steel product sales in 2008 were sold locally, compared to 74% the previous year.
InternationalExports of flat products in 2008 declined by 43% in comparison to the previous year and the share of exports to total sales dropped from 26% in 2007 to 17% in 2008. Exports outside the african region accounted for only 7% of total flat steel product sales, compared to 11% in the previous year, emphasising our strategy to focus on markets in africa. in 2008 our net realised export prices for flat products were on average 61% higher than 2007, while prices decreased by 8% during quarter four compared to quarter three.
Operational resultsThe operating profit for flat steel products increased by 45% during the year from R4 827 million in 2007 to R7 007 million in 2008. This is particularly pleasing given the decline in production and sales volumes.
Liquid steel production declined by 147 000 tonnes during 2008 as a result of the production cutbacks in the fourth quarter while the Corex and Midrex relines at Saldanha Works also limited output during the first half of the year.
The cash cost per tonne of hot rolled coil produced increased by 59% year-on-year amid surging prices of major input materials, led by coal, scrap and alloys.
Vanderbijlpark WorksThe year started with a continuation of the cold hearth conditions experienced on Blast Furnace D from December 2007. The furnace was fully recovered on 7 January 2008 and a new monthly liquid iron production record was achieved in april 2008.
Liquid steel production in Vanderbijlpark was also affected by the electricity supply shortages experienced in late January 2008. The electric arc furnaces were stopped for a week in January and operations were continued on only two furnaces for the bulk of the year. Operation on all three furnaces was possible only for relatively short periods of time when electricity demand in other operations of the company was low.
Notwithstanding the power shortages many of the production problems that beset the plant previously have been addressed. illustrating the improved quality performance, internal rejections at Vanderbijlpark Works reached a new low in 2008.
Operational review continued
The electric arc furnaces and DR kilns were stopped in October due to the drastic drop in demand for steel. Personnel were redeployed to other areas to reduce the dependency on hired labour. Blast Furnace D was stopped in November 2008 and was restarted only during February 2009.
Saldanha WorksProduction at Saldanha was adversely affected by the electricity shortages, particularly in January, as well as the failure of vacuum pumps in the VPSa section of the Midrex plant throughout the year. New pumps were ordered but will be available only in 2009.
However, Saldanha Works also set a number of production firsts, including a record low fuel rate in the Corex plant, three months of continuous operation without a breakout on the thin slab caster, the highest casting tempo on the thin slab caster to date as well as several new thin gauge production records. Good progress was also made with the production of ultra thin – below 1.09 mm – gauge HRC.
Safety, health and environmentThe safety performance at the flat steel division, as measured by the lost time injury frequency rate (LTiFR), was a mixed one. Vanderbijlpark improved its LTiFR from 2.53 in 2007 to 2.44 in 2008 and Saldanha Works from 2.3 to 2.1. During the year Vanderbijlpark Works achieved three million lost time injury free hours and Saldanha Works two
million. The Corex and Midrex relines started in February and were completed in april with no lost time injuries. Tragically, a fatal incident at Saldanha Works on 22 September 2008 led to the loss of life of an employee and a contractor, who died from exposure to carbon monoxide gas.
a special task force was established by arcelorMittal South africa in May 2008 to address the many environmental issues experienced in Vanderbijlpark and to prepare for a November 2008 inspection audit by the Green Scorpions. This made a significant contribution towards achieving greater environmental awareness throughout the Works. Simultaneously the company started interactions with local Vanderbijlpark communities as well as NGOs about our environmental legacy.
investment in environmental projects continued at Vanderbijlpark Works. The ceramic welding programme at the coke oven batteries was completed in September 2008 and has already contributed to an improved emission performance. The commissioning of the Coke Gas and Water Cleaning project will lead to a reduction of 40% in SO2 emissions at Vanderbijlpark.
The Green Scorpions audit took place from 3 – 7 November 2008 and a final report is still awaited.
ArcelorMittal South Africa annual Report 2008
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Vanderbijlpark Works
Markets (%) of total sales 2008 2007
Geographical sales distributionSouth africa 83 74africa 10 15asia 7 10Europe 0 1Local market segmentationBuilding and construction 37 36Pipe and tube (welded) 24 25Packaging 14 13automotive 13 14Mining, energy, water, chemicals and gas 5 5Furniture and appliances 3 3Machinery and equipment 2 2agriculture 1 1Transportation 1 1
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CapitalexpenditureTwonewDRIkilnsatVanderbijlparkWorks,withacombinedcapacityof350000tonnesayear,aresettobecommissionedinthefirsthalfof2009atanestimatedcostofR600million.InresponsetotheglobaleconomicslumpanumberofmajorexpansionprojectshavebeenputonholdpendingrevisionofArcelorMittalSouthAfrica’sgrowthstrategy.Theoriginalexpansionprogrammeforflatsteelproductsincludedanewgalvanisingline,anewcolour-coatinglineaswellasaco-generationpowerplantatVanderbijlparkWorks.However,thecompanyremainscommittedtogrowingitsbusinessinthemediumtolongtermandwillcontinuetomonitorallindicatorstoevaluatethetimingofitscapitalexpenditureplan.Environmentalprojects,andthosethatwillimprovethesafetyofouroperations,willcontinuetobefundedasfaraspossible.
Spendingontwomajorprojectscontinuedduringtheyear.TheCokeGasandWaterCleaningplantatVanderbijlparkWorkshasexperiencedcommissioningdelays,butwillbeoperationalduringthefirstquarterof2009,whiletheCorexandMidrexrelinesatSaldanhaWorksweresuccessfullycompletedinApril2008.
TheyearaheadDomesticflatsteeldemandisexpectedtoremainunderpressureformostof2009.Adeclineininflation,furtherpossibleinterestratecutsand
government’scommitmenttocontinuewithitsinfrastructureprogramme,shouldboostconsumerandinvestmentspendingtowardsthelatterpartof2009.Internationally,steelproductionandconsumptionin2009areexpectedtobewellbelow2008levels.Furthermore,economicactivityoutsideChinaisexpectedtobesluggish,especiallyinNorthAmericaandWesternEurope.Areturntostabilityisonlyexpectedinthesecondhalfof2009whenproductioncutsshouldbringthemarketclosertoequilibrium.
ThecommissioningofthetwonewDRIkilnsatVanderbijlparkWorkswillmaketheoperationlessdependentonscrapasfeedstockfortheElectricityArcFurnacesandwillhaveapositiveimpactontheplant’scoststructure.Thekilnswillalsoboostliquidsteelmanufacturingcapacityby220000tonnesayear.
WhileinternationalcommoditypriceshavedeclinedsharplysinceSeptember2008,theimpactonthecostofproductionwillbedelayeduntilthemiddleof2009whennewrawmaterialcontractpriceswillcomeintoeffect.Inordertocushionthecompanyfromtheworsteffectsoftheglobalfinancialcrisisawiderangeofmeasureswereintroduced,focusingonareductioninfixedcostsandcashmanagement.
Capital expenditure for the year ended 31 December (Rm) 2008 2007
Value-adding 287 490
Replacements 672 907
Environmental 76 46
Total 1035 1443
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28 ArcelorMittalSouthAfrica AnnualReport2008
Long steel productsThe long steel products division produces a range of products at the integrated steel works at Newcastle and the electric arc furnace at Vereeniging Works. These products include bar, billets, blooms, hot-finished and cold-drawn seamless tubes, window and fencing profiles, light, medium and heavy sections and rod. The biggest market is the building and construction industry which accounted for almost 50% of sales in 2008. Other significant markets are the mining, automotive, agricultural, engineering, manufacturing and petrochemical industries.
The division’s combined annual production capacity is 2.2 million tonnes of liquid steel, with Newcastle Works accounting for the bulk of this at 1.8 million tonnes. It supplies around 50% of the local market’s demand for long steel products and is also a strong competitor in various export markets, thanks to its ability to provide high-quality products at competitive prices.
Operational results for the year ended 31 December 2008 2007
Revenue(Rm) 12950 9238
Netoperatingincome(Rm) 3672 2652
Liquidsteelproduction(’000t) 1690 2144
Salesvolumes(’000t) 1677 1899
–Domestic 1540 1535
–Exports 137 364
Domesticsales(%) 92 81
Capitalexpenditure(Rm) 541 346
Averagelowcarbonwirerodexportprice–USD/t(c&f) 909 592
Numberofemployees 3008 2868
TotalbilletcashcostRandpertonne 3822 2310
TotalbilletcashcostUSDollarpertonne 466 327
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2 400
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4 000
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Operating profit – Long steel products
Gautrain rapid-rail link
South Africa’s flagship transport project
The Gautrain rapid-rail link spans 80 km of railway line linking Johannesburg, Sandton, Tshwane and the OR Tambo International Airport. The project, scheduled to cost R25.2 billion, is a private public partnership between the Gauteng provincial government and the Bombela Concession Company. When construction commenced in 2006 it was estimated that the project would require about 50 000 tonnes of steel particularly in the 15 km of the route that will be underground. The bulk of the steel is long steel products, such as these reinforcing bars used at the Rosebank section of the Gautrain tunnel. ArcelorMittal South Africa’s steel is supplied to Murray & Roberts, a 25% member of the Bombela consortium.
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Newcastle Works
Operational review continued
Markets DomesticSales of long steel products in 2008 improved by 7% in the first three quarters as spending on infrastructure projects continued. At the same time merchants accelerated speculative purchases to take advantage of surging global steel prices. But long product sales slumped in the fourth quarter which led to zero growth in sales for the year as a whole. ArcelorMittal South Africa is committed to meeting domestic sales first and 92% of total long product sales in 2008 were sold domestically compared with 81% in 2007.
While the South African government remains committed to its infrastructure programme, private sector spending has slumped making it unlikely that last year’s expected 11.5% overall rise in gross fixed capital formation will be repeated in 2009.
InternationalExport sales of long steel products in 2008 were 62% lower than the previous year as a result of the steel shortages during the first half of the year following the mini-reline of Blast Furnace N5 at Newcastle Works and the slump in
demand in the fourth quarter. Shipments outside the African region accounted for only 5% of total long steel product sales, compared with 9% in 2007. This reflected the consistent strong demand from the South African construction sector and the company’s commitment to give priority to the domestic market. The average net realised export prices for long steel products, rose 28.5% in 2008 and reached a record level in the third quarter. OperationalresultsThe net operating income of the long steel products division increased by 38% to R3 672 million in 2008 from R2 652 million in 2007, reflecting the rise in steel prices.
Liquid steel production declined by 454 000 tonnes during the year as a result of the production cutbacks in the fourth quarter to match lower demand levels. The mini-reline of Blast Furnace N5 at Newcastle Works also disrupted output in the second quarter.
The cash cost per tonne of billet produced increased by 65% year-on-year following the substantial hike in raw material prices. Scrap prices
in particular rose steeply contributing to the sharp escalation in the production cost of billets at Vereeniging Works which is a scrap-based plant.
NewcastleWorksThe mini-reline of the N5 Blast Furnace in Newcastle started in May 2008 and was completed in 45 days, ahead of schedule. The ramp-up of the furnace was also faster than planned. Several monthly throughput records were also achieved on the Billet and Bar Mills.
The sales slump from mid-September 2008 onwards forced a cut back in production at Newcastle Works from October onwards and on 4 December 2008 the Blast Furnace was shut down. It was blown in again at the end of December.
VereenigingWorksVereeniging Works had an excellent operational and financial year and achieved record throughput levels on almost all its facilities, before the slump in demand reduced output levels in the fourth quarter.
MaputoWorksThe small rolling mill ArcelorMittal South Africa bought in Maputo, Mozambique, in 2006, started production in May 2008, but the slump in demand forced us to stop production towards the end of 2008.
Safety,healthandenvironmentThe lost time injury frequency rate (LTIFR) for Newcastle Works at 1.73 is the best among our operations, but a slight deterioration from the 1.25 recorded in 2007. At Vereeniging Works the rate improved from 2.5 to 2.25 during the year. Newcastle Works achieved two million disabling injury free hours during the year and Vereeniging Works achieved one million hours.
Environmental investments in the long products division this year are headed by the effluent treatment projects at Newcastle Works for 2009. This project will comprise a new evaporator crystalliser and an upgrade of the Reverse Osmosis (RO) plant.
At Vereeniging Works significant improvements were reported in the control of fluoride levels in the effluent discharged from the Works, while dust emission levels at the Dunswart DRI plant in Benoni, were drastically reduced before the operation was mothballed in October 2008.
31 ArcelorMittalSouthAfrica Annual Report 2008
Markets (% of total sales) 2008 2007
Geographicalsalesdistribution
South Africa 92 81
Africa 3 10
Asia 3 6
Europe 1 2
Americas 1 1
Localmarketsegmentation
Building and construction 48 46
Machinery and equipment 20 21
Mining, energy, water, chemicals and gas 17 18
Automotive 8 8
Agriculture 5 5
Furniture and appliances 2 2
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CapitalexpenditureTheeconomicdownturnhasalsoimpactedonthegrowthstrategyandinvestmentprogrammeatlongsteelproducts.AtNewcastleWorkstheplannedBlastFurnaceN6–ArcelorMittalSouthAfrica’slargestexpansionproject–aswellasthenewbilletcasterandbar/sectionmillwereputonholduntilareturntosustainablegrowthlevelsinthesteelindustry.Eventhenallprojectswillbere-evaluatedastotheirfeasibilityunderprevailingmarketconditions.ThedustextractionsystemfortheElectricArcFurnaceatVereenigingWorksisprogressingwellandontrackforcompletioninearly2010.
TheyearaheadThemarketoutlookforlongsteelproductsissimilartothatoftheflatproductsdivision,withdemand
andpricesexpectedtoremaindepressedformostoftheyear.However,theoperationwillbelessaffectedbythesharpfallindemandforconsumerproducts,suchasvehiclesandotherdurablegoods.
Withdemandlevelslow,bothNewcastleandVereenigingWorkswillnotberunningatfullcapacity.Butweareonstandbytoincreaseproductionvolumeswhendemandimproved.
Althoughcommoditypricesshowedasignificantdropsincethefourthquarterof2008,thebulkofthebenefitwillonlystarttoflowthroughfromthesecondquarterof2009whenthenewcontractpriceswillcomeintoeffect.Similartoflatproducts,measurestocurbtheimpactoftheglobalfinancialcrisiswerealsointroducedatthelongproductsdivisiontoreducecostsandoptimiseworkingcapital.
Capital expenditure for the year ended 31 December (Rm) 2008 2007
Value-adding 48 111
Replacements 352 159
Environmental 141 76
Total 541 346
33 ArcelorMittalSouthAfrica AnnualReport2008
34 ArcelorMittalSouthAfrica AnnualReport2008
The core business of ArcelorMittal South Africa’s Coke and Chemicals’ operation is the production of commercial coke for the ferro-alloy industry from coke batteries located in Pretoria, Newcastle and Vanderbijlpark. We also process and beneficiate metallurgical and steel by-products, including coal tar.
Coke and Chemicals
Operational results for the year ended 31 December 2008 2007
Revenue(Rm) 3563 2065
Netoperatingincome(Rm) 1743 727
Capitalexpenditure(Rm) 23 59
Salesvolumes(’000t) 2167 2250
–Coke 814 992
–Tar 140 143
–Other 1213 1115
Numberofemployees 273 265
Operating profit – Coke and Chemicals
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2 000
2004 2005 2006 2007 2008
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OperationalresultsAsharpriseininternationalcokepricesisthemainreasonfortherecordfinancialperformanceofthedivisionin2008.RevenueincreasedfromR2065millionin2007toR3593millionin2008,whilenetoperatingprofitsurgedfromR727millionin2007toR1743millionin2008.
MarketconditionsThedivisionboosteditslevelofmarketcokeproductionamidalowerinternaldemandforcokeduringthemini-relineofBlastFurnaceN5inNewcastle,thethroatarmourrepairofBlastFurnaceCinVanderbijlparkandtherelinesoftheCorexandMidrexplantsatSaldanhaWorks.ThisenabledCokeandChemicalstosellalargepartofitsoutputathighermarketlevels.
ButsinceOctober2008themarketforcommercialcokehasbeenhardhitbythedownscalingandclosureofanumberofferro-alloysmelters.CutbacksincokeproductionhavebeenimplementedfromNovemberonwards.ProductionhasstoppedinNewcastleandVanderbijlparkandisnowonlycontinuing,atsignificantlyreducedlevels,atthePretoriacokebattery.
CapitalexpenditureIn2008ArcelorMittalCokeandChemicalsspentR23milliononmaintenance,safetyandenvironmentalprojects.Investmentsin2009arelikelytobebelowlastyear’slevel.
Safety,healthandenvironmentThesafetyperformanceatCokeandChemicals,asmeasuredbythelosttimeinjuryfrequencyrate(LTIFR),deterioratedfrom1.6to5.4between2007and2008followingaspateofinjuriesexperiencedinthefirstquarterof2008.Variousinterventionswerelaunchedtoimproveitssafetyperformance.ThedivisionisISO14001andOHSAS18001certified.
TheyearaheadThedivision’sfinancialperformancethisyearisforecasttobesubstantiallybelowthatof2008,duetothesharpfallindemandfromthedomesticferro-alloyindustryandalowerinternationalcokeprice.
35 ArcelorMittalSouthAfrica AnnualReport2008
PretoriaWorks
36 ArcelorMittalSouthAfrica AnnualReport2008
Finance reportThisreportshouldbereadinconjunctionwiththefinancialstatementspresentedonpage56to197ofthisannualreport.
Basis of preparationThegroupfinancialresultshavebeenpreparedonthehistoricalcostbasis,exceptfortherevaluationoffinancialinstruments.ThegrouphasadoptedallofthenewandrevisedstandardsandinterpretationsissuedbytheInternationalAccountingStandardsBoard(IASB)andtheInternationalFinancialReportingInterpretationsCommittee(IFRIC)oftheIASBthatarerelevanttoitsoperationsandeffectivefrom1January2008.
Theprincipalaccountingpoliciesandmethodsofcalculationareconsistentwiththoseappliedin2007exceptfortheearlyadoptionofnewandrevisedstandardsandinterpretationsassetoutinouraccountingpolicies.Thenewstandardsdidnothaveasignificantimpactonourfinancialresults.
Headline earningsHeadlineearningsfor2008increasedby65%toR9484millionfromR5741millioninthepreviousyear.Thissubstantialincreasewasdrivenbyhigherglobalsteelprices,asignificantlyimprovedincomecontributionfromourCokeandChemicalsbusiness,aswellashighergainsonforeignexchangetransactionsandfinancialinstruments.Lowersalesvolumesandescalatingcostspartiallyoffsetthesegains.
Revenueincreasedby36%toR39914millionduetohigherglobalsteelprices,whileaverage
netexportpriceswere45%higheryear-on-yearinUSdollartermsand70%inRandterms.Salesvolumesweredown13%comparedto2007asdomesticandexportvolumesdeclinedby1%and49%respectively.
IncludedinprofitfromoperationsisanimpairmentchargeofR121million.ThisrepresentsthewritedownoftheplantandequipmentattheMaputoWorksofR93millionandR28millionattheDunswartDirectReductionfacilityinBenoniafterproductionwastemporarilystoppedatbothplants.Adecisiononwhethertoreopenthefacilitieswilldependonfuturemarketconditions.
GainsonforeignexchangeandfinancialinstrumentsofR637millionrepresentsaprofitontherevaluationofourUSDollarcashbalanceandreceivablesaftertheRandweakenedby38%duringtheyearfromR6.81toR9.39/USD.
Interestincomedecreasedby28%afterthecapitalreductionofR6352millioninthelatterpartof2007ledtoaloweraveragecashbalancelastyear.
FinancecostsincreasedfromR117milliontoR238millionduemainlytotheincreaseintheprovisionforenvironmentalrehabilitation.TheaveragediscountrateusedattheendofDecember2008was10.75%comparedtoanaveragerateof11.25%attheendof2007.Thedecreaseof50basispointsledtoaR8millionfinancechargefor2008.In2007a195basispointriseinthediscountrateresultedinfinancecostcreditsofR79million.
Headline earnings per share, dividends per share and HRC export prices
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1 650
2 200
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500
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2004 2005 2006 2007 2008
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cents USD/tonne
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2004 2005 2006 2007 2008
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EquityearningsofR331millionincreasedby23%fromR270millionin2007,amidimprovedprofitsfromMacsteelInternationalHolding,ourmarketingandshippingjointventure.
Incometaxexpenseincreasedby57%,mirroringthe58%improvementinouroperatingprofit.Theeffectivetaxratein2008wasslightlylowerat29.2%comparedwiththe30%ratefor2007asgovernmentreducedthecorporatetaxratefrom29%to28%duringtheyear.
Thefollowingquarterlyheadlineearningstableillustratesourrecentearningstrendsandtheimpactofpriceandexchangeratemovementsonheadlineearnings:
HRCsalespriceCFR
USD/t
Headlineearnings
USDm
Headlineearnings
Rm
Exchangerate
R/USD
2007March 605 211 1530 7.24June 687 229 1624 7.10September 676 148 1055 7.11December 669 226 1532 6.77Average 659 203 1435 7.06
HRCsalespriceCFR
USD/t
Headlineearnings
USDm
Headlineearnings
Rm
Exchangerate
R/USD
2008March 729 265 2003 7.55June 936 330 2573 7.79September 1317 485 3772 7.78December 881 114 1136 9.93Average 966 287 2371 8.26
Profit from operationsProfitfromoperationsincreasedby58%toR12159million,withprofitfromflatcarbonsteelproductsrisingby45%andlongcarbonsteelproductsby38%.TheCokeandChemicalsdivisionboosteditsoperatingprofitby140%,whilethegroup’soveralloperatingmarginimprovedfrom26%in2007to30%to2008.
Bothflatandlongcarbonsteelbusinessesbenefitedfromhigherinternationalsteelprices.Averageflatcarbonsteelproductpricesroseby61%andaveragelongcarbonsteelproductpricesby63%year-on-year.Operatingresultswerepartiallyoffsetby13%lowersalesvolumesandanincreaseinrawmaterialcosts.
Thefollowingtableprovidesacomparableviewofourearningsfor2008:
Yearended31December
2008Rm
%change
2007Rm
Revenue 39914 36 29301
Profitfromoperations 12159 58 7703Gains/(losses)onchangesinforeignexchangerates andfinancialinstruments 637 586 (131)Interestincome 318 (28) 442Financecosts (238) 103 (117)Incomefrominvestments 3 (25) 4Incomefromequityaccountedinvestments(netoftax) 331 23 270Impairmentreversal 36Incometaxexpense (3865) 57 (2455)
Profitattributabletoownersofthecompany 9381 64 5716Earningspershare(cents) 2105 64 1282Profitfortheyear 9381 64 5716Adjusted for:Lossondisposalorscrappingofassets 39 26 31Bookvalueofassetsheld-for-salewrittenoff 4Impairmentcharge 121Impairmentreversal (36)Taxeffect (21) 110 (10)
Headlineearnings 9484 65 5741
Headlineearningspershare(cents) 2128 1288
38 ArcelorMittalSouthAfrica AnnualReport2008
Finance report continued
ThestrongperformanceoftheCokeandChemicalsbusinesswasmainlyduetoincreasesof125%intheinternationalpriceofmarketcokein2008.
Cost performanceCashcostspertonneofhotrolledcoilandbilletsrosesharplyby59%and65%respectivelycomparedto2007.Thiswasmainlyduetothesurgeininputmaterialcosts:cokingcoalpricesincreasedby102%andPCIcoalby181%,whilescrappriceswereonaverage125%higher.Thecostsofironorepelletsandironoreroseby84%and32%respectively.
Employeecostsincreasedby18%asmorehiredlabourandmoreovertimewasusedduringtherelinesatSaldanhaWorksandthemini-relineatNewcastleWorks.Otheroperatingexpenseswereupby16%followinghigherpriceschargedforservicessuchassub-contractorsandcivilworks.
Sincetheonsetofthecrisisinthesteelindustryweactedimmediatelytocurtailcostsfurther.Anumberofstrategieswereimplementedincluding:• Alargeportionofhiredlabourandtemporary
staffcontractswerenotrenewedorcancelled.
• Employeeswereredeployed.• Overtimepaymentsweresharplyreduced.• Labourcostcutsof10%targeted.• Thereductionofsalesandgeneraladministration
costsbyupto50%.Cash flowWereportedastrongnetcashflowofR3577millionin2008.(In2007cashflowwasanegativeR3564millionfollowingtheR6352millioncapitalreduction.)ThecashflowbreakdownshowsthatR14330millioninprofitsfromoperationswaspartiallyoffsetbyaR3391millionincreaseinworkingcapital,capitalexpenditureofR1832million,incometaxpaymentsofR3087millionandR2398millionindividendspayments.
HigherinputmaterialcostsandariseininventorylevelsliftedourinventoriesbyR4067million.Adeclineintradereceivablesandahigherleveloftradepayablesoffsettheincreaseinworkingcapital,duetohigherinventories,byR860millionatyear-end.
Cashflowsaredetailedbelow:
Yearended31December
2008Rm
2007Rm
Cashprofitfromoperations 14330 9044Workingcapital (3391) (605)Cashgeneratedfromoperations 10939 8439Interestincome 318 442Financecosts (59) (73)Investmentincomeanddividendfromequity-accountedinvestments 17 108Realisedforeignexchangemovement (202) (28)Incometaxpaid (3087) (2209)Dividendpaid (2398) (1948)Capitalreduction (6352)Capitalexpenditure (1832) (1852)Proceedsfromdisposalofproperty,plantandequipment 2 8Investmentinassociate (16)Repaymentofborrowingsandfinanceleaseobligations (121) (83)
Increase/(decrease)incash 3577 (3564)
Theearningsdetailsperoperatingsegmentareprovidedbelow:
Yearended31December
2008 2007
RmMargin
% RmMargin
%
Flatcarbonsteelproducts 7007 27 4827 25Longcarbonsteelproducts 3672 28 2652 29CokeandChemicals 1743 49 727 35Corporateandother (263) (503)
Profitfromoperations 12159 30 7703 26
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DividendTheboarddecidedtomaintainadividendpaymentofone-thirdofheadlineearningsfor2008,takingintoaccountthecompany’scurrentcashpositionaswellasfuturecapitalexpenditureandworkingcapitalrequirementsandthebleakoutlookforthedomesticandglobalsteelmarket.
Afinaldividendof365centspersharepayabletoshareholdersregisteredatcloseofbusinesson13March2009wasdeclaredbytheboard.This,togetherwiththeinterimdividendof342centspershare,paidon1September2008,liftedthetotaldividendfortheyearto707centspershare.Thefinaldividend,togetherwiththe10%SecondaryTaxonCompanieswillberecordedinthe2009financialresults.
Share performanceThecompany’saveragesharepricefor2008wasR165.98withahighofR265.00inJuneandalowofR58.65duringNovember.In2007theaveragewasR125.25withahighofR153.00inDecemberandalowofR91.53inJanuary.
Liquidityinoursharesremainshighwith163%oftheavailablesharesbeingtradedduringthe12months.DailyaveragesharetradinginourstocklastyearwasvaluedatR217millioncomparedtoR122millionin2007.
Ouraveragedividendyieldof4.6%overthepastfiveyearscompareswiththemarketaverageof2.7%,whileouraverageprice/earningsratioof8.8timesremainswellbelowthemarketaverageof14.8times.
Management of exchange rate and base metal exposuresWeareexposedtobotheconomicandtransactionrisksarisingfromthevolatilityinexchangerates,particularlytheRand/USDollarrate,aswellasthepricingofcommoditiesinUSDollars.During2008theRandweakenedby38%againsttheUSDollar.
ThefollowingtableshowsthequarterlyRand/USDollarexchangerates:
2008 2007Average Closing Average Closing
March 7.55 8.10 7.24 7.28June 7.79 7.83 7.10 7.07September 7.78 8.27 7.11 6.88December 9.93 9.39 6.77 6.81Year 8.26 9.39 7.06 6.81
InRandterms,changesintheexchangeratehaveasignificantinfluenceonourearningsasapproximately19%ofourproductswereexportedeachyearoverthelasttwoyears.Furthermoreourdomesticsteelpricesarealsoinfluencedbymovementsintheexchangerate.Ourdomesticpricingmodelisderivedfromabasketofdomesticpricesinbothdevelopinganddevelopedcountries.
Wemanageourexchangerateexposurebymatchingforeigncurrencyrevenueswithexpendituresandenteringintoeconomicexchangeratehedges.
Ourriskstounforeseenchangesinbasemetalpriceshavebeenmanagedbyanactivehedgingpolicythatiscoordinatedwithourparentcompany.Sincemid-2008wehavenottakenanyfurtherhedgedpositionsfollowingthecollapseincommodityprices.Amidfearsofadeeperandwiderglobalrecession,expectationsoffurtherbasemetalpricedeclinesmitigateagainstfurtherhedges.Wewillmonitormarketmovementsin2009todetermineifandwhenhedgingactivitiesshouldresume.
Financial risk managementTheworseningofthefinancialcrisisinthefourthquarteroftheyearunderreviewforcedusintoreviewingthemanagementofanumberofkeyfinancialrisks:creditrisk,bankrelationships,counterpartyexposureandliquidityrisk.
Ourcreditdefaultriskismitigatedthroughsufficientcollateral,anextensivecreditinsurancepolicyandcontinualassessmentofcustomerriskprofileswithinspecifiedcreditlimits.
Ourriskofbankingexposurehasbeenaddressedbydiversifyingourbusinessbetweenanumberofbanksbasedonperformanceandcompetitiveness.
Themanagementofcounterpartyriskdependsonthecounterparty’screditratingwhichdeterminestheexposurewecantake.Exposureagainstboard-approvedcounterpartylimitsismonitoredonacontinualbasis.
Finally,weforecasttheexpectedliquidityreserveonthebasisoflikelycashflows.Bytheendof2008wehadastrongbalancesheetandvirtuallynodebt.OurcashpositionofR8429millionattheendof2008ismorethandoubletheR4034millionweheldattheendof2007.Itwillbeutilisedfordividendsandtaxpaymentsaswellasinvestmentincrucialcapitalprojectsthatcannotbepostponed.
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Corporate governanceBoard of directors TheArcelorMittalSouthAfricaboardhasbeenconstitutedinaccordancewiththeKingCodeofCorporatePracticesandConduct(KingII)asaunifiedboardstructure.Itconsistsof13directorsofwhich10arenon-executiveandthreeexecutive,beingtheCEO,PresidentandCFO.Ofthe10non-executivedirectors,fiveareindependentincludingtheChairman.
Corporate governance is an integral part of ArcelorMittal South Africa’s business practice and is fully endorsed by its board of directors. Principles contained in the King Code of Corporate Practices and Conduct (King II) have been adopted in the company’s corporate governance structures and have been materially complied with in the year under review. ArcelorMittal South Africa is fully committed to entrenching and upholding the King II corporate governance standards.
EK DiackDCG MurrayMJN Njeke
Ms ND Orleyn
DK ChughCPD Cornier
S MaheshwariLP Mondi
AMHO Poupart-Lafarge
CEO: NMC Nyembezi-HeitaPresident: LGJJ Bonte
CFO: HJ Verster
CHAIRMANDr KDK Mokhele
Independent Non-Executive Director
INDEPENDENT NON-EXECUTIVE DIRECTORS
NON-EXECUTIVE DIRECTORS EXECUTIVE
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Duringtheyearunderreviewthefollowingchangestotheboardtookplace:• MsNMCNyembezi-Heitawasappointedas
ChiefExecutiveOfficerandamemberoftheboardwitheffectfrom1March2008;
• MrLGJJBontewasappointedasPresidentandamemberoftheboardwitheffectfrom1March2008;
• MrCPDCornierwasappointednon-executivedirectorfrom14May2008;
• MrAMHOPoupart-Lafargewasappointedalternatenon-executivedirectoron24July2008andnon-executivedirectoron30November2008;
• Twonon-executivedirectorsresigned:MrMALWurthandMrMMukherjeeresignedon30November2008and13May2008respectively;
• MrEMReatoresignedasChiefExecutiveOfficeron29February2008.
Theboardmeetsfivetimesayear,ormorefrequentlyifcircumstancesrequire,toconsiderissuesofstrategicdirection,approvemajorcapitalexpenditureprojects,reviewoperatingperformanceandconsiderothermattersthathaveamaterialeffectonthecompany.Theboard’smainresponsibilitiesaresetoutintheboardcharterandinadditiontheboarddeterminestheoverallpoliciesandprocessestoensuretheintegrityofthecompany’sriskmanagementandinternalcontrols,theappointmentofexecutivedirectorsaswellasstakeholdercommunication.Throughtheboard’sdelegationofauthorityframework,theboardhasdelegatedtheauthoritytothechiefexecutiveandotherexecutivedirectorstomanagetheday-to-dayoperationsofthecompanywhilstoverallaccountabilityismaintainedbytheboard.
Theattendanceregistershowstheattendanceofboardmemberstodate:
18/1/2008 31/1/2008 8/2/2008 7/5/2008 24/7/2008 30/10/2008 12/12/2008
KDKMokhele
LGJJBonte Apology Telecon
DKChugh Telecon Telecon Telecon Apology Telecon Telecon Telecon
CPDCornier Apology
EKDiack Apology
SMaheshwari Apology Apology Apology Apology Apology Apology Apology
LPMondi Telecon Apology
MMukherjee Telecon Telecon Apology Apology
DCGMurray Apology
MJNNjeke
NMCNyembezi-Heita
NDOrleyn Apology Apology Apology
AMHOPoupart-Lafarge Telecon Telecon
EMReato
HJVerster*
MALWurth Telecon Apology Apology Apology Apology Apology
*In compliance with JSE requirements, the register confirms that the CFO, HJ Verster, attended every board meeting.
IncompliancewiththeKingCodeandtheJSEListingsRequirements,theboardhasestablishedcertainboardcommitteestoassisttheboardanditsdirectorsindischargingtheirdutiesandresponsibilities.TheAuditandHumanResourcesandNominationsCommitteesareprescribedby
statute/regulation,whereastheRiskCommitteeandSafety,HealthandEnvironmentCommitteehavebeenestablishedinlinewithbestpractice.TheTransformationCommitteewasconstitutedintheboard’sdiscretiontoaddresscompany-specificissues.
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Allboardcommitteeshaveformallydeterminedtermsofreference,writtenscopeofauthorityandagreeduponreportingprocedures.Ateveryboardmeeting,thechairmenoftherespectivecommitteesformallyreportbacktotheboardontheworkdonebythecommitteeduringthequarterandrecommendationstotheboard.Thecommitteesarechairedbyindependentnon-executivedirectorsandtheworkundertakenbyeachcommitteeisreportedinthecompany’sannualreporttoshareholders.
Theboardhelditsannualstrategicsessionon27August2008.
AuditCommitteeTheAuditCommitteeisfullycompliantwiththeCorporateLawsAmendmentAct,2006.Itconsistsofthreeindependentnon-executivedirectors:MJNNjeke(Chairman),EKDiackandDCGMurray.
ThecommitteemeetsfourtimesayearandconductsitsworkaccordingtoanannualworkplanwhichisregularlymonitoredandupdatedbytheCompanySecretarytoensurethatthecommitteemeetsitslegalandregulatoryobligations.Thecommitteereviewsthefollowingmatters:• thequarterlyandhalf-yearlyfinancialreports;
• theannualfinancialstatementsandaccountingpoliciesforthecompanyandallsubsidiaries;
• theeffectivenessoftheinternalauditfunction;• managementinformationandothersystemsof
internalcontrol;• theauditor’sfindingsandrecommendation;• satisfiesitselfontheindependenceof
theexternalauditorandmeetswiththeexternalauditorsatleastonceayearwithoutmanagementbeingpresent;
• considersandmakesrecommendationstotheboardonallaspectsrelatingtotheappointment,retention,resignation/dismissalsofexternalauditorsandensuresthattheprocesscomplieswithallrelevantlegislation;
• nominationoftheexternalauditfirmandtheauditpartner;
• reviewsanystatementsonethicalstandardsforthecompanyandhowtheyarepromotedandenforced;
• satisfiesitselfthattheCFOisappropriatelyqualifiedandexperienced;and
• reviewssignificantcasesofunethicalactivitybyemployeesorbythecompanyitself.
Thecommitteealsoconsiderstheuseoftheexternalauditorsfornon-auditservices,whereappropriate,andapprovesallfeestobepaidtotheexternalauditors.
TheattendanceregisteroftheAuditCommitteemeetingsissetoutbelow:
07/02/2008 10/03/2008 07/05/2008 24/07/2008 30/10/2008
MJNNjeke
EKDiack Apology Apology
DCGMurray
HumanResourcesandNominationsCommitteeTheHumanResourcesandNominationsCommitteecomprisesthreeindependentnon-executivedirectors:NDOrleyn(Chairman),KDKMokheleandDCGMurray;onenon-executivedirector:DKChugh;andoneexpertco-optedmember:BFontana,vice-presidentHRfortheArcelorMittalGroup.MrMurraywasappointedtothecommitteeon7May2008.
Thecommittee,inconsultationwithmanagement,ensuresthatthecompany’semployeesarefairlyrewardedfortheir
contributiontothecompany’sperformance.Thecompany’sremunerationphilosophyalsofallsunderthedelegationofthiscommitteetoensurethatsalariesandrelatedbenefitsarecompetitive.Specifically,thecommitteeonbehalfoftheboardapprovestheemploymentcontractsandremunerationpackagesoftopmanagementandrecommendsdirectors’feestotheboardforapproval.Thecommitteealsoapprovesanyshort-termincentiveschemesandbonuses,includingtheofferofoptionsintermsoftheIscorManagementShareOptionScheme.
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Thecommitteealsooverseesthedirectorappointmentprocess,whichisopenandtransparent.Newdirectorsarerecommendedbythecommitteetotheboard.
Feestructuresforremuneratingboardmembersarerecommendedtotheboardandreviewedannually.Thecommitteetakescognisanceofmarketnorms,practicesandbenchmarksaswellasadditionalresponsibilitiesplacedonboardmembersbynewlegislation,regulationsandcorporategovernanceguidelines.Theboardrecommendsthe
feestructureforthenextyeartothecompany’sshareholdersattheAGMforapproval.TheCompanySecretaryadministerstheannuallyapprovedremunerationschedule.
Thecommitteeisalsotaskedwithadvisingtheboardregardingthesize,compositionandeffectivenessoftheboardandboardappointedcommittees,aswellasadvisingtheboardregardingtheappointmentofproposedcandidatestoserveontheboard.
TheHumanResourcesCommitteemeetings’attendanceregisterissetoutbelow:
18/01/2008 31/01/2008 19/03/2008 19/06/2008 07/11/2008
NDOrleyn
DKChugh Telecon Telecon Telecon Telecon Telecon
BFontana Telecon Telecon Telecon Telecon Telecon
KDKMokhele Apology
DCGMurray
RiskCommitteeTheRiskCommitteewasestablishedin2006followingarecommendationfromtheAuditCommitteethatfurthercapacitywasrequiredtoensureasystematicassessmentoftheprocessesandoutcomesofthecompany’skeyrisks.
TheRiskCommitteecomprisestwoindependentnon-executivedirectors,EKDiack(Chairman)andMJNNjeke;onenon-executivedirector,LPMondi;andthreeexecutivedirectors,NMCNyembezi-Heita;HJVersterandLGJJBonte.
TheRiskCommitteereceivesandreviewsreportsontheriskmanagementprocessinthecompany
andassessesthecompany’sexposuretothefollowingrisks:• operational,non-operationalandstrategicrisks
(top10risks);• humanresourceandtechnologyrisks;• businesscontinuityanddisasterrecoveryrisks;• creditandmarketrisks;and• compliancerisks.
Thiscommitteemeetstwiceannually,ormorefrequentlyifcircumstancesrequire,andreceivesquarterlyriskassessmentreportsfrommanagement.Unscheduled“redflag”reportsarereceivedfromthecommitteetohighlightunusualandsignificantriskswhentheneedarises.
TheRiskCommitteemeetings’attendanceregisterissetoutbelow:
20/02/2008 06/05/2008 15/07/2008 29/10/2008
EKDiack Apology
LGJJBonte Telecon
LPMondi Apology
MJNNjeke Apology Apology
NMCNyembezi-Heita
EMReato
HJVerster
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Safety,HealthandEnvironmentalCommitteeTheSafety,HealthandEnvironmental(SHE)Committeehasbeenmandatedtoassisttheboardinensuringsoundmanagementofsafety,healthandenvironmentalmatters.Thecommitteecomprisestwoindependentnon-executivedirectors,DCGMurray(Chairman)andKDKMohkele;twoexecutivedirectors,NMCNyembezi-HeitaandLGJJBonte;andonetradeunionrepresentative,UASA’sPBezuidenhout.ThetradeunionrepresentationrotatesonanannualbasisamongstthethreerecognisedunionsatArcelorMittalSouthAfrica.
Thecommitteemeetstwiceayear,orwhenrequired,androtatesitsvisitsbetweenallplantsites.Themaindutiesofthecommitteeareto:• ensurethatthemanagementofsafety,health
andtheenvironmentinthecompanyisaligned
withtheoverallbusinessstrategyofthecompany;
• considerandapprovecorporatesafety,healthandenvironmentalstrategiesandpolicies;
• legalcomplianceandthefulfilmentofthecompany’scommitmentsandobligationsinsafety,healthandtheenvironment;
• monitorcompliancewithsuchstrategiesandpolicies;
• considerandapprovemajorsafety,healthandenvironmentalprojects;
• ensurethatitsmembersareinformedaboutallsignificantimpactsonthecompanyinthesafety,healthandenvironmentalfieldandhowthesearemanaged(processandactivities);
• monitorthecompany’ssafety,healthandenvironmentalperformance,progressandcontinualimprovement;and
• dealwithanyothermattersformallydelegatedbytheboardtothecommitteefromtimetotime.
TheSafety,HealthandEnvironmentalCommitteemeetings’attendanceregisterissetoutbelow:
01/04/2008 04/06/2008 01/10/2008
DCGMurray
LGJJBonte Apology
KDKMokhele
NMCNyembezi-Heita Apology
PBezuidenhout–UASAtradeunion
TransformationCommitteeFollowingtheDepartmentofTradeandIndustry’sreleaseinFebruary2007oftherevisedCodesofGoodBusinessPracticeonBroad-basedBlackEconomicEmpowerment(B-BBEE),aTransformationCommitteewasestablishedtodrivestrategyandtheachievementofB-BBEEtargetswithinthecompany.
TheTransformationCommitteeconsistsoftwoindependentnon-executivedirectors,KDKMokhele(Chairman),NDOrleyn;twonon-executivedirectors,DKChughandLPMondi;twoexecutivedirectors,NMCNyembezi-HeitaandHJVerster;andoneexpertco-optedmember,thegeneralmanager,
HR,atArcelorMittalSouthAfrica.Thegeneralmanager,HR,wassubsequentlyreplacedbyMsMarionGreen-Thompson,manager,transformation,atArcelorMittalSouthAfrica.
ThecommitteeistaskedwithoverseeingmanagementactionsandeffortstocomplywithB-BBEElegislation,ensuringthatthekeyelementsofthebalancedscorecard(ownership,managementcontrol,skillsdevelopment,employmentequity,preferentialprocurement,enterprisedevelopmentandsocio-economicdevelopment)areaddressed,approvingstrategiesandplanstoachieveB-BBEEcompliancestatusandtoconsiderandrecommendmajorB-BBEEprojects.
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Thiscommitteeisscheduledtomeetatleasttwiceayear.Itisimportanttonotethatmanytransformationissuesarediscussedbythefullboard.
TheTransformationCommitteemeetings’attendanceregisterissetoutbelow:
01/02/2008 19/03/2008
KDKMokhele
DKChugh Telecon Telecon
MLotter(ActinggeneralmanagerHR)
LPMondi
NMCNyembezi-Heita
NDOrleyn
EMReato
HJVerster
AdditionalcommitteesExecutive Committee
ThiscommitteeischairedbytheChiefExecutive
Officerandcomprisestheexecutivedirectors
ofthecompanyandmembersofthesenior
managementteam.Itmeetsformallyona
monthlybasis.TheExecutiveCommitteeandits
membersareindividuallymandated,empowered
andheldaccountableforimplementingthe
strategiesandkeypoliciesdeterminedbythe
board;managingandmonitoringthebusiness
andaffairsoftheorganisationinaccordancewith
approvedbusinessplansandbudgets;prioritising
theallocationofcapitalandotherresources;
ensuringcompliancewithlawsandadherenceto
goodgovernanceprinciples;andestablishingbest
managementandoperatingpractices.
Capital Review Committee
TheChiefExecutiveOfficerchairsthiscommittee,
whichalsoconsistsoftheCFO,thePresidentand
otherseniormanagers.Thecommitteemeets
formallyonamonthlybasisandisresponsible
forreviewingallrequestsforcapitalexpenditure
involvingamountsexceedingUSD5millionand
formonitoringtheeffectivefunctioningof
thecapitalexpendituremanagementprocess,
includingthepost-implementationreview
system.
Policies and proceduresBoardeffectivenessandevaluationInMarch2008,theboardembarkedonan
appraisalexerciseconductedbyexternal
consultantstoevaluatetheeffectivenessof
theboardandboardcommittees.Theprocess
comprisedoralinterviewswithmembersofthe
boardandchairmenoftheboardcommitteesas
wellasthecompletionofindividualquestionnaires
byeachmemberoftheboard.TheChairmanand
theHumanResourcesandNominationsCommittee
reviewedtheoutcomeoftheexerciseand
communicatedthefindings.
Onthewhole,theboardwasfoundto
operateeffectivelyandtheChairmanmade
recommendationstotheboardtoaddresscertain
areaswhichrequiredimprovement.
ProfessionaladviceandCompanySecretaryThedirectorsareentitled,atthecompany’s
expense,toseekindependentprofessionaladvice
abouttheaffairsofthecompanyregardingthe
executionoftheirduties.Theyalsohaveaccess
totheadviceandservicesoftheCompany
Secretary,whoplaysanactiveroleinthe
corporategovernanceofthecompanyandisthe
centralsourceofinformationtotheboard.
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TheCompanySecretaryandChairmanoftheboardensurethattheaffairsoftheboardaremanagedeffectively.TheCompanySecretaryalsoensuresthatthecompanyanditssubsidiariesarefullycompliantwithstatutory,regulatoryandbestpracticerequirements.WithinthecompanytheCompanySecretaryoverseesmattersofbusinessethicsandgoodcorporategovernance.AppointmentandremovaloftheCompanySecretaryaredealtwithbytheboard.
Price-sensitiveinformationTheboardacknowledgesitsresponsibilityforensuringtheequaltreatmentofallshareholders.Tothisend,adisclosureofinformationpolicyisinplaceandsetsoutthenecessaryguidelinesthathavetobeadheredtoatalltimesintheexternalcommunicationofthecompany’saffairs.
InsidertradingInlinewithbestpractice,noemployeeordirectormaydeal,directlyorindirectly,inArcelorMittalSouthAfricasharesonthebasisofunpublishedprice-sensitiveinformationregardingthebusinessoraffairsofthecompany.Furthermore,nodirectororanyemployeewhoparticipatesinthemanagementsharescheme,maytradeinArcelorMittalSouthAfricasharesduringtheembargoperiodsdeterminedbytheboard.Theseincludetheperiodsbetweentheendofthequarterly,interimandannualreportingperiodsrespectively,andtheannouncementoffinancialandoperatingresultsforsuchperiods.
InaccordancewiththeListingsRequirementsoftheJSE,procedureshavebeenputinplacetoensurethatnodirectorofthecompanytradesinthecompany’sshareswithouttherequisiteapproval.
RemunerationpolicyArcelorMittalSouthAfricafollowsadifferentiatedremunerationapproach,basedonbestpracticesintheindustry.Annualbenchmarkingwithinthegroupandsimilarcompaniesbeyondtheworldofsteel,aswellasindividualperformances,arefactoredintofinalremunerationreviews.AccountabilityforthedesignandimplementationoftherewardstrategyandpracticesisvestedwithintheHumanResourcesandNominations
Committee,asub-committeeoftheboard.Theremunerationapproachisbasedonguaranteedandvariablepayandisalsolinkedtotheemployee’sindividualcompetencyandperformance.Thissystemisnegotiatedandagreedwithrecognisedtradeunionsandiscontainedwithinthecompany’sCollectiveAgreement.
AstockoptionplanisavailableforseniormanagersandformspartofArcelorMittal’srewardandretentionstrategyensuringthattheorganisationretainstheservicesofkeyresources.TheneedtoexpandandexchangefunctionalexpertisewithintheArcelorMittalgroup,isrecognised.Internationalmobilityisakeydrivertoensureattractionandretentionofkeyskillswithinthegroup.
Non-executivedirectorsNon-executivedirectorsreceiveanannualfeeandinadditionarepaidafeeforattendingandcontributingtoboardmeetings.TheChairmanreceivesafixedannualfeethatisinclusiveofallboardandboardcommitteeattendances.ArcelorMittalSouthAfricareimbursesnon-executivedirectorsforalltravellingandaccommodationexpensesinrespectofboardandboardcommitteemeetingsinaccordancewithcompanypolicy.
ExecutivedirectorsExecutivedirectorsarepaidabasesalaryaswellasavariableperformance-linkedbonusandalsoparticipateinthecompany’ssharescheme.TheseareestablishedintermsofArcelorMittalSouthAfrica’sremunerationprinciples,whichaimtorewarddirectorsappropriatelyinlinewiththemarketaswellaswithregardtotheirperformance.TheHumanResourcesandNominationsCommitteeundertakesanannualreviewofeachexecutivedirector’spay,includingthatoftheChiefExecutiveOfficer.Italsoapprovesthebonusstructureincludingperformanceparameterseachyear.
Annual financial statementsTheboardacknowledgesitsresponsibilityforensuringthepreparationoftheannualfinancialstatementsinaccordancewithInternational
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FinancialReportingStandards(IFRS)andtheresponsibilityoftheexternalauditorstoreportonthesefinancialstatements.Theboardisresponsibleforensuringthemaintenanceofadequateaccountingrecordsandeffectivesystemsofinternalcontrol.Duringtheyearunderreviewnothinghascometotheboard’sattentiontoindicatethatanybreakdowninthefunctioningoftheinternalcontrolsandsystemshasoccurredwhichcouldhaveamaterialimpactonthebusiness.
Theannualfinancialstatementsarepreparedfromtheaccountingrecordsonthebasisoftheconsistentuseofappropriateaccountingpoliciessupportedbyreasonableandprudentjudgementsandestimatesthatfairlypresentthestateofaffairsofthecompany.
Thefinancialstatementshavebeenpreparedona“goingconcern”basisandthereisnoreasontobelievethatthecompanywillnotcontinueasagoingconcerninthenextfinancialyear.ArcelorMittalSouthAfricaplacesstrongemphasisonachievingthehighestlevelsoffinancialmanagement,accountingandreportingtostakeholders.OuraccountingpoliciesandpracticesalsoconformtoIFRS.
Legal complianceAlegalcomplianceprogrammedesignedtoincreaseawarenessof,andimproveadherenceto,applicablelegislationandregulationisinplace.Thisprogrammeinvolvesthedelegationofresponsibilityforcompliancetodesignatedmanagersequippedtodealwiththeareaoflegalcompliance.AcomplianceframeworkdocumenthasbeenpreparedbylegalcounselandpresentedtotheExecutiveCommittee.Itisexpectedtoberolledoutinthefirsthalfofthisyearandisaimedatfurtherentrenchingasoundcomplianceculture.Aregularreviewoflegislationandtheirimpactisalsoconducted.Legalcompliancefallsundertheauspicesofthecompany’slegalcounselwhoreportsregularlytotheChiefExecutiveOfficerandtheExecutiveCommittee.
Sustainable developmentSustainabledevelopmentisacornerstoneofhowwedobusinessascapturedinourvisionof
producingsafe,sustainablesteel.Thisretainsourfocusonourkeygoalofimprovingthecompany’sfinancialviabilitywhilstensuringsocialequityandprotectingtheenvironmentinwhichweoperate.Beingasolidcorporatecitizeniscriticaltoourapproachtobusiness.
OurpoliciesandinitiativesaimedatachievingoursustainabledevelopmentobjectivesarecoveredextensivelyintheSustainabilityReportaccompanyingthisreport.Theseinclude:• socialresponsibility,includingeducationand
communitydevelopment;• safety,healthandenvironmentalmanagement,
policiesandpractices;• employeeissuessuchasemploymentequity,
thepotentialimpactofHIV/Aidsonouractivitiesandthedevelopmentofhumancapital;
• initiativestosupportBroad-basedBlackEconomicEmpowerment;and
• theidentificationandmanagementofrisk.
OursustainabilityreportisinaccordancewiththeGlobalReportingInitiativeguidelines.WealsosupportthestrategiesadoptedbytheWorldSteelAssociation(formerlytheInternationalIronandSteelInstitute)ofwhichweareanactivemember.
Internal assuranceTheinternalassurancedepartmentisintegraltoensuringeffectivecorporategovernanceprocesses.Itsmainareasoffocusincludeallaspectsconcerninginternalcontrols,riskmanagement,controlself-assessment,compliance,andreliabilityofthefinancialrecordsandthesafeguardingofassets.Theinternalassuranceteamassiststheboardinensuringasoundsystemofriskmanagement,internalcontrolandgovernance.
TheinternalassurancedepartmentisfullymandatedbyandaccountabletotheAuditCommittee,whichapprovestheinternalauditworkplanfortheyearandmonitorsthedepartment’sperformance.Aninternalauditcharterdefinesthepurposes,authorityandresponsibilityoftheinternalauditfunction.
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Risk managementArcelorMittalSouthAfrica’senterpriseriskmanagementpolicy(ERM),comprisingthestandardoperatingprocedures,policystatementandcharter,wasrevisedtoalignthepolicywithworldbestpractices,KingIIIproposalsandthedraftISO31000standard.TherevisedpolicyisalsoinlinewiththecodeofpracticeaslaidoutbytheRiskManagementFederationofSouthAfricaandtheArcelorMittalgroupriskmanagementpolicy.
ERMisanintegratedapproachtoriskmanagement,whosekeyobjectivesareto:• Effectivelyidentify,assess,monitorand
reportalltherisksandopportunitieswhichtheorganisationisexposedto;
• Implementinterventionprotocolstoadequatelymitigatetheseexposures;and
• Ensurethattheriskmanagementprocessisadequatelycontrolledandassessedonacontinualbasis.
Theriskmanagementprocessatthecompanyisoverseenbytheboard’sRiskCommittee.AchiefriskofficerpreparesaconsolidatedriskmanagementreportthatispresentedtotheExecutiveCommittee,theRiskManagementCommittee,theAuditCommitteeandfinallytotheboardofdirectors.
Thecompanyhasdocumentedbusinesscontinuityplansinplacewhichwillallowittocontinueitscriticalbusinessprocessesintheeventofadisastrousincidentimpactingonitsactivities.
AlistofArcelorMittalSouthAfrica’skeysystemicandbusinessrisksisonpage7oftheSustainabilityReport.
InsuranceThecompany’sinsurancedepartmentundertakesregularlosspreventionauditsofallthecompany’splantsandoperationsusingrecognisedinternationalproceduresandstandards.Thecompanyparticipatesinlocalandinternationalinsuranceprogrammesthatprovide,atcompetitivecosts,insurancecoverforlossesaboveagreeddeductibles.
CodeofbusinessconductArcelorMittalSouthAfricaiscommittedtothehigheststandardsofethicalandprofessionalconductwhichapplytoalldirectors,employeesandcontractors.Thecompany’scorevaluesofhonesty,integrityanddignityarefirmlyentrenchedinthecompany’scodeofbusinessconduct.Thecodecoversarangeofbehaviours,including:• compliancewithlawsandregulations;• preventionofconflictsofinterest;• fairdealing;• respectfortheenvironment;• protectionofconfidentialinformation;and• respectfortheworkplaceenvironment.
Thecompanyhasananonymousfraudhotlinewhichencouragesemployees,customers,suppliersandotherinterestedpartiestoreportincidentsofunethicalandcorruptbehaviour.AllreportedincidentsareinvestigatedbyauditorsErnst&Youngandoutcomesoftheinvestigationsarecommunicatedtoemployees.
Theanti-fraudriskprofiletrainingwasrolledoutduring2008,identifyingareaswheretheriskoffraudishighest,raisingawarenessofthehotlineamongmanagersandhighlightingtheconsequencesofbeingfoundoutaftercommittingfraud.
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Supplementary informationDefinitions
Cash and cash equivalentsCashandcashequivalentsincludecashonhand,depositsheldatcallwithbanks,andothershort-termhighlyliquidinvestmentswithoriginalmaturitiesofthreemonthsorless,whicharesubjecttoaninsignificantriskofchangesinvalue.
Current ratioCurrentassetsdividedbycurrentliabilities.Currentliabilitiesincludeshort-termborrowingsandinterest-freeliabilitiesotherthandeferredtaxation.
Dividend coverHeadlineearningsperordinarysharedividedbydividendsperordinaryshare.
Dividend yieldDividendsperordinarysharedividedbytheyear-endsharepriceattheJSELimited.
Earnings per ordinary share➧ Attributableearningsbasis Basicearningsattributabletoordinary
shareholdersdividedbytheweightedaveragenumberofordinarysharesinissueduringtheyear.
➧ Headlineearningsbasis Earningsattributabletoordinaryshareholders
adjustedforprofitsandlossesonitemsofacapitalnaturerecognisingthetaxationandminorityimpactsontheseadjustmentsdividedbytheweightedaveragenumberofordinarysharesinissueduringtheyear.
➧ Dilutedearningsbasis Earningsattributabletoordinaryshareholders
dividedbytheweightedaveragenumberofordinarysharesinissueduringtheyearincreasedbythenumberofadditionalordinarysharesthatwouldhavebeenoutstandingassumingtheconversionofalldilutivepotentialordinaryshares.
Financial cost coverNetoperatingprofitdividedbynetfinancingcosts.
Financial gearing (debt:equity ratio)Interest-bearingdebtlesscashandcashequivalentsasapercentageoftotalshareholders’equity.
Headline earnings yieldHeadlineearningsperordinarysharedividedbytheyear-endsharepriceattheJSELimited.
50 ArcelorMittalSouthAfrica AnnualReport2008
Invested capitalNetequity,interest-bearingdebt,non-currentprovisionsanddeferredtaxationlesscashandcashequivalents.
Net assetsSumofnon-currentassetsandcurrentassetslessallcurrentinterest-freeliabilities.
Net asset turnRevenuedividedbyclosingnetassets.
Net equity per ordinary shareOrdinaryshareholders’equitydividedbythenumberofordinarysharesinissueattheyear-end.
Number of years to repay interest-bearing debtInterest-bearingdebtdividedbycashflowfromoperatingactivitiesbeforedividendspaid.
Operating marginNetoperatingprofitasapercentageofrevenue.
Price-earnings ratioTheclosingsharepriceontheJSELimiteddividedbyearningsperordinaryshare.
Return on ordinary shareholders’ equity
➧ Attributableearnings Basicattributableearningstoordinary
shareholdersasapercentageofaverageordinaryshareholders’equity.
➧ Headlineearnings Headlineearningsattributabletoordinary
shareholdersasapercentageofaverageordinaryshareholders’equity.
Return on invested capitalNetoperatingprofitplusincomefromnon-equityaccountedinvestmentsplusincomefrominvestmentsinassociatesandincorporatedjointventuresasapercentageoftheaverageinvestedcapital.
Return on net assetsNetoperatingprofitplusincomefromnon-equityaccountedinvestmentsplusincomefrominvestmentsinassociatesandincorporatedjointventuresasapercentageoftheaveragenetassets.
Revenue per employeeRevenuedividedbytheaveragenumberofemployeesduringtheyear.
Weighted average number of shares in issueThenumberofsharesinissueatthebeginningoftheyear,increasedbysharesissuedduringtheyear,weightedonatimebasisfortheperiodwhichtheyhaveparticipatedintheincomeofthegroup.Inthecaseofsharesissuedpursuanttoasharecapitalisationawardinlieuofdividends,theparticipationofsuchsharesisdeemedtobefromthedateofissue.
Weighted average price paid per share tradedThetotalvalueofsharestradedeachyeardividedbythetotalvolumeofsharestradedfortheyearontheJSELimited.
Supplementary information continued
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JSE Limited
StatisticsYearended31December
2008 2007 2006 2005 2004
Numberofordinaryshares traded(m) 348 251 248 294 298Numberoftransactions(‘000) 308 136 90 87 50Valueofordinaryshares traded(Rm) 54435 31887 18069 15953 11518Volumeofsharestraded(%) 78 56 56 66 67Year-endmarketprice/ headlineearningsratio (times)–annualised 4.2 10.6 9.3 5.4 6.4Headlineearningsyieldat year-end(%)–annualised 24.1 9.4 10.8 18.6 15.6Dividendyieldatyear-end (%)–annualised 8.0 3.1 3.5 6.2 6.1Marketpriceperordinary share(cents) –year-end 8845 13650 9825 6125 6550 –highest 26500 15300 9900 6930 6850 –lowest 5865 9153 5640 4160 2650 –weightedaveragepricepersharetrade 15642 12704 7286 5426 3865Year-endmarketprice/net equityperordinaryshare (times) 1.41 2.96 1.88 1.40 1.84Marketcapitalisationat year-end(Rm) 39427 60845 43795 27302 29197ArcelorMittalSouthAfricasharepriceindex (base:2003=0) 307 474 341 213 227JSEActuariesindex– Industrial(base2003=0) 246 299 259 188 143
52 ArcelorMittalSouthAfrica AnnualReport2008
Supplementary information continued
SelectedgroupfinancialdatatranslatedintoUSDollarsandEurosfortheyearended31December2008
2008USD
million
2007USD
million
2008Euro
million
2007Euro
million
Incomestatement
Revenue 4832 4150 3307 3033
Operatingexpenses (3360) (3059) (2300) (2236)
Profitfromoperations 1472 1091 1007 797
Gains/(losses)onchangesinforeignexchangeratesand financialinstrumentsdesignatedasheld-for-trading atfairvaluethroughprofitorloss 77 (19) 53 (14)
Interestreceived 38 63 26 46
Financecosts (29) (17) (20) (12)
Incomefrominvestments 1
Impairmentreversal 4 3
Incomeaftertaxfromequity-accountedinvestments 40 38 27 28
Profitbeforetax 1602 1157 1096 845
Incometaxexpense (468) (348) (320) (254)
Profitfortheyear 1134 809 776 591
Attributableearningspershare(cents) 255 182 174 133
Headlineearnings 1148 813 786 594
Headlineearningspershare(cents) 258 182 176 133
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SelectedgroupfinancialdatatranslatedintoUSDollarsandEuroscontinuedfortheyearended31December2008
2008USD
million
2007USD
million
2008Euro
million
2007Euro
million
StatementoffinancialpositionAssetsNon-currentassets 1934 2480 1390 1684Property,plantandequipment 1694 2279 1218 1548Intangibleassets 8 9 5 6Unlistedequity-accountedinvestments 210 163 151 111Otherfinancialassets 22 29 16 19
Currentassets 2053 1662 1474 1129Inventories 920 703 661 478Tradeandotherreceivables 216 337 155 229Taxation 16 11Otherfinancialassets 19 14 13 9Cashandcashequivalents 898 592 645 402
Totalassets 3987 4142 2864 2813EquityandliabilitiesShareholders’equity 2982 3023 2142 2052Statedcapital 4 5 3 4Non-distributablereserves 160 111 115 75Retainedincome 2818 2907 2024 1973
Non-currentliabilities 508 627 365 427Borrowingsandotherpayables 5 8 4 5Financeleaseobligations 33 48 24 33Non-currentprovisions 201 189 144 129Deferredincometaxliability 269 382 193 260
Currentliabilities 497 492 357 334Tradeandotherpayables 360 422 258 286Borrowingsandotherpayables 4 1 3 1Otherfinancialliability 17 10 12 7Financeleaseobligations 4 13 3 9Taxation 83 60Currentprovisions 29 46 21 31
Totalequityandliabilities 3987 4142 2864 2813
54 ArcelorMittalSouthAfrica AnnualReport2008
Supplementary information continued
SelectedgroupfinancialdatatranslatedintoUSDollarsandEuroscontinuedfortheyearended31December2008
2008USD
million
2007USD
million
2008Euro
million
2007Euro
million
Condensedstatementofcashflow
Cashinflowsfromoperatingactivities 667 655 457 479
Cashoutflowsfrominvestingactivities (219) (248) (150) (181)
Netcashflowbeforefinanceactivitiesandcapitalreduction 448 407 307 298
Cashoutflowsfromfinancingactivities (15) (911) (10) (666)
Increaseincashandcashequivalents 433 (504) 297 (368)
Effectofforeignexchangeratechanges (129) 273 (54) 76
Cashandcashequivalentsatbeginningofyear 592 823 402 694
Cashandcashequivalentsatendofyear 898 592 645 402
Thegroupstatementsonthesepageshavebeen expressedinUSDandEuroforinformationpurposes. TheaverageR/USDandR/Euroratefortheyearhas beenusedtotranslatetheincomeandcashflow statements,whilethebalancesheethasbeentranslated attheclosingrateasatthelastdayofthereporting period.
R=USDatyear-end 9.39 6.81
R=USDaveragefortheyear 8.26 7.06
R=Euroatyear-end 13.07 10.03
R=Euroaveragefortheyear 12.07 9.66
ArcelorMittalSouthAfrica AnnualReport2008
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Contents56 Directors'responsibilityand
approvalofthegroupandcompanyannualfinancialstatements
56 Certificatebycompanysecretary
57 Reportoftheindependentauditors
58 Directors'report
61 Directors'remunerationreport
64 Groupandcompanyincomestatements
65 Groupandcompanystatementsofcomprehensiveincome
66 Groupandcompanystatementsoffinancialposition
67 Groupandcompanystatementsofcashflows
68 Groupandcompanystatementsofchangesinequity
70 Notestothegroupandcompanyannualfinancialstatements
Annexures
193 1.Unlistedequity-accountedinvestments
196 2.Investmentsinsubsidiaries
Annual financial
statements
56 ArcelorMittalSouthAfrica AnnualReport2008
Directors’ responsibility and approval of the group and company annual financial statements
Certificate by Company Secretary
TothemembersofArcelorMittalSouthAfricaLimited
ThedirectorsarerequiredbytheSouthAfricanCompaniesActtomaintainadequateaccountingrecordsandareresponsibleforthecontentandintegrityofthegroupandcompanyannualfinancialstatementsandrelatedfinancialinformationincludedinthisreport.Itistheirresponsibilitytoensurethattheannualfinancialstatementsfairlypresentthestateofaffairsofthegroupandcompanyasattheendofthefinancialyearandtheresultsofitsoperationsandcashflowforthefinancialyear,inconformitywithInternationalFinancialReportingStandards,JSEListingsRequirementsandapplicablelegislation.Thegroup’sexternalauditorsareengagedtoexpressanindependentopiniononthegroupandcompanyannualfinancialstatements.
Inorderforthedirectorstodischargetheirresponsibilities,managementhasdevelopedandcontinuestomaintainasystemofinternalcontrolaimedatreducingtheriskoferrororlossinacost-effectivemanner.Thedirectors,primarilythroughtheauditcommittee,whichconsistsofindependentnon-executivedirectors,meetperiodicallywiththeexternalandinternalauditors,aswellasexecutivemanagementtoevaluatemattersconcerningaccountingpolicies,internalcontrol,auditingandfinancialreporting.Thegroup’sinternalauditorsindependentlyevaluatetheinternalcontrols.Theexternalauditorsareresponsibleforreportingonthefinancialstatements.Theexternalandinternalauditorshaveunrestrictedaccesstoallrecords,propertyandpersonnelaswellastotheauditcommittee.Thedirectorsarenotawareofanymaterialbreakdowninthefunctioningofthesecontrolsandsystemsduringtheperiodunderreview.
Thedirectorsareoftheopinion,basedontheinformationandexplanationsgivenbymanagementandtheinternalauditorsthatthesystemofinternalcontrolprovidesreasonableassurancethatthefinancialrecordsmaybereliedonforthepreparationofthegroupandcompanyannualfinancialstatements.However,anysystemofinternalfinancialcontrolcanprovideonlyreasonable,andnotabsoluteassuranceagainstmaterialmisstatementorloss.
Thedirectorshavereviewedthegroupandcompany’sfinancialbudgetsfortheyearto31December2009.Inlightofthecurrentfinancialpositionandexistingborrowingfacilities,theyconsideritappropriatethattheannualfinancialstatementsbepreparedonthegoing-concernbasis.
Theexternalauditorshaveauditedtheannualfinancialstatementsofthegroupandcompanyandtheirunmodifiedreportappearsonpage57.
Thedirectorsofthecompanyacceptresponsibilityfortheannualfinancialstatementswhichwereapprovedbytheboardofdirectorson13March2009andaresignedonitsbehalfby:
NNyembezi-Heita HJVersterChiefExecutiveOfficer ExecutiveDirectorFinance13March2009 13March2009
InmycapacityastheCompanySecretary,Iherebyconfirm,intermsoftheSouthAfricanCompaniesAct,1973asamended,thatfortheyearended31December2008,ArcelorMittalSouthAfricaLimitedhaslodgedwiththeRegistrarofCompaniesallsuchreturnsasarerequiredofapubliccompanyintermsofthisAct,andthatallsuchreturnsare,tothebestofmyknowledgeandbelief,true,correctanduptodate.
MsCSingh13March2009
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Report of the independent auditors
TotheshareholdersofArcelorMittalSouthAfricaLimited
WehaveauditedtheannualfinancialstatementsandgroupannualfinancialstatementsofArcelorMittalSouthAfricaLimited,whichcomprisethedirectors’reportandthestatementoffinancialpositionandtheconsolidatedstatementoffinancialpositionasat31December2008andtheincomestatementandtheconsolidatedincomestatement,thestatementofcomprehensiveincomeandtheconsolidatedstatementofcomprehensiveincome,thestatementofcashflowsandtheconsolidatedstatementofcashflows,thestatementofchangesinequityandconsolidatedstatementofchangesinequityfortheyearthenended,asummaryofsignificantaccountingpoliciesandotherexplanatorynotes,assetoutonpages58to197.
Directors’responsibilityforthefinancialstatementsThecompany’sdirectorsareresponsibleforthepreparationandfairpresentationofthesefinancialstatementsinaccordancewithInternationalFinancialReportingStandards,andinthemannerrequiredbytheCompaniesActofSouthAfrica.Thisresponsibilityincludes:designing,implementingandmaintaininginternalcontrolrelevanttothepreparationandfairpresentationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror;selectingandapplyingappropriateaccountingpolicies;andmakingaccountingestimatesthatarereasonableinthecircumstances.
Auditors’responsibilityOurresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudit.WeconductedourauditinaccordancewithInternationalStandardsonAuditing.Thosestandardsrequirethatwecomplywithethicalrequirementsandplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrommaterialmisstatement.
Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthefinancialstatements.Theproceduresselecteddependontheauditor’sjudgement,includingtheassessmentoftherisksofmaterialmisstatementofthefinancialstatements,whetherduetofraudorerror.Inmakingthoseriskassessments,theauditorconsidersinternalcontrolrelevanttotheentity’spreparationandfairpresentationofthefinancialstatementsinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheentity’sinternalcontrol.Anauditalsoincludesevaluatingtheappropriatenessofaccountingprinciplesusedandthereasonablenessofaccountingestimatesmadebythedirectors,aswellasevaluatingtheoverallfinancialstatementpresentation.
Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforourauditopinion.
OpinionInouropinion,thefinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofthegroupandofthecompanyasat31December2008,andoftheirfinancialperformanceandtheircashflowsfortheyearthenendedinaccordancewithInternationalFinancialReportingStandards,andinthemannerrequiredbytheCompaniesActofSouthAfrica.
Deloitte&ToucheRegisteredAuditorsPerRMDuffyPartner13March2009
Deloitte&ToucheBuildings1and2,DeloittePlace Docex10JohannesburgTheWoodlandsOfficePark,WoodlandsDrive PrivateBagX6,GalloManor2052WoodmeadSandton SouthAfrica
NationalExecutive:GGGelink,ChiefExecutive;AESwiegers,ChiefOperatingOfficer;GMPinnock,Audit;DLKennedy,Tax&LegalandFinancialAdvisory;LGeeringh,Consulting;LBam,CorporateFinance;CRBeukman,Finance;TJBrown,ClientsandMarkets;NTMtoba,ChairmanoftheBoard.Afulllistofpartnersanddirectorsisavailableonrequest.
58 ArcelorMittalSouthAfrica AnnualReport2008
Directors’ reportfortheyearended31December2008
Thedirectorshavepleasureinpresentingtheirreportfortheyearended31December2008.
NatureofbusinessArcelorMittalSouthAfricaLimited,incorporatedinSouthAfrica,istheleadingsteelproducerontheAfricancontinent,
producinglongandflatproductsandbeneficiatingitsby-products.
FinancialresultsandactivitiesEarnings
2008 2007
Basicearnings(Rm) 9381 5716
Headlineearnings(Rm) 9484 5741
Basicearningspershare(cents) 2105 1282
Headlineearningspershare(cents) 2128 1288
Netassetvalue(Rm) 27995 20583
Netassetvaluepershare(cents) 6280 4618
Detailedreportsontheactivitiesandperformanceofthegroupandthevariousdivisionsofthegrouparecontainedinthe
reportonpages20to35.
Accountingpolicies,restatementsandreclassificationsThegrouphasadoptedallofthenewrevisedandamendedstandardsandinterpretationsissuedbytheInternational
AccountingStandardsBoard(IASB)andtheInternationalFinancialReportingInterpretationsCommittee(IFRIC)ofthe
IASBthatarerelevanttoitsoperationsandeffectiveforaccountingperiodsbeginningonorafter1January2008.
Certainstandardsandinterpretationshavebeenearlyadoptedandaredescribedinnote2tothefinancialstatements.
DividendsAfinaldividendof196centspershareforthefinancialyearended31December2007wasdeclaredon8February2008
andpaidtoshareholderson17March2008.
Theboarddeclaredaninterimdividendof342centspershareon24July2008whichwaspaidtoshareholderson
1September2008.
Thetotaldividendfortheyearamountedto538centspershare(2007:437centspershare).
Theboardhasdeclaredafinaldividendof365centspershareforthefinancialyearended31December2008,payableto
shareholdersregisteredatclose-of-businesson13March2009.Dividendswillbepaidonorabout16March2009.The
SecondaryTaxonCompanies(STC)onthefinaldividenddeclaredamountstoR163million.
ArcelorMittalSouthAfrica AnnualReport2008
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InsuranceInaccordancewiththeEnterprise-WideRiskManagementPolicyadoptedbythegroup,allinsurableexposureswerecovered.
Insurancecoverwasobtainedinboththelocalandoffshoremarketsthroughthegroupcaptiveinsurers.Thelargestexposure
tothegroupisthepotentialmaterialdamageandbusinessinterruptionlossesfromdamagetothegroupassets.Theinsurance
premiumfortheyearamountedtoR150million,ofwhichR101millionwasforcoveronassetsvaluedatR91992million.
Property,plantandequipmentTherewasnochangeinthenatureoftheproperty,plantandequipmentofthegrouporinthepolicyregardingtheiruse
duringtheyearunderreview.CapitalexpenditureamountedtoR1832million(December2007:R1852million).The
estimatedR1420millionofcapitalexpenditureenvisagedtobespentduringthe2009financialyearwillbefundedfrom
internalsources.
ArcelorMittalSouthAfricaDistribution(Proprietary)Limitedacquiredproperty,plantandequipmentfromTridentSteel
(Proprietary)LimitedforanamountofR63million.ThetransactionwasunconditionallyapprovedbytheCompetition
Commissionon12December2008.
ShareholdersresolutionsAtthetwentiethannualgeneralmeetingofshareholders,heldon7May2008,aspecialresolutionwaspassedauthorising
thedirectorstorepurchasecompanysharesintermsoftheauthoritygrantedinthearticlesofassociationofthecompany.
ThesubsidiariesofArcelorMittalSouthAfricaLimitedhavepassednootherordinaryorspecialresolutionsofmaterialinterest
orofasubstantivenature.
StatedcapitalAuthorisedTheauthorisedcapitalof1200000000ordinarysharesremainedunchangedduringtheyear.
IssuedThetotalnumberofordinarysharesinissueremainedunchangedduringtheyearat445752132shares.
ShareholdersTheissuedsharesofthecompanyarewidelyheldbythepublic.Ananalysisofshareholdersandshareholdingsappearson
page198.MittalSteelHoldingsAG,ascontrollingshareholder,hasashareholdingof52.02%.
Investmentsinjointventures,associatesandsubsidiariesThefinancialinformationinrespectofinterestsinjointlycontrolledentities,associatesandsubsidiariesofthecompanyis
disclosedinnotes20and21andAnnexure1and2tothefinancialstatements.
BorrowingpowersTheborrowingpowersofthecompanyarelimitedtototalequityasdetailedinnote32.6.
60 ArcelorMittalSouthAfrica AnnualReport2008
Directors’ report continuedfortheyearended31December2008
DirectorateandshareholdingsThenamesofthedirectorsinofficeandservingonthevariouscommitteesoftheboardatthedateofthisreportaresetout
onpage200.
Thefollowingchangestookplacetotheboardduringtheyear:
Resignations•EMReato Resignedwitheffect29February2008asChiefExecutiveOfficer
•MMukherjee Resignedwitheffect13May2008asnon-executivedirector
•MALWurth Resignedwitheffect30November2008asnon-executivedirector
Appointments• NNyembezi-Heita Appointed1March2008asChiefExecutiveOfficer
• DrLGJJBonte Appointed1March2008asPresident
• CPDCornier Appointed14May2008asnon-executivedirector
• AMHOPoupart-Lafarge Appointed24July2008asalternatenon-executivedirectorandon
30November2008asnon-executivedirector
Bothexecutiveandnon-executivedirectorsaresubjecttoretirementbyrotation.
Thefollowingnon-executivedirectorswillretirebyrotationandbeingeligibleforre-election,haveofferedthemselvesforre-election:
• CPDCornier
• SMaheshwari
• DrKDKMokhele
• AMHOPoupart-Lafarge
Thefollowingexecutivedirectorwillretirebyrotationandbeingeligibleforre-election,hasofferedhimselfforre-election:
• HJVerster
Thedetailsofthedirectandindirectinterestsofdirectorsinthesharesofthecompanyaresetoutinthedirectors’
remunerationreport.
AuditorsDeloitte&TouchecontinuedinofficeasauditorsofArcelorMittalSouthAfricaLimitedanditssubsidiaries.Attheannual
generalmeetingof12May2009shareholderswillberequestedtoappointDeloitte&ToucheasauditorsofArcelorMittal
SouthAfricaLimitedforthe2009financialyearanditwillbenotedthatMrRMDuffywillbetheindividualregisteredauditor
thatwillundertaketheaudit.
SecretaryTheCompanySecretaryisMsCSingh.Herbusinessandpostaladdressesappearonpage200.
SubsequenteventsThedirectorsarenotawareofanymatterorcircumstancearisingsincetheendofthefinancialyear,nototherwisedealtwith
inthisreportorinthegroupandcompanyfinancialstatementsthatwouldsignificantlyaffecttheoperationsortheresultsof
thegroupandcompany.
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GovernancestructuresAccountabilityforthedesignandimplementationofcompensationandbenefitspoliciesandpracticesinaccordancewith
goodcorporategovernanceisvestedinthehumanresourcesandnominationscommittee.Thisisasub-committeeofthe
ArcelorMittalSouthAfricaLimitedboardandassiststheboardindischargingtheirdutiesandresponsibilities.Itstermsof
reference,asapprovedbytheboardofdirectorson27May2004,mandatethecommitteeto,amongothers,performthe
followingduties:
• determineandagreewiththeboardthepolicyframeworkforremunerationofdirectors,seniormanagementandallother
employeecategories;
• determinethetargetsandrulesforanyperformance-relatedpayschemesaswellaslong-termincentives;
• approvegeneralsalaryandwageadjustments;
• withinpolicydeterminetheremunerationpackagesofexecutiveandnon-executivedirectors;
• determinethepolicyandscoperegardingpensionarrangementsandserviceagreementsfortheexecutivedirectors;
• ensurecompliancewiththecompany’ssuccessionplanningfortopmanagement;
• recommendallexecutiveappointmentstotheboard;
• ensuremarketcompetitivenessofremunerationfornon-executivedirectors;and
• ensurethattheboardanditssub-committeeshavethecapacitytodischargetheirresponsibilitiesinthemosteffectiveand
knowledgeableway.
Thecommitteeiscomposedoffivemembers;fourofwhomarenon-executivedirectors.Threeareindependent;
MsNDOrleyn,theChairperson,DrKDKMokheleandMrDCGMurrayandonerepresentstheholdingcompany;MrDKChugh.
MrBFontana,theExecutiveVicePresident,HumanResourcesofArcelorMittalgroupisthefourthmemberappointedin2005
inordertostrengthenthecommittee’sknowledgebaseonglobalhumanresourcemanagementpractices.
TheChiefExecutiveOfficerandGeneralManager,HumanResourcesofArcelorMittalSouthAfricaattendmeetingsexofficio,
butdonotformpartofcommitteemanagementanddecision-making.
Remunerationofdirectors• Theremunerationstrategyandpracticeforexecutivedirectorsdoesnotdiffertothatofotherseniormanagersofthe
company.Itconsistsoftwocomponents:afixedcomponentofguaranteedpayandavariablecomponentcomprising
anannualperformancebonuswhichisalignedwiththeArcelorMittalgroupperformanceincentivescheme.Long-term
incentivesconsistofparticipationintheshareoptionscheme.
Fixedsalariesarereviewedandalignedwithmarketbenchmarksannually;basedonthescopeoftheindividual’s
responsibilitiesaswellasperformance.Performancebonusesarepaidbasedonbusinessperformancemoderatedby
strategicbehaviourrequirementssuchasachievementofsafetyandemploymentequitytargets.
Benefitsincludesubsidisedmembershipofthecompany’saccreditedmedicalaidschemesaswellasretirementandrisk
benefits,likelifecoveranddeath-in-servicebenefits.Thescopeandnatureofthesebenefitsarethesameasforanyother
managerialemployee.
Executivedirectorshavestandardemploymentserviceagreementswithnoticeperiodsrangingfrom30to60days.
• Onlyindependentnon-executivedirectorsreceivedirectors’feesbasedonthescopeandextentoftheirresponsibilities.
Theseemolumentsarereviewedannuallytomaintainalignmentwithmarketbenchmarks.Thefeesareapprovedby
shareholdersattheannualgeneralmeeting.
Intermsofthecompany’sarticlesofassociationone-thirdofthedirectorsretireattheannualgeneralmeetingheldeach
year.Retiringdirectorsshallbeeligibleforre-election.
Directors’ remuneration reportfortheyearended31December2008
62 ArcelorMittalSouthAfrica AnnualReport2008
Directors’remunerationforArcelorMittalSouthAfricaanditssubsidiaries
NotesFees
R
Basicsalary
R
Bonuses/performance-
relatedpayments
R
Allow-ances
(note7)R
Otherbenefits(note8)
R
Retirementcontributions
R
Lossofoffice
(note9)R
TotalR
Fortheyearended31December2008ExecutivedirectorsLGJJBonte 1 2468890 231542 1324057 4024489NNyembezi-Heita 2 2529951 2000000 140941 18300 259709 4948901EMReato 3 391407 28116 14040 34641 2086526 2554730LLvanNiekerk 4 1312500 1312500HJVerster 2055094 838330 33167 32094 171022 3129707Sub-total 7445342 3069872 1526281 64434 465372 3399026 15970327
Non-executivedirectorsEKDiack 292000 292000KDKMokhele 710000 710000LPMondi 5 262000 262000DCGMurray 322000 4328 326328MJNNjeke 6 322000 322000NDOrleyn 282000 282000Sub-total 2190000 4328 2194328Total 2190000 7445342 3069872 1530609 64434 465372 3399026 18164655
Fortheyearended31December2007ExecutivedirectorsEMReato 2245410 816046 96712 64609 199300 3422077
HJVerster 1759869 587553 8604 146549 2502575
JJAMashaba 10 1191298 599670 99000 6222 107461 220036 2223687
LLvanNiekerk 4 1312500 1312500
Sub-total 5196577 2003269 195712 79435 453310 1532536 9460839
Non-executivedirectorsEKDiack 11 232710 232710
KDKMokhele 12 798536 1474 800010
LPMondi 5 184495 184495
DCGMurray 13 154495 1463 155958
MJNNjeke 6 384246 384246
NDOrleyn 14 276446 1397 277843
Sub-total 2030928 4334 2035262
Total 2030928 5196577 2003269 200046 79435 453310 1532536 11496101
Notes1.2.3.4.
5.
6.
Appointed as President on 1 March 2008.Appointed as Chief Executive Officer on 1 March 2008.Resigned on 29 February 2008.Resigned on 12 December 2004. Payment made on 31 March 2007 and 30 March 2008 for restraint of trade. Appointed as non-executive director on 11 May 2007. Fees paid to Industrial Development Corporation in Mr Mondi’s capacity as Chief Economist and Divisional Executive of Professional Services of that company.Fees paid to Kagiso Media in Mr Njeke’s capacity as deputy chairman of that company.
7.
8.9.
10.11.12.13.14.
Includes travel, entertainment, telephone, computer and relocation allowances, as well as reimbursive travel expenditure for non-executive directors. Includes deferred compensation and medical aid.Includes remaining restraint of trade payments and the payment of remaining leave benefit.Resigned on 30 September 2007.Appointed as non-executive director on 16 March 2007.Appointed as non-executive chairman on 1 January 2007.Appointed as non-executive director on 11 May 2007.Appointed as non-executive director on 1 February 2007.
Directors’ remuneration report continuedfortheyearended31December2008
ArcelorMittalSouthAfrica AnnualReport2008
63
Directors’shareoptionsOptionsissuedtoandsharespurchasedbythedirectors,whichformpartofthe41.1million(December2007:41.2million)sharesallocatedtotheManagementsharetrust,totalled202551asat31December2008(December2007:419695),asfollows:
Balanceasat1January2008 Issues Sold/forfeited
Balanceasat
31December2008
Name
Sub-scription
priceR Number Dateofissue
Periodgranted
(years)
Sub-scription
priceR
Numberof
options/shares
Dateofissue
Periodgranted
(years) Notes
Numberduring
theyear
Grossgainsonoptions/
shares Notes Number
Fortheyearended 31December2008DKChugh 50.26 42876 2005/09/28 6 20000 3184594 1 22876
53.38 48522 2005/12/12 10 4852291398 20000 3184594 71398
NNyembezi-Heita 186.50 31660 2008/03/25 10 2 31660EMReato 53.38 40326 2005/12/12 10 40326 3
54.19 10842 2006/03/01 10 10842 383.88 62608 2006/11/08 10 62608 376.51 28313 2006/11/20 10 28313 3
133.50 46360 2007/11/20 10 46360 3188449 188449
HJVerster 16.15 32486 2002/05/07 6 32486 5150655 414.32 7869 2003/03/18 6 7869 1252330 583.88 59523 2006/11/08 10 5952382.02 5950 2006/12/12 10 5950
133.50 34020 2007/11/20 10 34020139848 40355 6402985 99493
Total 419695 31660 248804 9587579 202551
Balanceasat1January2007 Issues Sold/forfeited
Balanceasat
31December2007
Name
Sub-scription
priceR Number Dateofissue
Periodgranted
(years)
Sub-scription
priceR
Numberof
options/shares
Dateofissue
Periodgranted
(years) Notes
Numberduring
theyear
Grossgainsonoptions/
shares Notes Number
Fortheyearended 31December2007DKChugh 56.50 38046 2005/09/28 6 50.26 4830 2007/08/01 6 6 42876
60.00 42980 2005/12/12 10 53.38 5542 2007/08/01 10 6 48522
81026 10372 91398
JJAMashaba 37.25 78050 2004/07/23 6 33.14 7823 2007/08/01 6 6 15000 1259850 963050 5905263 10
7823 11
78050 7823 85873 7165113
HJVerster 18.15 26760 2002/05/07 6 16.15 5726 2007/08/01 6 6 3248616.10 7000 2003/03/18 6 14.32 869 2007/08/01 6 6 786994.29 52470 2006/11/08 10 83.88 7053 2007/08/01 10 6 5952392.20 5250 2006/12/12 10 82.02 700 2007/08/01 10 6 5950
133.50 34020 2007/11/20 10 7 34020
91480 48368 139848
EMReato 60.00 35720 2005/12/12 10 53.38 4606 2007/08/01 10 6 4032660.91 9600 2006/03/01 10 54.19 1242 2007/08/01 10 6 1084294.29 55190 2006/11/08 10 83.88 7418 2007/08/01 10 6 6260886.00 24990 2006/11/20 10 76.51 3323 2007/08/01 10 6 28313
133.50 46360 2007/11/20 10 8 46360
125500 62949 188449
Total 376056 129512 85873 7165113 419695
Thedirectorshavenobeneficialnornon-beneficialinterestintheordinarysharecapitalofthecompany.Notes
1.
2.3.4.5.
Sold on 14 March 2008. 19 426 shares at R209.49 and 574 shares at R209.48.Offer accepted in March 2008.Resigned as Chief Executive Director on 29 February 2008.Sold on 19 March 2008 at R174.70.Sold on 19 March 2008. 2 163 shares at R174.70 and 5 706 shares at R173.00.
6.
7.8.9.
10.11.
Additional share options as a result of the capital reduction announced on 1 August 2007. Offer accepted in November 2007.Offer accepted in November 2007.Sold on 26 March 2007 at R121.24.Sold on 20 September 2007 at R126.80.Resigned on 30 September 2007.
64 ArcelorMittalSouthAfrica AnnualReport2008
Group and company income statementsfortheyearended31December2008
Group Company
Notes2008
Rm2007
Rm2008
Rm2007
Rm
Revenue 7 39914 29301 35990 25722
Rawmaterialsandconsumablesused (18556) (12141) (17699) (11186)
Employeecosts (2598) (2210) (2591) (2210)
Energy (1474) (1364) (1075) (1032)
Movementininventoriesoffinishedgoodsand work-in-progress 1844 (21) 1942 (82)
Impairmentcharge 8 (121) (28)
Depreciation (1310) (1088) (849) (743)
Amortisationofintangibleassets (12) (11) (9) (9)
Otheroperatingexpenses (5528) (4763) (4584) (4010)
Profitfromoperations 9 12159 7703 11097 6450
Gains/(losses)onchangesinforeignexchangerates andfinancialinstrumentsdesignatedasheldfor tradingatfairvaluethroughprofitorloss 10 637 (131) 633 (151)
Interestreceived 11 318 442 296 426
Financecosts 12 (238) (117) (201) (89)
Incomefrominvestments 13 3 4 341 285
Impairmentreversal/(charge) 14 36 (45) 2799
Incomeaftertaxfromequityaccounted investments 20 331 270
Profitbeforetaxation 13246 8171 12121 9720
Incometaxexpense 15 (3865) (2455) (3562) (2029)
Profitfortheyear 9381 5716 8559 7691
Attributableto:
Ownersofthecompany 9381 5716
Attributableearningspershare(cents)
–basic 16 2105 1282
–diluted 16 2097 1279
ArcelorMittalSouthAfrica AnnualReport2008
65
Group and company statements of comprehensive incomefortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
Profitfortheyear 9381 5716 8559 7691
Othercomprehensiveincome
Exchangedifferencesontranslationofforeign operations 591 (63)
Lossesandgainsonavailable-for-saleinvestment takentoequity (71) 62
Movementingainsandlossesdeferredtoequityon cashflowhedges (91) (111) (78) (111)
Incometaxonamountstakendirectlytoequity 25 27 21 27
Totalcomprehensiveincomefortheyear 9835 5631 8502 7607
Attributableto:
Ownersofthecompany 9835 5631
66 ArcelorMittalSouthAfrica AnnualReport2008
Group and company statements of financial position asat31December2008
Group Company
Notes2008
Rm2007
Rm2008
Rm2007
Rm
ASSETS
Non-currentassets
Property,plantandequipment 18 15917 15525 9781 9161
Intangibleassets 19 71 58 48 32
Unlistedequityaccountedinvestments 20 1968 1109 84 48
Investmentsinsubsidiaries 21 4825 5715
Otherfinancialassets 22 203 195 203 124
Totalnon-currentassets 18159 16887 14941 15080
Currentassets
Inventories 23 8642 4790 8076 4196
Tradeandotherreceivables 24 2031 2292 1765 2007
Taxation 108 164
Otherfinancialassets 22 174 94 172 94
Cashandcashequivalents 8429 4034 8121 3660
Totalcurrentassets 19276 11318 18134 10121
Totalassets 37435 28205 33075 25201
EquITyANDLIABILITIES
Capitalandreserves
Statedcapital 25 37 37 37 37
Non-distributablereserves 1503 757 (200) (108)
Retainedincome 26455 19789 26141 19980
Totalshareholders'equity 27995 20583 25978 19909
Non-currentliabilities
Borrowingsandotherpayables 26 46 52 5 1
Financeleaseobligations 27 314 328 168 174
Non-currentprovisions 28 1888 1290 1879 1282
Deferredincometaxliability 29 2526 2603 993 1007
Totalnon-currentliabilities 4774 4273 3045 2464
Currentliabilities
Tradeandotherpayables 30 3384 2873 2893 2386
Borrowingsandotherpayables 26 33 10 23
Otherfinancialliabilities 22 157 67 143 67
Financeleaseobligations 27 40 88 31 79
Taxation 780 690
Currentprovisions 28 272 311 272 296
Totalcurrentliabilities 4666 3349 4052 2828
Totalequityandliabilities 37435 28205 33075 25201
ArcelorMittalSouthAfrica AnnualReport2008
67
Group Company
Notes2008
Rm2007
Rm2008
Rm2007
Rm
Cashgeneratedfromoperations 31 10939 8439 9257 7088
Interestincome 318 442 296 426
Financecost (59) (73) (22) (41)
Dividendspaid 31 (2398) (1948) (2398) (1948)
Incometaxpaid 31 (3087) (2209) (2740) (2125)
Realisedforeignexchangemovements (202) (28) (211) (33)
Cashflowsfromoperatingactivities 5511 4623 4182 3367
Investmenttomaintainoperations 31 (1413) (1198) (1204) (987)
Investmenttoexpandoperations 31 (419) (654) (334) (512)
Proceedsfromdisposalofproperty,plantand equipment 2 8 2 8
Investmentinassociate (16) (16)
Dividendfromequityaccountedinvestments 14 104
Incomefrominvestments–dividends 338 281
Incomefrominvestments–interest 3 4 3 4
Cashflowsfrominvestingactivities (1813) (1752) (1195) (1222)
Interest-bearingborrowingsrepaid (11) (10) (1)
Financeleaseobligationrepaid (25) (15) (16) (6)
Decreaseinloanstosubsidiaries 809 681
IncreaseincontributionstotheManagementshare trustandother (85) (58) (94) (51)
Capitalreduction (6352) (6352)
Cashflowsfromfinancingactivities (121) (6435) 698 (5728)
Increase/(decrease)incashandcashequivalents 3577 (3564) 3685 (3583)
Effectofforeignexchangeratechangesoncash andcashequivalents 818 (152) 776 (124)
Cashandcashequivalentsatbeginningofyear 4034 7750 3660 7367
Cashandcashequivalentsatendofyear 8429 4034 8121 3660
Group and company statements of cash flowsfortheyearended31December2008
68 ArcelorMittalSouthAfrica AnnualReport2008
Group and company statements of changes in equity fortheyearended31December2008
Non-distributablereserves
Statedcapital
Rm
Capitalredemp-
tionreserve
Rm
Manage-mentsharetrust
Rm
Share-based
paymentreserve
Rm
Attribu-table
reservesofequity
accountedinvest-ments
Rm
Available-for-salefinancial
assetsRm
Trans-lationofforeign
operationsRm
Cashflow
hedgeaccounting
reserveRm
Retainedincome
Rm
Totalequity
Rm
Group
Balanceat 1January2007 6389 23 (106) 27 654 56 30 16187 23260
Totalcomprehensive incomeforyear 62 (63) (84) 5716 5631
Managementshare trust:nettreasury
sharepurchases(netofincometax) (43) (43)
Share-basedpayment expense 35 35
Dividend (1948) (1948)
Capitalreduction (6352) (6352)
Transferofequity accountedearnings 166 (166)
Balanceat 31December2007 37 23 (149) 62 820 62 (7) (54) 19789 20583
Totalcomprehensive incomeforyear (71) 591 (66) 9381 9835
Managementshare trust:nettreasury
sharepurchases(netofincometax) (58) (58)
Share-basedpayment expense 33 33
Dividend (2398) (2398)
Transferofequity accountedearnings 317 (317)
Balanceat 31December2008 37 23 (207) 95 1137 (9) 584 (120) 26455 27995
2008 2007
Dividendpershare(cents)
–interim 342 233
–final(declaredafter statementof financial positiondate) 365 196
Total 707 429
ArcelorMittalSouthAfrica AnnualReport2008
69
Non-distributablereserves
Statedcapital
Rm
Capitalredemp-
tionreserve
Rm
Manage-mentsharetrust
Rm
Share-based
paymentreserve
Rm
Cashflow
hedgeaccounting
reserveRm
Retainedincome
Rm
Totalequity
Rm
Company
Balanceat1January2007 6389 23 27 30 14237 20706
Totalcomprehensiveincomeforyear (84) 7691 7607
Managementsharetrust:nettreasuryshare purchases(netofincometax) (139) (139)
Share-basedpaymentexpense 35 35
Dividend (1948) (1948)
Capitalreduction (6352) (6352)
Balanceat31December2007 37 23 (139) 62 (54) 19980 19909
Totalcomprehensiveincomeforyear (57) 8559 8502
Managementsharetrust:nettreasuryshare purchases(netofincometax) (68) (68)
Share-basedpaymentexpense 33 33
Dividend (2398) (2398)
Balanceat31December2008 37 23 (207) 95 (111) 26141 25978
Inthecontextofthestatementofchangesinequity,thefollowingequityreservesareofrelevance:
1. Statedcapital Inthecomparativeperiod,thecompanyundertooktoreduceitsstatedcapitalintermsofsection90oftheSouthAfrican
CompaniesAct,1973.ThecumulativeamountreturnedtoshareholdersamountedtoR6352million.2. Capitalredemptionreserve Thecapitalredemptionreservefundwascreatedintermsofsection98(1)oftheSouthAfricanCompaniesAct,1973,following
theredemptionofodd-lotsharesduringtheyearended30June2000,outofprofitsthatwouldotherwisebeavailablefordistributiontoordinaryshareholders.
3. Managementsharetrustreserve TheManagementsharetrustreserverepresentsthenetoutflowfromthepurchaseoftreasurysharesinordertomeetobligations
intermsoftheequity-settledshareoptionplanhousedintheManagementsharetrust.ThetrustisconsolidatedasacontrolledspecialpurposeentityintermsofSIC-12,Consolidation – Special Purpose Entities.
4. Share-basedpaymentreserve Theshare-basedpaymentreserverepresentstheaccumulatedchargeforshareoptionsintermsofIFRS2.Theshareoptionplanis
equity-settled.
5. Available-for-salefinancialasset TheequityreserverepresentstheunrealisedfairvaluegainsandlossesaboveandbelowtheinitialR9millioncostofthegroup’s
investmentinHwangeCollieryCompanyLimited.
6. Translationofforeignoperationsreserve Thetranslationofforeignoperationsreservecomprisesallforeignexchangedifferencesarisingfromthetranslationofthefinancial
statementsofforeignoperations.
7. Cashflowhedgeaccountingreserve Thecashflowhedgeaccountingreservecomprisestheportionofthecumulativenetchangeinthefairvalueofderivatives
designatedineffectivecashflowhedgingrelationshipswherethehedgeditemhasnotyetaffectedthestatementoffinancialperformance.
70 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statementsfortheyearended31December2008
1. GENERALINFORMATION ArcelorMittalSouthAfricaLimited(thecompany)anditssubsidiaries(togetherthegroup)manufactureandselllongand
flatcarbonsteelproductsandbeneficiatedby-products.Thegroup’soperationsareprimarilyconcentratedinSouthAfricawithasalesfocusdomesticallyandinternationally,withspecificemphasisonsub-SaharanAfrica.
ThecompanyisalimitedliabilitycompanyincorporatedanddomiciledinSouthAfrica.Theaddressoftheregisteredofficeisdetailedonpage200.
Thecompany’sfunctionalcurrencyistheSouthAfricanRand(ZAR).
ThecompanyislistedontheJSELimitedinJohannesburg,SouthAfrica,andisasubsidiaryofMittalSteelHoldingsAGincorporatedinSwitzerland,whichispartoftheArcelorMittalgroup.
2. ADOPTIONOFNEwANDREVISEDSTANDARDS 2.1 Standards,interpretationsandamendmentseffectivein2008 NonewstandardsoramendmentstheretoasissuedbytheInternationalAccountingStandardsBoardhavean
effectivedateapplicabletothecurrentreportingperiod.
ThreeinterpretationsissuedbytheInternationalFinancialReportingInterpretationsCommitteeareeffectiveforthecurrentperiod:
• IFRIC11,IFRS2–Group and Treasury Share Transactions,providesguidanceonwhethershare-basedtransactionsinvolvingtreasurysharesorinvolvinggroupentities(forexample,optionsoveraparent’sshares)shouldbeaccountedforasequity-settledorcash-settledshare-basedpaymenttransactionsinthestand-aloneaccountsoftheparentandgroupcompanies.Thisinterpretationwasearlyadoptedinapreviousreportingperiodanddidnothaveanyimpactonthegroup’sandcompany’sfinancialstatements.
• IFRIC12,Service Concession Arrangements(effectiveforannualperiodsbeginningonorafter1January2008).Thisinterpretationwasearlyadoptedinapreviousreportingperiodanddidnothaveanyimpactonthegroup’sandcompany’sfinancialstatementsasitisnotrelevanttotheoperationsofbothreportingentities.
• IFRIC14,IAS19–The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction,providesguidanceonassessingthelimitinIAS19ontheamountofthesurplusthatcanberecognisedasanasset.Italsoexplainshowthepensionassetorliabilitymaybeaffectedbyastatutoryorcontractualminimumfundingrequirement.Thisinterpretationwasearlyadoptedinthepreviousreportingperiodanddidnothaveanyimpactonthegroup’sandcompany’sfinancialstatements.
2.2 Earlyadoptionofstandardsandinterpretations Thegroupandcompanyhaveelectedtoadoptthefollowingstandardsandinterpretationsinadvanceoftheir
effectivedates: • IAS1(Revised),Presentation of Financial Statements(effectiveforannualperiodsbeginningonorafter
1January2009); • IAS16(Amendment),Property, Plant and EquipmentandconsequentialamendmenttoIAS7,Statement of
Cash Flows(effectiveforannualperiodsbeginningonorafter1January2009); • IAS19(Amendment),Employee Benefits(effectiveforannualperiodsbeginningonorafter1January2009); • IAS20(Amendment),Accounting for Government Grants and Disclosure of Government Assistance(effective
forannualperiodsbeginningonorafter1January2009); • IAS23(Amendment),Borrowing Costs(effectiveforannualperiodsbeginningonorafter1January2009); • IAS27(Revised),Consolidated and Separate Financial Statements,andIFRS3(Revised),Business Combinations
(effectiveforannualperiodsbeginningonorafter1July2009); • IAS27(Amendment),Consolidated and Separate Financial Statements(effectiveforannualperiodsbeginning
onorafter1January2009);
ArcelorMittalSouthAfrica AnnualReport2008
71
2. ADOPTIONOFNEwANDREVISEDSTANDARDScontinued 2.2 Earlyadoptionofstandardsandinterpretationscontinued • IAS28(Amendment),Investments in Associates(andconsequentialamendmentstoIAS32,Financial
Instruments:Presentation,andIFRS7,Financial Instruments: Disclosures)(effectiveforannualperiodsbeginningonorafter1January2009);
• IAS29(Amendment),Financial Reporting in Hyperinflationary Economies(effectiveforannualperiodsbeginningonorafter1January2009);
• IAS31(Amendment),Interests in Joint VenturesandconsequentialamendmentstoIAS32Financial Instruments: PresentationandIFRS7,Financial Instruments:DisclosuresandIFRS7(effectiveforannualperiodsbeginningonorafter1January2009);
• IAS32(Amendment),Financial Instruments: Presentation,andIAS1(Amendment),Presentation of Financial Statements-Puttable Financial InstrumentsandObligations Arising on Liquidation(effectiveforannualperiodsbeginningonorafter1January2009);
• IAS36(Amendment),Impairment of Assets(effectiveforannualperiodsbeginningonorafter1January2009);
• IAS38(Amendment),Intangible Assets(effectiveforannualperiodsbeginningonorafter1January2009); • IAS39(Amendment),Financial Instruments: Recognition and MeasurementandIFRS7,Financial Instrument
Disclosures (effectiveforannualperiodsbeginningonorafter1July2009); • IAS39(Amendment),Financial Instruments: Recognition and Measurement(effectiveforannualperiods
beginningonorafter1January2009); • IAS39(Amendment),Financial Instruments: Recognition and Measurement(effectiveforannualperiods
beginningonorafter1July2009); • IAS40(Amendment),Investment PropertyandconsequentialamendmentstoIAS16,Property, Plant and
Equipment(effectiveforannualperiodsbeginningonorafter1January2009); • IFRS1(Amendment),First Time Adoption of IFRS,andIAS27,Consolidated and Separate Financial Statements
(effectiveforannualperiodsbeginningonorafter1January2009); • IFRS2(Amendment),Share-based Payment(effectiveforannualperiodsbeginningonorafter1January2009); • IFRS5(Amendment),Non-current Assets Held-for-SaleandDiscontinued Operationsandconsequential
amendmenttoIFRS1,First-time Adoption of IFRS(effectiveforannualperiodsbeginningonorafter1July2009);
• IFRS8,Operating Segments(effectiveforannualperiodsbeginningonorafter1January2009); • IFRIC15,Agreements for Construction of Real Estates(effectiveforannualperiodsbeginningonorafter
1January2009);and • IFRIC16,Hedges of a Net Investment in a Foreign Operation(effectiveforannualperiodsbeginningonorafter
1October2008).
2.2.1 IFRS8,OperatingSegments TheadoptionofIFRS8,Operating Segmentsinadvanceofitseffectivedate(effectiveforannualperiods
beginningonorafter1January2009),witheffectfrom1January2008broughtaboutthatsegmentinformationispresentedonlyatagrouplevelwhereitismostmeaningful.
Thegroup’sreportablesegmentsunderIFRS8areasfollows: • FlatCarbonSteelProductsconsistingoftheVanderbijlparkandSaldanhaWorks; • LongCarbonSteelProductsconsistingoftheNewcastle,VereenigingandMaputoWorks; • CokeandChemicalsundertakingtheprocessingandmarketingofby-productsandtheproductionand
marketingofcommercial-gradecokingcoal;and • CorporateandOtherhousingsalesandmarketingfunctions,procurementandlogisticsactivities,shared
services,centresofexcellence,thedecommissionedPretoriaWorkssite,available-for-saleinvestments,andtheresultsoftheconsolidatedsubsidiariesandspecialpurposeentities.
72 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
2. ADOPTIONOFNEwANDREVISEDSTANDARDScontinued 2.2 Earlyadoptionofstandardsandinterpretationscontinued 2.2.1 IFRS8,OperatingSegmentscontinued Flat-andLongCarbonSteelProductsandCokeandChemicalsrepresentthegroup’soperatingsegmentsin
whichproductioncapacityisconcentrated.
Informationregardingthesesegmentsisreportedinnote6.WiththeinclusionofMaputoWorksintheLongSteelCarbonProductssegment,disclosuresfortheyearended31December2007havebeenaffectedasfollows:
• Operatingprofit/(loss)beforedepreciation,amortisationandimpairmentssegmentprofit/(loss)fromoperations;profit/(loss)beforetaxdecreasedbyR9millionfortheLongSteelCarbonProductssegment,withacorrespondingincreaseintheCorporateandOthersegment;
• SegmentassetsincreasedbyR103millionfortheLongSteelCarbonProductssegment,withacorrespondingdecreaseintheCorporateandOthersegment;
• CapitalexpenditureincreasedbyR97millionfortheLongSteelCarbonProductssegment,withacorrespondingdecreaseintheCorporateandOthersegment;
• SegmentliabilitiesbyR6millionfortheLongSteelCarbonProductssegment,withacorrespondingdecreaseintheCorporateandOthersegment;and
• Cashinflow/(outflow)fromoperationsdecreasedbyR5millionfortheLongSteelCarbonProductssegment,withacorrespondingincreaseintheCorporateandOthersegment.
AsaresultoftheseparationoftheCorporateandOthersegmentandtheeliminationsandadjustments,disclosuresfortheyearended31December2007havebeenamendedaccordingly.
Theaccountingpoliciesofthereportablesegmentsarethesameasthegroup’saccountingpoliciesdescribedinnote3.9.
Segmentprofitfromoperationsrepresentstheprofitor(loss)earnedormadebyeachsegmentwithouttheallocationofafter-taxprofitsofequityaccountedinvestments,netinterestincome,incomefrominvestmentsandincometaxexpenses.
Allassetsandliabilitiesareallocatedtotheoperatingsegments,otherthanforthefollowingitemsthatareexclusivelyhousedintheCorporateandOthersegment,reflectingthemannerinwhichresourceallocationismeasured:
Assetsnotallocatedtooperatingsegments: • Resultsofconsolidatedsubsidiariesandspecialpurposeentities,otherthanforSaldanhaWorkswhichis
asubsidiaryhousedwithintheFlatCarbonSteelProductssegment; • Investmentsinequityaccountedentities; • Available-for-saleinvestments; • Cashandcashequivalents;and • Incometax,capitalgainstaxandvalueaddedtaxrelatedassets,asapplicable.
Liabilitiesnotallocatedtooperatingsegmentsarelimitedtoincometax,capitalgainstaxandvalueaddedtaxrelatedliabilities,asapplicable.
2.2.2 IAS1(Revised),PresentationofFinancialStatements ThegroupandcompanyhaveadoptedIAS1(Revised),Presentation of Financial Statements in advance of
its effective date(effectiveforannualperiodsbeginningonorafter1January2009),witheffectfrom1January2008.Similarly,theamendmentmadetoIAS1aspartoftheIASB’sannualimprovementsprojectpublishedinMay2008(effectivefrom1January2009),wasalsoearlyadopted.
ArcelorMittalSouthAfrica AnnualReport2008
73
2. ADOPTIONOFNEwANDREVISEDSTANDARDScontinued 2.2 Earlyadoptionofstandardsandinterpretationscontinued 2.2.2 IAS1(Revised),PresentationofFinancialStatementscontinued Therevisedstandardprohibitsthepresentationofitemsofincomeandexpenses(thatis,non-owner
changesinequity)inthestatementofchangesinequity,requiringnon-ownerchangesinequitytobepresentedseparatelyfromownerchangesinequity.Consequently,thegroupandcompanyhaveselectedtoshowallnon-ownerchangesinequityinanincomestatementandstatementofcomprehensiveincome.
Furthermore,intermsoftherevisions,titlechangeshavebeenadoptedforthefollowingstatements: • Balancesheettostatementoffinancialposition;and • Cashflowstatementtostatementofcashflows.
Theadoptionshavehadnoimpactonthegroup’sandcompany’sresults.
2.2.3 IAS19(Amendment),EmployeeBenefits ThegroupandcompanyhaveadoptedIAS19(Amendment),Employee Benefitsinadvanceofitseffective
date(effectiveforannualperiodsbeginningonorafter1January2009)witheffectfrom1January2008.
TheamendmentsarepartoftheIASB’sannualimprovementsprojectpublishedinMay2008andentails: • Distinctionbetweenshort-termandlong-termemployeebenefitshasbeenclarifiedasbeingbasedon
whetherbenefitsareduetobesettledwithinorafter12monthsofemployeeservicebeingrendered.Thesettlementexpectationdoesnotinfluencetheclassification.
• Theamendmentclarifiesthataplanamendmentthatresultsinachangeintheextenttowhichbenefitpromisesareaffectedbyfuturesalaryincreasesisacurtailment,whileanamendmentthatchangesbenefitsattributabletopastservicegivesrisetoanegativepastservicecostifitresultsinareductioninthepresentvalueofthedefinedbenefitobligation.
• Thedefinitionofreturnonplanassetshasbeenamendedtostatethatplanadministrationcostsaredeductedinthecalculationofreturnonplanassetsonlytotheextentthatsuchcostshavebeenexcludedfrommeasurementofthedefinedbenefitobligation.
• IAS37,Provisions, Contingent Liabilities and Contingent Assets,requirescontingentliabilitiestobedisclosed,notrecognised.IAS19hasbeenamendedtobeconsistent.
Theimplicationoftheseamendmentsonthegroup’sandcompany’saccountingpoliciesandresultsare: • Fortheretirementbenefitplansoperatedbythegroupandcompany,(i)noeventshaveoccurredthat
meetthedefinitionofcurtailment,or(ii)noamendmentmaderesultinginnegativepastservicecosthavingbeenrecognisedundertheperiodunderrevieworitscomparativeperiod.
• Administrationcostsareincludedinfullinmeasuringthedefinedbenefitobligation. • Thetwodefinedbenefitplansoperatebythegroupandcompanyarewhollyfunded.Thepaymentofthe
fundedbenefitsdependsnotonlyontheplans’financialpositionandinvestmentperformance,butalsoonthegroup’sandcompany’sabilitytomakegoodanyfundingshortfallinthetwoplans.Therefore,thegroupandcompanyeffectivelyunderwritetheplansinvestmentandactuarialrisk.Historicallynocontingentliabilityhasbeendisclosedastheplans’areadequatelyfunded.Despitethecontinuedadequacyofthefundingfortheperiodunderreview,giventhenatureoftheitem,thecommitmentofthegroupandcompanytofundanyshortfallthushasbeendisclosedasacontingentliability,alongwithanestimateofthelikelihoodoftheliabilitybeingrecognised.Enhanceddisclosurehasbeenmadeinnote34.
2.2.4 Revisionsandamendmentswithnoimpactonthegroup’sandcompany’saccountingpoliciesandfinancialresults
TheadoptionofIAS16(Amendment),IAS20(Amendment),IAS23(Amendment),IAS27(Revised),IAS27(Amendment),IAS28(Amendment),IAS29(Amendment),IAS31(Amendment),IAS32(Amendment),IAS36(Amendment),IAS38(Amendment),IAS39(Amendments),IAS40(Amendment),IFRS1(Amendments),IFRS5(Amendment),IFRIC15andIFRIC16havehadnoimpactonthegroup’sandcompany’saccountingpoliciesorfinancialresults.
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Notes to the group and company annual financial statements continuedfortheyearended31December2008
2. ADOPTIONOFNEwANDREVISEDSTANDARDScontinued 2.3 AuthoritativeguidanceandcircularsissuedbytheSouthAfricanInstituteofCharteredAccountants IncompliancewiththeJSEListingsRequirementsthefollowingauthoritativeguidanceissuedbytheSouthAfrican
InstituteofCharteredAccountants(SAICA)in2008,wasconsidered: • CC08/07,Headline Earnings(issuedFebruary2008).SincethecircularwasfirstissuedinNovember2007,a
minoreditorialclarificationwasneededtoensureconsistenttreatmentofheadlineearningswithrespecttotheexclusionofbothgainsandlossesonthedisposalofasubsidiary.Theclarificationhadnoimpactonthegroup’sfinancialstatements.
• AccountingPracticesBoard(APB),theofficialfinancialreportingstandards-setterinSouthAfrica,whenapprovingtheIASB’sReclassification of Financial Assets-AmendmentstoIAS39-Financial Instruments:Recognition and MeasurementandIFRS7-Financial Instruments: Disclosures inOctober2008,expressedtheviewthatitishighlyunlikelythatthereweresuch“rarecircumstances”inSouthAfricaasenvisagedbytheIASB’samendment.Theamendmentallowsafinancialassettobevoluntarilyreclassifiedfromheld-for-trading(measuredatfairvaluethroughprofitorloss)toanotherfinancialassetcategoryin“rarecircumstances”.TheAPBdidhowevernotethattheremaywellbe“rarecircumstances”affectingSouthAfricancompaniesthathaveoperationsorfinancialassetsinothercountriesthathavesuch“rarecircumstances”.ThegroupandcompanymadenovoluntaryreclassificationsascontemplatedbytheIASBorAPB.
3. SIGNIFICANTACCOuNTINGPOLICIES Theprincipalaccountingpoliciesappliedinthepreparationofthegroup’sandcompany’sfinancialstatementsaresetout
below.Thesepolicieshavebeenconsistentlyappliedtothecomparativeyearspresented.
3.1 Statementofcompliance ThegroupandcompanyfinancialstatementsarepreparedincompliancewithInternationalFinancialReporting
Standards(IFRS)andinterpretationsissuedrespectivelybytheInternationalAccountingStandardsBoard(IASB)andtheInternationalFinancialReportingInterpretationsCommittee(IFRIC)oftheIASBthatarerelevanttoitsoperationsandeffectiveforannualreportingperiodsbeginningonorafter1January2008,andthosestandardsearlyadoptedasdescribedinnote2.2.
3.2 Basisofpreparation Thegroup’sandcompany’sfinancialstatementshavebeenpreparedunderthehistoricalcostconvention,as
modifiedbytherevaluationof: • Derivativefinancialinstrumentsthataredesignatedaseffectivehedginginstrumentsincashflowhedge
relationships; • Derivativefinancialinstrumentsthataredesignatedasheld-for-tradingatfairvaluethroughprofitorloss
(FVTPL); • Embeddedderivativefinancialinstrumentsbifurcatedfromtheirhostcontracts;and • Investmentsinequityinstrumentsclassifiedasavailable-for-sale.
Thepreparationoffinancialstatements,inconformitywithIFRS,requirestheuseofcertaincriticalaccountingestimates.Italsorequiresmanagementtoexerciseitsjudgementintheprocessofapplyingthegroup’sandcompany’saccountingpolicies.Theareasinvolvingahigherdegreeofjudgementorcomplexity,orareaswhereassumptionsandestimatesaresignificanttothefinancialstatementsaredisclosedinnote4and5respectively.
3.3 Investmentsinsubsidiaries,jointventuresandassociatesbythecompany Thecompanyaccountsforallinvestmentsinsubsidiaries,jointlycontrolledentitiesandassociatesatcost,andnot
atfairvalueintermsofIAS39,Financial Instruments, Recognition and Measurement.
Dividendsreceivedfromsubsidiaries,jointlycontrolledentitiesandassociatesarerecognisedinprofitorlosswhenthecompanyhastherighttoreceivethedividend.Dividendincomeisrecognisedifevidenceisavailablethat:
• Thecarryingamountoftheinvestmentinthecompany’sseparatefinancialstatementsexceedsthecarryingamountinthegroup’sfinancialstatementsoftheinvestee’snetassets;or
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.3 Investmentsinsubsidiaries,jointventuresandassociatesbythecompanycontinued • Thedividendexceedsthetotalcomprehensiveincomeofthesubsidiary,jointlycontrolledentityorassociatein
theperiodinwhichthedividendisdeclared,animpairmentassessmentisperformedonthecarryingamountoftheinvestment.
Theaccountingforsubsidiaries,jointlycontrolledentitiesandassociatesbythegroupisdetailedintheaccountingpoliciescontainedinnotes3.4to3.8.
3.4 Basisofconsolidation–subsidiaries Thegroupfinancialstatementsincorporatefinancialstatementsofthecompanyanditssubsidiaries.
Subsidiariesareallentities(includingspecialpurposeentities)overwhichthegrouphasthepowertogovernthefinancialandoperatingpoliciessoastoobtainbenefitsfromtheentities’activities.Generally,controlisaccompaniedwithashareholdingofmorethanonehalfofthevotingrights.Theexistenceandeffectofpotentialvotingrightsthatarecurrentlyexercisableorconvertibleareconsideredwhenassessingwhetherthegroupcontrolsanotherentity.
Subsidiariesarefullyconsolidatedfromthedateonwhichcontrolistransferredtothegroup.Theyarede-consolidatedfromthedatethatcontrolceases.
Inter-companytransactions,balancesandunrealisedgainsontransactionsbetweengroupcompaniesareeliminated.Unrealisedlossesarealsoeliminatedbutconsideredanimpairmentindicatoroftheassettransferred.Accountingpoliciesofsubsidiarieshavebeenchangedwherenecessarytoensureconsistencywiththepoliciesadoptedbythegroup.
3.5 Businesscombinations–investmentsinsubsidiaries Theacquisitionmethodofaccountingisusedtoaccountforbusinesscombinationsbythegroup.Theconsideration
transferredfortheacquisitionofasubsidiaryisthefairvaluesoftheassetstransferred,theliabilitiesincurredandtheequityinterestsissuedbythegroup.
Theconsiderationtransferredincludesthefairvalueofanyassetorliabilityresultingfromacontingentconsiderationarrangement.Acquisition-relatedcostsareexpensedasincurred.
Identifiableassetsacquiredandliabilitiesandcontingentliabilitiesassumedinabusinesscombinationaremeasuredinitiallyattheirfairvaluesattheacquisitiondate.Onanacquisition-by-acquisitionbasis,thegrouprecognisesanynon-controllinginterestintheacquireeeitheratfairvalueoratthenon-controllinginterest’sproportionateshareoftheacquiree’snetassets.
Theexcessoftheconsiderationtransferredforthepurchaseofanynon-controllinginterestintheacquireeandtheacquisition-datefairvalueofanypreviousequityinterestintheacquireeoverthefairvalueofthegroup’sshareoftheidentifiablenetassetsacquiredisrecordedasgoodwill.Ifthisislessthanthefairvalueofthenetassetsofthesubsidiaryacquired,asinthecaseofabargainpurchase,thedifferenceisrecogniseddirectlyintheincomestatement.
Inter-companytransactions,balancesandunrealisedgainsontransactionsbetweengroupcompaniesareeliminated.Unrealisedlossesarealsoeliminated.Accountingpoliciesonsubsidiarieshavebeenchangedwherenecessarytoensureconsistencywiththepoliciesadoptedbythegroup.
Thegrouptreatstransactionswithnon-controllinginterestsinthesamewayastransactionswithequityownersofthegroup.Forpurchasesfromnon-controllinginterests,thedifferencebetweenanyconsiderationpaidandtherelevantshareacquiredofthecarryingvalueofnetassetsofthesubsidiary,isrecordedinequity.Gainsorlossesondisposalstonon-controllinginterestsarealsorecordedinequity.
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Notes to the group and company annual financial statements continuedfortheyearended31December2008
3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.6 Interestsinjointventures Ajointventureisacontractualarrangementwherebythegroupandotherpartiesundertakeaneconomicactivity
thatissubjecttojointcontrol,whichiswhenthestrategicfinancialandoperatingpolicydecisionsrelatingtotheactivitiesrequiretheunanimousconsentofthepartiessharingcontrol.
Jointventurearrangementsthatinvolvetheestablishmentofaseparateentityinwhicheachventurerhasaninterestarereferredtoasjointlycontrolledentities.
Theassetsandliabilitiesofjointlycontrolledentitiesareincorporatedinthegroup‘sfinancialstatementsusingtheequitymethodofaccounting,exceptwhentheinvestmentisclassifiedasheldforsale,inwhichcaseitisaccountedforinaccordancewithIFRS5,Non-current Assets Held for Sale and Discontinued Operations.
Thegroup’sshareofitsjointlycontrolentities’post-acquisitionprofitsorlossesisrecognisedintheincome
statementanditsshareofpost-acquisitionmovementsinreservesisrecognisedinreserves.Thepost-acquisitionprofitorlossesrecognisedinretainedearningsaresubsequentlytransferredtoanequityaccountingreserve,distinctfromretainedearnings.Thecumulativepost-acquisitionmovementsareadjustedagainstthecarryingamountoftheinvestment.
Lossesofajointlycontrolledentityinexcessofthegroup’sinterestinthatentity(whichincludesanylong-termintereststhat,insubstance,formpartofthegroup’snetinvestmentinthejointlycontrolledentity)arerecognisedonlytotheextentthatthegrouphasincurredlegalorconstructiveobligationsormadepaymentsonbehalfofthejointlycontrolledentity.
Anyexcessofthecostofacquisitionoverthegroup’sshareofthenetfairvalueoftheidentifiableassets,liabilitiesandcontingentliabilitiesofthejointlycontrolledentityrecognisedatthedateofacquisitionisrecognisedasgoodwill.Thegoodwillisincludedwithinthecarryingamountoftheinvestmentandisassessedforimpairmentaspartofthatinvestment.Anyexcessofthegroup’sshareofthenetfairvalueoftheidentifiableassets,liabilitiesandcontingentliabilitiesoverthecostofacquisition,afterreassessment,isrecognisedimmediatelyinprofitorloss.
Whereagroupentitytransactswithajointlycontrolledentityofthegroup,profitsandlossesareeliminatedtotheextentofthegroup’sinterestintherelevantjointlycontrolledentity.
3.7 Investmentsinassociates Anassociateisanentityoverwhichthegrouphassignificantinfluenceandthatisneitherasubsidiarynoran
interestinajointventure.Significantinfluenceisthepowertoparticipateinthefinancialandoperatingpolicydecisionsoftheinvesteebutisnotcontrolorjointcontroloverthosepolicies.
Theresultsandassetsandliabilitiesofassociatesareincorporatedinthefinancialstatementsusingtheequitymethodofaccounting,exceptwhentheinvestmentisclassifiedasheldforsale,inwhichcaseitisaccountedforinaccordancewithIFRS5,Non-current Assets Held for Sale and Discontinued Operations.Undertheequitymethod,investmentsinassociatesarecarriedintheconsolidatedstatementoffinancialpositionatcostasadjustedforpost-acquisitionchangesinthegroup’sshareofthenetassetsoftheassociate,lessanyimpairmentinthevalueofindividualinvestments.
Thegroup’sshareofitsassociates’post-acquisitionprofitsorlossesisrecognisedintheincomestatementanditsshareofpost-acquisitionmovementsinreservesisrecognisedinreserves.Thepost-acquisitionprofitorlossesrecognisedinretainedearningsaresubsequentlytransferredtoanequityaccountingreserve,distinctfromretainedearnings.Thecumulativepost-acquisitionmovementsareadjustedagainstthecarryingamountoftheinvestment.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.7 Investmentsinassociatescontinued Lossesofanassociateinexcessofthegroup’sinterestinthatassociate(whichincludesanylong-terminterests
that,insubstance,formpartofthegroup’snetinvestmentintheassociate)arerecognisedonlytotheextentthatthegrouphasincurredlegalorconstructiveobligationsormadepaymentsonbehalfoftheassociate.
Anyexcessofthecostofacquisitionoverthegroup’sshareofthenetfairvalueoftheidentifiableassets,liabilitiesandcontingentliabilitiesoftheassociaterecognisedatthedateofacquisitionisrecognisedasgoodwill.Thegoodwillisincludedwithinthecarryingamountoftheinvestmentandisassessedforimpairmentaspartofthatinvestment.Anyexcessofthegroup’sshareofthenetfairvalueoftheidentifiableassets,liabilitiesandcontingentliabilitiesoverthecostofacquisition,afterreassessment,isrecognisedimmediatelyinprofitorloss.
Whereagroupentitytransactswithanassociateofthegroup,profitsorlossesareeliminatedtotheextentofthegroup’sinterestintherelevantassociate.
3.8 Goodwillandnetfairvalueoftheidentifiableassets,liabilitiesandcontingentliabilitiesovercostofanacquiredinterest
Goodwill Goodwillarisingontheacquisitionofasubsidiary,ajointlycontrolledentityoranassociate,representstheexcess
ofthecostofacquisitionoverthegroup’sinterestinthenetfairvalueoftheidentifiableassets,liabilitiesandcontingentliabilitiesoftheinvesteerecognisedatthedateofacquisition.Goodwillisinitiallyrecognisedasanassetatcostandissubsequentlymeasuredatcostlessanyaccumulatedimpairmentlosses.
Aninvestmentinajointlycontrolledentityoranassociateistreatedasasingleassetforthepurposesofimpairmenttesting.Anyimpairmentlossisnotallocatedtospecificassetsincludedwithintheinvestment,forexample,goodwill.Reversalsofimpairmentarerecordedasanadjustmenttotheinvestmentbalancetotheextentthattherecoverableamountoftheassociateincreases.
Forthepurposeofimpairmenttestingofthegroup’scashgeneratingunits,goodwillisallocatedtoeachoftheunitsexpectedtobenefitfromthesynergiesofthecombination.Cash-generatingunitstowhichgoodwillhasbeenallocatedaretestedforimpairmentannually,ormorefrequentlywhenthereisanindicationthattheunitmaybeimpaired.Iftherecoverableamountofthecash-generatingunitislessthanthecarryingamountoftheunit,theimpairmentlossisallocatedfirsttoreducethecarryingamountofanygoodwillallocatedtotheunitandthenpro ratatotheotherassetsoftheunitonthebasisofthecarryingamountofeachassetintheunit.Animpairmentlossrecognisedforgoodwillisnotreversedinasubsequentperiod.
Ondisposalofasubsidiary,ajointlycontrolledentityoranassociate,theattributableamountofgoodwillisincludedinthedeterminationoftheprofitorlossondisposal.
Thegroup’spolicyforgoodwillarisingontheacquisitionofajointlycontrolledentityandanassociateisdescribedinnote3.6and3.7respectively.
Net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of an acquired interest Wheresuchaninterestexceedsthecostofthebusinesscombination,theidentificationandmeasurementofthe
acquiredidentifiableassets,liabilitiesandcontingentliabilities,andthemeasurementofthecostofthecombinationisreassessed;withanyexcessremainingafterthereassessmentbeingrecognisedimmediatelyinprofitorloss.
3.9 Segmentreporting Operatingsegmentsarereportedinamannerconsistentwiththeinternalreportingprovidedtothechiefoperating
decision-maker.Thechiefoperatingdecision-maker,whoisresponsibleforallocatingresourcesandassessingperformanceoftheoperatingsegments,hasbeenidentifiedastheExecutiveCommitteeofArcelorMittalSouthAfrica.
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Notes to the group and company annual financial statements continuedfortheyearended31December2008
3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.10 Foreigncurrencytranslation Functional and presentation currency Itemsincludedinthefinancialstatementsofeachofthegroup’sentitiesaremeasuredusingthecurrencyof
theprimaryeconomicenvironmentinwhichtheentityoperates(thefunctionalcurrency).Thegroup’sfinancialstatementsarepresentedinZAR,whichisthecompany’sfunctionalandpresentationcurrency.
Transactions and balances Foreigncurrencytransactionsaretranslatedintothefunctionalcurrencyusingtheexchangeratesprevailingatthe
datesofthetransactions.Foreignexchangegainsandlossesresultingfromthesettlementofsuchtransactionsandfromthetranslationatyear-endexchangeratesofmonetaryassetsandliabilitiesdenominatedinforeigncurrencies,arerecognisedasgainsorlossesintheincomestatementexceptwhendeferredinequityasqualifyingcashflowhedges.
Asreferredtoinnote3.17inthecontextofavailable-for-salefinancialassets,changesinthefairvalueofsuchmonetarysecuritiesdenominatedinforeigncurrencyareanalysedbetweentranslationdifferencesresultingfromchangesintheamortisedcostofthesecurity,andotherchangesinthecarryingamountofthesecurity.Translationdifferencesrelatedtochangesinamortisedcostarerecognisedinprofitorloss,andotherchangesincarryingamountsarerecognisedinequity.
Group companies Theresultsandfinancialpositionofallthegroupentities(noneofwhichhasthecurrencyofahyperinflationary
economy)thathaveafunctionalcurrencydifferentfromthepresentationcurrencyaretranslatedintothepresentationcurrencyasfollows:
• Assetsandliabilitiesforeachreportingdatepresentedaretranslatedattheclosingrateatthedateofthestatementoffinancialposition;
• Incomeandexpensesforeachreportingdatearetranslatedataverageexchangerates;forthereportingperiod;and
• Allresultingexchangedifferencesarerecognisedasaseparatecomponentofequity.
Onconsolidation,exchangedifferencesarisingfromthetranslationofthenetinvestmentinforeignoperationsaredisclosedintheincomestatementofcomprehensiveincomeandaretakentoshareholders’equity.
Whenaforeignoperationispartiallydisposedoforsold,exchangedifferencesthatwererecordedinequityarerecognisedintheincomestatementaspartofthegainorlossonsale.
Goodwillandfairvalueadjustmentsarisingontheacquisitionofaforeignentityaretreatedasassetsandliabilitiesoftheforeignentityandtranslatedattheclosingrate.
Thegroupusedthefollowingexchangeratesforfinancialreportingpurposes:
Rateat31December
2008 2007
ZARtooneUSD 9.389 6.8133
Averageannualratefortheyearended31December
2008 2007
ZARtooneUSD 8.262 7.0555
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.11 Property,plantandequipment Thenetcarryingamount,beingthecapitalisedinitialandsubsequentcosts(iegrosscarryingamount)less
subsequentaccumulateddepreciationandimpairmentlossesagainstproperty,plantandequipmentismeasuredandrecognisedonahistoricalcostbasis.
Subsequentcostsareincludedinthecarryingamountofanitemofproperty,plantandequipmentorrecognisedasaseparateasset,asappropriate,onlywhenitisprobablethatfutureeconomicbenefitsassociatedwiththeitemwillflowtothegroupandcompanyandthecostoftheitemcanbemeasuredreliably.Thecarryingamountofthereplacedpartisderecognised.
Initialandsubsequentlyrecognisedcostsarecomponentisedinordertosubstantiallyreflecttheusefullivesofthesignificantassetcomponents.
Allassetsareregardedasdepreciableassets,otherthanforfreeholdlandwhichisreflectedathistoricalcostlessaccumulatedimpairmentlosses.
Thegrosscarryingamountofpurchasedandself-constructedassetsincludeallinitialandsubsequentcostsnecessarytoplacetheassetsinaconditionnecessarytomeettheirintendeduse.Ofspecificnotearethefollowingcostelements:
• Afair,pro-ratedportionofdirectlyallocablefixedoverheadcostischargedtoself-constructedassets;and • Thepresentvalueofassetretirementcosts(oninitialrecognitionandsubsequentchangesthereto)wherethese
costsarereliablydeterminableandmeasurable,asdetailedinnote3.28.
Directlyattributablecostsarerecognisedinthegrosscarryingamountofanitemofproperty,plantandequipmentduringacommissioningperiodrelatingtothephysicalpreparationforuse,inwhichitisnotpossibletooperateatnormallevelsbecauseoftheneedtorun-inmachinery,testequipment,ortoensuretheproperoperationoftheequipment.Capitalisationofthesecostsceasesoncetheassetiscapableofbeingoperatedatnormallevels.
Forproperty,plantandequipmentunderconstruction,paymentsinadvanceofcertifiedstage-of-completioncertificates,areclassifiedasprepaymentsandarenotcapitalisedtothecarryingamountoftheasset.
Fordepreciableassets,depreciationcommencesoncetheaforementionedintendedusableconditionhasbeenreached.Temporaryinterruptionsintheassets’intendedusedoesnotresultinthecessationofdepreciation.
Theassets’residualvaluerepresentsthebestestimateofthecurrentrecoverableamountoftheassetattheendoftheirusefullives.Residualvaluesandusefullivesarereviewed,andadjustedifappropriate,ateachstatementoffinancialpositiondate.Formostofthegroup’sandcompany’sproperty,plantandequipment,otherthanland,theresidualvaluesarenil.
Usefullivesanddepreciationratesofproperty,plantandequipmentarereassessedonanannualbasis.
Depreciationischargedsoastowriteoffthecostofassets,otherthanlandandassetsunderconstruction,overtheirestimatedusefullives,usingthestraight-linemethod.
Inordertoachievecomparabilitywithotherinternationalsteelcompanies,thefollowingmaximumusefullivesareappliedasguidelines:
• Buildingsandinfrastructure 50years • Plant,machineryandrelatedequipment(includingmillrollsandplantspecificreconditionablespares)25years • Mobileequipment,integratedprocesscomputersandgeneralreconditionablespares 15years • Non-integratedcomputerhardware 5years
Theaboveguidelinesarere-assessedonanannualbasis,andrevisedasappropriate.
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Notes to the group and company annual financial statements continuedfortheyearended31December2008
3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.11 Property,plantandequipmentcontinued Anasset’scarryingamountiswrittendownimmediatelytoitsrecoverableamountiftheasset’scarryingamountis
greaterthanitsestimatedrecoverableamount.
Thegainorlossarisingonthedisposalorretirementofanitemofproperty,plantandequipmentisdeterminedasthedifferencebetweenthesalesproceedsandthecarryingamountoftheassetandisrecognisedinprofitorloss.
Landandbuildingswithavailablesparecapacitythatareappliedtoearnincidentalrentalrevenuearenotclassifiedasinvestmentproperties.
Maintenanceandrepairswhichneithermateriallyaddtothevalueofassetsnorappreciablyprolongtheirusefullivesarechargedtoprofitorlossfortheperiod.
Theordinaryactivitiesofthegroupandcompanydonotcomprisetheleasing(rentingout)andsubsequentlysellingofsuchassets.Anyrentalofproperty,plantandequipmentisincidentalinnature.Consequently,incidentalrentalincomeisoffsetagainstotheroperationexpenseandisincludedinthelineitem“otheroperatingexpenses”intheincomestatement.Onthesaleofsuchassets,theassetswouldbeclassifiedasheldforsale.Theproceedsonthedisposaloftheassetsaredisclosedas“cashflowsfrominvestingactivities”inthestatementofcashflows.
3.12 Start-upactivities Start-upactivitiesaredefinedbroadlyasnon-recurringactivitiesrelatedtoopeninganewfacility,introducinga
newproduct,conductingbusinessinanewcountry,initiatinganewprocessinanexistingfacility,orcommencingsomenewoperation.Thecostsincludepre-openingcosts,pre-operatingcostsandorganisingcosts.
Costsassociatedwithsuchactivitiesareexpensedasincurred.
3.13 Accountingforfinanceleasesaslessee Financeleasearrangementsconsistofthosetransactionsthatare: • leasesinbotheconomicsubstanceandlegalform;and • thosethatariseoutofcommercialarrangementsthatineconomicsubstancerepresentleases,thoughnotin
legalform. Thegroupandcompanyleasecertainproperty,plantandequipment.Leasesofproperty,plantandequipment
wherethegroupandcompanyhavesubstantiallyalltherisksandrewardsofownership,areclassifiedasfinanceleases.Financeleasesarecapitalisedatthelowerofthefairvalueoftheleasedproperty,plantandequipmentandthepresentvalueoftheminimumleasepaymentsofthelease.
Eachleasepaymentisallocatedbetweentheliabilityandfinancechargessoastoachieveaconstantrateonthecapitalbalanceoutstanding,usingtheeffectiveinterestratemethod.Thecorrespondingrentalobligations,netoffinancecharges,areshownasfinanceleaseobligations.Theinterestelementofthefinancecostischargedtotheincomestatementovertheleaseperiodsoastoproduceaconstantperiodicrateofinterestontheremainingbalanceoftheliabilityforeachperiod.Theproperty,plantandequipmentacquiredunderfinanceleasesisdepreciatedovertheshorteroftheusefullifeoftheassetandtheleaseterm.
Financeleaseobligationswithsettlementtenuresgreaterthan12monthsafterthestatementoffinancialpositiondate,areclassifiedasnon-currentfinanceleaseobligations,whilethosetobesettledwithin12monthsofthestatementoffinancialpositiondateareclassifiedascurrentfinanceleaseobligations.
3.14 Non-currentassetsanddisposalgroupsheldforsale Non-currentassetsanddisposalgroupsareclassifiedasheldforsaleiftheircarryingamountwillberecoveredprincipally
throughasaletransactionratherthanthroughcontinuinguse.Thisconditionisregardedasmetonlywhenthesaleishighlyprobableandthenon-currentassetordisposalgroupisavailableforimmediatesaleinitspresentcondition.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.14 Non-currentassetsanddisposalgroupsheldforsalecontinued Managementmustbecommittedtothesale,whichshouldbeexpectedtoqualifyforrecognitionasacompleted
salewithinoneyearfromthedateofclassification.
Non-currentassetsanddisposalgroupsclassifiedasheldforsalearemeasuredattheloweroftheirpreviouscarryingamountandtheirfairvaluelesscoststosell.
Whentherequirementsforclassificationasheldforsalearenolongermet,thenon-currentassetordisposalgroupisreclassifiedoutoftheheldforsalecategory.Suchnon-currentassetsordisposalgroupsarecarriedatthelowerof(i)theircarryingamountbeforebeingclassifiedasheldforsale,adjustedforanyamortisationorrevaluationsthatwouldhavebeenrecognisedhaditnotbeenclassifiedasheldforsale;and(ii)theirrecoverableamountatthedateofthesubsequentdecisionnottosell.
Allofasubsidiary’sjointlycontrolledentity’soranassociate’sassetsandliabilitiesareclassifiedasheldforsaleifapartialdisposalsaleplanresultsinlossofcontrol.
3.15 Intangibleassets Internally-generated intangible assets – research and development Researchexpenditureisrecognisedasanexpenseasincurred.Costsincurredondevelopmentprojects(relatingto
thedesignandtestingofneworimprovedproducts)arerecognisedasintangibleassetswhenthefollowingcriteriaarefulfilled:
• itistechnicallyfeasibletocompletetheintangibleassetsothatitwillbeavailableforuseorsale; • managementintendstocompletetheintangibleassetanduseorsellit; • thereisanabilitytouseorselltheintangibleasset; • itcanbedemonstratedhowtheintangibleassetwillgenerateprobablefutureeconomicbenefits; • adequatetechnical,financialandotherresourcestocompletethedevelopmentandtouseorselltheintangible
assetareavailable;and • theexpenditureattributabletotheintangibleassetduringitsdevelopmentcanbereliablymeasured.
Otherdevelopmentexpendituresthatdonotmeetthesecriteriaarerecognisedasanexpenseasincurred.Developmentcostspreviouslyrecognisedasanexpensearenotrecognisedasanassetinasubsequentperiod.Capitaliseddevelopmentcostsincludesthecostofmaterial,directlabourandanappropriateportionofoverheadsandarerecordedasintangibleassetsandamortisedfromthepointatwhichtheassetisreadyforuseonastraight-linebasisoveritsusefullife.Capitaliseddevelopmentexpenditureisshownatcostlessaccumulatedamortisationandaccumulatedimpairmentlosses.
Developmentassetsaretestedforimpairmentannually,inaccordancewithIAS36,Impairment of Assets.
Purchased intangible assets other than goodwill (i) “Right-of-use” operating licences Thecostofacquisitionofoperatinglicences,otherthanthoseobtainedfromthegovernmentauthorities,are
capitalisedattheirhistoricalcostasintangibleassets,andamortisedovertheright-of-useperiod.Thisperiodisreviewedatleastannually.
Environmentalimpactcertificationsandgeneraloperatinglicencesgrantedbytheauthoritiestooperateafacilityarenotregardedasseparableintangibleassets.Thiscost-of-complianceisrecognisedasanintegralcomponentofthespecificproperty,plantandequipmentitemstowhichitrelates.
(ii) Patents, trademarks and licences Acquiredpatents,trademarksandlicencesareshownathistoricalcost.Patents,trademarksandlicenceshave
afiniteusefullifeandarecarriedatcostlessaccumulatedamortisation.Amortisationiscalculatedusingthestraight-linemethodtoallocatethecostoftrademarksandlicencesovertheirestimatedusefullives,typicallybetweenthreetofiveyears.
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Notes to the group and company annual financial statements continuedfortheyearended31December2008
3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.15 Intangibleassetscontinued (iii) Non-integrated computer software Acquiredcomputersoftwarelicencesarecapitalisedonthebasisofthecostsincurredtoacquireandbringto
usethespecificsoftware.Thesecostsareamortisedovertheirestimatedusefullives.
Costsassociatedwithdevelopingormaintainingofcomputersoftwareprogrammesarerecognisedasanexpenseasincurred.Coststhataredirectlyassociatedwiththedevelopmentofidentifiableanduniquesoftwareproductscontrolledbythegroupandcompany,andthatwillprobablygenerateeconomicbenefitsexceedingcostsbeyondoneyear,arerecognisedasintangibleassets.Costsincludethedirectemployeecostsincurredasaresultofdevelopingsoftwareandanappropriateportionofrelevantoverheads.
Computersoftwaredevelopmentcostsrecognisedasassetsareamortisedovertheirestimatedusefullives,typicallynotexceedingsevenyears.
(iv) Mineral rights Mineralrightsarestatedathistoricalcostlessaccumulatedamortisationandimpairmentlosses. Forintangibleassetsunderdevelopment,paymentsinadvanceofcertifiedstage-of-completioncertificates,are
classifiedasprepaymentsandarenotcapitalisedtothecarryingamountoftheasset. 3.16 Impairmentoftangibleandintangibleassetsexcludinggoodwill Ateachstatementoffinancialpositiondate,thegroupandcompanyreviewthecarryingamountsoftangibleand
intangibleassetstodeterminewhetherthereisanyindicationthatthoseassetshavesufferedanimpairmentloss.Ifanysuchindicationexists,therecoverableamountoftheassetisestimatedinordertodeterminetheextentoftheimpairmentloss(ifany).Inordertoensurecompletenessoftheimpairmentassessmentofindividualassets,alltangibleassetsandintangibleassetsareallocatedtothecash-generatingunittowhichtheybelong.Animpairmentassessmentisthenundertakenontheindividualcash-generatingunits.
Recoverableamountisdefinedasthehigheroffairvaluelesscoststosellandvalue-in-use.Inassessingvalue-in-use,theestimatedfuturecashflowsarediscountedtotheirpresentvalueusingapre-taxdiscountratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheasset.
Cash-generatingunitsaredefinedasthebusinessunitsofVanderbijlparkWorks,NewcastleWorks,SaldanhaWorks,VereenigingWorksandCokeandChemicals.Recoverableamountinthecontextofthesecashgeneratingunitsisdefinedastheenterprisevaluecomputedusingadiscountedcashflowmethodologybasedonthelatestbudgetsandforecasts.Iftherecoverableamountofanasset(orcash-generatingunit)isestimatedtobelessthanitscarryingamount,thecarryingamountoftheasset(cash-generatingunit)isreducedtoitsrecoverableamount.Animpairmentlossisrecognisedimmediatelyinprofitorloss,unlesstherelevantassetiscarriedatarevaluedamount,inwhichcasetheimpairmentlossistreatedasarevaluationdecrease.
Whereanimpairmentlosssubsequentlyreverses,thecarryingamountoftheasset(cash-generatingunit)isincreasedtotherevisedestimateofitsrecoverableamount,butsothattheincreasedcarryingamountdoesnotexceedthecarryingamountthatwouldhavebeendeterminedhadnoimpairmentlossbeenrecognisedfortheasset(cash-generatingunit)inprioryears.Areversalofanimpairmentlossisrecognisedimmediatelyinprofitorloss,unlesstherelevantassetiscarriedatarevaluedamount,inwhichcasethereversalistreatedasarevaluationincrease.
3.17 Financialassets Financialassetsarerecognisedandderecognisedonthetradedatewherethepurchaseorsaleoftheassetisunder
acontractwhosetermsrequiredeliverywithinthetimeframeestablishedbythemarketconcerned.Theseassetsareinitiallymeasuredatfairvalue,netoftransactioncostsexceptforthosefinancialassetsclassifiedasatfairvaluethroughprofitorloss(FVTPL),whichareinitiallymeasuredatfairvalue.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.17 Financialassetscontinued Financialassetsareclassifiedintothefollowingspecifiedcategories: • financialassetsasat“fairvaluethroughprofitorloss”(FVTPL); • “held-to-maturity”investments; • “available-for-sale”(AFS)financialassets;and • “loansandreceivables”.
Theclassificationdependsonthenatureandpurposeofthefinancialassetsandisdeterminedatthetimeofinitialrecognition.
Effective interest method for financial assets Theeffectiveinterestmethodisamethodofcalculatingtheamortisedcostofafinancialassetandofallocating
interestincomeovertherelevantperiod.Theeffectiveinterestrateistheratethatexactlydiscountsestimatedfuturecashreceiptsthroughtheexpectedlifeofthefinancialasset,orwhereappropriate,ashorterperiod.
IncomeisrecognisedonaneffectiveinterestbasisfordebtinstrumentsotherthanthosedesignatedasatFVTPL.
Financial assets at FVTPL FinancialassetsareclassifiedasatFVTPLwherethefinancialassetiseither: • held-for-trading;or • designatedasatFVTPL.
Afinancialassetisclassifiedasheld-for-tradingif: • ithasbeenacquiredprincipallyforthepurposeofsellinginthenearfuture; • itisapartofanidentifiedportfoliooffinancialinstrumentsthatthegroupandcompanymanagetogetherand
hasarecentactualpatternofshort-termprofit-taking;or • itisaderivativethatisnotdesignatedandeffectiveasahedginginstrument.
Whenaderivativethatwaspreviouslydesignatedasaneffectivehedginginstrumentnolongerqualifiesassuch,orwhenaderivativebecomesadesignatedandeffectivehedginginstrumentwithinahedgerelationship,suchcircumstancesarenotconsideredtobereclassificationintooroutofFVTPLintermsofthegeneralprohibitiononreclassificationsintoandoutofthiscategory.
Afinancialassetotherthanafinancialassetheld-for-trading,maybedesignatedasatFVTPLuponinitialrecognitionif:
• suchdesignationeliminatesorsignificantlyreducesameasurementorrecognitioninconsistencythatwouldotherwisearise;
• thefinancialassetformspartofagroupoffinancialassetsorfinancialliabilitiesorboth,whichismanaged,anditsperformanceevaluated,onafairvaluebasis,inaccordancewiththegroup’sandcompany’sdocumentedriskmanagementorinvestmentstrategy,andinformationaboutthegroupingisprovidedinternallyonthatbasis;
• itformspartofacontractcontainingoneormoreembeddedderivatives,andIAS39,Financial Instruments: Recognition and Measurementpermitstheentirecombinedcontract(assetorliability)tobedesignatedasatFVTPL;or
• itisabifurcatedembeddedderivativeseparatelymeasuredatFVTPLwherethehostcontractisnotfairvaluedasdetailedinnote3.19.
Financialassetsclassifiedasheld-for-tradingareclassifiedascurrentornon-currentdependingonthematurity
profileoftheinstrument.
FinancialassetsatFVTPLarestatedatfairvalue,withanyresultantgainorlossrecognisedinprofitorloss.Thenetgainorlossrecognisedinprofitorlossincorporatesanydividendorinterestearnedonthefinancialasset.Fairvalueisdeterminedinthemannerdescribedinnote32.3.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.17 Financialassetscontinued Held-to-maturity investments Securitiesandsimilarinstrumentswithfixedordeterminablepaymentsandfixedmaturitydatesthatthegroupand
companyhavethepositiveintentandabilitytoholdtomaturityareclassifiedasheld-to-maturityinvestments.
Held-to-maturityinvestmentsarerecordedatamortisedcostusingtheeffectiveinterestmethodlessimpairment,withrevenuerecognisedonaneffectiveyieldbasis.
AFS financial assets Listedsharesandsimilarsecuritiesheldbythegroupandcompanythataretradedinanactivemarketareclassified
asbeingAFSandarestatedatfairvalue.Fairvalueisdeterminedinthemannerdescribedinnote33.3.
GainsandlossesarisingfromchangesinfairvaluearerecogniseddirectlyinequityintheAFSinvestmentsreserve,withtheexceptionofimpairmentlosses,interestcalculatedusingtheeffectiveinterestmethodandforeignexchangegainsandlossesonmonetaryassets,whicharerecogniseddirectlyinprofitorloss.Wheretheinvestmentisdisposedoforisdeterminedtobeimpaired,thecumulativegainorlosspreviouslyrecognisedintheAFSinvestmentsreserveisincludedinprofitorlossfortheperiod.
DividendsonAFSequityinstrumentsarerecognisedinprofitorlosswhenthegroup’sandcompany’srighttoreceivepaymentisestablished.
ThefairvalueofAFSmonetaryassetsdenominatedinaforeigncurrencyisdeterminedinthatforeigncurrencyandtranslatedatthespotrateatthestatementoffinancialpositiondate.Thechangeinfairvalueattributabletotranslationdifferencesthatresultfromachangeinamortisedcostoftheassetisrecognisedinprofitorloss,andotherchangesarerecognisedinequity.
ThemovementintheAFSinvestmentreserveisdetailedinthestatementofcomprehensiveincomeandstatementofchangesinequity.
Loans and receivables Tradereceivables,loans,andotherreceivablesthathavefixedordeterminablepaymentsthatarenotquotedinan
activemarketareclassifiedas“loansandreceivables”.Loansandreceivablesaremeasuredatamortisedcostusingtheeffectiveinterestmethodlessanyimpairment.Interestincomeisrecognisedbyapplyingtheeffectiveinterestrate,exceptforshort-termreceivableswheretherecognitionofinterestwouldbeimmaterial.
Financial guarantee contracts held IAS39,Financial Instruments: Recognition and Measurement,doesnotprescribetheaccountingfortheholderofa
financialguaranteecontract.Thegroupandcompanyhaveconcludedthatitisreasonabletoadoptanaccountingpolicythatissymmetricaltothatappliedforfinancialguaranteecontractsissued.
Suchcontractsareinitiallyrecognisedatfairvalue,andsubsequentlyrecognisedatthehigherofamortisationoftheinitialfairvalue,andtheamountthatcanberecordedasacontingentassetunderIAS37,Provisions, Contingent Liabilities and Contingent Assets.
Reclassifications Asnotedabove,movementsintoandoutoftheFVTPLcategoryoccurwhereaderivativecommencesorceases
toqualifyasahedginginstrumentincashflowornetinvestmenthedge.
Voluntarilyreclassificationmaybemadeofafinancialassetinthefollowinginstancesifthefinancialassetisnolongerheldforthepurposeofsellingorrepurchasinginthenearterm.
• Financial assets(otherthanthosethatwouldhavemetthedefinitionofloansandreceivables):Afinancialassetmaybereclassifiedfromheld-for-tradingtoanotherfinancialassetcategoryonlyinextremelyrarecircumstances.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.17 Financialassetscontinued Reclassifications continued • Loans and receivables:Assetsthatwereclassifiedasheld-for-tradingorasAFSthatwouldhavemetthe
definitionofloansandreceivablesoninitialrecognitioncanbereclassifiedtotheloansandreceivablescategoryifthegroupandcompanyhaveboththeintentionandabilitytoholdthefinancialassetfortheforeseeablefutureoruntilmaturity.
• Restrictions on reclassification:DerivativesandfinancialassetsthatweredesignatedatFVTPLuponinitialrecognitioncannotbereclassified.Financialinstrumentsmaynotbereclassifiedtoeitherheld-for-tradingorbedesignatedtobecarriedatFVTPLafterinitialrecognitionorreclassification.
• Measurement:Allreclassifiedfinancialassetsaremeasuredattheirfairvalueonthedateofreclassification.Thefairvalueofthosefinancialassetsbecomesthestartingfairvalueoramortisedcostfortheinstrument’snewfinancialinstrumentcategoryonthedateofreclassification.Gainsorlossesthatwerealreadyrecognisedinprofitorlossinrespectofheld-for-tradingfinancialassetsarenotbereversed.
• Subsequent increases in recoverability of cash receipts:Whereafinancialassetisreclassifiedasaloanandreceivableasenvisagedaboveandthegroupandcompanysubsequentlyincreasestheirestimatesoffuturecashreceiptsasaresultofincreasedrecoverabilityofthosecashreceipts,theeffectofthatincreaseisrecognisedasanadjustmenttotheeffectiveinterestratefromthedateofthechangeinestimateratherthanasanadjustmenttothecarryingamountoftheassetatthedateofthechangeinestimate.
Impairment of financial assets Financialassets,otherthanthoseatFVTPL,areassessedforindicatorsofimpairmentateachstatementoffinancial
positiondate.
Financialassetsareimpairedwherethereisobjectiveevidencethat,asaresultofoneormoreeventsthatoccurredaftertheinitialrecognitionofthefinancialasset,theestimatedfuturecashflowsoftheinvestmenthavebeenimpacted.Forfinancialassetscarriedatamortisedcost,theamountoftheimpairmentisthedifferencebetweentheasset’scarryingamountandthepresentvalueoftheestimatedfuturecashflows,discountedattheoriginaleffectiveinterestrate,wheretheimpactofdiscountingissignificant.
Thecarryingamountofallfinancialassetsisreduceddirectlybyanyimpairmentlosswiththeexceptionoftradeandotherreceivableswherethecarryingamountisreducedthroughtheuseofanallowancefordoubtfuldebtsaccount.
Whenatradereceivableisuncollectible,itiswrittenoffagainstthisallowanceaccount.Subsequentrecoveriesofamountspreviouslywrittenoffarecreditedagainsttheallowanceaccount.Changesinthecarryingamountoftheallowanceaccountarerecognisedinprofitorloss.
Otherallowancesagainsttradereceivablesrelatetocomplaintsandsettlementdiscount.
Increasesordecreasesintradeandotherreceivableallowancesthataffectprofitorloss,arereflectedintheincomestatementlineitem“otheroperatingexpenses”.
WiththeexceptionofAFSequityinstruments,ifinasubsequentperiod,theamountoftheimpairmentlossdecreasesandthedecreasecanberelatedobjectivelytoaneventoccurringaftertheimpairmentwasrecognised,thepreviouslyrecognisedimpairmentlossisreversedthroughprofitorlosstotheextentthatthecarryingamountoftheinvestmentatthedatetheimpairmentisreversed,doesnotexceedwhattheamortisedcostwouldhavebeenhadtheimpairmentnotbeenrecognised.
ForAFSequityinvestments,anyincreaseinfairvaluesubsequenttoanimpairmentlossisrecogniseddirectlyinequity.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.18 Financialliabilitiesandequityinstrumentsissuedbythegroupandcompany Classification as debt or equity Debtandequityinstrumentsareclassifiedaseitherfinancialliabilitiesorasequityinaccordancewiththesubstance
ofthecontractualarrangement. Equity instruments Anequityinstrumentisanycontractthatevidencesaresidualinterestintheassetsofanentityafterdeducting
allofitsliabilities.Equityinstrumentsarerecordedattheproceedsreceived,netofdirectissuecosts.Theseinstrumentsinclude:
• Puttableinstrumentsthataresubordinatetoallotherclassesofinstrumentsandthatentitletheholdertoapro ratashareofthecompany’snetassetsintheeventoftheissuingcompany’sliquidation.
• Instruments,orcomponentsofinstruments,thataresubordinatetoallotherclassesofinstrumentsandthatimposeonthecompanyanobligationtodelivertoanotherpartyapro ratashareofthenetassetsofthecompanyonlyonliquidation.
Compound instruments Thecomponentpartsofcompoundinstrumentsareclassifiedseparatelyasfinancialliabilitiesandequityin
accordancewiththesubstanceofthecontractualarrangement.Atthedateofissue,thefairvalueoftheliabilitycomponentisestimatedusingtheprevailingmarketinterestrateforasimilarnon-convertibleinstrument.Thisamountisrecordedasaliabilityonanamortisedcostbasisuntilextinguisheduponconversionorattheinstrument’smaturitydate.Theequitycomponentisdeterminedbydeductingtheamountoftheliabilitycomponentfromthefairvalueofthecompoundinstrumentasawhole.Thisisrecognisedandincludedinequity,netofincometaxeffects,andisnotsubsequentlyre-measured.
Financial guarantee contract liabilities Financialguaranteecontractliabilitiesaremeasuredinitiallyattheirfairvaluesandaresubsequentlymeasuredatthe
higherof: • theamountoftheobligationunderthecontract,asdeterminedinaccordancewithIAS37,Provisions,
Contingent Liabilities and Contingent Assets;and • theamountinitiallyrecognisedless,whereappropriate,cumulativeamortisationrecognisedinaccordancewith
therevenuerecognitionpoliciessetoutinnote3.29.
Financialguaranteecontractsincludefinancialstand-bylettersofcreditbutexcludecommerciallettersofcredit.Thelatteraredocumentsissuedbyafinancialinstitutiononbehalfofitsclientauthorisingathirdpartytodrawamountsontheinstitutionuptoastipulatedamountandwithspecifiedtermsandconditions.
IAS39,Financial Instruments: Recognition and Measurement,doesnotcontainexemptionsforfinancialguaranteecontractsissuedbetweenparents,subsidiariesorotherentitiesundercommoncontrol.Therefore,thosecontractsissuedbythecompanyinfavourofitssubsidiariesarereflectedonlyintheentity-ownaccountsofcompany.
Financial liabilities FinancialliabilitiesareclassifiedaseitherfinancialliabilitiesatFVTPLorotherfinancialliabilities. (i) Financial liabilities at FVTPL FinancialliabilitiesareclassifiedasatFVTPLwherethefinancialliabilityiseitherheld-for-tradingoritis
designatedasatFVTPL. Afinancialliabilityisclassifiedasheld-for-tradingif: – ithasbeenincurredprincipallyforthepurposeofrepurchasinginthenearfuture; – itisapartofanidentifiedportfoliooffinancialinstrumentsthatthecompanyandgroupmanagestogether
andhasarecentactualpatternofshort-termprofit-taking;or – itisaderivativethatisnotdesignatedandeffectiveasahedginginstrument.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.18 Financialliabilitiesandequityinstrumentsissuedbythegroupandcompanycontinued Financial liabilities continued Afinancialliabilityotherthanafinancialliabilityheld-for-tradingmaybedesignatedasatFVTPLuponinitial
recognitionif: – suchdesignationeliminatesorsignificantlyreducesameasurementorrecognitioninconsistencythatwould
otherwisearise; – thefinancialliabilityformspartofagroupoffinancialassetsorfinancialliabilitiesorboth,whichismanagedand
itsperformanceisevaluatedonafairvaluebasis,inaccordancewiththecompany’sandgroup’sdocumentedriskmanagementorinvestmentstrategy,andinformationaboutthegroupingisprovidedinternallyonthatbasis;
– itformspartofacontractcontainingoneormoreembeddedderivatives,andIAS39,Financial Instruments: Recognition and Measurement,permitstheentirecombinedcontract(assetorliability)tobedesignatedasatFVTPL;or
– itisabifurcatedembeddedderivativeseparatelymeasuredatFVTPLwherethehostcontractisnotfairvaluedasdetailedinnote3.19.
FinancialliabilitiesatFVTPLarestatedatfairvalue,withanyresultantgainorlossrecognisedinprofitorloss.Thenetgainorlossrecognisedinprofitorlossincorporatesanyinterestpaidonthefinancialliability.Fairvalueisdeterminedinthemannerdescribedinnote32.3.
(ii) Other financial liabilities Otherfinancialliabilities,includingborrowingsandfinanceleaseobligationsareinitiallymeasuredatfairvalue,
netoftransactioncosts.
Otherfinancialliabilitiesaresubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod,withinterestexpenserecognisedonaneffectiveyieldbasis.
Effective interest method for financial liabilities Theeffectiveinterestmethodisamethodofcalculatingtheamortisedcostofafinancialliabilityandofallocating
interestexpenseovertherelevantperiod.Theeffectiveinterestrateistheratethatexactlydiscountsestimatedfuturecashpaymentsthroughtheexpectedlifeofthefinancialliability,orwhereappropriate,ashorterperiod.
3.19 Derivativefinancialinstruments Thegroupandcompanyenterintoavarietyofderivativefinancialinstrumentstomanageexposuretocommodity
pricerisk,foreignexchangeraterisk,andfreightraterisk,including: • cash-settledover-the-counterbasemetalforwardpurchaseandoptioncontracts; • cash-settledover-the-counterforeignexchangeforwardandoptioncontracts;and • embeddedderivativefeaturesinhighlyselectivehostprocurementcontracts.
Furtherdetailsofderivativefinancialinstrumentsaredisclosedinnote22tothefinancialstatements.
Derivativesareinitiallyrecognisedatfairvalueatthedateaderivativecontractisenteredintoandaresubsequentlyre-measuredtotheirfairvalueateachstatementoffinancialpositiondate.Theresultinggainorlossisrecognisedinprofitorlossimmediatelyunlessthederivativeisdesignatedandeffectiveasahedginginstrument,inwhicheventthetimingoftherecognitioninprofitorlossdependsonthenatureofthehedgerelationship.
Thegroupandcompanydesignatecertainderivativesaseitherhedgesofthefairvalueofrecognisedassetsorliabilitiesorfirmcommitments(fairvaluehedges),orhedgesofhighlyprobableforecasttransactionsorhedgesofforeigncurrencyriskoffirmcommitments(cashflowhedges).
Thefairvalueofhedgingderivativesisclassifiedasanon-currentassetoranon-currentliabilityiftheremainingmaturityofthehedgerelationshipismorethan12monthsandasacurrentassetoracurrentliabilityiftheremainingmaturityofthehedgerelationshipislessthan12months.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.19 Derivativefinancialinstrumentscontinued Derivativesnotdesignatedintoaneffectivehedgerelationshipareclassifiedasheld-for-tradingatFVTPLas
detailedinnote3.17and3.18.
Bifurcated embedded derivatives Derivativesembeddedinotherfinancialinstrumentsorotherhostcontractsaretreatedasseparatederivatives
whentheirrisksandcharacteristicsarenotcloselyrelatedtothoseofthehostcontractsandthehostcontractsarenotmeasuredatfairvaluewithchangesinfairvaluerecognisedinprofitorloss.BifurcatedembeddedderivativesareclassifiedasfinancialassetsorliabilitiesatFVTPLasdetailedinnote3.17and3.18.
Hedge accounting Thegroupandcompanydesignatecertainstand-alonehedginginstrumentstransactedtoeconomicallymitigate
commoditypriceriskandforeigncurrencyriskaseithercashflowhedgesorfairvaluehedges.
Generallyhedgesof: • TheUSDcommoditypriceriskofhighlyprobableforecastbasemetalpurchasetransactions;and • Theforeignexchangeriskofhighlyprobableforecastexportsteelsaletransactions,areaccountedforascash
flowhedges.
Theforward,asopposedtothespotrate,isdesignatedasthehedgedrisk.
Attheinceptionofthehedgerelationshiptherelationshipbetweenthehedginginstrumentandhedgeditemisdocumented,alongwithitsriskmanagementobjectivesanditsstrategyforundertakingvarioushedgetransactions.Furthermore,attheinceptionofthehedgeandonanongoingbasis,itisdocumentedwhetherthehedginginstrumentthatisusedinahedgingrelationshipishighlyeffectiveinoffsettingchangesincashflowsorfairvaluesofthehedgeditem.
Whenoptionsaredesignatedashedginginstruments,theoptioninitsentiretywouldbedesignatedasahedgeinstrumentofaone-sidedriskarisingfromaforecasttransaction,resultinginhedgeineffectiveness.
Hedgerelationshipsaredesignatedbythecentraltreasuryfunctionbetweenexternallytransactedhedginginstrumentsandtheinternalbusinessunitorsubsidiaryexposedtothehedgedrisk.Thehedgessodesignatedqualifyforhedgeaccountingintheentity-ownaccountsofthecompanyandsubsidiarycompanies(asapplicable),andthegroupaccounts.
Notes22and32containdetailsofthefairvaluesofthederivativeinstrumentsusedforhedgingpurposes.
Movementsinthecashflowhedgingreserveinequityaredetailedinthestatementofcomprehensiveincomeandthestatementofchangesinequity.
Cash flow hedges Theeffectiveportionofchangesinthefairvalueofderivativesthataredesignatedandqualifyascashflowhedges
aredeferredinequity.Thegainorlossrelatingtotheineffectiveportionisrecognisedimmediatelyinprofitorloss.
Amountsdeferredinequityarerecycledinprofitorlossintheperiodswhenthehedgeditemisrecognisedinprofitorloss.Whentheforecasttransactionthatishedgedresultsintherecognitionofanon-financialassetoranon-financialliability,thegainsandlossesremaininequityandarenotincludedintheinitialmeasurementofthecostoftheassetorliability.Thedeferredgainsandlossesareonlyrecycledtotheincomestatementwhentheforecasttransaction,throughitsrecognitionasapurchaseorsale,isultimatelyrecognisedinprofitorloss.Therecycledgainsandlossesarerecognisedasacomponentofrevenueandcostofsales,asappropriate.
Forcashflowhedgerelationshipdesignationpurposes,theunderlyinghedgeitemismodelledusingthehypotheticalderivativemethodonaone-to-one(onehedginginstrumenttoonehedgeditem)basis.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.19 Derivativefinancialinstrumentscontinued Cashflowhedgeeffectivenessisassessedusingthehypotheticalderivativemethod,asfollows: • USDbasemetalhedgingrelationships:regressionanalysisusingtheparameters: – Coefficientofdetermination:R2>0.8 – Slope:0.8-1.25 – Statisticalsignificance:F-test>0.95 • Foreignexchangehedgingrelationshipcontracts:dollaroff-setmethodinthe0.8to1.25range.
Ineffectivenessismeasuredastheabsoluteamountbywhichthechangeinthefairvalueofthehedginginstrumentexceededthechangeinthefairvalueofthehedgeditem,modelledasahypotheticalderivative.
Hedgeaccountingisdiscontinuedwhenthehedgingrelationshipisrevoked,thehedginginstrumentexpiresorissold,terminated,orexercised,ornolongerqualifiesforhedgeaccounting.Anycumulativegainorlossdeferredinequityatthattimeremainsinequityandisrecognisedwhentheforecasttransactionisultimatelyrecognisedinprofitorloss.Whenaforecasttransactionisnolongerexpectedtooccur,thecumulativegainorlossthatwasdeferredinequityisrecognisedimmediatelyinprofitorloss.
Inflationishedgedintheinstancewherechangesininflationareacontractually-specifiedportionofcashflowsofarecognisedfinancialinstrument.
Fair value hedges Changesinthefairvalueofderivativesthataredesignatedandqualifyasfairvaluehedgesarerecordedinprofit
orlossimmediately,togetherwithanychangesinthefairvalueofthehedgeditemthatisattributabletothehedgedrisk.
Hedgeaccountingisdiscontinuedwhenthehedgingrelationshipisrevoked,thehedginginstrumentexpiresorissold,terminated,orexercised,ornolongerqualifiesforhedgeaccounting.Theadjustmenttothecarryingamountofthehedgeditemarisingfromthehedgedriskisamortisedtoprofitorlossfromthatdate.
Theeffectivenessoffairvaluehedgingrelationshipsareassessedusingthedollaroff-setmethodinthe0.8to1.25range.
Forfairvaluehedging,thehedgeditemmaybeasingleassetorliabilityoraportfolioofsimilarassetsorliabilities.
Ifsimilarassetsorsimilarliabilitiesareaggregatedandhedgedasaportfolio,theindividualassetsorindividualliabilitiesmustsharetheriskexposureforwhichtheyaredesignatedasbeinghedged.Thechangeinfairvalueattributabletothehedgedriskforeachindividualiteminahedgedportfoliomustbeexpectedtorespondinagenerallyproportionatemannertotheoverallchangeinfairvalueoftheaggregateportfolioattributabletothehedgedrisk.Thegroup’sandcompany’sinterpretationof“approximatelyproportional”isthatfairvaluechangesintheamountsofindividualitemscomposingtheportfoliomustbewithina90%to110%ofthefairvaluechangesinaverageportfolio.
3.20 Inventories Inventoriesarestatedatthelowerofcostandnetrealisablevalue.Costisdeterminedusingthefirst-in,first-
out(FIFO)method.Rawmaterialinventoriesaremeasuredusingthestandardcostmeasurementformula,whichapproximatesactualcost.Consumablestoresinventoryaremeasuredusingamovingaveragecostformula.
Rawmaterialsandconsumablestoreinventoryarecarriedatcostinclusiveoffreight,shippingandhandlingcosts.
Thecostoffinishedgoodsandwork-in-progresscomprisesrawmaterials,directlabour,otherdirectcostsandrelatedproductionoverheadsbasedonnormaloperatingcapacityincurredinbringingtheinventoriestotheirpresentlocationandcondition.Itexcludesborrowingcosts.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.20 Inventoriescontinued Forfinishedgoodsinventorydestinedforoverseasexportsale,thedistributionandhandlingcoststotheport
ofsale,arecapitalisedasinventorialcost.Distributionandhandlingcostsincurredaftertherisksandrewardsofownershiphavepassed,arenot.
Costsofinventoriesexcludethetransferfromequityofanygains/lossesonqualifyingcashflowhedgesforthepurchaseofbasemetals.
Forfinishedsteelinventory,netrealisablevalue(NRV)istheestimatedsellingpriceintheordinarycourseofbusiness,lessapplicablevariablesellingexpenses.NRVcalculationsarerolledbackfromfinishedgoodinventoriestofurtherencompasswork-in-progressandrawmaterialinventories.Sparepartsandconsumablestoreitemsareassessedforobsolescence.
3.21 Tradeandotherreceivables Tradeandotherreceivablesarerecognisedinitiallyatfairvalueandsubsequentlymeasuredatamortisedcostusing
theeffectiveinterestratemethod,lessprovisionforimpairment.
Aprovisionforimpairmentfortradeandotherreceivablesisestablishedwhenthereisobjectiveevidencethatthegroupandcompanywillnotbeabletocollectallamountsdueaccordingtotheoriginaltermsofthereceivables.
Significantfinancialdifficultiesofthedebtor,probabilitythatthedebtorwillenterbankruptcyorfinancialreorganisationanddefaultordelinquencyinpaymentsareconsideredindicatorsthatthetradereceivableisimpaired.Theamountoftheprovisionisthedifferencebetweentheasset’scarryingamountandthepresentvalueofestimatedfuturecashflows,discountedattheoriginaleffectiveinterestrate,wheresignificant.
Theimpairmentoftradeandotherreceivablesisdescribedinnote3.17.
3.22 Cashandcashequivalents Cashandcashequivalentsincludescashonhand,depositsheldoncallwithbanksandothershort-termhighlyliquid
investmentswithoriginalmaturitiesofthreemonthsorless,whicharesubjecttoaninsignificantriskofchangesinvalue.
3.23 Statedcapital Equityinstrumentsissuedbythecompanyandgroupareclassifiedaccordingtothesubstanceofthecontractual
arrangementsenteredintoandthedefinitionsofanequityinstrument.Anequityinstrumentisanycontractthatevidencesaresidualinterestintheassetsofthecompanyandgroupafterdeductingallliabilities.
Ordinarysharesareclassifiedasequity.
Incrementalcostsdirectlyattributabletotheissueofnewsharesoroptionsareshowninequityasadeduction,netoftaxeffects,fromtheproceeds.
Whereanygroupcompany(includingtheManagementsharetrust)purchasesthecompany’sequitysharecapital(treasuryshares),theconsiderationpaid,includinganydirectlyattributableincrementalcosts(netofincometaxes),isrecognisedinanequityreserveattributabletothecompany’sequityholdersuntilthesharesarecancelledorreissued.Wheresuchsharesaresubsequentlyreissued,anyconsiderationreceived(netofanydirectlyattributableincrementaltransactioncostsandtherelatedincometaxeffects)isincludedinequityattributabletothecompany’sequityholders.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.23 Statedcapitalcontinued Whenathirdpartyfinancialinstitutionisusedtobuybacksharesofthecompanyinthemarket,whetherthatparty
isactingasprincipaloragent,hasanimpactontheaccountingtreatmentofsuchapurchase: • Ifactingasagent,onlywhensharesareacquiredbythethirdpartywilltheacquiringgroupcompanyrecognise (i)afinancialliabilitytopaythethirdparty,and(ii)adebittoequityforthesharestobedelivered,being
treasuryshares. • Ifactingasprincipal,theacquiringgroupcompanywillrecogniseoncontractingwiththethirdparty(i)thegross
obligationbeingthepresentvalueofthemaximumamountthegroupcompanycouldberequiredtopaythethirdparty,and(ii)adebittoequity.Changesinthepresentvalue(duetotheunwindingofthediscountrateorchangesintheshareprice(unlesscapped))willberecognisedinprofitorloss.Aspurchasesaremaderesultinginpaymentstothethirdparty,theliabilitywillbereduced.Attheendoftheprogrammeanyremainingliabilitywillbederecognised,withacredittoequity,assumingthefullobligationinitiallyrecognisedisnotutilised.
Capitaldistributionstoshareholdersthroughcapitalreductionprogrammesarecreditedagainststatedcapital.Incometaxconsequencesofsuchandsimilartransactionsarechargedtoprofitorlossandnotstatedcapital.
3.24 Tradeandotherpayables Tradeandotherpayablesareinitiallymeasuredatfairvalue,andaresubsequentlymeasuredatamortisedcost,using
theeffectiveinterestratemethod.
3.25 Borrowings Borrowingsarerecognisedinitiallyatfairvalue,netoftransactioncostsincurred.Borrowingsaresubsequently
statedatamortisedcost;anydifferencebetweentheproceeds(netoftransactioncosts)andtheredemptionvalueisrecognisedintheincomestatementovertheperiodoftheborrowingsusingtheeffectiveinterestratemethod.
Borrowingsareclassifiedascurrentliabilitiesunlessthegroupandcompanyhaveanunconditionalrighttodefersettlementoftheliabilityforatleast12monthsafterthestatementoffinancialpositiondate.
3.26 Deferredincometax Deferredincometaxisprovidedinfull,usingtheliabilitymethod,ontemporarydifferencesarisingbetweenthetax
basesofassetsandliabilitiesandtheircarryingamountsinthegroupfinancialstatements.However,thedeferredincometaxisnotaccountedforifitarisesfrominitialrecognitionofanassetorliabilityinatransactionotherthanabusinesscombinationthatatthetimeofthetransactionaffectsneitheraccountingnortaxableprofitorloss.
Deferredincometaxisdeterminedusingtaxratesthathavebeenenactedorsubstantiallyenactedbythestatementoffinancialpositiondateandareexpectedtoapplywhentherelateddeferredincometaxassetisrealisedorthedeferredincometaxliabilityissettled.
Deferredincometaxassetsarerecognisedtotheextentthatitisprobablethatfuturetaxableprofitwillbeavailableagainstwhichthetemporarydifferencescanbeutilised.
Deferredincometaxisprovidedontemporarydifferencesarisingoninvestmentsinsubsidiariesexceptwherethetimingofthereversalofthetemporarydifferenceiscontrolledbythegroupanditisprobablethatthetemporarydifferencewillnotreverseintheforeseeablefuture.
Deferredtaxesonmovementsinexchangedifferencesontranslationofforeignoperationstransferredtoequity,arecorrespondinglytransferredtoequitytotheextentthatsuchtransactionsrepresenttemporarydifferences.
Deferredtaxesonmovementsingainsandlossesdeferredinequityoncashflowhedgesarecorrespondinglytransferredtoequity,withoutaffectingthetaxchargeintheincomestatement.
92 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.27 Employeebenefits Short-term employee benefits Servicesrenderedbyemployeesduringanaccountingperiod,arerecognisedastheundiscountedamountofshort-
termemployeebenefitsexpectedtobepaidinexchangeforthatserviceasaliability,afterdeductinganyamountalreadypaid;andasanexpense,unlessincludedinthecostofinventoryorproperty,plantandequipment.Thereforethecostofallshort-termemployeebenefits,suchassalaries,bonuses,housingallowances,medicalandothercontributionsisrecognisedduringtheperiodinwhichtheemployeerenderstherelatedservice.
Bonus plans Thegroupandcompanyrecognisealiabilityandanexpenseforbonuses,basedonaformulathattakesinto
considerationcost,profit,cashgeneration,employmentequityandsafetytargets.
Short-term compensated absences Theexpectedcostofshort-termemployeebenefitsintheformofcompensatedabsencesarerecognised(i)inthe
caseofaccumulatingcompensatedabsences,whentheemployeesrenderservicethatincreasestheirentitlementtofuturecompensatedabsences;and(ii)inthecaseofnon-accumulatingcompensatedabsences,whentheabsencesoccur.Theleavepaybenefitsofthegroupandcompanyareaccumulativeinnatureandentailautomaticencashmentofthebenefitsoncetheentitlementsreachanaccumulationlimit,asmorefullydescribedinnote28.
Short term and long term distinction Short-termemployeebenefitsareemployeebenefitswhichareduetobesettledwithin12monthsaftertheend
oftheperiodinwhichtheemployeesrendertherelatedservice.Theremainingemployeebenefitsareclassifiedaslongterm.
Retirement benefits Contributionstodefinedcontributionplansarerecognisedasanexpensewhenemployeeshaverenderedservice
entitlingthemtothecontributions.
Fordefinedbenefitplans: • Thecostofprovidingbenefitsisdeterminedusingtheprojectedunitcreditmethod,withactuarialvaluations
beingcarriedoutateachstatementoffinancialpositiondate; • Actuarialgainsandlossesthatexceed10percentofthegreaterofthepresentvalueofthegroup’sand
company’sdefinedbenefitobligationandthefairvalueofplanassetsasattheendoftheprioryearareamortisedovertheexpectedaverageremainingworkinglivesoftheparticipatingemployees;
• Pastservicecostisrecognisedimmediatelytotheextentthatthebenefitsarealreadyvested,andotherwiseisamortisedonastraight-linebasisovertheaverageperioduntilthebenefitsbecomevested;
• Aplanamendmentthatresultsinachangeintheextenttowhichbenefitpromisesareaffectedbyfuturesalaryincreasesisacurtailment,whileanamendmentthatchangesbenefitsattributabletopastservicegivesrisetoanegativepastservicecostifitresultsinareductioninthepresentvalueofthedefinedbenefitobligation;
• Administrationcostsareincludedinfullinmeasuringthedefinedbenefitobligation;and • Thegroup’sandcompany’sobligationtomakegoodfundingshortfallsintheplansisdisclosedinnote34.
Onlyobligationsrecognisedinthestatementoffinancialpositionrepresentsthepresentvalueofthedefinedbenefitobligationasadjustedforunrecognisedactuarialgainsandlossesandunrecognisedpastservicecost,andasreducedbythefairvalueofplanassets.Anyassetresultingfromthiscalculationislimitedtounrecognisedactuariallossesandpastservicecost,plusthepresentvalueofavailablerefundsandreductionsinfuturecontributionstotheplan.
Unconditionalrightstoarefundarerecognisedasanassetandmeasuredastheamountofthesurplusatthestatementoffinancialpositiondate.Thisamountisthefairvalueoftheplanassetslessthepresentvalueofthedefinedbenefitobligation,lessanyassociatedcosts,suchastaxes.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.27 Employeebenefitscontinued Retirement benefits continued Intheabsenceofaminimumfundingrequirement,theeconomicbenefitsavailableasareductioninfuture
contributionsarethepresentvalueofthefutureservicecost(excludingcostsbornebyemployees)over(i)theshorteroftheexpectedlifeoftheplan;and(ii)theexpectedlifeoftheentitydeterminedusingassumptionsconsistentwiththoseusedtodeterminethedefinedbenefitobligation(includingthediscountrate);andbasedonconditionsthatexistatthestatementoffinancialpositiondate.
Medical benefits Nocontributionsaremadetothemedicalaidofretiredemployees,exceptforaclosedgroupofearlyretirees
inrespectofwhomcontributionsaremade.Thepresentvalueofthepost-retirementmedicalaidobligation(asdetailedinnote28)forsuchearlyretirementsisactuariallydeterminedannuallyontheprojectedunitcreditmethodandanydeficitorsurplusisimmediatelyrecognisedinprofitorloss.
Termination benefits Terminationbenefitsarepayablewheneveranemployee’semploymentisterminatedbeforethenormalretirement
dateorwheneveranemployeeacceptsvoluntaryredundancyinexchangeforthesebenefits.
Thegroupandcompanyrecogniseterminationbenefitswhenitisdemonstrablycommittedtoeither: • Terminatetheemploymentofcurrentemployeesaccordingtoadetailedformalplanwithoutpossibility
ofwithdrawal;or • Provideterminationbenefitsasaresultofanacceptedoffermadetoencouragevoluntaryredundancyin
exchangeforthesebenefits.
Share-based compensation benefits Refertotheshare-basedpayments,note3.32.
3.28 Provisions,contingentliabilitiesandcontingentassets Provisions Provisionsforassetretirementobligations,environmentalremediationobligations,onerouscontracts,restructuring
costs,legalclaimsandsimilarobligationsarerecognisedwhen: • Apresentlegalorconstructiveobligationexistsasaresultofpastevents; • Itisprobablethatanoutflowofresourceswillberequiredtosettletheobligation;and • Theamounthasbeenreliablyestimated.
Thenature,backgroundandtreatmentofassetretirementobligationsandenvironmentalremediationprovisionsisdetailedinnote28.
Onerouscontractprovisionscompriseprimarilyofoperatingleaseterminationpenalties.
Restructuringprovisionscompriseemployeeterminationpaymentsandotherdirectlyrelatedexpenditurenotassociatedwithongoingactivities.
Provisionsarenotrecognisedforfutureoperatinglossesorforcapitalexpenditureofanenvironmentalnaturerelatingtoanoperationalfacility.
Provisionsaremeasuredatthepresentvalueoftheexpendituresexpectedtoberequiredtosettletheobligationusingapre-taxratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheobligation.
Theincreaseintheprovisionduetopassageoftimeisrecognisedasaccretionexpenseswithinfinancecharges.Changesinthediscountratearerecognisedasfinancecharges,exceptforassetretirementobligationswhicharecapitalisedtoproperty,plantandequipment.
94 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.28 Provisions,contingentliabilitiesandcontingentassetscontinued Contingent liabilities (i) Legal claims Legalclaimsareassessedusingacumulativeprobabilitymethodologyinorderto: • Determineifapresentobligationexists(recognition);and • Measuretheobligation.
Managementappliesitsjudgementtothefactpatternsandadviceitreceivesfromitsattorneys,advocatesandotheradvisers.Lossestimatesandindividualprobabilitiesofoccurringareattachedtotheidentifiedpossibleoutcomes.Acumulativeprobabilityofoccurringisdetermined,beingthecumulativesumofindividualprobabilities,wherethelossestimatesofeachpossibleoutcomearesortedindescendingorder.
Apresentobligation,classifiedasaprovision,isrecognisedasprobableandismeasuredastheestimatedlossofthatoutcomethatismorethan50%likelywhenmeasuredusingacumulativeprobabilitymethodology.
Forclaimsthatareregardedasreasonablypossible,beingbetween20%and50%whenmeasuredusingacumulativeprobabilitymethodology,thefactsandcircumstancesofthepossiblelossandanestimateoftheamount,ifdeterminable,aredisclosed.
Remoteclaims,being<20%usingacumulativeprobabilitymethodologyarenotdisclosedorprovidedfor. (ii) Financial guarantees Financialguaranteecontractliabilitiesareaccountedforasdetailedinnote3.18.Forthoseguarantees
notrecognised,thefinancialpositionofthebeneficiaryentityisassessedusingthecumulativeprobabilitymethodologydescribedaboveinordertoassesshowtheguaranteeshouldbetreated.
Contingent assets Contingentassetsarenotrecognised,butaredisclosedwhereaninflowofeconomicbenefitsisprobable.
3.29 Revenuerecognition Sale of goods Revenuecomprisesthefairvalueoftheconsiderationreceivedorreceivableforthesaleofgoodsintheordinary
courseofthegroup’sandcompany’sactivities.Revenueisshownnetofvalueaddedtax,returns,rebates,discountsand,inthecaseofthegroupaccounts,aftereliminatingsaleswithinthegroup.
Allamountsinvoicedtoacustomerinasaletransactionrelatedtodistributionandhandlingcostsareclassifiedasrevenue,withthecostsrelatedtheretoshownasdistributionandhandlingcostswithinsales,generalandadministrativeexpenses.
Thegroupandcompanyrecogniserevenuewhentheamountofrevenuecanbereliablymeasured,itisprobablethatfutureeconomicbenefitswillflowtotheentityandspecificcriteriahavebeenmetforeachofthegroup’sandcompany’sactivitiesasdescribedbelow.
Theamountofrevenueisnotconsideredtobereliablymeasurableuntilallcontingenciesrelatingtothesalehavebeenresolved.Thegroupandcompanybasesuchestimatesonhistoricalresults,takingintoconsiderationthetypeofcustomer,thetypeoftransactionandthespecificsofeacharrangement.
Salesofgoodsarerecognisedbasedontherelevantdeliverytermsatwhichpointtherisksofobsolescenceandlosshavebeentransferredtothecustomerandeitherthecustomerhasacceptedtheproductsinaccordancewiththesalescontract,orthegroupandcompanyhaveobjectiveevidencethatallcriteriaforacceptancehavebeensatisfied.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.29 Revenuerecognitioncontinued Interest income Interestincomeisrecognisedonatime-proportionbasisusingtheeffectiveinterestmethod.Whenareceivableis
impaired,thegroupandcompanyreducethecarryingamounttoitsrecoverableamount,beingtheestimatedfuturecashflowdiscountedattheoriginaleffectiveinterestrateoftheinstrument,andcontinueunwindingthediscountasinterestincome.Interestincomeonimpairedloansisrecognisedusingtheoriginaleffectiveinterestrate.
Dividend income Dividendincomeisrecognisedwhentherighttoreceivepaymentisestablished.
3.30 Operatingleases Operatingleasepaymentsarerecognisedasanexpenseonastraight-linebasisovertheleaseterm,exceptwhere
anothersystematicbasisismorerepresentativeofthetimepatterninwhicheconomicbenefitsfromtheleasedassetareconsumed.Contingentrentalsarisingunderoperatingleasesarerecognisedasanexpenseintheperiodinwhichtheyareincurredandarenotstraight-lined.
Intheeventthatleaseincentivesarereceivedtoenterintooperatingleases,suchincentivesarerecognisedasa
liability.Theaggregatebenefitofincentivesisrecognisedasareductionoftherentalexpenseonastraight-linebasis,exceptwhereanothersystematicbasisismorerepresentativeofthetimepatterninwhicheconomicbenefitsfromtheleasedassetareconsumed.
3.31 Borrowingcosts Incurredborrowingcostscalculatedinaccordancewiththeeffectiveinterestratemethodanddirectlyattributable
totheacquisition,constructionorproductionofqualifyingassets,forthoseassetsthatnecessarilytakeasubstantialperiodoftimetogetreadyfortheirintendeduseorsale,areaddedtothecostofthoseassets,untilsuchtimeastheassetsaresubstantiallyreadyfortheirintendeduseorsale.
Investmentincomeearnedonthetemporaryinvestmentofspecificborrowingspendingtheirexpenditureonqualifyingassetsisdeductedfromtheborrowingcostseligibleforcapitalisation.
Allotherborrowingcostsarerecognisedinprofitorlossintheperiodinwhichtheyareincurred.
3.32 Share-basedpayments Equity-settled share-based payments Equity-settledshare-basedpaymentstoemployeesandothersprovidingsimilarservicesaremeasuredatthefair
valueoftheequityinstrumentsatthegrantdate.
Fairvaluedeterminationofequity-settledshare-basedtransactionsismeasuredusingtheBinomialMatrixpricingmodel.Thekeyassumptionsforstaffturnoverperannum,theearly-exercisemultiple,risk-freerate,sharepricevolatilityanddividendyieldarebasedonmanagement’sbestestimatesatthedateofvaluation.ThereasonabilityofthepricingestimateissimultaneouslyassessedagainsttheBlack-Scholes-Mertonpricingmodel.
Thefairvaluedeterminedatthegrantdateoftheequity-settledshare-basedpaymentsisexpensedonastraight-linebasisoverthevestingperiod,basedonthegroup’sandcompany’sestimateofequityinstrumentsthatwilleventuallyvest.Ateachstatementoffinancialpositiondate,thegroupandcompanyrevisetheirestimateofthenumberofequityinstrumentsexpectedtovest.Theimpactoftherevisionoftheoriginalestimates,ifany,isrecognisedinprofitorlossovertheremainingvestingperiod,withacorrespondingadjustmenttotheequity-settledemployeebenefitsreserve.
Thepolicydescribedaboveisappliedtoallequity-settledshare-basedpaymentsthatweregrantedafter7November2002andvestedafter1January2005.
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Notes to the group and company annual financial statements continuedfortheyearended31December2008
3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.32 Share-basedpaymentscontinued Cash-settled share-based payments Forcash-settledshare-basedpayments,aliabilityequaltotheportionofgoodsorservicesreceivedisrecognised
asthecurrentfairvalueateachstatementoffinancialpositiondate.
Share-based payment arrangements involving equity instruments of the parent granted to employees of the subsidiary Sucharrangementsaremanifestthrough(i)share-basedpaymentrightissuesbyaparentorsubsidiarytoan
employeeofthatentity,followedbythetransferoftheemployeetoanothergroupcompany;and(ii)employeeshare-purchaseplansinvolvingequityinstrumentsoftheparentcompanyofferedtoemployeesofasubsidiarycompany.
Equity-settledshare-basedpaymentsinvolvingequityinstrumentsoftheparentgrantedtoemployeesofthesubsidiaryareaccountedforinthegroupfinancialstatementsoftheparent.Thesubsidiarymeasuretheservicesreceivedfromitsemployeesinaccordancewiththeaccountingpolicyapplicabletoequity-settledshare-basedpaymenttransactions,withacorrespondingincreaserecognisedinequityasacontributionfromtheparent.
Whereaparentmaygrantshare-basedpaymentrightstotheemployeesofitssubsidiaries,conditionaluponthecompletionofcontinuingservicewiththegroupforaspecifiedperiod,andsuchemployeestransferemploymenttoanothersubsidiaryduringthespecifiedvestingperiodwithouttheemployee’srightstoequityinstrumentsoftheparentundertheoriginalshare-basedpaymentarrangementbeingaffected,theneachsubsidiarymeasurestheservicesreceivedfromtheemployeebyreferencetothefairvalueoftheequityinstrumentsatthedatethoserightswereoriginallygrantedbytheparentandtheproportionofthevestingperiodservedbytheemployeewitheachsubsidiary.Iftherightsdonotvestbecauseofanemployee’sfailuretomeettheservicecondition,noamountisrecognisedonacumulativebasisfortheservicesreceivedfromthatemployeeinthefinancialstatementsofanysubsidiary.
Vesting conditions Vestingconditionsareserviceconditionsandperformanceconditionsonly.Otherfeaturesofashare-based
paymentarenotvestingconditions.Featuresofashare-basedpaymentthatarenotvestingconditionsareincludedinthegrantdatefairvalueoftheshare-basedpayment.Thefairvaluealsoincludesmarket-relatedvestingconditions.
Cancellations Allcancellations,whetherbythegroup,company,orbyotherparties,suchasemployeeparticipants,receive
thesameaccountingtreatment.Acancellationofequityinstrumentsisaccountedforasanaccelerationofthevestingperiod.Anyamountunrecognisedthatwouldotherwisehavebeenchargedisrecognisedimmediately.Anypaymentsmadewiththecancellationareaccountedforastherepurchaseofanequityinterest.Anypaymentinexcessofthefairvalueoftheequityinstrumentsgrantedisrecognisedasanexpenseinprofitorloss.
3.33 Governmentorparastatalgrants Grantsfromthegovernmentarerecognisedattheirfairvaluewherethereisreasonableassurancethatthegrant
willbereceivedandthegroupandcompanywillcomplywithallrequiredconditions.
Governmentgrantsrelatingtocostsaredeferredandrecognisedintheincomestatementovertheperiodnecessarytomatchthemwiththecoststhattheyareintendedtocompensate.
Governmentgrantsrelatingtoproperty,plantandequipmentareincludedinnon-currentliabilitiesasdeferredgovernmentgrantsandarecreditedtotheincomestatementonastraight-linebasisovertheexpectedlivesoftherelatedassets.
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3. SIGNIFICANTACCOuNTINGPOLICIEScontinued 3.33 Governmentorparastatalgrantscontinued Thebenefitofabelow-marketrategovernmentloanismeasuredasthedifferencebetweenthecarryingamount
inaccordancewithIAS39,Financial Instruments: Recognition and Measurementandtheproceedsreceived.Thebenefitisrecognisedintheincomestatement.
Governmentgrantsthattaketheformofbenefitsthatareavailableindeterminingtaxableincomeorare
determinedorlimitedonthebasisofincometaxliability(suchasspecialinfrastructuralprojectallowances,incometaxholidays,investmenttaxcredits,accelerateddepreciationallowancesandreducedincometaxrates)arerecognisedasareductionintaxchargeandthecorrespondingliability.
3.34 Taxation Incometaxexpenserepresentsthesumofthetaxcurrentlypayable(beingSouthAfricannormaltax),deferredtax,
andSecondaryTaxonCompanies(beingaSouthAfricantaxondividends).
Normal tax Thetaxcurrentlypayableisbasedontaxableprofitfortheyear.Taxableprofitdiffersfromprofitasreportedinthe
incomestatementbecauseitexcludesitemsofincomeorexpensethataretaxableordeductibleinotheryearsanditfurtherexcludesitemsthatarenevertaxableordeductible.Theliabilityforcurrenttaxiscalculatedusingtaxratesthathavebeenenactedorsubstantivelyenactedbythestatementoffinancialpositiondate.
Deferred income tax Refertonote3.26.
Secondary Tax on Companies (STC) – South Africa STCistreatedaspartoftheincometaxexpenseintheincomestatementfortheperiod.Itisrecognisedasan
expenseinthesameperiodastherelateddividendisaccruedasaliability.Asthelevelofdividendsmayvarybetweenreportingperiods,theresultingtaxchargeintheincomestatementmaybedisproportionatetopre-taxearnings.
Withholding tax on dividends Dividendsreceivedsubjecttowithholdingtaxareshowninclusiveofanywithholdingtax,astoshowonlythenett
amountoftheincomereceivedwhichissubjecttowithholdingtaxfailstoreflectthefullamounttaxableinthehandsofthereceivingentity.Thewithholdingtaxamountisincludedinthetaxchangeforthereportingperiod.
3.35 Dividenddistribution Dividenddistributiontothecompany’sshareholdersisrecognisedasaliabilityinthefinancialstatementsinthe
periodinwhichthedividendsareapprovedbythecompany’sboardofdirectors.
3.36 Offset Wherealegallyenforceablerightofoffsetexistsforrecognisedfinancialassetsandfinancialliabilities,andthereis
anintentiontosettletheliabilityandrealisetheassetsimultaneously,ortosettleonanetbasis,allrelatedfinancialeffectsareoffset.
3.37 Comparativefigures Whennecessary,comparativefigureshavebeenadjustedtoconformtochangesinpresentationinthecurrentperiod.
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Notes to the group and company annual financial statements continuedfortheyearended31December2008
4. CRITICALJuDGEMENTS Intheprocessofapplyingthegroup’sandcompany’saccountingpolicies,managementhasmadethefollowingjudgements
thathavethemostsignificanteffectontheamountsrecognisedinthefinancialstatements(apartfromthoseinvolvingestimation,whicharedealtwithinnote5).
4.1 Impairmentindicatorassessmentforthecarryingamountofproperty,plantandequipment IAS36,Impairment of Assets,statesthatanentityshallassessateachreportingdatewhetherthereisany
indicationthatanasset(orcash-generatingunit)maybeimpaired.Ifanysuchindicationexists,theentityisrequiredtoestimatetherecoverableamountoftheasset(orcash-generatingunit).Asaminimum,internalandexternalsourcesofinformation,asdetailedinthestandard,needtobeconsidered.Theassessmentrequiressignificantjudgementtobeapplied.
FollowingtheriskshocktoworldfinancialmarketsinSeptember2008andthewash-overintotherealeconomy,actualandforecastlocalandinternationalsteelconsumptionreduced.Asanimpairmentindicator,therecoverableamountofthecarryingamountoftheproperty,plantandequipmentandintangibleassetsofthecash-generatingunitswereassessed.Themajorcash-generatingunitsarethefivemajorbusinessunitsidentifiedinnote3.16.
Duetothehighlevelsofuncertaintyregardingthedepthandlengthofthedownturn,estimationoffuturecashflowsandgrowthratesisparticularlyjudgemental.Ofthemajorcash-generatingunits,theSaldanhaWorks,withitshighnetcarryingamountofproperty,plantandequipment,anditsexportmarketfocus,isespeciallysensitivetochangesinassumptions.Theinputsusedintheassessmentandtheassociatedsensitivitiesaredetailedinnote5.1.
Inadditiontotheassessmentofthemajorcash-generatingunits,theassessmentofsecondarycash-generatingunitsandothermajorplantfacilitiesresultedinanimpairmentchargeofR93millionandR28millionbeingrecognisedagainstthecarryingamountofproperty,plantandequipmentoftheMaputoWorksandtheDunswartDirectReductionfacilityrespectively.Theimpairmentisdescribedinnote8.
4.2 CarryingamountoftheinvestmentinHwangeCollieryCompanyLimited(HCCL) Thegroup’savailable-for-saleequityinvestmentinHCCLpertainstoanentitywhichoperatesandislistedin
Zimbabwe,ahyperinflationaryeconomywithforeigncurrencyrestrictions.On14November2008alltradingactivitiesontheZimbabweStockExchange(ZSE)ceased.OnthatdatethecarryingamountoftheinvestmentwasR76millionwithfairvaluegainsdeferredtotheavailable-for-saleinvestmentreserveofR67million.
Thefungibleconduitshareschemearrangementutilisedbythegroup’sbrokers,whichenablestherealisationofsuchinvestmentsatfairvalueviatheuseofadual-listedfungibleconduitsharearrangement,wasfurthermoresuspended.
FollowingtherequirementsofIAS39,Financial Instruments: Recognition and Measurement,thelossoftradingonanactivemarketisnotofitselfanimpairmentindicator.However,withthecessationoftrading,theequityinvestmentinHCCLiseffectivelyakintothatofanunlistedshare.ThegroupdeemeditappropriatetoapplyamarketabilitydiscountthatwouldreducethefairvaluegainsdeferredtoequitytoRnil.
Furthermore,inresponsetothesuspensionofthefungibleconduitsharearrangement,thegroupreviseditsliquidityriskassessmentindeterminingthefairvalueoftheinvestment.Asaconsequence,thefairvalueatthereportingdateisassessedasbeingRnilwiththereductioninfairvaluebelowcostbeingdeferredtoequity.OncethefungibleconduitsharearrangementisreinstatedordemonstrableevidenceexiststhattheReserveBankofZimbabwewillpermittheorderlyrepatriationofproceedsfromanypossiblefuturesaleoftheinvestment,theliquidityriskdiscountedwillberevised.Theaccountingimplicationsaremorefullydescribedinnote22.
Asensitivityanalysisapplicabletothe2007carryingamountoftheinvestmentandindicativeguidanceapplicabletothe14November2008valueisdetailedinnote32.15.
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4. CRITICALJuDGEMENTScontinued 4.3 Carryingamountofthegroup’sandcompany’sinvestmentinjointlycontrolledentity,Microsteel
(Proprietary)Limited(Microsteel) Followingthecessationofsteel-makingactivitiesatMicrosteelin2000,thecarryingamountofthegroup’sand
company’sinvestmenthadbeenfullyimpairedtoRnil.
Basedonrevisedestimatesofthefairvaluelesscost-to-sellofMicrosteel’sproperty,plantandequipment,Microsteelhasbeenabletofullyreverseanimpairmentallowanceagainstthecarryingamountofitsproperty,plantandequipment.Asaconsequence,thecarryingamountofthegroup’sandcompany’sinvestmenthasincreasedtoR36millionat31December2008(December2007:Rnil)asdescribedmorefullyinnote20andinnote14.
Thegroupandcompanyhaverecognisedforthereportingperiodended31December2008,basedonbestestimates,afundingcommitmentobligationtoMicrosteelofR3million,whichisdisclosedinthe“otheroperatingexpenses”lineitemincomestatementandasa“sundry”payableinnote30.
4.4 Consolidationofsubsidiariesandspecialpurposeentities Inassessingallitsmajorprocurement,salesandinvestmentrelationships,managementhasapplieditsjudgementin
theassessmentofwhetherthecommercialandeconomicrelationshipsaretantamounttode factocontrol.Basedonfactpatterns,materialityandqualitativerelevanceconsiderations,andmanagement’sbestjudgement,ifsuchcontrolexists,therelationship(ofcontrol)isrecognisedintermsofIAS27,Consolidated and Separate Financial Statements,andSIC-12,Consolidation – Special Purpose Entities.
Certainnon-coreservicesandcorporatesocialdevelopmentactivitiesofthegroupandcompanyaremanagedviatwoassociationsnotforgain,namely,theVescoGroupandVescoCommunityEnterprises.Whilethecompanyhasde factocontroloverbothentities,duetothemateriality,theseentitiesarenotconsolidatedwithinthegroupaccounts.
ExpensesincurredforservicesrenderedandCSI-relatedcontributionspayabletobothentitiesamountedto:
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
Servicerendered 56 49 55 49
CSI-relatedcontributions 15 7 15 7
Total 71 56 70 56
Loansandotherreceivables 2 3 2 3
Payables 21 22 21 22
Theseamountsareincludedinthe“otheroperatingexpenses”lineitemintheincomestatement.
FurtherdetailsofCSI-relatedcontributionstotheVescoGroupandVescoCommunityEnterprisesarecontainedintheArcelorMittalSouthAfricaLimitedSustainabilityReport,2008.
Nonewcontrolrelationshipshaverequiredrecognitionforthereportingperiodended31December2008.
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Notes to the group and company annual financial statements continuedfortheyearended31December2008
4. CRITICALJuDGEMENTScontinued 4.5 Classificationofacquisitionsaseitherbusinesscombinationsorassetpurchases,andthedeterminationof
thepointofinitialrecognitionofthetransaction Whereitisunclearwhetheranacquisitionconstitutesabusinesscombinationtobeaccountedforintermsof
IFRS3,Business Combinations,oranassetpurchasetobeaccountedforintermsofIAS16,Property, Plant and Equipment,managementappliesitsjudgementasfollowsindeterminingiftheacquiredassetsconstituteabusiness:
• identificationoftheelementsincludedintheacquiredsetofactivitiesandassets; • comparisonoftheassetsettoacompletesetofelementsnecessarytoconductbusiness,andidentificationof
anymissingelements;and • forthemissingelements,anassessmentismadeofthelevelofinvestment/degreeofdifficultyneededto
obtaintheseelements,withconclusionsdrawnrelativeheretoastowhethertheelementsacquiredconstituteabusiness.
Fortheyearended31December2008,ArcelorMittalSouthAfricaDistribution(Proprietary)Limitedpurchasedtheproperty,plantandequipmentofTridentSteel(Proprietary)Limited’sSaldanhafacilityforR63million.Inadditionthepurchasemakesprovisionforthere-employmentofthefacility’semployees.Thepurchasewasclassifiedasanassetpurchaseasopposedtoabusinesscombination.
Followingthemeetingoftheconditionprecedent,intheformoftheunconditionalapprovaloftheacquisitionbytheCompetitionTribunalon12December2008,thepartiesaredemonstrablyandirrevocablycommittedtothepurchase.Consequently,at31December2008,theproperty,plantandequipmentwererecognisedalongwithaliabilityforthepurchaseprice.Thepurchasepriceisexpectedtobepaidinthefirstquarterof2009oncetheformalitiesofregisteringthepropertyinthenameofthecompanyarecompleted.
4.6 Derivativeandembeddedderivativeinstruments ThegroupandcompanyfollowtheguidanceofIAS39,Financial Instruments: Recognition and Measurement,in
identifyingderivativecontractsandcontractscontainingembeddedderivatives.Otherthanforover-the-counterstand-alonederivativecontracts,mostofthegroup’sandcompany’scontractsencompassnon-financialitems.Consequently,thedeterminationastowhetheracontractisaderivativeorhostsanembeddedderivativerequiressignificantjudgement.
Inassessingifanembeddedderivativerequiresseparateidentificationandmeasurementfromthehostcontract,managementassessestheavailablefactpatternswithregardstotheimpacttheembeddedderivativeinstrumenthasontheunderlyingvalueofthehostcontract.Judgementwasappliedastowhetherthecashflowcorrelationbetweenthehostcontractandhybridinstrumentcontainingtheembeddedfeaturecouldberegardedascloselyrelated.Wherethecorrelationrelationshipwasjudgedtobeweak,theembeddedderivativeinstrumentisseparatelyrecognisedandmeasured(iebifurcated).
Insynthesisingthevalueofabifurcatedembeddedderivative,judgementisappliedashowbesttomodelthederivative,forexample,asaforward,anoptionetc.
Fortheperiodunderreview,otherthanforover-the-counterstand-alonederivatives,nonewcontractswereidentifiedthatmetthederivationofaderivative,norwereanynewembeddedderivativesidentifiedrequiringbifurcation.
Theestimationsensitivitiesaffectingthevaluationofthebifurcatedembeddedderivativearereferredtoinnote5.3andnote32.12.
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4. CRITICALJuDGEMENTScontinued 4.7 Assetretirementandenvironmentalremediationobligations Upondecommissioningofafacilityorbusinessoperation,thegroupandcompanyhavealegalobligationwith
regardstotheretirementofthefacilityandtherelatedenvironmentalremediation.Theplantremovalandhousekeepingcoststhatarenotofalegalnaturearenotprovidedforunlessadefinitiveconstructiveobligationexiststhatcanbesubjecttoobjectivemeasurementandrecognitioncriteria.ManagementapplieditsjudgementandtheadvicereceivedfromitsexternalenvironmentalexpertsinrecognisingsuchobligationsasliabilitiesintermsofIAS37,Provisions, Contingent Liabilities and Contingent Assets.
Inparticularjudgementisrequiredindistinguishingbetweenassetretirementobligations(AROs)andenvironmentalremediationobligations(EROs).Sensitivitiesinthisregardaredescribedinnote5.4.
4.8 Contingentliabilitiesanduncertaintaxationpositions Managementappliesitsjudgementtothefactpatternsandadviceitreceivesfromitsattorneys,advocatesand
otheradvisersinassessingifalossoutcomeisprobable,reasonablypossible,orremote.SuchjudgementsareusedtodetermineiftheobligationisrecognisedasaliabilityordisclosedasacontingentliabilityintermsofIAS37,Provisions, Contingent Liabilities and Contingent AssetsandIAS12,Income Taxes,whenspecificallydealingwithuncertainincometaxpositions.
Followingthe2008settlementofthetaxationdisputerelatingtotheBusinessAssistanceAgreement,noothertaxuncertaintiesexistwhichqualifyfordisclosureascontingentliabilities.
4.9 Determinationofthefunctionalcurrenciesofforeignoperations IAS21,The Effects of Changes in Foreign Exchange Rates,requiresthefunctionalcurrencyofeachindividualforeign
operationofthegrouptobethecurrencyusedintheprimaryeconomicenvironmentinwhichtheforeignoperationoperates,whichitusesprimarilytogenerateandexpendcash.Toaidthedecision,thestandarddetailsprimary,secondaryandotherindicatorstobeconsidered.
Inthemajorityofsituations,theaboveindicatorsaremixedandthefunctionalcurrencyisnotobvious.Consequentlymanagementappliesitsjudgementtodeterminethefunctionalcurrencythatmostfaithfullyrepresentstheeconomiceffectsoftheunderlyingtransactions,eventsandconditions.Priorityisgiventoprimaryindicators.
SubsidiariesandjointlycontrolledentitieswithafunctionalcurrencyotherthantheZARarenotedinAnnexure1andAnnexure2.
4.10 Distinguishingbetweenfinanceandoperatingleasesincommercialarrangementscontainingleases Oncealeaseisidentifiedasbeingembeddedwithinacommercialarrangement,theindicatorsinIAS17,Leases,
andIFRIC4,Determining whether an Arrangement contains a Lease,areassessedastowhethertheleaseiseitherafinanceoranoperatinglease.Whentheassessmentyieldsmixedresults,managementappliesitsjudgementinmakingtheclassificationbyfurtherconsidering,inter alia:
• Locationoftheasset; • Availabilityofanalternativeasset; • Costofinstallationofanalternativeasset; • Interruptiontocustomerserviceasaresultofanassetreplacement; • Futureuseofareplacedasset;and • Assetreplacementpatterns.
Nonewsignificantembeddedleasearrangementwasidentifiedduringtheyearended31December2008.
102 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
4. CRITICALJuDGEMENTScontinued 4.11 Significantinfluenceversusjointcontrol IAS31,Interests in Joint Ventures,stressesthattheaccountingtreatmentadoptedforsuchinvestments
shouldreflectthesubstanceandeconomicrealityofthearrangement,ratherthanthelegalform.Therefore,anarrangementshouldbeassessednotbyitslegalconstitution,butbytheagreementsbetweenthepartiesinvolvedastothemechanismofcontrol.
Theclassificationofaninvesteeasbeingeitheranassociateorajointlycontrolledentityrequiresanassessmentofwhethertheinvestmentinterestrepresentseithersignificantinfluenceorunanimousconsentoverthestrategicfinancialandoperatingdecisionsoftheinvestee.
Astheresultsoftheassessmentareoftenmixed,theassessmentrequiressignificantjudgementtobeapplied.
4.12 Incometaxes Thegroupandcompanyaresubjecttoincometaxesinnumerousjurisdictions.Significantjudgementisrequiredin
determiningtheworldwideprovisionforincometaxes.Determinationofincometaxesinvolvesinterpretationoftaxlaw,assessmentofinterpretationsandguidelinesissuedbytaxauthorities,interactionswiththetaxauthorities,andadvicereceivedfromexternaltaxexperts.
5. KEySOuRCESOFESTIMATIONuNCERTAINTyANDASSOCIATEDSENSITIVITIES Thefollowingarethekeyassumptionsconcerningthefuture,andotherkeysourcesofestimationuncertaintyatthe
statementoffinancialpositiondate,thathaveasignificantriskofcausingamaterialadjustmenttothecarryingamountofassetsandliabilities.
5.1 Recoverableamountdeterminationforcash-generatingunits Asdescribedinnote4.1,managementreassessedtherecoverabilityofthecarryingamountofthegroup’sand
company’sproperty,plantandequipmentwhichiscarriedatR15917millionandR9781millionrespectivelyat31December2008.
Value-in-userecoverableamountswerecomputedusingadiscountedcashflowanalysisvaryinginlengthfromfiveto20years.Terminalvaluegrowthratesvariedbetween2%and5%,withaverageddiscountratesvariedbetweenanaverageof14.9%and17.4%,and11.9%and16.8%forthefive-yearand20-yearmodellinglimits,respectively.
Thevalue-in-useamountswerefurthersubjectedtosensitivityanalysesappliedtothefollowinginputs:freecashflowgeneration,discountrates,exchangeratesandterminalvaluegrowthrates.
Fromthesensitivityanalysis,SaldanhaWorkswasparticularlyvulnerable,whenusingthefive-yeardiscountedcashflowmodel,tofreecashflowreductionsandstrongerUSD/ZARexchangerates.Inreactiontothisresult,break-evenanalysistestingwasperformedusingthe20-yearmodel,simulatingnumerousscenariosincludingceasingoperationsforayear,andotherextremeoutcomessuchassimulatingtheeventsofthe1998economiccrisis(theAsianContagion),protractedrecessionaryconditionsandafuturerepeatofacommodity“boomandbust”cyclewhichculminatedintheeventsof2008.
Followinganassessmentoftheresultsofthesensitivityanalyses,managementisconfidentthatthecarryingamountoftheassetsofallthemajorcash-generatingunitswillberecoveredinfull.
5.2 usefullivesandresidualvaluesofproperty,plantandequipmentandintangibleassets Theestimatesofremainingusefullivesastranslatedintodepreciationratesaredetailedintheproperty,plantand
equipment(note3.11),andtheintangibleassets(note3.15)accountingpolicies.
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5. KEySOuRCESOFESTIMATIONuNCERTAINTyANDASSOCIATEDSENSITIVITIEScontinued 5.2 usefullivesandresidualvaluesofproperty,plantandequipmentandintangibleassetscontinued Theseratesandtheresidualvaluesoftheassetsarereviewedannuallytakingcognisanceof: • Forecastcommercialandeconomicrealities; • BenchmarkingwithinthegreaterArcelorMittalGroup;and • Guidancereceivedfromexpertinternationalvaluers.
5.3 Valuationoffinancialinstruments Thecarryingamountofover-the-counterstand-alonederivativefinancialinstrumentsisbasedontheirfairvalue
atthestatementoffinancialpositiondate.Thevaluesofthesederivativeinstrumentsfluctuateonadailybasisandtheactualamountsrealisedmaydiffermateriallyfromthevalueatwhichtheyarereflectedatthereportingdate.Correspondingly,thematurityprofileforsuchderivatives,aspresentedinnote32.16,maybeaffectedbysuchfluctuations.
Thesignificantapplicationofestimateswasmadeinthevaluationofthebifurcatedembeddedderivativeinstrumentsandinthedeterminationofthedisclosedvaluationofunlistedequityaccountedinvestments.Theseassumptionsforbothsetsofvaluationsaredetailedinnote32.3.
Relevantsensitivitiesforthefinancialassetsandfinancialliabilitiesaredescribedinthefollowingnotes: • Stand-alonebasemetalderivatives:note32.10. • Embeddedderivative:note32.12. • AFSfinancialasset:note32.15. • Foreigncurrencyexposures:note32.11. • Interestrateexposures:note32.14.
5.4 Assetretirementobligationsandtheirrelatedassets,andenvironmentalremediationobligationestimates EstimatingthefuturecashflowsassociatedwithobligationsrecognisedintermsofIAS37,Provisions, Contingent
Liabilities and Contingent Assets,andtherelatedassetcomponentsrecognisedintermsofIAS16,Property, Plant and Equipment,iscomplex.
Existinglawsandguidelinesarenotalwaysclearastotherequiredend-statesituation.Theprovisionsarealsoaffectedbychangingtechnologiesandpolitical,environmental,safety,businessandlegalconsiderations.
Managementassesseslong-termoperationalplans,technologicalandlegislativedevelopments,guidelinesissuedbytheauthorities,advicefromexternalenvironmentalexperts,andcomputationsprovidedbyquantitysurveyorsinordertoderiveanestimatedfuturecashflowprofiletoserveasabasisforthecomputationoftheobligationsandrelatedassets.
Forthemajorityofoperationalsites,withlong-termoperatinghorizons,itisnotpossibletoreliablymeasuretheassociatedcostsofassetretirementandenvironmentalremediation.Thisisseparatelydisclosedasacontingentliability.
104 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
5. KEySOuRCESOFESTIMATIONuNCERTAINTyANDASSOCIATEDSENSITIVITIEScontinued 5.4 Assetretirementobligationsandtheirrelatedassets,andenvironmentalremediationobligationestimatescontinued Thesensitivityofthecarryingamountoftheobligationsat31December2008inresponsetochangesinkeyinputsis:
Assetretirementobligations
Rm
Environmentalremediationobligations
Rm
Carryingamountat31December2008(note28) 240 1338
%changeinallcashflows
+10% +24 +134
-10% -24 -134
%changeincashflowsinfirstfiveyears
+10% +21 +101
-10% -21 -101
Basispointchangeindiscountrate
+100basispoints -8 -56
-100basispoints +9 +59
Basispointchangeindiscountrateinfirstfiveyears
+100basispoints -5 -29
-100basispoints +6 +30
5.5 Commercialarrangementscontainingfinancialleases Anumberofcommercialsupplyarrangementshavebeendeterminedbymanagementtocontainembeddedfinance
leasesasdescribedinnote27.ForthepurposeofapplyingtherequirementsofIAS17,Leases,paymentsandotherconsiderationsrequiredbythearrangementareseparatedattheinceptionofthearrangementintothosefortheleaseandthoseforotherelementsonthebasisoftheirrelativefairvalues.Theminimumleasepaymentsincludeonlypaymentsforthelease(ietherighttousetheasset)andexcludepaymentsforotherelementsinthearrangement(egforgoodsandservicessupplied).
Separatingthepaymentsfortheleasefrompaymentsforotherelementsinthearrangementrequiresmanagementtouseestimationtechniques.Thetechniquesusedinclude:
(a) estimatingtheleasepaymentsbyreferencetoaleaseagreementforacomparableassetthatcontainsnootherelements;or
(b) whereimpracticabletoseparatethepaymentsreliably,managementrecognisedtheleasedassetandthefinanceleaseobligationmeasuredasthesumoftheleasepaymentsoverthetenureofthearrangement,reducedbyanimputedfinancechargebasedonmanagement’sbestestimateoftheapplicableincrementalborrowingrateatinception(orreassessment)ofthearrangement.
Theleasedassetsaredepreciatedoverthelesseroftheirusefullivesorthetenureofthearrangement.Theformerisbaseduponmanagement’sbestestimatetakingcognisanceoftheavailableinformation.Asforallproperty,plantandequipment,usefullivesareassessedannually.
Thefairvalueofthefinanceleaseobligationifitweretoberefinancedatcurrentrates,keepingthecashinstalmentsconstantisdescribedinnote32.3.
5.6 Definedbenefitpensionplans Thepresentvalueofthedefinedbenefitpensionobligationsdependsonanumberoffactorsthataredetermined
onanactuarialbasisusinganumberofassumptions.Theassumptionsusedindeterminingthenetcost(income)forpensionsinclude,inter alia,thediscountrate,thereturnonplanassetsandtheinflationrate.Anychangesintheseassumptionswillimpactthecarryingamountofpensionobligations.
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5. KEySOuRCESOFESTIMATIONuNCERTAINTyANDASSOCIATEDSENSITIVITIEScontinued 5.6 Definedbenefitpensionplanscontinued Thegroupandcompanydeterminetheappropriatediscountrateattheendofeachyearinconsultationwith
thefundadministratorsandindependentactuaries.Thisistheinterestratethatshouldbeusedtodeterminethepresentvalueofestimatedfuturecashoutflowsexpectedtoberequiredtosettlethepensionobligations.Indeterminingtheappropriatediscountrate,considerationisgiventotheinterestratesofhigh-qualitycorporatebondsthataredenominatedinthecurrencyinwhichthebenefitswillbepaid,andthathavetermstomaturityapproximatingthetermsoftherelatedpensionliability.
Otherkeyassumptionsforpensionobligationsarebasedinpartoncurrentmarketconditions.Additionalinformationrelatingtotheactuarialvaluationisdetailedinnote34.1.2.
Plans’rulesprohibitthedistributionofthedefinedbenefitsurplusintheformofrefundsfromtheplanordeductionsinfuturecontributionstotheplan.Onpartialandfullliquidationoftheplans,anyavailablesurplusisapportionedtothesolebenefitofthemembers.Thegroupandcompanyisthusunabletorecogniseadefinedbenefitsurplus,however,itiscommittedtofundadeficit.
Thesensitivityofthedefinedbenefitplans,definedbenefitobligations,planassetsandexperienceadjustmentsin
responsetochangesintheprincipalassumptionsisasfollowsat31December2008:
IscorRetirementFund
Presentvalueofdefined
benefitobligation
Rm
(Fairvalueofplanassets)
Rm
(Surplus)/deficit
Rm
Experienceadjustments
onplanliabilities–
gains/(losses)Rm
Experienceadjustments
onplanassets–
gains/(losses)Rm
Valuationat31December2008 405 (476) (71) 61 (50)1
Discountrate decreasedby 100basispoints 412 (476) (64) (1) (50)
Discountrate increasedby 100basispoints 399 (476) (77) 12 (50)
Previousyears’ expectedreturn onplanassets decreasedby1% 405 (521) (116) 6 (95)
Previousyears’ returnonplan assetsexpected increasedby1% 405 (531) (126) 6 (105)
Salaryinflation decreasedby1% 404 (476) (72) 7 (50)
Salaryinflation increasedby1% 406 (476) (70) 5 (50)1Non-cumulative, only for the reporting period ended 31 December 2008.
106 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
5. KEySOuRCESOFESTIMATIONuNCERTAINTyANDASSOCIATEDSENSITIVITIEScontinued 5.6 Definedbenefitpensionplanscontinued
MittalSteelSouthAfricaPensionFund
Presentvalueofdefined
benefitobligation
Rm
(Fairvalueofplanassets)
Rm
(Surplus)/deficit
Rm
Experienceadjustments
onplanliabilities–
gains/(losses)Rm
Experienceadjustments
onplanassets–
losses/(gains)Rm
Valuationat31December2008 6562 (7276) (714) 1211 (1004)1
Discountrate decreasedby 100basispoints 6566 (7276) (710) 117 (1004)
Discountrate increasedby 100basispoints 6559 (7276) (717) 124 (1004)
Previousyears’ expectedreturn onplanassets decreasedby1% 6562 (8201) (1639) 121 (1929)
Previousyears’ expectedreturn onplanassets increasedby1% 6562 (8360) (1798) 121 (2088)
Salaryinflation decreasedby1% 6559 (7276) (717) 124 (1004)
Salaryinflation increasedby1% 6566 (7276) (710) 117 (1004)1 Non-cumulative, only for the reporting period ended 31 December 2008.
Asnoneofthesensitivitiesresultsinafundingdeficit,andduetotheassetrecognitionrestriction,thesensitivitieshavenoimpactonthefinancialresultsofthegroupandcompany.
5.7 Valuationofshare-basedpayments ThecriticalestimatesasusedintheBinomialMatrixvaluationmodelsforequity-settledshareoptionplansare
detailedinnote36.2.
Fortheoutstanding,unvestedequity-settledshareoptionsat31December2008,theestimatedchargetobeexpensedinthefutureuptothedateofthevestingoftheoptionsisR35million.
Fortheunvestedcash-settledshareparticipationrightsdescribedinnote36.1,R28millionhasbeenrecognisedasliability(note26)withR38millionstilltovestovertheremainingperiodtomaturity,basedonthevaluationat31December2008.
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6. SEGMENTALREPORT Segmentinformationispresentedonlyatagrouplevelwhereitismostmeaningful.Operatingsegmentsareidentified
onthebasisofinternalreportsaboutcomponentsofthegroupthatareregularlyreviewedbythechiefoperatingdecision-makerinordertoallocateresourcestothesegmentandtoassessitsperformance.
Thegroup’sreportablesegmentsare: • FlatCarbonSteelProductsconsistingoftheVanderbijlparkandSaldanhaWorks; • LongCarbonSteelProductsconsistingoftheNewcastle,VereenigingandMaputoWorks; • CokeandChemicalsundertakingtheprocessingandmarketingofby-productsandtheproductionandmarketingof
commercial-gradecokingcoal;and • CorporateandOther,consistsofsalesandmarketingfunctions,procurementandlogisticsactivities,sharedservices,
centresofexcellence,thedecommissionedPretoriaWorkssite,available-for-saleinvestments,andtheresultsoftheconsolidatedsubsidiariesandspecialpurposeentities.
Flat,LongCarbonSteelProductsandCokeandChemicalsrepresentthegroup’soperatingsegmentsinwhichproductioncapacityisconcentrated.
Theaccountingpoliciesofthereportablesegmentsarethesameasthegroup’saccountingpoliciesdescribedinnote3.9.
Segmentprofitfromoperationsrepresentstheprofitearnedbyeachsegmentwithouttheallocationofafter-taxprofitsofequity-accountedinvestments,netinterestincome,incomefrominvestmentsandincometaxexpenses.
Allassetsandliabilitiesareallocatedtotheoperatingsegments,otherthanthefollowingitemsthatareexclusivelyhousedintheCorporateandOthersegment,reflectingthemannerinwhichresourceallocationismeasured:
Assetsnotallocatedtooperatingsegments: • resultsofconsolidatedsubsidiariesandspecialpurposeentities,otherthanforSaldanhaWorkswhichisasubsidiary
housedwithintheFlatCarbonSteelProductssegment; • investmentsinequity-accountedentities; • available-for-saleinvestments; • cashandcashequivalents;and • incometax,capitalgainstaxandvalue-addedtax-relatedassets,asapplicable.
Liabilitiesnotallocatedtooperatingsegmentsareincometax,capitalgainstaxandvalue-addedtax-relatedliabilities,asapplicable.
108 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
FlatCarbonSteelProducts
LongCarbonSteelProducts CokeandChemicals CorporateandOther
Adjustmentsandeliminations
Totalreconcilingtotheconsolidatedamounts
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
6. SEGMENTALREPORTcontinued
Revenue
–externalcustomers 24447 18613 11936 8666 3496 2022 35 39914 29301
–inter-segmentcustomers 1066 627 1014 572 67 43 (2147) (1242)
Totalrevenue 25513 19240 12950 9238 3563 2065 (2112) (1242) 39914 29301
Distributedas:
–Local 20635 14582 10861 7111 3427 1996 8 34931 23689
–Export
Africa 2428 1947 240 722 69 26 15 2752 2695
Europe 76 207 245 175 2 323 382
Asia 1303 1848 384 540 9 1696 2388
Other 5 29 206 118 1 212 147
Results
Operatingprofit/(loss)beforedepreciation, amortisationandimpairments 8112 5265 3993 2838 1781 765 (278) (55) (6) (11) 13602 8802
Depreciationandamortisation (1105) (438) (200) (186) (38) (38) (23) (17) 44 (420) (1322) (1099)
Impairmentcharge (121) (121)
Segmentprofit/(loss)fromoperations 7007 4827 3672 2652 1743 727 (301) (72) 38 (431) 12159 7703
(Loss)/gainsonchangesinforeignexchangerate andfinancialinstrumentsdesignatedasheld-for- tradingatfairvaluethroughprofitorloss (112) (15) (57) 15 (1) 806 (130) 637 (131)
Interestreceived 318 442 318 442
Financecosts (238) (117) (238) (117)
Incomefrominvestments 3 4 3 4
Impairment(charge)/reversal (45) 81 36
Incomeaftertaxfromequity-accounted investments 331 270 331 270
Profit/(loss)beforetax 6895 4812 3615 2667 1743 726 874 397 119 (431) 13246 8171
Incometaxexpense (3865) (2455)
Profitaftertax 9381 5716
Segmentassets 20198 18244 5097 4007 1130 1043 10244 5052 (1202) (1250) 35467 27096
Investmentsinequity-accountedentities 1972 1117 (4) (8) 1968 1109
Capitalexpenditure 1035 1443 541 346 23 59 233 4 1832 1852
Segmentliabilities (7935) (6665) (3162) (2123) (796) (219) 2194 1107 259 278 (9440) (7622)
Cashinflow/(outflow)fromoperations 5616 5195 3021 2783 1751 588 561 (134) (10) 7 10939 8439
Numberofemployeesatyear-end 5280 5119 3008 2868 273 265 915 865 9476 9117
ArcelorMittalSouthAfrica AnnualReport2008
109
FlatCarbonSteelProducts
LongCarbonSteelProducts CokeandChemicals CorporateandOther
Adjustmentsandeliminations
Totalreconcilingtotheconsolidatedamounts
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
6. SEGMENTALREPORTcontinued
Revenue
–externalcustomers 24447 18613 11936 8666 3496 2022 35 39914 29301
–inter-segmentcustomers 1066 627 1014 572 67 43 (2147) (1242)
Totalrevenue 25513 19240 12950 9238 3563 2065 (2112) (1242) 39914 29301
Distributedas:
–Local 20635 14582 10861 7111 3427 1996 8 34931 23689
–Export
Africa 2428 1947 240 722 69 26 15 2752 2695
Europe 76 207 245 175 2 323 382
Asia 1303 1848 384 540 9 1696 2388
Other 5 29 206 118 1 212 147
Results
Operatingprofit/(loss)beforedepreciation, amortisationandimpairments 8112 5265 3993 2838 1781 765 (278) (55) (6) (11) 13602 8802
Depreciationandamortisation (1105) (438) (200) (186) (38) (38) (23) (17) 44 (420) (1322) (1099)
Impairmentcharge (121) (121)
Segmentprofit/(loss)fromoperations 7007 4827 3672 2652 1743 727 (301) (72) 38 (431) 12159 7703
(Loss)/gainsonchangesinforeignexchangerate andfinancialinstrumentsdesignatedasheld-for- tradingatfairvaluethroughprofitorloss (112) (15) (57) 15 (1) 806 (130) 637 (131)
Interestreceived 318 442 318 442
Financecosts (238) (117) (238) (117)
Incomefrominvestments 3 4 3 4
Impairment(charge)/reversal (45) 81 36
Incomeaftertaxfromequity-accounted investments 331 270 331 270
Profit/(loss)beforetax 6895 4812 3615 2667 1743 726 874 397 119 (431) 13246 8171
Incometaxexpense (3865) (2455)
Profitaftertax 9381 5716
Segmentassets 20198 18244 5097 4007 1130 1043 10244 5052 (1202) (1250) 35467 27096
Investmentsinequity-accountedentities 1972 1117 (4) (8) 1968 1109
Capitalexpenditure 1035 1443 541 346 23 59 233 4 1832 1852
Segmentliabilities (7935) (6665) (3162) (2123) (796) (219) 2194 1107 259 278 (9440) (7622)
Cashinflow/(outflow)fromoperations 5616 5195 3021 2783 1751 588 561 (134) (10) 7 10939 8439
Numberofemployeesatyear-end 5280 5119 3008 2868 273 265 915 865 9476 9117
110 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
6. SEGMENTALREPORTcontinued
6.1 Revenuefrommajorproductsandservices
Thegroup’srevenuefromitsmajorproductswas:
2008Rm
2007Rm
FlatCarbonSteelProducts
–Plate 1859 1194
–Hotrolledcoil 12740 9528
–Coldrolledcoil 2296 1658
–Galvanisedsheet 4477 3398
–Coatedsheet 1095 821
–Tinplate 1777 1684
–Other 203 330
LongCarbonSteelProducts
–Billetsandblooms 241 152
–Barsandrebars 2502 1822
–Wirerod 3088 2444
–Sections 3990 2629
–Rails 61 97
–Seamlesstubularproducts 1045 781
–Forged 994 720
–Other 15 21
CokeandChemicals
–Coke 2930 1589
–Tar 444 357
–Other 122 76
–Consolidation 35
Totalconsolidatedrevenue 39914 29301
6.2 Geographicalinformation
ThegroupoperatesprincipallyinSouthAfrica.Exportsalesareprimarilysoldintosub-SaharanAfricaandAsia.Thesegmentalallocationofthegeographicalrevenueisdescribedinnote6above.
Thegroup’soperationsarebasedinSouthAfricaotherthanfora35000tonnesperannumbarmillinMozambique.
6.3 Informationaboutmajorcustomers
Segmentationofthegroup’stopthreecustomers,asmeasuredontotalrevenue,is:
2008Rm
2007Rm
FlatCarbonSteelProducts 8479 5843
LongCarbonSteelProducts 4912 2956
Totalrevenueattributabletotopthreecustomers 13391 8799
Expressedasa%oftotalconsolidatedrevenue 34% 30%
Ofthesetopthreecustomers,onecustomercontributesmorethan 10%tototalrevenue
6603 4097
Expressedasa%oftotalconsolidatedrevenue 17% 14%
Furtherdetailsrelatingtocreditriskconcentrationsaredescribedinnote32.17.
ArcelorMittalSouthAfrica AnnualReport2008
111
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
7. REVENuE
Saleofgoods 39914 292981 35990 25721
Gainsonderivativeinstrumentsindesignated cashflowhedgeaccountingrelationships 3 1
Total 39914 29301 35990 257221 Amount has been reduced by R32 million to exclude unearned profit adjustments made in 2007 relating to sales to jointly controlled entities on inventory still on hand at 31 December 2007.
8. IMPAIRMENTCHARGE
Impairmentchargeagainstproperty,plant andequipment (121) (28)
Total (121) (28)
ImpairmentchargesofR93millionand R28millionhavebeenrecognisedagainstthe carryingamountoftheMaputoWorksandthe DunswartDirectReductionfacilityrespectively.
TheMaputoWorksishousedwithinthesubsidiary, ArcelorMittalMaputoSA.
9. PROFITFROMOPERATIONS
Profitfromoperationshasbeenarrivedat aftercharging:
Amortisationofintangibleassets 12 11 9 9
Depreciation 1310 1088 849 743
–Buildingsandinfrastructure 40 52 34 35
–Machinery,plantandequipment 1155 977 708 659
–Sitepreparation,miningdevelopment andexploration 4 5 4 5
–Assetretirementobligationassets 41 20 41 20
–Leasedassetsunderfinanceleases 70 34 62 24
Consultancyfees 24 18 22 15
Employeecosts 2598 2210 2591 2210
–Salariesandwages 2356 1971 2349 1971
–Terminationbenefits 2 3 2 3
–Pensionandmedicalcosts 207 201 207 201
–Share-basedpaymentexpense 33 35 33 35
Lossondisposalorscrappingofproperty, plantandequipment 39 31 38 31
Operatingleaserentals 137 146 134 143
–Property 4 3
–Equipmentandvehicles 133 146 131 143
Railageandtransport 1159 706 1076 706
112 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
9. PROFITFROMOPERATIONScontinued
Repairsandmaintenance 2084 1847 1606 1515
Researchanddevelopmentcosts 63 58 63 58
Reconditionablesparesusage 12 13 9 11
Write-downofinventorytonetrealisablevalue: 215 26 182 27
–Finishedgoods 133 26 109 27
–Work-in-progress 35 35
–Rawmaterials 47 38
Auditors’remuneration 12 11 10 10
–Auditfees 11 10 9 9
–Otherservicesandexpenses 1 1 1 1
Managementfees 135 (41) (153)
Directors’remuneration 18 11
Fairvaluelosses/(gains)transferredfromequityon effectivederivativeinstrumentsdesignatedas cashflowhedges(note32),includedin1
–Rawmaterialsandconsumablesused 138 (5) 138 (6)
–Ineffectivenessarisingfromeffective cashflowhedges 02 02 02 02
Fairvaluelossestransferredfromequityon ineffectivederivativeinvestmentsdesignated ascashflowhedges,includedin
–Rawmaterialsandconsumablesused 33 23
Impairmentlossesonfinancialassets
–Allowancefordoubtfuldebtsrecognisedon tradeandotherreceivables(note24) 12 02 12 02
–Otherallowances(reversed)/recognisedon tradeandotherreceivables(note24) (22) 47 (37) 49
(Gains)/lossesonderivativefinancialinstruments designatedatfairvaluethroughprofitandloss, notheld-for-trading
–(Gains)/lossesonchangesinthefairvalue ofembeddedderivativeinstruments (148) 33 (148) 33
1 Excludes adjustments relating to hedge ineffectiveness that is disclosed separately. 2 Rounding to zero due to the use of numeric reporting scale format of one million.3 As detailed in note 32.10 (note (i) and note (ii) of reserve movement for 2007 and 2008 respectively).
ArcelorMittalSouthAfrica AnnualReport2008
113
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
10. GAINSANDLOSSESONCHANGESIN FOREIGNExCHANGERATESANDFINANCIAL INSTRuMENTSDESIGNATEDASHELD-FOR- TRADINGATFAIRVALuETHROuGHPROFIT ANDLOSS
Gains/(losses)onchangesinforeign exchangerates
Gainsonchangesinforeignexchangerates 901 38 882 20
Lossesonchangesinforeignexchangerates (256) (188) (244) (180)
Total,arisingon: 645 (150) 638 (160)
–Tradeandotherreceivables 52 (43) 18 (34)
–Tradeandotherpayables (148) (128) (1)
–Cashandcashequivalents 741 (107) 748 (125)
ofwhich:
–Realisedincash (46) (148) (59) (160)
–Unrealised 691 (2) 697
Fairvalue(losses)/gainstransferredfromequityon ineffectivederivativeinstrumentsde-designated ascashflowhedges1 (10) 3 (10) 2
Gainsonchangesinthefairvalueofderivative instrumentsdesignatedasheld-for-tradingat fairvaluethroughprofitorloss 2 16 5 7
Total 637 (131) 633 (151)
1 As detailed in note 32.10 (note (i) and note (ii) of reserve movement for 2007 and 2008 respectively.)
11. INTERESTRECEIVED
Bankdepositandotherinterestincomeexcluding interestincomefromsubsidiariesandequity- accountedinvestments(note13) 318 442 296 426
Total 318 442 296 426
12. FINANCECOSTS
Interestexpenseonbankoverdraftsandloans (13) (20) (3) (16)
Interestexpenseonfinanceleaseobligations1 (46) (53) (19) (25)
Discountingrateadjustmentofthenon-current provisions2 (8) 79 (8) 79
Unwindingofthediscountingeffectinthepresent valuedcarryingamountofthenon-current provisions (171) (123) (171) (127)
Total (238) (117) (201) (89)
1 Interest expense arising from the application of IAS 17, Leases, and IFRIC 4, Determining whether an Arrangement contains a Lease.2The credit adjusted discount rate was decreased from an average rate of 11.25% to 10.75% (2007: 10.5% to 11.25%) in line with
changes in the South African zero swap rates.
Noborrowingcostsqualifiedforcapitalisationduringthecurrentorcomparativeyear.
114 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
13. INCOMEFROMINVESTMENTSDividendsreceived 338 281Interestreceived 3 4 3 4
Total 3 4 341 285
14. IMPAIRMENTREVERSAL/(CHARGE)Impairmentreversalagainstinvestmentinjointly controlledentity 36 36Impairment(charge)/reversalagainstinvestment insubsidiary (81) 2799Total 36 (45) 2799
ImpairmentreversalagainstinvestmentinjointlycontrolledentityFollowinganimpairmentreversalagainstproperty,plantandequipmentbythejointlycontrolledentity,Microsteel(Proprietary)Limited,acorrespondingreversalofR36millionagainsttheimpairmentagainsttheinvestmenthasbeenmadebythecompany.
Impairment(charge)/reversalagainstinvestmentinsubsidiaryIncontextoftheimpairmentagainstproperty,plantandequipmentofMaputoWorksasdescribedinnote8,animpairmentchargeofR81millionwasrecognisedagainstafixedloantoArcelorMittalMaputoSA,beingthefundingadvancedfortheinitialequipmentpurchase.Theamountisreversedforconsolidationpurposes.
Fortheyearended31December2007,duetosubstantialretainedlosses,animpairmentagainstthecompany’sinvestmentinthethenjointlycontrolledentity,SaldanhaSteel(Proprietary)Limited,wasraisedinthe2001financialyear,amountingtoR2336million.TheimpairmentincreasedtoR4051millionin2002whenSaldanhaSteel(Proprietary)Limitedbecameasubsidiary.
Benefitingfromarecapitalisation,amorestableoperatingperformance,andanimprovedglobalsteelmarket,itwaspossibletoreducetheimpairmenttoR3810millionin2003,andR2799millionby2004.
ThesurplusbetweenthenetassetvalueofSaldanhaSteel(Proprietary)LimitedandtheimpairednetcarryingamountofArcelorMittalSouthAfrica’sinvestment,exceededtheremainingimpairmentofR2799million.Consequently,thetotalimpairmentagainsttheinvestmentwasreversedin2007.
Forthegroup,theincreaseintheequityaccountedcarryingamountofMicrosteel(Proprietary)Limitedisreflectedinnote20.
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
15. INCOMETAxExPENSEIncometaxrecognisedinprofitorlossTaxexpensecomprises:Currenttaxexpense 3661 1871 3311 1813Adjustmentsrecognisedinthecurrentyearin relationtothecurrenttaxofprioryears 5 (36) (3) (40)
3666 1835 3308 1773
Deferredtaxexpenserelatingtotheorigination andreversaloftemporarydifferences 24 137 26 (191)Deferredtaxincomerecognisedinthecurrentyear inrelationtothedeferredtaxofprioryears 7 1 11 1Effectofchangesincorporatetaxrate (89) (35)
(58) 138 2 (190)
SecondaryTaxonCompanies 244 482 239 446Withholdingtaxonforeignincome 13 13
Totaltaxexpense 3865 2455 3562 2029
ArcelorMittalSouthAfrica AnnualReport2008
115
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
15. INCOMETAxExPENSEcontinued
Thetotalchargefortheyearcanbereconciled totheaccountingprofitasfollows:
Profitbeforetax 13246 8171 12121 9720
Incometaxexpensecalculatedat28%and29%1 3709 2370 3394 2819
Effectofrevenuethatisnon-taxable/exempt fromtaxation (2) (3) (97) (113)
Effectofexpensesthatarenotdeductiblein determiningtaxableprofit 6 47 8 44
Effectofassessedlossde-recognisedandloss notcapitalised 6
Effectofchangeincorporatetaxrate1 (89) (35)
Effectoftaxconcessions2 (39) (39)
Effectofimpairmentcharge/(reversal) 24 13 (812)
Effectofequityprofitdisclosednetoftaxand effectofdifferenttaxratesofsubsidiaries operatinginotherjurisdictions (77) (90)
Effectofrevenueimputedfromcontrolledforeign companies 21 7 21 7
Effectofdeferredtaxassetraisedon environmentalobligations (277)3 (277)3
Taxrebateonforeigndividends (2) (7) (2) (7)
Adjustmentsrecognisedinthecurrentyearin relationtothecurrenttaxanddeferredtaxof prioryears. 12 (35) 8 (39)
SecondaryTaxonCompanies 244 482 239 446
Withholdingtaxonforeignincome 13 13
3865 2455 3562 2029
Taxationasapercentageofprofitbeforetaxation 29.2% 30.0% 29.4% 20.9%1The tax rate used for the 2008 and 2007 reconciliations above is the corporate tax rate of 28% and 29% respectively payable by
corporate entities in South Africa on taxable profits. A 1% corporate tax rate reduction from 29% to 28%, effective for years of assessment ending during the 12-month period ending on 31 March 2009, was enacted during the year.
2Strategic Industrial Project (SIP) allowance granted in terms of section 12(G) of the South African Income Tax Act for construction of coke oven batteries at Newcastle Works.
3Recognised as a consequence of the amendments to relevant tax legislation, inter alia, as promulgated in the Revenue Law Amendments Act of 2007.
Incometaxrecognisedinequity
Currentanddeferredtaxexpense
Normaltaxon:
–gainsandlossesrealisedbutnotyetreleased totheincomestatementoncashflowhedges (6) (12) (5) (12)
–lossesonsharepurchasesviathemanagement sharetrust (26) (15) (26) (15)
Deferredtaxonunrealisedlossesoncashflow hedges (19) (15) (16) (15)
Totalcurrentanddeferredtaxrecognisedinequity (51) (42) (47) (42)
116 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group
2008Rm
2007Rm
16. EARNINGSPERSHARE
Basicearningspersharearecalculatedbydividing profitattributabletotheownersofthe companybytheweightedaveragenumberof ordinarysharesinissueduringtheyear.
Theweightedaveragenumberofsharesis calculatedtakingintoaccountthesharesissued asdisclosedinthedirectors’reportandnote25.
Profitattributabletoownersofthecompany(Rm) 9381 5716
Weightedaveragenumberofordinarysharesin issue(thousands) 445752 445752
Basicearningspershare(cents) 2105 1282
Dilutedearningspershareiscalculatedbydividing theprofitattributabletotheownersofthe companybytheweightedaveragenumberof ordinarysharesinissueduringtheyearincreased bythenumberofadditionalordinaryshares thatwouldhavebeenoutstandingassuming theconversionofalloutstandingshareoptions representingdilutivepotentialordinaryshares.
Profitattributabletoownersofthecompany(Rm) 9381 5716
Weightedaveragenumberfordilutedshares (thousands) 447433 447052
Dilutedearningspershare(cents) 2097 1279
Thecalculationforheadlineearningspershareisbasedonthebasicearningspersharecalculation,reconciledasfollows:
2008Gross
Rm
2008Netoftax
Rm
2007Gross
Rm
2007Netoftax
Rm
Profitattributabletoownersofthecompany 9381 5716
PlusIAS16lossondisposalorscrappingof property,plantandequipment 39 28 31 22
PlusIFRS5write-downtorecoverableamounton thereclassificationofassetspreviouslyclassified asheldforsale 4 3
Plusimpairmentofassets 121 111
Lessimpairmentofequity-accountedinvestments reversal (36) (36)
Headlineearnings(Rm) 9484 5741
ArcelorMittalSouthAfrica AnnualReport2008
117
Group
2008Rm
2007Rm
16. EARNINGSPERSHAREcontinued
Headlineearningspershare(cents)
–Basic 2128 1288
–Diluted 2120 1284
Theweightedaveragenumberofsharesusedinthe computationofdilutedearningspersharewere determinedasfollows(thousands):
-Sharesinissue 445752 445752
Adjustmentsfordilutiveimpactofthe Managementsharetrust:
–Sharesunderoption 1681 1284
–Sharesunderloanpurchaseanddeferredpurchase 16
Dilutedsharesinissue(thousands) 447433 447052
17. DIVIDENDPERSHARE
Thedividenddistributionfor2008consistsof:
• On8February2008afinaldividendof196centspershare(R874million)forthe2007financialyearwaspaidtoshareholderson17March2008.
• On24July2008aninterimdividendof342centspershare(R1524million)forthe2008financialyearwaspaidtoshareholderson1September2008.
Thedividenddistributionfor2007consistsof:
• On19February2007afinaldividendof204centspershare(R909million)forthe2006financialyearwaspaidtoshareholderson26March2007.
• On30July2007aninterimdividendof233centspershare(R1039million)forthe2007financialyearwaspaidtoshareholderson3September2007.
118 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
18. PROPERTy,PLANTANDEquIPMENT
Landandbuildings
Rm
Buildingsandinfrastructure
Rm
Machinery,plantandequipment
Rm
Sitepreparation
Rm
Assetretirementobligation
componentassetat
presentvalueRm
Leasedassets1
Rm
Extensionsunder
constructionRm
TotalRm
GROuP
Fortheyearended31December2008
Grosscarryingamount
Atbeginningofyear 59 1782 22500 98 154 2177 1140 27910
Additions 10 863 136 797 1806
Disposals (2) (368) (1) (371)
Othermovements 36 611 6 77 27 (617) 140
Atendofyear 59 1826 23606 103 231 2340 1320 29485
Accumulateddepreciationandimpairmentlosses
Atbeginningofyear 2 1071 9783 59 129 1341 12385
Depreciationcharges 40 1155 4 41 70 1310
Impairmentcharge 121 121
Accumulateddepreciationondisposals (1) (316) (1) (318)
Othermovements 70 70
Atendofyear 2 1110 10743 62 170 1481 13568
Netcarryingamountatendofyear 57 716 12863 41 61 859 1320 15917
GROuP
Fortheyearended31December2007
Grosscarryingamount
Atbeginningofyear 60 1742 21045 98 146 1875 1132 26098
Additions 25 984 8 302 906 2225
Disposals (1) (3) (398) (5) (407)
Othermovements 18 867 5 (898) (8)
Reclassifiedfromassetsheldforsale 2 2
Atendofyear 59 1782 22500 98 154 2177 1140 27910
Accumulateddepreciationandimpairmentlosses
Atbeginningofyear 2 1022 9125 59 109 808 11125
Depreciationcharges 52 977 5 20 34 1088
Accumulateddepreciationondisposals (3) (347) (5) (355)
Othermovements 28 499 527
Atendofyear 2 1071 9783 59 129 1341 12385
Netcarryingamountatendofyear 57 711 12717 39 25 836 1140 155251Including the assets of the two captive mines for an amount of R575 million (December 2007: R623 million).
ArcelorMittalSouthAfrica AnnualReport2008
119
18. PROPERTy,PLANTANDEquIPMENT
Landandbuildings
Rm
Buildingsandinfrastructure
Rm
Machinery,plantandequipment
Rm
Sitepreparation
Rm
Assetretirementobligation
componentassetat
presentvalueRm
Leasedassets1
Rm
Extensionsunder
constructionRm
TotalRm
GROuP
Fortheyearended31December2008
Grosscarryingamount
Atbeginningofyear 59 1782 22500 98 154 2177 1140 27910
Additions 10 863 136 797 1806
Disposals (2) (368) (1) (371)
Othermovements 36 611 6 77 27 (617) 140
Atendofyear 59 1826 23606 103 231 2340 1320 29485
Accumulateddepreciationandimpairmentlosses
Atbeginningofyear 2 1071 9783 59 129 1341 12385
Depreciationcharges 40 1155 4 41 70 1310
Impairmentcharge 121 121
Accumulateddepreciationondisposals (1) (316) (1) (318)
Othermovements 70 70
Atendofyear 2 1110 10743 62 170 1481 13568
Netcarryingamountatendofyear 57 716 12863 41 61 859 1320 15917
GROuP
Fortheyearended31December2007
Grosscarryingamount
Atbeginningofyear 60 1742 21045 98 146 1875 1132 26098
Additions 25 984 8 302 906 2225
Disposals (1) (3) (398) (5) (407)
Othermovements 18 867 5 (898) (8)
Reclassifiedfromassetsheldforsale 2 2
Atendofyear 59 1782 22500 98 154 2177 1140 27910
Accumulateddepreciationandimpairmentlosses
Atbeginningofyear 2 1022 9125 59 109 808 11125
Depreciationcharges 52 977 5 20 34 1088
Accumulateddepreciationondisposals (3) (347) (5) (355)
Othermovements 28 499 527
Atendofyear 2 1071 9783 59 129 1341 12385
Netcarryingamountatendofyear 57 711 12717 39 25 836 1140 155251Including the assets of the two captive mines for an amount of R575 million (December 2007: R623 million).
120 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
18. PROPERTy,PLANTANDEquIPMENTcontinued
Landandbuildings
Rm
Buildingsandinfrastructure
Rm
Machinery,plantandequipment
Rm
Sitepreparation
Rm
Assetretirementobligation
componentassetat
presentvalueRm
Leasedassets1
Rm
Extensionsunder
constructionRm
TotalRm
COMPANy
Fortheyearended31December2008
Grosscarryingamount
Atbeginningofyear 53 1414 13201 98 154 1982 889 17791
Additions 10 662 136 705 1513
Disposals (2) (224) (1) (227)
Othermovements 28 358 6 77 27 (393) 103
Atendofyear 53 1450 13997 103 231 2145 1201 19180
Accumulateddepreciationandimpairmentlosses
Atbeginningofyear 926 6264 59 129 1252 8630
Depreciationcharges 34 708 4 41 62 849
Accumulateddepreciationondisposals (1) (176) (1) (178)
Impairment 28 28
Othermovements 70 70
Atendofyear 959 6824 62 170 1384 9399
Netcarryingamountatendofyear 53 491 7173 41 61 761 1201 9781
COMPANy
Fortheyearended31December2007
Grosscarryingamount
Atbeginningofyear 54 1393 11947 98 146 1680 1031 16349
Additions 6 818 8 302 717 1851
Disposals (1) (3) (396) (5) (405)
Othermovements 18 830 5 (859) (6)
Reclassifiedfromassetsheldforsale 2 2
Atendofyear 53 1414 13201 98 154 1982 889 17791
Accumulateddepreciationandimpairmentlosses
Atbeginningofyear 894 5945 59 109 729 7736
Depreciationcharges 35 659 5 20 24 743
Accumulateddepreciationondisposals (3) (347) (5) (355)
Othermovements 7 499 506
Atendofyear 926 6264 59 129 1252 8630
Netcarryingamountatendofyear 53 488 6937 39 25 730 889 91611Including the assets of the two captive mines for an amount of R575 million (December 2007: R623 million).
ArcelorMittalSouthAfrica AnnualReport2008
121
18. PROPERTy,PLANTANDEquIPMENTcontinued
Landandbuildings
Rm
Buildingsandinfrastructure
Rm
Machinery,plantandequipment
Rm
Sitepreparation
Rm
Assetretirementobligation
componentassetat
presentvalueRm
Leasedassets1
Rm
Extensionsunder
constructionRm
TotalRm
COMPANy
Fortheyearended31December2008
Grosscarryingamount
Atbeginningofyear 53 1414 13201 98 154 1982 889 17791
Additions 10 662 136 705 1513
Disposals (2) (224) (1) (227)
Othermovements 28 358 6 77 27 (393) 103
Atendofyear 53 1450 13997 103 231 2145 1201 19180
Accumulateddepreciationandimpairmentlosses
Atbeginningofyear 926 6264 59 129 1252 8630
Depreciationcharges 34 708 4 41 62 849
Accumulateddepreciationondisposals (1) (176) (1) (178)
Impairment 28 28
Othermovements 70 70
Atendofyear 959 6824 62 170 1384 9399
Netcarryingamountatendofyear 53 491 7173 41 61 761 1201 9781
COMPANy
Fortheyearended31December2007
Grosscarryingamount
Atbeginningofyear 54 1393 11947 98 146 1680 1031 16349
Additions 6 818 8 302 717 1851
Disposals (1) (3) (396) (5) (405)
Othermovements 18 830 5 (859) (6)
Reclassifiedfromassetsheldforsale 2 2
Atendofyear 53 1414 13201 98 154 1982 889 17791
Accumulateddepreciationandimpairmentlosses
Atbeginningofyear 894 5945 59 109 729 7736
Depreciationcharges 35 659 5 20 24 743
Accumulateddepreciationondisposals (3) (347) (5) (355)
Othermovements 7 499 506
Atendofyear 926 6264 59 129 1252 8630
Netcarryingamountatendofyear 53 488 6937 39 25 730 889 91611Including the assets of the two captive mines for an amount of R575 million (December 2007: R623 million).
122 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
18. PROPERTy,PLANTANDEquIPMENTcontinued
Allproperty,plantandequipmentiscarriedathistoricalcostotherthanfortheassetretirementobligationassetsthatarecarriedatpresentvalue.
LandregisterandassetpledgesAregisteroflandisavailableforinspectionattheregisteredofficeofthecompany.
Thegroupandcompanyhavenotpledgedproperty,plantandequipmenttosecurebankingfacilitiesgranted.
ImpairmentTheimpairmentassessmentisdescribedinnote4.1and5.1.
19. INTANGIBLEASSETS
Patentsandtrademarks
Rm
Non-integratedsoftware
RmTotal
Rm
GROuP
Fortheyearended31December2008
Grosscarryingamount
Atbeginningofyear 41 224 265
Additions 25 25
Disposals (3) (3)
Atendofyear 41 246 287
Amortisation
Atbeginningofyear 17 190 207
Amortisationcharge 2 10 12
Accumulatedamortisationchargeondisposals (3) (3)
Atendofyear 19 197 216
Netcarryingamountatendofyear 22 49 71
GROuP
Fortheyearended31December2007
Grosscarryingamount
Atbeginningofyear 41 214 255
Additions 3 3
Othermovements 8 8
Disposals (1) (1)
Atendofyear 41 224 265
Amortisation
Atbeginningofyear 15 182 197
Amortisationcharge 2 9 11
Accumulatedamortisationchargeondisposals (1) (1)
Atendofyear 17 190 207
Netcarryingamountatendofyear 24 34 58
ArcelorMittalSouthAfrica AnnualReport2008
123
19. INTANGIBLEASSETScontinued
Patentsandtrademarks
Rm
Non-integratedsoftware
RmTotal
Rm
COMPANy
Fortheyearended31December2008
Grosscarryingamount
Atbeginningofyear 222 222
Additions 25 25
Disposals (3) (3)
Atendofyear 244 244
Amortisation
Atbeginningofyear 190 190
Amortisationcharge 9 9
Accumulatedamortisationchargeondisposals (3) (3)
Atendofyear 196 196
Netcarryingamountatendofyear 48 48
COMPANy
Fortheyearended31December2007
Grosscarryingamount
Atbeginningofyear 214 214
Additions 3 3
Othermovements 6 6
Disposals (1) (1)
Atendofyear 222 222
Amortisation
Atbeginningofyear 182 182
Amortisationcharge 9 9
Accumulatedamortisationchargeondisposals (1) (1)
Atendofyear 190 190
Netcarryingamountatendofyear 32 32
124 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
20. uNLISTEDEquITy-ACCOuNTEDINVESTMENTS
Theinvestmentrepresentsinterestinunlisted incorporatedjoint-controlledentitiesandan associate
Atbeginningofyear 1109 953 48 32
Netafter-taxshareofresultsaspertheincome statement 331 270
Dividendsreceived (14) (104)
Currencytranslationdifferences 502 (18)
Unrealisedprofitonsales 4 (8)
Acquisitionofinterestinassociate 16 16
Impairmentreversal 36 36
Atendofyear(Annexure1) 1968 1109 84 48
Aggregatepost-acquisitionreserves 1137 820
Unlistedequity-accountedinvestmentsat 31December2008includesnogoodwill (December2007:nil).
Thegrouphasnounrecognisedlossesforany individualequity-accountedinvestment.
21. INVESTMENTSINSuBSIDIARIES
Indebtedness
–bysubsidiaries 4663 5553
–tosubsidiaries (94) (94)
Netindebtedness 4569 5459
Indebtedness 4569 5459
Sharesatcost(Annexure2) 256 256
Total 4825 5715
Aggregateattributableafter-taxprofits 731 1241
Themajorityofthecarryingvalueofthecompany’sinvestmentinsubsidiariesconsistsofitsinvestmentinSaldanhaSteel(Proprietary)Limited,beingthecostofsharesandindebtedness,attheinitialandsubsequentacquisitiondates.
In2007theremaininginvestmentimpairmentofR2799millionintheentity-ownaccountsofArcelorMittalSouthAfricaLimitedwasreversedinfull(note14).
ArcelorMittalSouthAfrica AnnualReport2008
125
Group Company
Non-current Current Non-current Current
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
22. OTHERFINANCIALASSETS/(LIABILITIES)
Derivativesdesignated ashedging instrumentscarried atfairvalue
Basemetalforward purchasecontracts
•Unmatured (129) (53) (117) (53)
•Maturednotsettled (28) (14) (26) (14)
Financialassets/ (liabilities)carriedat fairvaluethrough profitorloss(FVTPL)
Embeddedderivatives atFVTPL 203 124 163 94 203 124 163 94
Held-for-trading derivativesthatare notdesignatedin hedgeaccounting relationships
•Basemetalforward purchasecontracts unmatured 9 9
•Foreigncurrencyforward purchasecontracts unmatured 01 2 01 01 01
Available-for-sale(AFS) investmentscarried atfairvalue
Equityinstruments2 71
Total 203 195 17 27 203 124 29 27
Includedinthefinancial statementsas:
Otherfinancialassets 203 195 174 94 203 124 172 94
Otherfinancialliabilities (157) (67) (143) (67)
Total 203 195 17 27 203 124 29 271Rounding to zero due to the use of numeric reporting scale format of one million.2 The group holds 10% of the ordinary share capital of Hwange Colliery Company Limited, a coal, coke and by-products producer in Zimbabwe.
On 14 November 2008 all trading activities on the Zimbabwe Stock Exchange ceased. On that date the carrying amount of the investment was R76 million with fair value gains deferred to the available-for-sale equity reserve of R68 million. The fungible conduit share scheme arrangement utilised by the group’s brokers, which enables the realisation of such investments at fair value via the use of a dual-listed fungible conduit share arrangement, was furthermore suspended. The group deemed it appropriate to apply a marketability discount that would reduce the fair value gains deferred to equity, to Rnil. In response to the suspension of the fungible conduit share arrangement, the group revised its liquidity risk assessment in determining the fair value of the investment. As a consequence, the fair value at the reporting date is assessed as being nil, with the reduction in fair value below cost being deferred to equity as described in note 32.3.
126 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
23. INVENTORIES
Finishedproducts 1207 1146 1140 1012
Work-in-progress 3140 1487 3003 1467
Rawmaterials 3710 1741 3431 1366
Plantsparesandconsumablestores 585 416 502 351
Total 8642 4790 8076 4196
Includedintheaboveare:finishedproductsofR258million(December2007:R111million),work-in-progressofR128million(December2007:R37million)andrawmaterialsofR348million(December2007:R0million)carriedatnetrealisablevalue.
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
24. TRADEANDOTHERRECEIVABLES
Tradereceivables
–Localsectors
Manufacturing 491 685 407 552
Merchants 681 692 681 692
Structuralmetal 323 343 323 343
Foodandbeverage 150 130 150 130
Other 124 269 124 267
–Exports 244 179 145 105
Totalgrosstradereceivables 2013 2298 1830 2089
Lessallowances
Allowancefordoubtfuldebts
–Localsectors
Manufacturing (5) (2) (5) (2)
Structuralmetal (1) (1)
Other (1) (1) (1) (1)
–Exports (2) (2)
Totalallowancesfordoubtfuldebts (9) (3) (9) (3)
Otherallowances
–Localsectors
Manufacturing (134) (148) (134) (148)
Merchants (46) (40) (46) (40)
Structuralmetal (33) (28) (33) (28)
Foodandbeverage (5) (3) (5) (3)
Other (1) (32) (1) (32)
–Exports (15) (5) (5)
Totalotherallowances (234) (256) (219) (256)
ArcelorMittalSouthAfrica AnnualReport2008
127
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
24. TRADEANDOTHERRECEIVABLEScontinued
Nettradereceivables
–Localsectors
Manufacturing 352 535 268 402
Merchants 635 652 635 652
Structuralmetal 289 315 289 315
Foodandbeverage 145 127 145 127
Other 122 236 122 234
–Exports 227 174 143 100
Totalnettradereceivables 1770 2039 1602 1830
Otherreceivables 257 179 179 122
–Less:allowancefordoubtfuldebts (21) (18) (21) (18)
236 161 158 104
VATrecoverable 25 92 5 73
Netotherreceivables 261 253 163 177
Total 2031 2292 1765 2007
Thesectoralsplitoftheaveragecreditperiodonsalesofgoodsis:
2008 2007 2008 2007
Averagecreditperiodindaysfor tradereceivables
–Localsectors1
Manufacturing 36 34 37 35
Merchants 33 32 33 32
Structuralmetal 34 37 34 37
Foodandbeverage 30 30 30 30
Other 30 30 30 30
–Exports2 9 9 9 91Local sectors credit period measured from date of statement.2Exports credit period measured from bill-of-lading date.
Nointerestischargedontradereceivablesforthefirst30daysfromdateofstatement.Thereafter,interestischargedatprime+3%perannumontheoutstandingbalance.
128 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
24. TRADEANDOTHERRECEIVABLEScontinued
Includedinthegroup’sandcompany’stradereceivablebalancearedebtorswithacarryingamountofR220million(December2007:R84million),whicharepastdueatthereportingdatewhichhavenotbeenprovidedagainstastherehasnotbeenasignificantchangeincreditqualityandtheamountsarestillconsideredrecoverable.
Thesectoralsplitis:
Tradereceivablespastdue
–Localsectors
Manufacturing 113 31 113 31
Merchants 43 21 43 21
Structuralmetal 16 22 16 22
Foodandbeverage 1 1
Other 42 9 42 9
–Exports 6 6
Total 220 84 220 84
ThegroupandcompanyholdfinancialguaranteesandsimilarcreditenhancementswithafacevalueofR203million(December2007:R74million)overtheremainderofthesebalances.Asdetailedinnote32.7,thecarryingamountofthesefinancialassetsheldisRnil(December2007:Rnil).
Theageingofthepastdueamountsis:
Tradereceivables
–Upto3months
–Localsectors
Manufacturing 112 19 112 19
Merchants 43 18 43 18
Structuralmetal 13 21 13 21
Foodandbeverage 1 1
Other 41 9 41 9
–Exports 3 3
Total 212 68 212 68
–3to6months
–Localsectors
Manufacturing 1 2 1 2
Merchants 1 1
Total 1 3 1 3
ArcelorMittalSouthAfrica AnnualReport2008
129
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
24. TRADEANDOTHERRECEIVABLEScontinued
–Beyond6months
–Localsectors
Manufacturing 1 10 1 10
Merchants 2 2
Structuralmetal 2 1 2 1
Other 1 1
–Export 3 3
Total 7 13 7 13
Total 220 84 220 84
Otherreceivablesrelateprimarilytoby-productsales,siterentaldue,prepaymentsandstaffeducationandbursaryloans.
Indeterminingtherecoverabilityoftradeandotherreceivables,thegroupandcompanyconsideranychangeinthecreditqualityofthetradereceivablefromthedatecreditwasinitiallygranteduptothereportingdate.Managementbelievesthatthereisnofurthercreditprovisionrequiredinexcessoftheallowancefordoubtfuldebts.
Thefollowingallowancesexist:• Allowancefordoubtfuldebts,whichisbasedonthespecificriskprofile,ageingofagivenreceivableandhistorical
experience.Otherthanforamountswhicharepastdue,thoughrecoverable,astherehasnotbeenasignificantchangeincreditquality,theamountprovidedforis25%ofreceivablesthatareregardedasmarginalanddoubtful,and100%foramounts>120days,lesstheparticipationpercentageoftheinsurer.Theimpairmentrecognisedrepresentsthedifferencebetweenthecarryingamountofthespecifictradereceivableandthepresentvalueoftheexpectedliquidationproceeds,wheretimevalueisregardedassignificant.
• Otherallowances,whichrelatetosettlementdiscounts,price,quality,dispatchandrelatedclaimsarebasedontheexactamountsaswithheldfrompaymentbycustomers,forwhichcreditnotesstillhavetobeissued.
130 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
24. TRADEANDOTHERRECEIVABLEScontinued
Themovementinthetradeandotherreceivablesallowancebalanceis:
Movementintradereceivableallowances
Allowancefordoubtfuldebt
Balanceatbeginningofyear (3) (3) (3) (3)
Amountswrittenoffduringyear 1 1
(Increase)/decreaseinallowancerecognised inprofitorloss (7) (7)
Balanceatendofyear (9) (3) (9) (3)
Otherallowances
Balanceatbeginningofyear (256) (209) (256) (207)
Decrease/(increase)inallowancerecognised inprofitorloss 22 (47) 37 (49)
Balanceatendofyear (234) (256) (219) (256)
Movementinotherreceivableallowances
Balanceatbeginningofyear (18) (27) (18) (23)
Amountswrittenoffduringyear 2 5 2 5
Increase/(decrease)inallowancerecognised inprofitorloss (5) 4 (5)
Balanceatendofyear (21) (18) (21) (18)
Thegroupandcompanydidnottransferanyreceivablestorelatedorunrelatedentitiesduringthecurrentorcomparativeyears.Nofactoringorsecuritisationarrangementsweretransacted.
Thecurrencydenominationoftradeandotherreceivablesforthegroupandcompanyisdescribedfullyinnote32.11.
Creditriskconcentrationsaredescribedinnote32.17.
ArcelorMittalSouthAfrica AnnualReport2008
131
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
25. STATEDCAPITAL
Authorised
1200000000ordinarysharesatnoparvalue (December2007:1200000000ordinary sharesatnoparvalue)
2357584"C"redeemablepreferencesharesat R10each(December2007:2357584)
Issued
445752132ordinarysharesatnoparvalue (December2007:445752132ordinaryshares atnoparvalue) 37 37 37 37
Total 37 37 37 37
Aspecialresolutionwaspassedattheannualgeneralmeeting(AGM)ofthecompanyon7May2008authorisingthedirectorstoundertakeageneralpurchaseofupto10%ofthecompany’sownsharesinissue.Theauthorityappliesforaperiodofnomorethan15monthsaftertheAGM.Theacquisitionpricemaynotbemorethan10%abovetheweightedaveragemarketvalueofthesharesoverthefivebusinessdaysimmediatelyprecedingthedateonwhichtheacquisitioniseffected.
AnysharespurchasedwouldbehousedinVicvaInvestmentsandTradingNine(Proprietary)Limited,awhollyownedsubsidiaryofthecompany.
Fortheyearended31December2008noshareshadbeenpurchasedintermsofthespecialresolution.
Thecapitalriskmanagementpolicyisdescribedinnote32.18.
Thegroupandcompanyhaveashare-basedpaymentplanintermsofwhichshareoptionsaregrantedtoqualifyingemployees.Theplanishousedinthemanagementsharetrust,aspecialpurposeentity,fundedbyArcelorMittalSouthAfricaLimited.
Asanequity-settledplan,thesharesnecessarytomeetthetrust’sobligationsundertheplanarepurchasedintheopenmarket.SuchsharepurchasesareclassifiedastreasurysharesintermsofIAS32andarerecognisedinthemanagementsharetrustreserveinthestatementofchangesinequity.
Theunissuedordinarysharesarenotunderthecontrolofthedirectors.
132 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
26. BORROwINGSANDOTHERPAyABLES
Borrowingsunsecured–atamortisedcostLoanfromPretoriaPortlandCement 51 61
OtherpayablesCash-settledshare-basedpayments1 28 1 28 1
79 62 28 1
Includedinthefinancialstatementsas:Non-currentborrowingsandotherpayables 46 52 5 1
Currentborrowingsandotherpayables 33 10 23
Total 79 62 28 11Representing share participation rights. Refer note 36.1
for the relevant terms and conditions.
TheZAR-denominatedloanisunsecuredandbearsinterestatafixedrateof16.00%andisrepayableannuallywiththefinalpaymentduein2013.
Therewerenoloanbreachesordefaultsduringthecurrentorcomparativeperiod.
Thefairvalueoftheborrowingsandthusexposuretorefinancingriskisdetailedinnote32.3.
27. FINANCELEASEOBLIGATIONS
Secured–atamortisedcostforthefollowing arrangements: 354 416 199 253
Rawmaterials 98 138 98 138
Gases 95 21 95 106
Electricityandtransportutilities 147 149
Steelprocessingandfoundryservices 14 108 6 9
Includedinthefinancialstatementsas:Non-currentfinanceleaseobligations 314 328 168 174
Currentfinanceleaseobligations 40 88 31 79
Total 354 416 199 253
ThefinanceleasesareembeddedwithinsupplyarrangementswithsuppliersandhavebeenassessedintermsofIFRIC4,Determining whether an arrangement contains a lease.
Theleaseliabilitiesareeffectivelysecuredastherightstotheleasedassetsasembeddedinthesupplyagreementswouldgenerallyreverttothelessorsupplierintheeventofdefault.
Functionalcategory Termexpirydate Fixedeffectiveinterestrate
Rawmaterials 2013–2014 0%
Gases 2016 13.37%–23.75%
Electricityandtransportutilities 2018–2022 15.35%–17.32%
Steelprocessingandfoundryservices 2012 7.17%–8.90%
Therewerenoloanbreachesordefaultsduringthecurrentorcomparativeperiod.
Thefairvalueoftheborrowingsandthusexposuretorefinancingriskshouldsupplycontractsbere-tenderedisdetailedinnote32.3.
ArcelorMittalSouthAfrica AnnualReport2008
133
27. FINANCELEASEOBLIGATIONScontinued
Financeleaseobligationbyfunction
Minimumleasepayments
Notlaterthan
1yearRm
Laterthan1year
andnotlaterthan
5yearsRm
Laterthan5years
RmTotal
Rm
Lessfuture
financecharges
Rm
Presentvalueof
minimumlease
paymentsRm
GROuPFortheyearended 31December2008Rawmaterials 19 74 5 98 98Gases 29 97 50 176 81 95Electricityandtransport utilities 28 113 203 344 197 147Steelprocessingand foundryservices 7 9 16 2 14
Total 83 293 258 634 280 354
GROuPFortheyearended 31December2007Rawmaterials 50 75 13 138 138
Gases 9 16 25 4 21
Electricityandtransport utilities 28 113 231 372 223 149
Steelprocessingand foundryservices 38 97 73 208 100 108
Total 125 301 317 743 327 416
COMPANyFortheyearended 31December2008Rawmaterials 19 74 5 98 98Gases 28 97 51 176 81 95Steelprocessingand foundryservices 2 5 7 1 6
Total 49 176 56 281 82 199
COMPANyFortheyearended 31December2007Rawmaterials 50 75 13 138 138
Gases 37 96 73 206 100 106
Steelprocessingand foundryservices 4 7 11 2 9
Total 91 178 86 355 102 253
134 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
28. PROVISIONS
Assetretirementobligation
Rm
Environ-mental
remediationRm
Onerouscontracts
Rm
Leavepay
benefitsRm
Post-retirement
medical-aid
benefitsRm
OtherRm
TotalRm
GROuP
Fortheyearended 31December2008
Atbeginningofyear 158 833 253 268 9 80 1601
Chargetoincomestatement 22 561 68 93 2 746
Additions/(releases) 425 47 93 2 567
Discountratechange 16 (8) 8
Unwindingofthediscount effect 22 120 29 171
Utilisedduringyear (17) (56) (43) (67) (1) (80) (264)
Capitalisationtoasset 77 77
Atendofyear 240 1338 278 294 10 2160
Includedinthefinancial statementsas:
Non-currentprovisions 217 1201 234 227 9 1888
Currentprovisions 23 137 44 67 1 272
Total 240 1338 278 294 10 2160
GROuP
Fortheyearended 31December2007
Atbeginningofyear 146 813 312 243 9 73 1596
Transfer 3 (3)
Chargetoincomestatement 16 48 (1) 77 1 17 158
Additions/(releases) 11 19 (11) 77 1 17 114
Discountratechange (58) (21) (79)
Unwindingofthediscount effect 5 87 31 123
Utilisedduringyear (12) (25) (58) (52) (1) (10) (158)
Capitalisationtoasset 5 5
Atendofyear 158 833 253 268 9 80 1601
Includedinthefinancial statementsas:
Non-currentprovisions 125 765 216 176 8 1290
Currentprovisions 33 68 37 92 1 80 311
Total 158 833 253 268 9 80 1601
ArcelorMittalSouthAfrica AnnualReport2008
135
28. PROVISIONScontinued
Assetretirementobligation
Rm
Environ-mental
remediationRm
Onerouscontracts
Rm
Leavepay
benefitsRm
Post-retirement
medical-aid
benefitsRm
OtherRm
TotalRm
COMPANy
Fortheyearended 31December2008
Atbeginningofyear 158 826 253 268 8 65 1578
Chargetoincomestatement 22 560 68 93 2 745
Additions/(releases) 424 47 93 2 566
Discountratechange 16 (8) 8
Unwindingofthediscount effect 22 120 29 171
Utilisedduringyear (17) (56) (43) (67) (1) (65) (249)
Capitalisationtoasset 77 77
Atendofyear 240 1330 278 294 9 2151
Includedinthefinancial statementsas:
Non-currentprovisions 217 1193 234 227 8 1879
Currentprovisions 23 137 44 67 1 272
Total 240 1330 278 294 9 2151
COMPANy
Fortheyearended 31December2007
Atbeginningofyear 146 805 312 243 8 73 1587
Transfer 3 (3)
Chargetoincomestatement 16 49 (1) 77 1 2 144
Additions/(releases) 11 16 (11) 77 1 2 96
Discountratechange
Unwindingofthediscount effect 5 33 10 48
Utilisedduringyear (12) (25) (58) (52) (1) (10) (158)
Capitalisationtoasset 5 5
Atendofyear 158 826 253 268 8 65 1578
Includedinthefinancial statementsas:
Non-currentprovisions 125 758 216 176 7 1282
Currentprovisions 33 68 37 92 1 65 296
Total 158 826 253 268 8 65 1578
136 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
28. PROVISIONScontinued
Maturityprofile
Thepresentvaluematurityprofileoftheprovisionsforthegroupissetoutinthetablebelow:
Lessthan1year
Morethan1year
lessthan5years 5years+
Assetretirementobligation 23 182 35
Environmentalremediation 137 889 312
Onerouscontracts 44 146 88
Leavepaybenefits 67 227
Post-retirementmedical-aidbenefits 1 5 4
Total 272 1449 439
Thepresentvaluematurityprofileoftheprovisionsforthecompanyissetoutinthetablebelow:
Lessthan1year
Morethan1year
lessthan5years 5years+
Assetretirementobligation 23 182 35
Environmentalremediation 137 887 306
Onerouscontracts 44 146 88
Leavepaybenefits 67 227
Post-retirementmedical-aidbenefits 1 4 4
Total 272 1446 433
Assetretirementobligation(ARO)andenvironmentalremediationobligationprovisionsEnvironmentalobligationsconsistofassetretirementobligationsandenvironmentalremediationobligations.
Environmentalremediationobligationsrepresentthepresentvalueofthecostofremedialactiontoclean-upandsecureasite.Theseactionsareprimarilyattributabletohistorical,thatis,legacywastedisposalactivities.Withsubsequentchangesinnationalenvironmentallegislation,theunithasalegalobligationtoremediatethesefacilities.
Assetretirementobligations(ARO),whicharisefromlegalrequirements,representmanagement’sbestestimateofthepresentvalueofcoststhatwillberequiredtoretireplantandequipment.Themajorityoftheobligationrelatestoancillaryplantandequipmentthatwillberetiredaspartoftheclean-upandclosureofthosefacilitiestoberemediatedviatheenvironmentalremediationobligation.ThenetcarryingamountoftheAROassetcomponentincludedwithinnote18,amountstoR61million(December2007:R25million)forboththegroupandcompany.
Thetermoftheobligationassessmentvariesaccordingtothesite.Themaximumtermis20years.
ArcelorMittalSouthAfrica AnnualReport2008
137
28. PROVISIONScontinued
Thefuturecashoutflowsarediscountedataweightedaveragecredit-adjusteddiscountrateasindicatedinthetablebelow:
Businessunit2008
%2007
%
VanderbijlparkWorks 10.67 11.38
VereenigingWorks 10.75 11.21
NewcastleWorks 10.75 11.79
SaldanhaWorks 10.75 10.98
PretoriaWorks 10.75 10.91
CokeandChemicals 10.52
Theaverageescalationfactorappliedtothecurrentcashflowestimatesis6.8%(December2007:averagerateof5.11%).
Theincreaserelativetothecomparativeperiodispartlyreflectedinthescopeamendmentstotakecognisanceof,amongotherfeatures,newinvestigationoutcomesandrevisedpriorities,andisduetoincreasesincivil,mechanicalandtransportcostescalationfactors.
OnerouscontractprovisionTheprovisionrepresentsanonerousoperatingleasecontractembeddedinalong-term,take-or-paygassupplycontract.Theunavoidabilityofthecostaroseuponthe1997de-commissioningofsteel-makingfacilitiesatPretoriaWorks.Theprovisionrepresentsthepresentvalueofthefutureleasepaymentsthatthegroupandcompanyarepresentlyobligatedtomakeunderthenon-cancellableonerousoperatinglease.NetcashoutflowfortheyearamountedtoR43million(December2007:R58million).Theunexpiredtermofthecontractis11years.Thelong-termaverageescalationfactorappliedtothecurrentcashflowestimatesis6.64%(December2007:5.11%).Thefuturecashoutflowsarediscountedatanaveragecredit-adjusteddiscountrateof10.7%(December2007:10.91%).
LeavepaybenefitsIntermsofthegroupandcompanypolicy,employeesareentitledtoaccumulatevestedleavebenefitsnottakenwithinaleavecycle.Theobligationisreviewedannually.
Thedistinctionappliedbythegroupandcompanytodistinguishbetweencurrentandnon-currentleavepaybenefitentitlementshashistoricallybeenbasednotonthetimingofthesettlementexpectationbutratheronwhenthebenefitsareduetobesettled,thatis,takenasleaveorsettledincash.Allstatutoryleavebenefits(21daysina12-monthleavecycle)andanymandatoryleaveencashmenttobemadewithin12monthsofthereportingdateareclassifiedasacurrentleavepaybenefitobligation.Theremainingentitlementsareclassifiedasanon-currentleavepaybenefitobligation.
From1September2008,theleavepaybenefitpolicyofthegroupandcompanywasmodifiedsothatallleavepaybenefitsaccumulatedinexcessof50dayswillbemandatorilyencashedandsettledonasemesterlybasisinJuneandDecembereachyear.Theamountisdisclosedasacurrentobligation.
Aspartofthetransitionprocess,allaccumulatedleaveabove50dayson1September2008wasring-fenced.Totheextentthatsuchleavepaybenefitsremainoutstandingat30April2010,theamountwillbeautomaticallyencashed.Thecarryingamountofsuchbenefitsat31December2008amountstoR227million,whichisdisclosedasanon-currentobligation.
Theprovisionisnotdiscounted.
Post-retirementmedical-aidbenefitsThegroupandcompanyrecognisealiabilityrelatingtofuturemedicalaidforcertainearlyretirees.Theobligationrepresentsapresentvalueamount,whichisactuariallyvaluedonanannualbasis.Anysurplusordeficitarisingfromthevaluationisrecognisedintheincomestatement.
Other:Taxationdispute–BusinessAssistanceAgreementTheAlternativeDisputeResolution(ADR)processwiththeSouthAfricanRevenueServiceswasfinalisedduringMarch2008,withsettlementbeingreachedonthedisputepertainingtothetaxdeductibilityofpaymentsmadeintermsoftheBusinessAssistanceAgreement.ThesettlementamountwasR100million.ForthefinancialyearendedDecember2007,aprovisionalobligationofR80millionwasrecognisedintermsofthesettlementoffermadeduringtheADRhearing.AfurtherR20millionwasrecognisedasanexpenseinthefirsthalfof2008.
138 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
29. DEFERREDTAxATION
Deferredtax(assets)/liabilitiesarisefromthefollowing:
Temporarydifferences
Cashflowhedges
Rm
Property,plant,
equipmentandintangible
assetsRm
EmployeecostRm
Available-for-sale
assetsRm
ProvisionsRm
Doubtfuldebts
Rm
Financeleaseobligations
RmOther
Rm
Unusedtaxlossesand
creditsRm
TotalRm
GROuP
Fortheyearended31December2008
Temporarydifferences
Atbeginningofyear (15) 3197 (81) (353) (5) (122) (16) (2) 2603
Ratechangechargedtoincome (109) 3 12 4 1 (89)
Chargedtoincome 141 (7) (134) (2) 19 12 2 31
Chargedtoequity (19) (19)
Atendofyear (34) 3229 (85) (475 (7) (99) (3) 2526
GROuP
Fortheyearended31December2007
Temporarydifferences
Atbeginningofyear (2) 3192 (76) 1 (45) (7) (172) (14) (392) 2485
Chargedtoincome 8 5 (5) (1) (308) 2 50 (3) 390 138
Chargedtoequity (21) 1 (20)
Atendofyear (15) 3197 (81) (353) (5) (122) (16) (2) 2603
COMPANy
Fortheyearended31December2008
Temporarydifferences
Atbeginningofyear (15) 1542 (81) (350) (5) (75) (9) 1007
Ratechangechargedtoincome (53) 3 12 3 (35)
Chargedtoincome 149 (7) (131) (2) 17 11 37
Chargedtoequity (16) (16)
Atendofyear (31) 1638 (85) (469) (7) (55) 2 993
COMPANy
Fortheyearended31December2007
Temporarydifferences
Atbeginningofyear (2) 1470 (76) 1 (43) (5) (122) (5) 1218
Chargedtoincome 8 72 (5) (1) (307) 47 (4) (190)
Chargedtoequity (21) (21)
Atendofyear (15) 1542 (81) (350) (5) (75) (9) 1007
ArcelorMittalSouthAfrica AnnualReport2008
139
29. DEFERREDTAxATION
Deferredtax(assets)/liabilitiesarisefromthefollowing:
Temporarydifferences
Cashflowhedges
Rm
Property,plant,
equipmentandintangible
assetsRm
EmployeecostRm
Available-for-sale
assetsRm
ProvisionsRm
Doubtfuldebts
Rm
Financeleaseobligations
RmOther
Rm
Unusedtaxlossesand
creditsRm
TotalRm
GROuP
Fortheyearended31December2008
Temporarydifferences
Atbeginningofyear (15) 3197 (81) (353) (5) (122) (16) (2) 2603
Ratechangechargedtoincome (109) 3 12 4 1 (89)
Chargedtoincome 141 (7) (134) (2) 19 12 2 31
Chargedtoequity (19) (19)
Atendofyear (34) 3229 (85) (475 (7) (99) (3) 2526
GROuP
Fortheyearended31December2007
Temporarydifferences
Atbeginningofyear (2) 3192 (76) 1 (45) (7) (172) (14) (392) 2485
Chargedtoincome 8 5 (5) (1) (308) 2 50 (3) 390 138
Chargedtoequity (21) 1 (20)
Atendofyear (15) 3197 (81) (353) (5) (122) (16) (2) 2603
COMPANy
Fortheyearended31December2008
Temporarydifferences
Atbeginningofyear (15) 1542 (81) (350) (5) (75) (9) 1007
Ratechangechargedtoincome (53) 3 12 3 (35)
Chargedtoincome 149 (7) (131) (2) 17 11 37
Chargedtoequity (16) (16)
Atendofyear (31) 1638 (85) (469) (7) (55) 2 993
COMPANy
Fortheyearended31December2007
Temporarydifferences
Atbeginningofyear (2) 1470 (76) 1 (43) (5) (122) (5) 1218
Chargedtoincome 8 72 (5) (1) (307) 47 (4) (190)
Chargedtoequity (21) (21)
Atendofyear (15) 1542 (81) (350) (5) (75) (9) 1007
140 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
30. TRADEANDOTHERPAyABLES
Tradepayables
–Rawmaterials 1456 760 1399 698
–Energy 74 89 66 83
–Railandtransport 46 235 29 192
–Other 1084 1345 982 1119
Totaltradepayables 2660 2424 2476 2092
Otherpayables
–Sundry 17 124 17 29
–Accruals 707 320 400 265
Totalotherpayables 724 444 417 294
Total 3384 2873 2893 2386
Thefunctionalsplitoftheaveragecreditperiodontradeandotherpayablesis:
2008 2007 2008 2007
Averagecreditperiodindaysfortradepayables
–Rawmaterials 28 32 28 34
–Energy 24 30 28 32
–Railandtransport 13 14 11 14
–Other,includingrelatedparties 52 54 58 58
Averagecreditperiodindaysforotherpayables
–Sundry 22 32 22 32
Thegroupandcompanyhavefinancialriskmanagementpoliciesinplacetoensurethatallpayablesarepaidwithinthe creditterms.
Forthegroupandcompany,theinterestexpenseincurredforlatepaymentontradeandotherpayablesisRnil (December2007:Rnil).
ArcelorMittalSouthAfrica AnnualReport2008
141
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
31. NOTESTOTHESTATEMENTOFCASHFLOwS31.1 Cashgeneratedfromoperations
Profitfromoperations 12159 7703 11097 6450Adjustedfornon-cashmovements–Depreciationandamortisation 1322 1099 858 752-Unrealisedprofitonsalestojoint
ventures (4) 8–Embeddedderivativesunrealised (141) 33 (141) 33–Shareoptionandparticipationcosts 60 35 60 35–Impairmentcharge 121 28–Movementsinprovisions 547 96 538 90–Allowancefornetrealisablevalue 215 26 182 27–Reconditionablesparesusage 12 13 9 11–Lossondisposalorscrappingof
property,plantandequipment 39 31 38 31Workingcapitalmovements–(Increase)/decreaseininventories (4067) (41) (4062) 160–Decrease/(increase)intradeandother
receivables 253 (118) 232 (84)–Increase/(decrease)intradeandother
payables 607 (288) 602 (259)–Utilisationofprovisions (184) (158) (184) (158)
10939 8439 9257 7088
31.2 DividendspaidChargedtoequity (2398) (1948) (2398) (1948)
(2398) (1948) (2398) (1948)
31.3 NormaltaxationNormaltaxationrecoverableat beginningofyear 108 179 164 234Amountschargedtotheincome statement (3909) (2316) (3547) (2219)Amountsrecognisedinequity 32 21 31 21Transferfromprovisions (80) 15 (65)Othermovements (5) 3Withholdingtax (13) (13)Normaltaxationpayable/(recoverable) atendofyear 780 (108) 690 (164)
(3087) (2209) (2740) (2125)
31.4 InvestmenttomaintainoperationsReplacementofproperty,plantand equipment (1114) (1003) (926) (810)Intangibleassets (25) (11) (25) (9)Environmental (217) (126) (215) (121)Reconditionablespares (57) (58) (38) (47)
(1413) (1198) (1204) (987)
31.5 InvestmenttoexpandoperationsProperty,plantandequipmentfor expansionandnewtechnology (419) (654) (334) (512)
(419) (654) (334) (512)
Totalcapitalexpenditure (1832) (1852) (1538) (1499)
142 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
32. FINANCIALINSTRuMENTS
32.1 Significantaccountingpolicies
Detailsofthesignificantaccounting policiesandmethodsadopted,including thecriteriaforrecognition,thebasis ofmeasurementandthebasisonwhich incomeandexpensesarerecognisedin respectofeachclassoffinancialasset, financialliabilityandequityinstrument aredisclosedinnote3,tothefinancial statements.
32.2 Categoriesoffinancialinstruments
Financialassets
Fairvaluethroughprofitorloss(FVTPL)
•Held-for-trading 11 01 9 01
•DesignatedatFVTPL
–Bifurcatedembeddedderivatives 366 218 366 218
Loansandreceivables
• Cashandcashequivalents 8429 4034 8121 3660
• Tradeandotherreceivables 2031 2292 1765 2007
• Available-for-salefinancialassets 71
Financialguaranteecontractsheld 02 02 02 02
Total 10837 6615 10261 5885
Financialliabilities
DesignatedasatFVTPL
•Held-for-trading 01 01
Derivativeinstrumentsindesignated hedgeaccountingrelationships
•Unmatured 129 53 117 53
•Maturedyetunsettled 28 14 26 14
Loanscarriedatamortisedcost
•Borrowingsandotherpayables 79 62 28 1
•Financeleaseobligations 354 416 199 253
•Tradeandotherpayables 3384 2873 2893 2386
Financialguaranteecontractsissued 02 02 02 02
Total 3974 3418 3263 2707
Netfinancialassets 6863 3197 6998 31781 Rounding to zero due to the use of numeric reporting scale format of one million.2 Financial guarantees with a fair value of zero are described in note 32.7.
Thegroupandcompanydonothave:
•financialassetsdesignatedasheld-to-maturity;and/or
•financialliabilitiesdesignatedatFVTPL(otherthanforderivativeinstrumentsheld-for-tradingatFVTPL).
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32. FINANCIALINSTRuMENTScontinued
32.3 FairvalueoffinancialinstrumentsThefairvaluesoffinancialassetsandfinancialliabilitiesaredeterminedas:
• thefairvalueoffinancialassetswithstandardtermsandconditionsandtradedonactiveliquidmarketsisdeterminedwithreferencetoquotedmarketprices;
• thefairvalueofthosefinancialassetsforwhichactiveandliquidmarketsdonot,ordonolonger,existarevaluedusinggenerallyacceptedvaluationtechniques,suchasthoserecommendedwithintheInternational Private Equity and Venture Capital Valuation Guidelines;
• thefairvalueofstand-aloneover-the-counterderivativeinstrumentsiscalculatedusingquotedprices;
• thefairvalueofembeddedderivativesiscalculatedusingavaluationtechniqueforwhichoneormoresignificantinputsarenotbasedonobservablemarketdata;and
• thefairvaluefinancialguaranteecontractsissuedorheldiscalculatedusingthecumulativeprobabilitymethodology,asdescribedinnote3.28.
Thefollowingfinancialassetsandfinancialliabilitiesaremeasuredatfairvalueintermsofthegroup’sandcompany’saccountingpolices:
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
FinancialassetsmeasuredatfairvalueFairvaluethroughprofitorloss(FVTPL)
• Held-for-trading 11 01 9 01
• DesignatedatFVTPL
–Bifurcatedembeddedderivatives 366 218 366 218
Derivative instruments in designated hedge accounting relationships
Available-for-salefinancialassets 71
Financialguaranteecontractsheld 02 02 02 02
Total 377 289 375 218
Financialliabilitiesmeasuredat fairvalueDesignatedasatFVTPL
• Held-for-trading 01 01
Derivative instruments in designated hedge accounting relationships
• Unmatured 129 53 117 53
• Maturedyetunsettled 28 14 26 14
Financialguaranteecontractsissued 02 02 02 02
Total 157 67 143 67
Netfinancialassetsmeasuredat fairvalue 220 222 232 1511 Rounding to zero due to the use of numeric reporting scale format of one million.2 Financial guarantees with a fair value of zero are described in note 32.7.
144 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.3 Fairvalueoffinancialinstrumentscontinued
Bifurcatedembeddedderivatives,available-for-sale(AFS)financialassetsandfinancialguaranteecontractsheldandissued,aremeasuredusingavaluationtechniqueforwhichoneormoresignificantinputsarenotbasedonobservablemarketdata.
Fortheembeddedderivative,thekeyvaluationinputs,thesensitivityanalysispertainingtothoseinputs,thecarryingamountsandchangesthereincomparedtothecomparativeperiodaredetailedinnote32.12.Similarlyfinancialguaranteecontractsareanalysedinnote32.7.
Developmentsrelatingtotheavailable-for-saleequityinvestment,beingthegroup’sinvestmentinHCCL,aredescribedinnote4.2andnote22.Thefairvaluemeasurementoftheinvestmentwasreclassifiedfrombeingbasedonquotedpricesonactivemarketsforthesameinstrumenttobeingbasedonavaluationtechniqueforwhichoneormoresignificantinputsarenotbasedonobservablemarketdata.Thereclassificationandaccountingimpactthereofare:
Group
AFSfinancialasset
Rm
AFSequityinvestmentmeasuredatfairvaluebasedon quotedpricesonactivemarketsforthesameinstrument
Balanceat1January2007
Initialrecognitionatcost 9
Totalgainsand(losses)inothercomprehensive income(AFSinvestmentreserve) 62
Balanceat31December2007 71
ReclassifiedasanAFSfinancialassetmeasuredusing avaluationtechniqueforwhichoneormoresignificant inputsarenotbasedonobservablemarketdata (71)
Balanceat31December2008
AFSequityinvestmentmeasuredatfairvalueusinga valuationtechniqueforwhichoneormoresignificant inputsarenotbasedonobservablemarketdata
Balanceat31December2007
ReclassifiedfromanAFSequityinvestmentmeasuredat fairvaluebasedonquotedpricesonactivemarketsfor thesameinstrument,consistingof:
–cost 9
–gainsrecognisedinAFSinvestmentreserve 62
Subsequentchangeinfairvaluewithtotallossesrecognised inothercomprehensiveincome(AFSinvestmentreserve) (71)
Balanceat31December2008
Totallossesincludedinprofitandlossfortheyear
ChangeinAFSinvestmentreserveincludedinother comprehensiveincome (71)
CarryingamountoftheAFSinvestmentreserve (deferredfairvalueloss) (9)
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32. FINANCIALINSTRuMENTScontinued
32.3 Fairvalueoffinancialinstrumentscontinued
Exceptasdetailedinthefollowingtable,thecarryingamountsofthosefinancialassetsandfinancialliabilitiesrecordedatamortisedcostinthefinancialstatementsapproximatetheirfairvalues.
Carryingvalue2008
Rm
Fairvalue2008
Rm
Carryingvalue2007
Rm
Fairvalue2007
Rm
GROuPNon-currentliabilitiesNon-currentborrowings 41 39 51 47
Non-currentfinanceleaseobligations 314 342 329 390
CurrentliabilitiesCurrentborrowings 10 16 10 17
Currentfinanceleaseobligations 40 44 88 63
TotalliabilitiesTotalborrowings 51 55 61 64
Totalfinanceleaseobligations 354 386 417 453
COMPANyNon-currentliabilitiesNon-currentfinanceleaseobligations 168 155 174 195
CurrentliabilitiesCurrentfinanceleaseobligations 31 33 79 53
TotalliabilitiesTotalfinanceleaseobligations 199 188 253 248
Thegenerallyhigherfairvaluerelativetocarryingamountofinterest-bearingborrowingsandfinanceleaseobligationsreflectthelowerreportingdatecredit-adjustedinterestratesrelativetothecontractedandimputedrates.Thefairvaluerepresentsthecapitalamountwhichcouldbeborrowedifthearrangementswererefundedatthereportingdate.
Thegroup’sfinancialstatementsincludeunlistedequity-accountedinvestmentsinanassociateandjointlycontrolledentities(note20andAnnexure1).Thefairvalueestimatesforasingleinvestmentaredeterminedusingacombinationofvaluationmethods,namely:(i)discountedcashflowanalysis,(ii)earningsmultiples;and/or(iii)aterminationliquidationbasis.Certainlimitedassumptionsarenotsupportablebyobservablemarketpricesorrates.
Thegroupandcompanyhavesignificantinvestmentsinthefollowingequity-accountedinvestments:
•MacsteelInternationalHoldingsBV;•Collect-a-Can(Proprietary)Limited;•ConsolidatedWireIndustriesLimited;•EnsimbiniTerminal(Proprietary)Limited;•ToyotaTsushoSAProcessing(Proprietary)Limited;•Microsteel(Proprietary)Limited;and•PietersburgIronCompany(Proprietary)Limited.
Indeterminingthefairvalueofthesesignificantinvestmentsforimpairmentassessmentanddisclosurepurposes,greateremphasiswasplacedonanetassetvalue,liquidationandsimpleearningsmultiplevaluationtechniquesforthereportingperiodended31December2008.Useofdiscountedcashflowtechniqueswerede-emphasisedduetothedifficultyinforecastingforwardearningsinthecurrenteconomicclimate.
Ingeneral,anearningsmultipleof5wasappliedtotheinvestments(December2007:earningsmultipleofbetween7to9times),whileaverageliquidationrealisationratesrangedfrom90%to100%dependingonthenatureofthebusiness(December2007:70%to100%).Thehigherrealisationratesfor2008reflectarealisationadjustmentlargelyrelatingtocertainpropertyvaluationratesthathistoricallyhavebeenbasedonverylowhistoricalcosts.Theadjustmentisbasedonobservablemarketratesforsimilarassets.
146 ArcelorMittalSouthAfrica AnnualReport2008
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32. FINANCIALINSTRuMENTScontinued
32.4 Financialriskmanagementoverviewandobjectives
Thegroup’sandcompany’sfinancialriskmanagementprogrammefocusesontheunpredictabilityoffinancialmarketsandseekstominimisepotentialadverseeffectsonfinancialperformance.
Financialriskisasubsetofthegroup’senterprise-wideriskmanagementpolicy(EWRM).Thelatterpolicyisapprovedbytheboardofdirectorsandreviewedbi-annually.
Thefinancialrisks1towhichthegroupandcompanyareexposedconsistof:•bankrelationshipandfinancialcounterpartyrisk;•financialmarketrisk,consistingof: –commoditypricerisks; –exchangeratefluctuations;and –liquidityrisk,being: cashflowvolatility;and fairvalueandcashflowinterestraterisk;•capitalmanagementandgearingrisk;and•customercreditrisk.1 Margin risk is driven by operational risk factors, which are addressed in the Sustainability Report. Corporate governance risk
is addressed in the Finance sub-section of the annual report.
Otherthanforcustomercreditrisk,theremainingfinancialrisksareaddressedinthecorporatetreasurypolicy.ThispolicyisalignedtothegreaterArcelorMittalgrouppolicyexceptforthefollowingaspectsrelatingtoSouthAfricanexchangecontrolregulationsasregulatedbytheSouthAfricanReserveBank(SARB):•repatriationofexportproceedswithina180-dayperiod;•limitationsontheamount(hedgepercentage)andforwardperiodforderivativesusedtoeconomicallyhedge
theUSDpricevolatilityriskoffuturebasemetalpurchases;•foreignfundingandrepaymentapprovalsbytheSARB;and•offshorepaymentsofsurpluscashpositions.
Thetreasurypolicyaddressesmarket,liquidity,capitalmanagementandgearingriskthroughthedirectionofthefollowingactivities:•bankrelationshipsandfinancialcounterpartyexposuremanagement;•financingfacilities;•financialguaranteesandlettersofcredit;•marketriskmanagement,through: –commodityriskmanagement; –currencyriskmanagement;and –interestratemanagement•cashmanagement,throughliquiditymanagement.
Thetreasurypolicyisenactedbythetreasurydepartment(Treasury).Treasuryidentifies,evaluatesandmitigatesfinancialrisksincloseco-operationwiththegroup’sandcompany’soperatingunits.Board-approvedwrittenpoliciescoverthespecificactivitiesnotedaboveandaddressrisklimits,theuseofderivativeandnon-derivativefinancialinstrumentstohedgecertainexposures,andtheapprovalframeworkgoverningtransactionlevels.
Hedgeperformanceismeasuredagainstthreebenchmarklevels:•performanceagainstbudgetedlevels;•performanceagainstmarketlevels;and•performanceagainsttheunhedgedexposurepositions.
Well-definedmarkettriggerlevelsareusedtoensurethemaintenanceofanappropriatelycomposedhedgepositioninresponsetomarketmovements.
Treasuryfulfilsasharedservicefunctionforsubsidiarycompaniesinthegroup.Forassociateandjointlycontrolledentities,atreasuryoverviewroleisperformedthroughrepresentationonthosecompanies’boardsofdirectorsandauditcommittees.
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32. FINANCIALINSTRuMENTScontinued
32.4 Financialriskmanagementoverviewandobjectivescontinued
Thecorporatecreditriskmanagementpolicy(creditpolicy)managesthecustomercreditriskexposureofthegroupandcompany.Theobjectivesofthecreditpolicyareto:•increasesalesthroughinvestinginthecustomerbase;•avoidextensionsthatcouldleadtofinancialdistressanddefaultbycustomers;•maintainproductivecustomerrelationshipswithintheframeworkofprudentriskmanagement;•optimisingcashcollectionperiods;and•diversifyingcreditexposureoverabroadclientbase.
Thecreditpolicyisenactedbythecreditmanagementdepartment(CreditManagement)andisbasedontheSouthAfricanKingIIReportonCorporateGovernanceandinternationalbestpractice.CreditManagementensuresthatcreditextensionandmanagementisconductedwithintheapprovedframeworks,andadequatelyassessesandreportsallcreditexposures,whichincludesthemaintenanceofappropriatecollateral,financialguaranteesandcreditinsurance.
Thegroup’sprudentcreditriskmanagementapproachcontributessignificantlytominimiseexposuretocreditdefaults.Creditdefaultriskismitigatedthroughsufficientcollateral,anextensivecreditinsurancepolicy,continualassessmentofcustomers’riskprofilesandmanagementofexposurepercustomerwithinapprovedcreditlimits.Thisapproachwillcontinuetobefollowedtoensureminimalexposureduringthecreditcrisis.Despiteanincreaseinpast-dueaccountsatyear-end,themajorityofthesehavebeenrecoveredduringJanuary2009.
32.5 Bankrelationshipandfinancialcounterpartyexposuremanagement
(a) Bank relationship management Thegroupandcompanystrivetohaveabalancedpoolofbanksthatcanprovidethedesiredfundingand
servicesatacompetitiveprice,whilelimitingandmanagingtheconcentrationofcounterpartyrisk.
Duetotheimportanceofhavingaccesstolong-termfinancingforgrowthpurposes,thegroupandcompanyselectcounterpartiesbasedontheirabilityandwillingnesstosupportboththegroupandthecompany.Bankingbusinessisdividedbetweenthebanksinabalancedwaybasedonperformanceandcompetitiveness.
Riskistakenoncounterpartiesinaccordancewithcounterpartylimits.Limitspercounterpartyaredetermineddependingonthecounterparty’screditrating.Withthefinancialriskshocksinlate2008,thismatteriscarefullymonitoredbyseniormanagement.
(b) Financial counterparty exposure management Theboardofdirectorsapprovecounterpartylimits.
Actualexposureagainsttheselimitsismonitoredonacontinualbasis.Positionsareplacedonlywithcounterpartieswithahigh-qualityrating.Theweightedaverageriskexposuretoanyonebankisbasedonitssettlementlimitplusapredefinedpercentagedependingonthetypeofbusinessbeingtransacted.Thatpercentagerepresentsthepremiumofreinstatingthearrangementwithanotherbank.
Thegroup’sexposurepercategoryaccordingtoFitch’sinternationalbankratingscaleagainstcounterpartylimitsis:
Depositandcallaccounts
Foreigncurrencyderivatives1
Basemetalderivatives1
LimitRm
BalanceRm
LimitRm
BalanceRm
Limit2Rm
BalanceRm
Fortheyearended 31December2008F1andabove 4800 4505 5100 17 246F2 6900 39243 0 0 31Total 11700 8429 5100 17 277Fortheyearended 31December2007F1andabove 6800 307 12000 105 370F2 7600 31693 10500 7F3 1000 558 2100 7Total 15400 4034 24600 119 3701 Notional absolute amount of contracts, as opposed to fair value.2 Base metal trading is managed in collaboration with the greater ArcelorMittal Group. 3Includes call account balances for which no limit exists. The deposit account limits were not exceeded.
148 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.5 Bankrelationshipandfinancialcounterpartyexposuremanagementcontinued
(b)Financialcounterpartyexposuremanagementcontinued
Fitchinternationalrating Description
F1 Highestcreditquality.Indicatesthestrongestcapacityfortimelypaymentoffinancialcommitments.
F2 Goodcreditquality.Asatisfactorycapacityfortimelypaymentoffinancialcommitments,butthemarginofsafetyisnotasgreatasinthecaseofthehigherratings.
F3 Faircreditquality.Thecapacityfortimelypaymentoffinancialcommitmentsisadequate.
Limitswereadjustedduringtheyeartoalignwithexpectedbusinessneeds.
Nocreditlimitswereexceededduringthereportingperiodandmanagementdoesnotexpectanylossesfromnon-performancebythebankingcounterparties.
32.6 Financingfacilities
Prudentliquidityriskmanagementincludesmaintainingsufficientcashandmarketablesecurities,theavailabilityoffundingfromanadequateamountofcreditfacilities,andtheabilitytoclose-outmarketpositions.
Managementmonitorsrollingforecastsofthegroup’s1liquidityreserveonthebasisofexpectedcashflow.
Theborrowingcapacityofthegroupis:
2008Rm
2007Rm
Borrowingcapacityisdeterminedbythedirectorsintermsofthe ArticlesofAssociation,namely100%ofthegroup’sequity 27995 20583
Lesstotalborrowingsandfinanceleaseobligations (405)2 (478)
Unutilisedborrowingcapacity 27590 201051Financing facilities are presented only on a group basis as this is the most meaningful level of aggregation for related
decision-making.2Borrowings exclude the cash-settled share-based payment payable.
Toaddresspotentialunforeseenfundingrequirementsthegrouphasaccesstothefollowingfacilities:
FacilityRm
DrawnRm
AvailableRm
Term
31December2008
Stand-byfacilities
–Uncommittedshort-termfacility 1398 (51) 1347Demandfacilities
–Facilityavailablewith24hours’notice 1000 1000Demandfacilities
Total 2398 (51) 2347
31December2007
Stand-byfacilities
–Uncommittedshort-termfacility 2484 (61) 2423Demandfacilities
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32. FINANCIALINSTRuMENTScontinued
32.7 Financialguaranteecontracts
Group Company
2008 2007 20081 20071
Financialguaranteecontractsissued–Numbers 1 2 12 6–Facevalue(Rm) 1 32 69 82–Carryingamount 0 0 0 0Financialguaranteecontractsheld–Carryingamount 0 0 0 01 As required by IAS 39, the company amounts include instruments guaranteeing subsidiary companies.
FinancialguaranteecontractsissuedBusinessisconductedasfaraspossibleonanopen-accountbasis,andthustheissuanceofguaranteesisdoneonalimited,highlyselectivebasis.Insistencebystateinstitutionsforsuchfacilitiesmakessuchissuanceslargelyunavoidable.Anadditionalmotivationforissuanceiswhenitresultsinaconcomitantreductioninthecostofapurchasedsupply.
Thefollowingarenotregardedasfinancialguaranteecontractsandareexcludedfromtheanalysis:
•contractswherethegrouporcompanyhastheabilitytocontrolthetriggeringoftheguaranteeevent (lettersofcomfort);and
•commerciallettersofcredit.
ThecarryingamountofallfinancialguaranteecontractsissuedisRnil(December2007:Rnil)astheriskofdefaultishighlyremote.Thereisnocollateralagainsttheseguarantees.
Thefacevalueofallcontractsisdisclosedascontingentliabilitiesinnote35.
FinancialguaranteecontractsheldThecarryingamountofallfinancialguaranteecontractsheldisRnil(December2007:Rnil)as(i)theriskofdefaultishighlyremote;and(ii)forthoserareinstanceswheredefaultoccursandtheguaranteeisinvoked,theamountsareinsignificant.
Thetotalfacevalueoffinancialguaranteecontractsheldbythegroupandcompanyisdisclosedinnote22.
32.8 FinancialmarketriskThegroup’sandcompany’sactivitiesexposethereportingentitiesprimarilytothefinancialrisksofchangesincommodityprices,foreigncurrencyexchangerates,interestratesandpotentialliquidityconstraints.
Duetotheholdingofanavailable-for-saleequityinvestment,thegroupisalsoexposedtoequitypricerisk.
Thegroupandcompanymayenterintoavarietyofderivativefinancialinstrumentstomanageexposuretofinancialrisk,asfollows:
•Over-the-counter,LME-referenced,cash-settledforwardbasemetalpurchasecontracts,andoptionstoeconomicallyhedgetheUSDcommoditypriceriskarisingfromthepurchaseofbasemetalsbeing,aluminium,zinc,tinandnickelusedintheproductionofsteel.
•Over-the-counter,cash-settledforeignexchangeforwardcontractsandoptionstoeconomicallyhedgetheexchangerateriskarisingon(i)theexportoffinishedsteelfromSouthAfricatovariousexportmarkets;and(ii)ad hocpurchaseofrawmaterialandcapitalequipmentthatcannotbenaturallyhedgedusingoff-shoreheldforeigncurrencyproceeds.
•Embeddedderivativefeaturesinprocurementcontractsusedtoeconomicallyhedgethepriceriskofcertainsuppliesthatcannotbehedgedusingstand-aloneover-the-counterderivativeinstruments.
•Over-the-counter,cash-settledswapcontracts,forwardrateagreements(FRAs)andoptionstoeconomicallyhedgetheinterestrateriskarisingfromsurpluscashorfundingpositionsdenominatedinZARandUSD.
• Over-the-counter,cash-settledforwardfreightagreementsusedtoeconomicallyhedgethefreightrateriskoftheoutwardleasingoffreightcapacitybythesteeltradingjointlycontrolledentity,MacsteelInternationalHoldingsBV(MIHBV).
FinancialmarketriskexposuresaremeasuredusingtheValueatRisk(VaR)methodology,supplementedbysensitivityanalyses.
150 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.9 ValueatRiskanalysis
ValueatRisk(VaR)calculatesthemaximumpre-taxlossexpected(orworst-casescenario)onaninvestmentorderivativepositionheld,overagiventimeperiodandgivenaspecifieddegreeofconfidence.
TheVaRmethodologyisastatisticallydefined,probability-basedapproachthattakesintoaccount,inter alia,marketvolatilitiesrelativetoapositionheld.AVaRstatistichasthreecomponents:atimeperiod,aconfidencelevelandalossamount.Riskscanbemeasuredconsistentlyacrossallmarketsandproducts,andriskmeasurescanbeaggregatedtoarriveatasinglerisknumber.
Thegrouputilisesavariance-covariance,ordelta-normal,modelwhichassumesthatreturnsarenormallydistributed.Itrequiresthedeterminationofonlytwofactors–anexpected(oraverage)returnandastandarddeviation,fromwhichanormaldistributioncurvecanbeplotted.Themodelassumesthatreturnsarewellbehavedaccordingtothesymmetricalnormalcurveandthathistoricalpatternswillrepeatintothefuture.
Theone-month97%VaRstatisticusedbythegroupreflectsthe97%probabilitythatthemonthlylosswillnotexceedthereportedVaR.
Intheinterestofsimplicity,noadjustmentismadetocorrectskewnessagainsttheassumptionofnormaldistributionasVaRanalysisisusedonlyasanindicativemeasureofrisk.Itiscombinedwithotherformsoftechnicalandfundamentalanalysesandperformancebenchmarks,whicharecollectivelyusedtodetermineriskstrategiesandtriggerlevels.
Intheanalysisbelow,anegativeamountrepresentsalosswhileapositiveisagain.Thehistorictimeperiodsusedtoderivethemeanandstandardderivationvaluesare:
• Foreigndenominatedcashandcashequivalents,andforeignexchangederivativesfrom1January2006to31December2008(2007:1January2005to31December2007).
• Basemetalderivativesfrom1January2006to31December2008(2007:1November2005to31December2007).
Foreigncurrencyexposureinherentintradeandotherreceivables,tradeandotherpayables,andbifurcatedembeddedderivativesarenotmanagedusingVaRanalysis.Similarly,theanalysisisnotusedtomeasuresuchexposureinthebasemetalprocurementportfolio,duetotheinherentlimitationsofVaRanalysis.
TheVaRanalysisispresentedsolelyfromagroupperspectiveasthisrepresentsthemostmeaningfullevelofexposureanalysis.
Variance–co-variance
VaR(97%,one-month)byrisktype:investmentoropenpositionheldAverage Minimum Maximum Year-end
(high) (low)
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
Foreign denominated cashand cash equivalents onhand1
–USD (641) (49) (78) 285 (1204) (382) 02 02
Total (641) (49) (78) 285 (1204) (382) 02 02
1 MZN excluded for 2008 as amounts do not significantly contribute to the VaR analysis.2 Re-valued at the closing rate for the reporting period, therefore no variance arises.
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32. FINANCIALINSTRuMENTScontinued
32.9 ValueatRiskanalysiscontinued
Variance–co-variance
VaR(97%,one-month)byrisktype:investmentoropenpositionheldAverage Minimum Maximum Year-end1
(high) (low)
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
Derivatives
unmatured basemetal forward purchase contracts
–Aluminium (17) 2 4 9 (39) (5) (53) (1)
–Zinc 21 35 65 177 (22) (107) (21) (50)
–Nickel3 (1) (1) 28 9 (30) (10) (25) (2)
–Tin (14) (3) 2 1 (30) (7) (21) 02
Basemetal derivatives total (11) 33 99 196 (121) (129) (120) (53)
unmatured foreign currency contracts
–BuyUSD (1) 5 (7) 02
–BuyEUR (3) (14) 1 3 (7) (32) 2 02
–SellEUR (1) 02 (3) 02
–SellUSD 02 2 (3) 02
Foreign currency derivatives total (3) (16) 1 10 (7) (45) 2 02
Total derivatives (14) 17 100 206 (128) (174) (118) (53)1 Carrying amount of derivatives at the reporting date.2 Rounding to zero due to the use of numeric reporting scale format of one million.3 The VaR for nickel combines the forward purchase and sales contract exposures.
Detailsofthesensitivityanalysisforforeigncurrencyriskandinterestrateriskarediscussedlaterinthisnote.
152 ArcelorMittalSouthAfrica AnnualReport2008
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32. FINANCIALINSTRuMENTScontinued
32.10 Commoditypriceriskmanagementusingbasemetalderivatives
EconomichedgingusingderivativecontractsThegroupandcompanyareexposedtobasemetalpricevolatility.BasemetalsaretradedinUSDandtheexchangerateriskisoffsetagainstUSDexportproceeds.
Basemetalsarehedgedusingover-the-countercash-settledforwardpurchasecontractsandoptions.Thederivativesaretransactedwithreputable,creditworthy,largeretail,merchantandinvestmentbanks.
TheriskmanagementobjectiveistoreducethevariabilityintheUSDcashflowsexpectedtobepaidontheforecastpurchaseofthebasemetal.ThestrategyistousetheUSDcashflowreceivedorpaidfromsettlementofaLondonMetalExchange(LME)-referencedderivativethatiseconomicallyhedgingtheforecasttransaction,tooffsetthevariabilityintheUSDcashflowsontheforecastpurchaseofthebasemetal.
Theeconomichedginglimitsare:
Period Minimumhedginglevel Maximumhedginglevel
Upto12months None 75%
Theeconomichedgedpositionforthebasemetalsis:
Group Company
2008 2007 2008 2007
At31December2008
Aluminium
–Percentofexposurehedged 25% 15% 25% 15%
–Periodhedgedto: Dec2009 Sep2008 Dec2009 Sep2008
–Averagehedgedpriceofforward purchasecontract(USD/tonne) 3135 2505 3135 2505
Zinc
–Percentofexposurehedged 8% 42% 8% 42%
–Periodhedgedto: Jun2009 Oct2008 Jun2009 Oct2008
–Averagehedgedpriceofforward purchasecontract(USD/tonne) 1997 2841 1997 2841
Nickel
–Percentofnetexposurehedged 30% 13% 30% 13%
–Periodhedgedto: Dec2009 Sep2008 Dec2009 Sep2008
–Averagehedgedpriceofforward purchasecontract(USD/tonne) 25905 29900 25905 29900
–Averagehedgedpriceofforwardsales contract(USD/tonne) 22688 22688
Tin
–Percentofexposurehedged 14% 6% 14% 6%
–Periodhedgedto: Mar2009 Mar2008 Mar2009 Mar2008
–Averagehedgedpriceofforward purchasecontract(USD/tonne) 21912 16732 21912 16732
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32. FINANCIALINSTRuMENTScontinued
32.10 Commoditypriceriskmanagementusingbasemetalderivativescontinued
Cashflowhedgingrelationshipsaredesignedonaone-to-oneandnotaportfoliobasisduetodifferencesinthepricingtermsofthevariousmetalspurchasedbythespecificoperatingunitswithinthegroupandcompany.
Certainoftheinstrumentsarenotdesignatedascashflowhedgesif:
• thevolumesinvolvedaretoolowtomeritdesignation;• nosuitableunderlyingriskcouldbefoundtoprospectivelyformaneffectivehedgerelationship;• thecashflowhedgerelationshipceasedtobeeffectivebasedonretrospectivetesting;• voluntaryde-designationofthecashflowhedgerelationshipoccurred;or• theunderlyingforecasttransactionwasnolongerexpectedtooccur.
Theseinstrumentsareclassifiedasheld-for-tradinginstrumentsasFVTPL.
At31December2008thetonnageofbasemetalshedgedbyunmaturedderivativeinstrumentsdecreasedby63%and66%forthegroupandcompanyrespectivelyrelativetothecomparativeperiod.Despitetheeconomicallyhedgedtonnagehavingreduced,thepercentageofexposurehedgedishigherthanforthecomparativeperiodforallbasemetalsotherthanzinc.Thepositionreflectstheconfluenceofhedgedpositionstakeninearly2008,andthelate-2008impactofsubstantialreductionsintheexpectedforwardpurchaserequirementofbasemetalsinresponsetotheweakersteeldemandsituationexpectedinto2009.
Sincemid-2008managementhasdecidednottotakeanyfurtherhedgedpositionsfollowingthecommoditypricecollapseparticularlyinthesecondhalfof2008.Withfearsofadeeperandwiderglobalrecession,theexpectationoffurtherdownsidepricingpressureonbasemetalsactsasadeterrenttothetransactingoffurthereconomichedges.Marketstrendswillcontinuetobemonitoredinto2009inordertodeterminethemostopportunetimetorecommencehedgingactivities.
154 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.10 Commoditypriceriskmanagementusingbasemetalderivativescontinued
Averageprice Tonnes ContractvalueFairvalue
(Favourable)Fairvalue
(Unfavourable)Profitorloss
gains/(losses)Otherequity-hedgingreservegains/(losses)1
unmaturedinstrumentst:tonnes
2008uSD/t
2007USD/t
2008 2007 2008uSDm
2007USDm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
GROuP
(i) Derivative instruments in designated cash flow hedge accounting relationships
Forwardpurchasecontracts
Aluminium 3135 2505 3644 2880 11 7 (53) (1) (53) (1)
Zinc 1997 2841 2769 15370 6 44 (21) (50) (21) (50)
Nickel 25905 29900 249 72 6 2 (34) (2) (6) (28) (2)
Tin 21912 16732 189 84 4 1 (21) 02 (21) 02
(ii) Held-for-trading at FVTPL
Forwardsalescontracts
Nickel 22688 (86) (2) 9 9
Nettotal 6765 18406 25 54 9 (129) (53) 3 (123) (53)
COMPANy
(i) Derivative instruments in designated cash flow hedge accounting relationships
Forwardpurchasecontracts
Aluminium 3135 2505 2841 2250 9 6 (41) (1) (41) (1)
Zinc 1997 2841 2769 15370 6 44 (21) (50) (21) (50)
Nickel 25905 29900 249 72 6 2 (34) (2) (6) (28) (2)
Tin 21912 16732 189 84 4 1 (21) 02 (21) 02
(ii) Held-for-trading at FVTPL
Forwardsalescontracts
Nickel 22688 (86) (2) 9 9
Nettotal 5962 17776 23 53 9 (117) (53) 3 (111) (53)1 Excludes matured instruments not yet settled, and realised gains and losses on matured instruments not yet released from
the hedging reserve. Refer to the “Base metal cash flow hedge accounting reserve” section below for a complete analysis of the cash flow hedging reserve.
2 Rounding to zero due to the use of numeric reporting scale format of one million.
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32. FINANCIALINSTRuMENTScontinued
32.10 Commoditypriceriskmanagementusingbasemetalderivativescontinued
Averageprice Tonnes ContractvalueFairvalue
(Favourable)Fairvalue
(Unfavourable)Profitorloss
gains/(losses)Otherequity-hedgingreservegains/(losses)1
unmaturedinstrumentst:tonnes
2008uSD/t
2007USD/t
2008 2007 2008uSDm
2007USDm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
GROuP
(i) Derivative instruments in designated cash flow hedge accounting relationships
Forwardpurchasecontracts
Aluminium 3135 2505 3644 2880 11 7 (53) (1) (53) (1)
Zinc 1997 2841 2769 15370 6 44 (21) (50) (21) (50)
Nickel 25905 29900 249 72 6 2 (34) (2) (6) (28) (2)
Tin 21912 16732 189 84 4 1 (21) 02 (21) 02
(ii) Held-for-trading at FVTPL
Forwardsalescontracts
Nickel 22688 (86) (2) 9 9
Nettotal 6765 18406 25 54 9 (129) (53) 3 (123) (53)
COMPANy
(i) Derivative instruments in designated cash flow hedge accounting relationships
Forwardpurchasecontracts
Aluminium 3135 2505 2841 2250 9 6 (41) (1) (41) (1)
Zinc 1997 2841 2769 15370 6 44 (21) (50) (21) (50)
Nickel 25905 29900 249 72 6 2 (34) (2) (6) (28) (2)
Tin 21912 16732 189 84 4 1 (21) 02 (21) 02
(ii) Held-for-trading at FVTPL
Forwardsalescontracts
Nickel 22688 (86) (2) 9 9
Nettotal 5962 17776 23 53 9 (117) (53) 3 (111) (53)1 Excludes matured instruments not yet settled, and realised gains and losses on matured instruments not yet released from
the hedging reserve. Refer to the “Base metal cash flow hedge accounting reserve” section below for a complete analysis of the cash flow hedging reserve.
2 Rounding to zero due to the use of numeric reporting scale format of one million.
156 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.10 Commoditypriceriskmanagementusingbasemetalderivativescontinued
Cumulativeineffectivenessofbasemetalcashflowhedgesmeasuredasapercentageoftherelevantcashflowhedgingreserveis:
Group Company
2008 2007 2008 2007
At31December
Basemetalshedgeineffectiveness percentage
0.28% 0.02% 0.28% 0.02%
BasemetalsensitivityforderivativecontractsThefollowingtabledetailsthegroup’sandcompany’ssensitivitytoa10%increase/(decrease)intheUSDforwardmarketpriceagainstthehedgedpositionsoftherelevantbasemetals.The10%stringencyisthesensitivityrateusedwhenreportingbasemetalriskinternallytokeymanagementpersonnel,andrepresentsmanagement’sassessmentofthepossiblechangeinbasemetalpricesthatcanbefurthereasilyextrapolatedinresponsetotherecenthighlevelsofpricevolatility.Thesensitivityanalysisincludesonlyoutstanding,unmaturedbasemetalderivativeinstruments(bothheld-for-tradingatFVTPLandthosedesignatedinhedgeaccountingrelationships),andadjuststheirmark-to-marketpriceatthereportingdatefora10%changeinbasemetalprices.
Apositive/(negative)numberindicatesanincrease/(decrease)inprofit or loss and otherequitywheretherespectivebasemetalpricechangesagainsttherelevantbasemetalforwardposition.
Group Company
ProfitorlossOtherequity–cashflowhedgingreserve Profitorloss
Otherequity–cashflowhedgingreserve
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
Purchase contracts
Aluminium+10% 5 5 4 5
Aluminium-10% (5) (5) (4) (5)
Zinc+10% 3 24 3 24
Zinc-10% (3) (24) (3) (24)
Nickel+10% 1 2 1 1 2 1
Nickel-10% (1) (2) (1) (1) (2) (1)
Tin+10% 2 1 2 1
Tin-10% (2) (1) (2) (1)
Salescontract
Nickel+10% (1) (1)
Nickel-10% 1 1
Total+10% 12 31 11 31
Total-10% (12) (31) (11) (31)
Thegroup’sandcompany’ssensitivitytobasemetalpricesatthereportingdateislessastheun-hedgedtonnageislowerthanin2007.
AsisevidentfromtheVaRmaximumlossexposureofR121million,thecarryingamountat31December2008ofbasemetalderivativesofR120millionisconvergingonthestatisticalmaximumlossexposurelevels.Whileabsolutemaximumlosslevelsarecomparabletotheprioryear,theriskismuchmorestronglyconcentratedinthepricedownsideriskgiventhatsignificantlylowertonnageswerehedgedagainstthecomparativeperiod.
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32. FINANCIALINSTRuMENTScontinued
32.10 Commoditypriceriskmanagementusingbasemetalderivativescontinued
Base metal cash flow hedge accounting reserve
Detailedanalysisofthecashflowhedgeaccountingreserveforbasemetalsisasfollows:
Group Company
Cashflowhedge
accountingreserve
Rm
Cashflowhedge
accountingreserve
Rm
Balanceat1January2007 30 30Gains/(losses)recognisedinothercomprehensiveincomeand cashflowhedgingreserveEffectivebasemetalforwardcontracts (103) (103)(Gains)/lossestransferredtoprofitorloss:(i)Effectivebasemetalforwardcontracts (2) (3)Effectivebasemetalzerocostcollaroptions (3) (3)De-designatedineffectivecashflowhedginginstruments(asdetailedinnote(i)) (3) (2)Ineffectivenessmeasurementofeffectivecontracts 01 01
Relatedincometax 27 27
Balanceat31December2007 (54) (54)Gains/(losses)recognisedinothercomprehensiveincomeand cashflowhedgingreserveEffectivebasemetalforwardcontracts (242) (228)(Gains)/lossestransferredtoprofitorloss:(ii)Effectivebasemetalforwardcontracts 138 138EffectivebasemetalzerocostcollaroptionsDe-designatedineffectivecashflowhedginginstruments(asdetailedinnote(ii)) 13 12Ineffectivenessmeasurementofeffectiveinstruments 01 01
Relatedincometax 25 21
Balanceat31December2008 (120) (111)
2007(i)Gains/(losses)transferredfromcashflowhedgingreserveinto
profitorlossduringtheperiodareincludedinthefollowingline itemsintheincomestatement
–Profitfromoperations(note9)–Rawmaterialsandconsumablesused(effectiveinstruments) 5 6–Ineffectivenessmeasurementofeffectiveinstruments 01 01
–Gainsandlossesonchangesinfinancialinstrumentsdesignatedas held-for-tradingatfairvaluethroughprofitorloss(note10),as De-designatedineffectivecashflowhedginginstruments 3 2
Total 8 8
2008(ii)Gains/(losses)transferredfromcashflowhedgingreserveinto
profitorlossduringtheperiodareincludedinthefollowingline itemsintheincomestatement:
–Profitfromoperations(note9),asrawmaterialsandconsumablesused •Effectiveinstruments (138) (138) •Ineffectiveinstruments (3) (2)–Ineffectivenessmeasurementofeffectiveinstruments 01 01
–Gainsandlossesonchangesinfinancialinstrumentsdesignatedas held-for-tradingatfairvaluethroughprofitandloss(note10),as
De-designatedineffectivecashflowhedginginstruments (10) (10)Total (151) (150)1 Rounding to zero due to the use of numeric reporting scale format of one million.
158 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.11 Foreigncurrencyriskmanagement
ThecarryingamountinZAR,astranslatedattheclosingexchangerate,oftheforeigncurrencydenominatedmonetaryassetsandmonetaryliabilitiesatthereportingdateis:
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
Monetaryassets
(i)uSD
Fairvaluethroughprofitorloss(FVTPL)
•Held-for-trading 9 02 9 02
Loansandreceivables
•Cashandcashequivalents 2946 2439 2670 2134
•Tradeandotherreceivables
–Relatedparties 254 158 160 84
–Unrelatedparties 4 23 4 23
(ii)MZN
Loansandreceivables
•Cashandcashequivalents 21
(iii)ZwD
Available-for-salefinancialassets1 71
(iv)EuR
Fairvaluethroughprofitorloss(FVTPL)
•Held-for-trading 2
Loansandreceivables
•Tradeandotherreceivables
–Relatedparties 2 2
–Unrelatedparties 1 11 The available-for-sale equity investment in HCCL, which is carried at Rnil (December 2007: R71 million) is not regarded
as a pure foreign denominated financial asset despite its Zimbabwe Stock Exchange listing. The existence of the – albeit at reporting date suspended - fungible share arrangement, as described in note 4.2 and note 22, makes for the objective delineation between exchange rate and other changes in fair value particularly difficult. In order to preserve the purity of the foreign currency exposure sensitivity analysis, which due to the nil carrying amounts is of relevance only to the comparative period, the HCCL investment is excluded from the analysis in the sections which follow.
2 Rounding to zero due to the use of numeric reporting scale format of one million.
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32. FINANCIALINSTRuMENTScontinued
32.11 Foreigncurrencyriskmanagementcontinued
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
Monetaryliabilities
(i)uSD
Derivativeinstrumentsindesignated hedgeaccountingrelationships
•Unmatured 129 53 117 53
• Maturedyetunsettled 28 14 26 14
Carriedatamortisedcost
•Tradeandotherpayables
–Relatedparties 846 4 865 4
– Unrelatedparties 22 67 22 67
(ii)EuR
Fairvaluethroughprofitorloss(FVTPL)
•Held-for-trading 01 01
Carriedatamortisedcost
•Tradeandotherpayables
–Relatedparties 01 5 01 5
–Unrelatedparties 59 54 48 45
(iii)JPy
Carriedatamortisedcost
•Tradeandotherpayables
–Unrelatedparties 1 01 1 01
(iv)GBP
Carriedatamortisedcost
•Tradeandotherpayables
–Relatedparties 01 01
–Unrelatedparties 1 1 1 1
(v)SEK
Carriedatamortisedcost
• Tradeandotherpayables
–Unrelatedparties 01 01 01
(vi)AuD
Carriedatamortisedcost
•Tradeandotherpayables
–Unrelatedparties 01 01
1 Rounding to zero due to the use of numeric reporting scale format of one million.
160 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.11 Foreigncurrencyriskmanagementcontinued
Foreign currency sensitivity
Thefollowingtabledetailsthegroup’sandcompany’ssensitivitytoa10%weakeningintheZARagainsttherespectiveforeigncurrencies.Astherisksarelinearinnature,strengtheningoftheZARwouldresultinanequalbutoppositeamounttothatdetailedinthesensitivitybelow.
The10%stringencyisthesensitivityrateusedwhenreportingforeigncurrencyriskinternallytokeymanagementpersonnelandrepresentsmanagement’sassessmentofthepossiblechangeinforeignexchangeratesthatcanbefurthereasilyextrapolatedinresponsetothehighlevelsofratevolatilityexperiencedbytheZAR.Thesensitivityanalysisincludesonlyoutstandingforeigncurrencydenominatedmonetaryitemsasdetailedinthetableaboveandadjuststheirtranslationatthereportingdatefora10%changeinforeigncurrencyrates.
Apositivenumberindicatesanincreaseinprofit or loss and other equitywheretheZARweakensagainsttherelevantcurrency.
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
uSD
Profitorloss 242 255 196 217
Othercomprehensiveincome (hedgingreserve) (16) (7) (16) (7)
EuR
Profitorloss (6) (6) (5) (5)
MZN
Profitorloss 2
Total1
Profitorloss 238 249 191 212
Othercomprehensiveincome (hedgingreserve) (16) (7) (16) (7)
1JPY, GBP, SEK and AUD are not material and not reported due to the use of numeric reporting scale format of one million.
ProfitandlossexposureismainlyattributabletotheexposureonUSDcashbalancesatyear-end.Theequityexposureismainlyasaresultofthechangesinthefairvalueofderivativeinstrumentsdesignatedascashflowhedges.
Thegroup’sandcompany’ssensitivitytoforeigncurrencyismarginallylowercomparedto2007duetoslightlylowerUSD-denominatedcashholdingat31December2008.AlowerexporttodomesticsalesratesresultedinlowerUSDcashreserves.
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32. FINANCIALINSTRuMENTScontinued
32.11 Foreigncurrencyriskmanagementcontinued
Economic hedging using derivative contracts
ThegroupandcompanyutilisetheZARasfunctionalcurrency.ExportsteelsalesareUSD-denominatedasarecertainUSD-denominatedinputmaterialandcapitalequipmentpurchases.
ForeigncurrencymanagementmusttakecognisanceoftheSouthAfricanReserveBank(SARB)exchangecontrolregulationsthatprohibitslocalcompaniesfromaccumulatingforeignexchangeproceedsbeyond180daysfromreceipt.
Withintheserestrictions,thegroupandcompanyaccumulatethemaximumallowedUSD-denominatedforeigncurrencyproceeds.TheseproceedsareusedtonaturallyhedgeUSD-denominatedpurchases.Suchfundsalsoserveasahedgeoflong-termZARdepreciation.
Itisthepolicytoenterintoforwardforeignexchangecontractsandoptionstomitigatespecificforeigncurrencytransactionalexposures,namely,significant:•exposuresexceedingthe180-dayexchangecontrolregulationperiod;and• non-USDexposures,againsttheZAR.
Exchangerateexposuresaremanagedwithinapprovedpolicyparametersutilisingforwardforeignexchangecontractsandoptions.Derivativesaretransactedwithreputable,creditworthy,largeretail,merchantorinvestmentbanks.
Economicforeigncurrencyhedgingisundertakentomanagethetransactionalexchangerateexposureof:• theexportoffinishedsteelfromSouthAfricatovariousexportmarkets;and• ad hocpurchaseofrawmaterialandcapitalequipmentthatcannotbenaturallyhedgedusingoff-shore
foreigncurrencyproceeds.
Onlytheformertransactiontypeisdesignatedwithincashflowhedgingrelationships,thelatterisclassifiedasheld-for-tradingasFVTPL.Thedifferenceinaccountingtreatmentreflectsthegreaternumberofderivativestransactedtoaddresstheexchangeraterisksonsteelexportation.Thecashflowhedgingrelationshipsaredesignatedonaportfoliobasiswherethetermsofthevariouscontractsareidenticalforthespecificoperatingunitswithinthegroupandcompany.
Itisthepolicytohedgeexportsaleexposuresuptoamaximumof70%oftherollingsix-monthexposure,wheretheeconomicexposureisdefinedasthatbeyondtheSARB180-dayrule.Thehedgecoveragelimitsare:• 80%ofthe1-2monthexposure;• 70%ofthe3-4monthexposure;and• 60%ofthe4-6monthexposure.
Exposurefrom6-12monthscanbefullyhedgedifapprovedbytheExecutiveCommittee.Exposuresfrom12-24monthsduetoseverecurrencyunder-valuation;andexposuresbeyond24monthsduetoextrememarketconditions,requireboardapprovalandthenecessarySARBconsent.
Thereexistsnominimumhedginglevelforforeigncurrencyexposures.
Foreigncurrencyexposuresrelatingtorawmaterialandcapitalprocurementthatcannotbenaturallyhedgedareselectivelyhedgedonacase-by-casebasis.
162 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.11 Foreigncurrencyriskmanagementcontinued
Theforeigndenominatedcontractvalueofunmaturedforeignexchangederivativesat31December2008decreasedsignificantlyby95%and97%forthegroupandcompanyrespectively,relativetothecomparativeperiod,primarilyduetothesystematicweaknessoftheZARthroughout2008,andparticularlyinthelastquarteroftheyear,andtheconsequentialbeneficialimpactonexportrevenuesandforeignreceivables,includingcashandcashequivalents.
Thefollowingtabledetailstheoutstandingunmaturedforwardforeigncurrencycontractsatthereportingdate:
unmaturedinstruments
Averageprice ContractvalueFairvalue
(Favourable)Fairvalue
(Unfavourable)Profitorloss
Gains/(losses)Otherequity-hedgingreserve
gains/(losses)1
FC:foreigncurrency2008FC/R
2007FC/R
2008FCm
2007FCm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
GroupForwardcontracts(i)Held-for-tradingatFVTPLCapitalprocurement
BuyuSD0-3months 6.90 7 02 02
SelluSD0-3months 6.92 3 02 02
BuyEuR0-3months 13.55 9.95 02 6 02 02 02
7-11months 11.42 10.40 1 3 2 02 02
12-24months 11.42 1 02 02
SellEuR0-3months 10.10 1 02 02
7-11months 10.29 02 02 02
Total 1 21 2 02 02 02 02
CompanyForwardcontracts(i)Held-for-tradingatFVTPLCapitalprocurementBuyuSD0-3months 6.90 7 02 02
SelluSD0-3months 6.92 3 02 02
BuyEuR0-3months 13.55 9.95 02 6 02 02 02
7-11months 10.13 1 02 02
12-24monthsSellEuR0-3months 10.10 1 02 02
7-11months 10.29 02 02 02
Total 02 18 02 02 02 02
1 Excludes matured instruments not yet settled, and realised gains and losses on matured instruments not yet released from the hedging reserve. Refer to the “Foreign currency cash flow hedge accounting reserve” section below for a complete analysis of the cash flow hedging reserve.
2 Rounding to zero due to the use of numeric reporting scale format of one million.
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32. FINANCIALINSTRuMENTScontinued
32.11 Foreigncurrencyriskmanagementcontinued
Theforeigndenominatedcontractvalueofunmaturedforeignexchangederivativesat31December2008decreasedsignificantlyby95%and97%forthegroupandcompanyrespectively,relativetothecomparativeperiod,primarilyduetothesystematicweaknessoftheZARthroughout2008,andparticularlyinthelastquarteroftheyear,andtheconsequentialbeneficialimpactonexportrevenuesandforeignreceivables,includingcashandcashequivalents.
Thefollowingtabledetailstheoutstandingunmaturedforwardforeigncurrencycontractsatthereportingdate:
unmaturedinstruments
Averageprice ContractvalueFairvalue
(Favourable)Fairvalue
(Unfavourable)Profitorloss
Gains/(losses)Otherequity-hedgingreserve
gains/(losses)1
FC:foreigncurrency2008FC/R
2007FC/R
2008FCm
2007FCm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
2008Rm
2007Rm
GroupForwardcontracts(i)Held-for-tradingatFVTPLCapitalprocurement
BuyuSD0-3months 6.90 7 02 02
SelluSD0-3months 6.92 3 02 02
BuyEuR0-3months 13.55 9.95 02 6 02 02 02
7-11months 11.42 10.40 1 3 2 02 02
12-24months 11.42 1 02 02
SellEuR0-3months 10.10 1 02 02
7-11months 10.29 02 02 02
Total 1 21 2 02 02 02 02
CompanyForwardcontracts(i)Held-for-tradingatFVTPLCapitalprocurementBuyuSD0-3months 6.90 7 02 02
SelluSD0-3months 6.92 3 02 02
BuyEuR0-3months 13.55 9.95 02 6 02 02 02
7-11months 10.13 1 02 02
12-24monthsSellEuR0-3months 10.10 1 02 02
7-11months 10.29 02 02 02
Total 02 18 02 02 02 02
1 Excludes matured instruments not yet settled, and realised gains and losses on matured instruments not yet released from the hedging reserve. Refer to the “Foreign currency cash flow hedge accounting reserve” section below for a complete analysis of the cash flow hedging reserve.
2 Rounding to zero due to the use of numeric reporting scale format of one million.
164 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.11 Foreigncurrencyriskmanagementcontinued
Foreign currency sensitivity for derivative contracts
Thefollowingtabledetailsthegroup’sandcompany’ssensitivitytoa10%weakeningintheZARexchangerateagainsttherelevantforeigncurrencies.The10%stringencyisthesensitivityrateusedwhenreportingforeigncurrencyriskinternallytokeymanagementpersonnel,andrepresentsmanagement’sassessmentofthepossiblechangeinforeignexchangeratesthatcanbefurthereasilyextrapolatedinresponsetothehighlevelsofratevolatilityexperiencedbytheZAR.Thesensitivityanalysisincludesonlyoutstanding,unmaturedforeigncurrencydenominatedmonetaryitemsandadjuststheirtranslationatthereportingdatefora10%changeinforeigncurrencyrates.
Apositivenumberindicatesanincreaseinprofit or loss and other equitywheretheZARweakensagainsttherelevantcurrency.DuetothelinearityoftherelationshipsastrengtheningintheZARratewouldresultinanequalbutoppositeamountchargedtoprofit or loss and other equity.
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
uSD
Profitorloss
–Buy 4 4
–Sell (2) (2)
Othercomprehensiveincome (hedgingreserve)
EuR
Profitorloss
–Buy 2 10 1 8
–Sell (1) (1)
Othercomprehensiveincome (hedgingreserve)
Total
Profitorloss
–Buy 2 14 1 12
–Sell (3) (3)
Othercomprehensiveincome (hedgingreserve)
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32. FINANCIALINSTRuMENTScontinued
32.11 Foreigncurrencyriskmanagementcontinued
Foreign currency cash flow hedge accounting reserve
Detailedanalysisofthecashflowhedgeaccountingreserveforforeigncurrencyderivativesis:
Group Company
Cashflowhedge
accountingreserve
Rm
Cashflowhedge
accountingreserve
Rm
Balanceat1January2007
Gains/(losses)recognisedinothercomprehensiveincomeand cashflowhedgingreserve
Effectiveforeigncurrencyforwardexchangecontracts 3 1
(Gains)/lossestransferredtoprofitorloss(i)
Effectiveforeigncurrencyforwardexchangecontracts (3) (1)
Ineffectivenessmeasurementofeffectiveinstruments 01 01
Relatedincometax
Balanceat31December2007 01 01
2007
(i)Gains/(losses)transferredfromcashflowhedgingreserveintoprofit orlossduringtheperiodareincludedinthefollowinglineitemsin thestatementoffinancialperformance:
–Revenue(note7)
•Effectiveinstruments 3 1
•Ineffectivenessmeasurementofeffectiveinstruments 01 01
Total 3 11Rounding to zero due to the use of numeric reporting scale format of one million.
166 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.12 Commodityriskmanagedbyembeddedderivatives
Thegroupandcompanyenterintocontractualarrangementstomanagepricerisksexposuresfromthosecommoditiesandmaterialsthatcannotbehedgedusingstand-alonederivativeinstruments.
Embeddedderivativeinstruments
Numberofinstruments
Activehedging
indicesExpirydate(s)
FairvalueRm
Recognisedfairvalue
gains/(loss)Rm
Groupandcompany
Fortheyearended 31December2008
Energy–pricingcap
1
SAPPI,SteelIndustryIndex,USPPI,
HeavyFuelOilIndex Ref.Note(i)1 366 148
Total 366 148
Fortheyearended 31December2007
Energy–pricingcap
1
SAPPI,SteelIndustryIndex,USPPI,
HeavyFuelOilIndex Ref.Note(i)1 218 19
Rawmaterial–pricingforward 1 SAPPI Ref.Note(ii) (29)
Refractoryservices –pricingforward 1
Exchangerate2 Ref.Note(iii) (23)
Total 218 (33)1No expiry date defined in the contract.2USD: ZAR.
(i) Energy – pricing cap Thecappedpricingcomponentoftheembeddedderivativewasmodelledonanintrinsic-valuebasis.The
valueofthederivativeisthedifferencebetweentheexpectedmarket-basedcashflowsandexpectedcontract-basedcashflows.
Asmarketpricesareafactorofindustrysegmentandpurchasedgasvolume,managementhasuseditsbestestimatetodeterminemarket-basedpricesapplicabletocustomersinthesameindustryasthecompany,withsimilarpurchasedgasvolumes.
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32. FINANCIALINSTRuMENTScontinued
32.12 Commodityriskmanagedbyembeddedderivativescontinued
(ii) Raw material - pricing forward Theforwardcontractwithintheembeddedderivativewassolvedforafairvalueofzeroatinception.
Management’sestimatedincreasesinSAPPIatinceptionwereappliedtotheestimatedvolumesforthedurationofthecontractatinception.Thechangeinthefairvalueoftheforwardcontractwasdeterminedbyapplyingmanagement’srevisedincreaseestimationsatsubsequentvaluationdatestothevolumeestimations,andcalculatingthedifferencebetweentheinitialestimatedcashflowsandtherevisedestimates.
Attheendof2007,theoriginalcontract’sterms,basedonanescalationrateof85%ofSAPPI,wereabandoned.IFRIC9,Reassessment of Embedded Derivatives,requiresanentitytorevisititsbifurcationassessmentifthereisachangeinthetermsofthecontractthatsignificantlymodifiedthecashflowsthatwouldotherwiseberequiredunderthe(original)contract.
Thepricingtermsofthecontracthavechangedsignificantlyand,consequently,theassociatedcashflows. Thecashflowsarenowmarket-relatedand,therefore,thecarryingvalueofthebifurcatedindexing
featurewasunwoundtothestatementoffinancialperformance.
(iii) Refractory services – pricing forward Theforwardcontractpricewithintheembeddedderivativewassolvedforafairvalueofzeroatinception.
Foreigncurrencyforwardratesatinceptionwereestimatedfromobservableinterestratedifferentials.These,togetherwithmanagement’sexpectationofincreasesintherelevantpricecomponents(denominatedinforeigncurrency)wereappliedtomanagement’sestimatedvolumesforthedurationofthecontractatinception.Thechangeinthefairvalueoftheforwardcontractwasdeterminedbyapplyingtherevisedestimatedforeigncurrencyforwardrates(calculatedfromobservableinterestratedifferentials),aswellasmanagement’srevisedcomponentincreaseexpectationsatsubsequentvaluationdatestothevolumeestimations,andcalculatingthedifferencebetweentheinitialestimatedcashflowsandtherevisedestimates.
Aspartofthecontinualaccountingimprovementsprogramme,itwasclarifiedduring2007thattheUSD,EURandZARaregenerallyregardedascurrenciesthatarecommonlyusedincontractstopurchaseorsellnon-financialitemsinSouthAfrica.Consequently,asthecontactisdenominatedinUSDitwasdeemedappropriatetounwindthecarryingvalueofthebifurcatedforeigncurrencyfeaturetothestatementoffinancialperformance.
EmbeddedderivativesensitivityThegroup’sandcompany’ssensitivitytoanincreaseanddecreaseinthevaluationofembeddedderivativeshasbeenmodelledbyvaryingthosevariablesthathavethegreatestimpactonthefairvaluecarryingamountofthebifurcatedinstruments.
Thesensitivitiesusedarethoseappliedwhenreportingvaluationriskinternallytokeymanagementpersonnelandrepresentsmanagement’sassessmentofthepossiblechangeinthevaluationvariables.Apositivenumberindicatesanincreaseinprofit or lossrelativetothevalueatyear-end.
168 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.12 Commodityriskmanagedbyembeddedderivativescontinued
Ifvariableshadbeen10%higher/(lower)andallothervariableswereheldconstant,theprofitfortheyearendedwouldincrease/(decrease)asdetailedinthetablebelow.
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
Energy
Marketpriceforgas
+10% 88 54 88 54
-10% (88) (54) (88) (54)
Cappedoilpriceinflation
+10% (4) (3) (4) (3)
-10% 4 3 4 3
Steelindustryindex
+10% (1) (1) (1) (1)
-10% 1 1 1 1
Gaspriceinflation
+10% 4 9 4 9
-10% (4) (9) (4) (9)
Volumeoff-take(GJ)change
+10% 36 22 36 22
-10% (36) (22) (36) (22)
Bulk-userpricediscounttoordinary industrialgasprice
+10% (72) (47) (72) (47)
-10% 72 47 72 47
ArcelorMittalSouthAfrica AnnualReport2008
169
32. FINANCIALINSTRuMENTScontinued
32.13 Freightraterisks
Therisksassociatedwithfreightratesemanatefromthesteeltradingjointlycontrolledentity,MacsteelInternationalHoldingsBV(MIHBV).Thisriskismitigatedviatheuseofforwardfreightagreements;theimpactiscontainedintheincomestatementlineitem“incomeaftertaxfromequityaccountedinvestments”.
32.14 Interestrateriskmanagement
Sources of interest rate risk are:• interestexpenses,ascompaniesinthegroupenterarrangementstofundtheconstructionofassetseither
intheformofbona fida borrowingarrangementsorthroughsupplyarrangementscontainingfinancialleasestructuresatfixedinterestrates;and
• interestincome,duetothegroup’sandcompany’snetcashpositionandtheinvestmentthereofatvariableinterestrates.
Interest expensesThegrouphasoneunsecuredloanfromPretoriaPortlandCementthatbearsinterestatafixedrateof16%perannumasdescribedinnote26.Noearlysettlementprovisionexistsforthisloan.Theremainingborrowingsarefinanceleaseobligationssecuredbytheleasedassetsatfixedratesofinterest,asdescribedinnote27.
Althoughthefinanceleaseobligationsaresignificant,theinherentinterestrateriskisnotseparatelyhedgedasthetotalcostofsupply(whichincludestheembeddedleasecharge)ismanagedaspartofthecontinuouscostsavinginitiativeaimedatreducingthetotalcostofownership.
Theratesapplicabletotheaboveborrowingsandfinanceleaseobligationsarefixed,andassuchdonothaveanimpactonprofitorloss.
Interest incomeGiventhenetcashposition,theboundariesofriskexposurecanbehighlightedasfollows:• floatingratesresultinginfullexposuretohigherratesbutparticipationinlowerrates;against• fixedratesresultinginnoexposuretolowerrates,butnoadvantagefromhigherrates.
Theinterestpolicyfollowedrelatingtothenetcashpositionaimstobalancethetwoextremesoffixedandfloatingratesandtheexpectationoffutureratemovements.
Theratesapplicabletothenetcashpositionarefloatinginnature,andhencehaveanimpactonprofitorloss.
Interest rate sensitivityThesensitivityanalysisaddressesonlythefloatinginterestrateexposureemanatingfromthenetcashposition.Thecashanddepositholdingsarebasedonaveragebalancelevelsforthereportingperiods.Theinterestrateexposurehasbeencalculatedwiththestipulatedchangetakingplaceatthebeginningofthefinancialyearandheldconstantthroughoutthereportingperiod.
A10%increaseordecreaseisusedwhenreportinginterestrateriskinternallytokeymanagementpersonnel,andrepresentsmanagement’sassessmentofthepossiblechangeininterestratesthatcanbefurthereasilyextrapolatedinresponsetothelikelyhighratevolatilityintheyearahead.
170 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.14 Interestrateriskmanagementcontinued
Ifinterestrateshadincreased/(decreased)by10%andallothervariableswereheldconstant,theprofitfortheyearendedonmajorcashandcashequivalentholdingswouldincrease/(decrease)asdetailedinthetablebelowduetotheuseofthevariableinterestratesapplicabletothecashanddepositholdingbalances.Thefixedinterestrateontheborrowingswouldnotaffectthefinancialperformance.Anygainorlosswouldbeunrealandconsequentlythenotionalimpactisnotpresented.
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
ZARcashanddepositholdings
+10% 39 28 39 28
-10% (39) (28) (39) (28)
uSDcashanddepositholdings
+10% 6 14 5 13
-10% (6) (14) (5) (13)
Total
+10% 45 42 44 41
-10% (45) (42) (44) (41)
Basedontheanalysisabove,thegroup’sandcompany’ssensitivitytointerestrateshasmarginallyincreasedduetohigheraverageZARcashholdingsandinterestratescomparedwiththecomparativereportingperiod.
32.15 Otherpricerisks
Thegroupisexposedtoequitypricerisksarisingfromanavailable-for-saleequityinvestment.Theequityinvestmentisheldforstrategicratherthantradingpurposes.Thegroupdoesnotactivelytradethisinvestment.
Equity price sensitivityThesensitivityanalysishasbeendeterminedbasedontheexposuretoequitypricerisksatthereportingdate.AlthoughHCCLisalistedcompany,itsvaluationisdependentontheavailabilityofaconduitfungiblesharearrangement,whichwassuspendedinlate-2008.Thecriticaljudgementsrelatingtothisinvestmentisdescribedinnote4.2,andtheaccountingimpactexplainedinnote32.3.At31December2008,thecarryingamountoftheinvestmentwasRnil(December2007:R71million),withaR9millionlossdeferredtotheAFSinvestmentreserve(December2007:R62milliondeferredgain).
WithaRnilcarryingamountat31December2008,asensitivityanalysishasnotbeenperformed.However,thevalueoftheinvestmentonthelastdaythattheZSEtraded,14November2008,wasR76million,whichcloselyapproximatesthecarryingamountat31December2007.Therefore,oncetradingresumesandliquidityimpedimentsareremoved,shouldmarketvaluesreverttopre-suspensionlevels,the2007sensitivityanalysismaybeappliedasasurrogateindicatorofvaluationsensitivity.
ArcelorMittalSouthAfrica AnnualReport2008
171
32. FINANCIALINSTRuMENTScontinued
32.15 Otherpriceriskscontinued
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
Available-for-saleinvestmentreserve
Marketvalueofforeignlistedequity shares
+10% 7
-10% (7)
Marketvalueofforeignlistedfungible conduitshare
+10% (7)
-10% 7
MarketvalueofSouthAfricanlisted fungibleconduitshare
+10% 7
-10% (7)
Subsequentremovalofanypartoftheliquiditydiscountappliedtothe31December2008valuationwouldnotaffectprofitorlossastheresultinggainswouldberecognisedinothercomprehensiveincome,withintheAFSinvestmentreserve.
32.16 Liquidityriskmanagement
Ultimateresponsibilityforliquidityriskmanagementrestswiththeboardofdirectors,whichhasbuiltanappropriateliquidityriskmanagementframeworkforthemanagementofthegroup’sandcompany’sshort,mediumandlong-termfundingandliquiditymanagementrequirements.
Theobjectivesoftheliquiditymanagementpolicyareasfollows:•maintenanceofadequatereserves,bankingfacilitiesandreserveborrowingfacilitiesbycontinually
monitoringforecastandactualcashflowsandmatchingthematurityprofilesoffinancialassetsandliabilities.Includedinnote32.6isalistingofadditionalundrawnfacilitiestofurtherreduceliquidityrisk;
•optimisetheaccountanddomesticcashpoolstructures;•minimisebankcharges(paymentsandcollectionfees,spreadsetc);•optimisetheavailabilityanduseofshort-termliquiditypositionsacrossthegroupwithoutcompromisingthe
day-to-daycashneeds;•optimisethenetinterestresult;and•minimisethenumberofbankaccounts,toreduceriskofmisuseandcosts.
172 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.16 Liquidityriskmanagementcontinued
Liquidityandinterestrisktables
(i) Contractual maturity for its non-derivative financial liabilities Thefollowingtablesdetailthegroup’sandcompany’sremainingcontractualmaturityfornon-derivative
financialliabilities.
Thetableshavebeendrawnupbasedontheundiscountedcashflowsoffinancialliabilitiesbasedontheearliestdateonwhichthegroupandcompanycanberequiredtopay.Thetableincludesbothinterestandprincipalcashflows.
The“discount”columnrepresentsthepossiblefuturecashflowsattributabletotheinstrumentincludedinthematurityanalysis,whicharenotincludedinthecarryingamountofthefinancialliabilityonthefaceofthestatementoffinancialposition.
Annualeffective
interestrate1
0–6months
Rm
7–12months
Rm
1–5years
Rm>5years
RmDiscount
Rm
Carryingamount
Rm
GROuPFortheyearended 31December2008Non-interestbearing• Tradeandotherpayables 0.0% 3384 3384Financeleaseliability 13.8% 41 42 293 258 (280) 354Borrowingsandotherpayables 16.5%2 46 63 (30)2 79
Total 3425 88 356 258 (310) 3817
Fortheyearended 31December2007Non-interestbearing• Tradeandotherpayables 0.0% 2873 2873Financeleaseliability 13.9% 62 63 301 317 (327) 416Borrowingsandotherpayables 15.9%2 20 68 12 (38)2 62
Total 2935 83 369 329 (365) 3351
COMPANyFortheyearended 31December2008Non-interestbearing• Tradeandotherpayables 0.0% 2893 2893Financeleaseliability 9.7% 24 25 176 56 (82) 199Borrowingsandotherpayables 28.6%2 29 9 (10)2 28
Total 2917 54 185 56 (92) 3120
Fortheyearended 31December2007Non-interestbearing• Tradeandotherpayables 0.0% 2386 2386Financeleaseliability 7.5% 45 46 178 86 (102) 253Borrowingsandotherpayables 411.7%2 5 (4)2 1
Total 2431 46 183 86 (106) 26401 Calculated over the remaining tenure of the non-derivative financial liability.2 Share participation rights, being the difference between total fair value and the cash-settled liability recognised at the
reporting date. Effective interest rate is a function of the share price performance of ArcelorMittal South Africa.
ArcelorMittalSouthAfrica AnnualReport2008
173
32. FINANCIALINSTRuMENTScontinued
32.16 Liquidityriskmanagementcontinued
(ii) Expected maturity for its non-derivative financial assets Thefollowingtabledetailsthegroup’sandcompany’sexpectedmaturityfornon-derivativefinancialassets.
Thetablesbelowhavebeendrawnupbasedontheundiscountedcontractualmaturitiesofthefinancialassetsincludinginterestthatwillbeearnedonthoseassets.
The“discount”columnrepresentsthepossiblefuturecashflowsattributabletotheinstrumentincludedinthematurityanalysis,whicharenotincludedinthecarryingamountofthefinancialassetonthefaceofthestatementoffinancialposition.
Annualeffective
interestrate1
0–6months
Rm
7–12months
Rm
1–5years
Rm>5years
RmDiscount
Rm
Carryingamount
Rm
GROuPFortheyearended 31December2008Fixedinterestratereceivables• Tradeandotherreceivables2 0.3% 2037 (6) 2031Fixedandvariableinterest ratecashholdings• Cashandcashequivalents3 3.48% 8575 147 (293) 8429
Total 10612 147 (299) 10460
Fortheyearended 31December2007Non-interestbearing• Available-for-sale
financialassets0.0% 71 71
Fixedinterestratereceivables• Tradeandotherreceivables2 0.0% 2293 (1) 2292Fixedandvariableinterest ratecashholdings• Cashandcashequivalents3 7.1% 4177 142 (285) 4034
Total 6470 142 71 (286) 6397
COMPANyFortheyearended 31December2008Fixedinterestratereceivables• Tradeandotherreceivables2 0.3% 1771 (6) 1765Fixedandvariableinterest ratecashholdings• Cashandcashequivalents3 3.18% 8250 129 (258) 8121
Total 10021 129 (264) 9886
Fortheyearended 31December2007Fixedinterestratereceivables• Tradeandotherreceivables2 0.1% 2008 (1) 2007Fixedandvariableinterest ratecashholdings• Cashandcashequivalents3 7.2% 3791 131 (262) 3660
Total 5799 131 (263) 56671 Calculated over the remaining tenure of the non-derivative financial assets.2 Fixed rate interest applicable on overdue accounts.3 Fixed and variable rates applicable to call and short-term deposit holdings. Maturity profile reflects the synthesised
availability of the cash and cash equivalents on hand at the end of the reporting period, and the expected annual investment income to be earned thereon.
174 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.16 Liquidityriskmanagementcontinued
(iii) Derivative financial instruments Thefollowingtabledetailstheliquidityanalysisforderivativefinancialinstruments.
Thetablehasbeendrawnupbasedontheundiscountednetcashinflows/(outflows)onthederivativeinstrumentsthatsettleonanetcash-settledbasis.Noderivativefinancialinstrumentsaresettledonagrossbasis.Whentheamountpayableorreceivableisnotfixed,theamountdisclosedhasbeendeterminedbyreferencetotheprojectedinterestrateandforeigncurrencyforwardcurvesexistingatthereportingdate.
The“discount”columnrepresentsthepossiblefuturecashflowsattributabletotheinstrumentincludedinthematurityanalysiswhicharenotincludedinthecarryingamountofthefinancialassetsandliabilitiesonthereportingdate.
Financialassets/(liabilities)
0–6months
Rm
7–12months
Rm
1–5years
Rm>5years
RmDiscount
Rm
Carryingamount
Rm
GROuP
Fortheyearended31December2008
Netcash-settledderivatives(unmatured)
Basemetalforwards1 (88) (32) 02 (120)
Foreigncurrencyforwards 02 2 02 2
Embeddedderivatives 86 86 240 (46) 366
Total (2) 56 240 (46) 248
Fortheyearended31December2007
Netcashsettledderivatives(unmatured)
Basemetalforwards (35) (18) 02 (53)
Foreigncurrencyforwards 02 02 02 02 01,2
Embeddedderivatives 49 51 161 (43) 218
Total 14 33 161 (43) 165
COMPANy
Fortheyearended31December2008
Netcashsettledderivatives(unmatured)
Basemetalforwards1 (81) (27) 02 (108)
Foreigncurrencyforwards 02 02 02
Embeddedderivatives 86 86 240 (46) 366
Total 5 59 240 (46) 258
Fortheyearended31December2007
Netcash-settledderivatives(unmatured)
Basemetalforwards (35) (18) 02 (53)
Foreigncurrencyforwards 02 02 02 01,2
Embeddedderivatives 49 51 161 (43) 218
Total 14 33 161 (43) 1651 Cumulative amount for purchase and sales contracts.2 Rounding to zero due to the use of numeric reporting scale format of one million.
ArcelorMittalSouthAfrica AnnualReport2008
175
32. FINANCIALINSTRuMENTScontinued
32.17 Customercreditriskmanagement
Customercreditriskisassessedonagroup-widebasisandreferstotheriskthatacustomerwilldefaultonitscontractualobligationsresultinginfinanciallosstothegroup.
Thegrouphasadoptedapolicyofonlydealingwithcreditworthycustomersandobtainingsufficientcollateral,whereappropriate,andcomprehensivecreditinsurance,asameansofmitigatingtheriskoffinanciallossfromdefaults.
Customersareindependentlyrated.Independentratingagency,ExperianSouthAfrica(Proprietary)LimitedtradingasKreditinformisusedfordomesticcustomers.Ifthereisnoindependentrating,CreditManagementassessesthecreditqualityofthespecificcustomer,takingintoaccountitsfinancialposition,pastexperienceandotherfactors.Individualrisklimitsaresetbasedoninternalorexternalratingsinaccordancewithlimitssetbytheboardofdirectors.Creditlimitsareregularlymonitored.
CreditinsuranceisplacedwiththeCofaceGroupwithamaximumliabilityofR1800millionwitha10%excess.CreditinsuranceclaimsamountedtoRnilmillion(2007:Rnilmillion).
Thegroupisexposedtothreemaincustomers,whichaccountforapproximatelyathirdofitstradeandotherreceivablesbalance.Thesetopthreecustomersoperateinthedomesticmarket.Thetablebelowdetailsthecumulativecreditlimitandbalance(bothinclusiveofvalueaddedtax)ofthetopthreecustomersatthestatementoffinancialpositiondateforthegroupandcompany:
Customer Rating
Creditlimit
2008Rm
Balance2008
Rm
Creditlimit
2007Rm
Balance2007
Rm
Topthreecustomersbysalesvalue 2:A 2575 564 1766 672
1:B
%ofnettradereceivables
–Group 32% 33%
–Company 35% 37%
Creditriskexposureonanindustryandgeographicalbasisforthegroupandcompanyisasfollows:
Group Company
2008%
2008%
ByindustryManufacturing 26 24Merchants 43 42Structuralmetal 16 18Foodandbeverage 8 9Other 7 7
100 100
BygeographicalareaSouthAfrica 87 91Asia 5 4Other 8 5
100 100
Exceptasdetailedinnote35,thecarryingamountoffinancialassetsrecordedinthefinancialstatements,grossedupforanyallowancesforlosses,representsthegroup’smaximumexposuretocreditriskwithouttakingaccountofthevalueofanycollateralobtained.
Forthegroupandcompanyrespectively,thetotalfacevalueoffinancialguaranteesandsimilarcollateralheldisR1449million(December2007:R1394million).Ofthisamount,R67million(December2007:R58million)representsbankguarantees.
176 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
32. FINANCIALINSTRuMENTScontinued
32.18 Capitalriskmanagement
Thegroup’sandcompany’sobjectiveswhenmanagingcapitalare:•tosafeguardtheabilitytocontinueasagoingconcern,soastobeabletocontinuetoprovidereturnsfor
shareholdersandbenefitsforotherstakeholders;and•toprovideanadequatereturntoshareholdersbypricingproductsandservicescommensuratelywiththe
levelofrisk.
Theamountofcapitalissetinproportiontorisk.Thecapitalstructureismanagedandadjustedinlightofchangesineconomicconditionswithinthedomesticandglobalsteelindustryandtheriskcharacteristicsoftheunderlyingassets.
Thegroup’sandcompany’soverallstrategyremainedunchangedfor2008.
Consistentwithothersintheindustry,thegroupandcompanymonitorcapitalonadebt-to-totalshareholders’equitybasis.
Netdebtistotalinterest-bearingborrowingsincludingfinanceleaseobligationslesscashandcashequivalents.Totalshareholders’equityisasreportedonthefaceofthestatementoffinancialposition.
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
Cashandcashequivalents 8429 4034 8121 3660
Less:totalinterestbearingborrowings andfinanceleaseobligations
(405) (478) (199) (253)
Netcashandcashequivalents 8024 3556 7922 3407
Totalshareholders’equity 27995 20583 25978 19909
Gearingratio 0% 0% 0% 0%
ArcelorMittalSouthAfrica AnnualReport2008
177
33. RELATED-PARTyTRANSACTIONS
Duringtheyearthecompanyanditssubsidiaries,intheordinarycourseofbusiness,enteredintovarioussalesandpurchasetransactionswithitsjointlycontrolledentities,itsassociatesandotherentitieswithinthegreaterArcelorMittalGroup.Thesetransactionsoccurredundertermsthatarenolessfavourabletothecompanythanthosearrangedwiththirdparties.
CompanieswithinthegreaterArcelorMittalGroupThroughutilisingthegroup’scentralisedpurchasingpowerduring2008,thecompanypurchasedproductsandservicestothevalueofR5038million(December2007:R222million)fromothercompaniesinthegroup.
Theoutstandingbalancesatyear-endare:•includedintradeandotherreceivables(note24)R15million(December2007:R8million);and•includedintradeandotherpayables(note30)R1026million(December2007:R24million).
JointlycontrolledentitiesandassociatesDetailsofinvestmentsinjointlycontrolledentitiesandtheassociatearedisclosedinAnnexure1whileincome,aftereliminatingunrealisedprofits,isdisclosedinnote20.InterestincomefromjointlycontrolledentitiesofR3million(December2007:R4million)isincludedinincomefrominvestments(note13).
ThegrouppurchasedgoodsandservicestothevalueofR44million(December2007:R57million)from,andsoldgoodstothevalueofR5604million(December2007:R5877million)tojointlycontrolledentitiesanditsassociate.
Theoutstandingbalancesatyear-endare:•includedintradeandotherreceivables(note24)R264million(December2007:R190million);•includedintradeandotherpayables(note30)Rnil(December2007:Rnil);and•includedinthecarryingvalueofjointlycontrolledentities(note20)arelong-termloansofR9million(December
2007:R10million).
SubsidiariesDetailsofincomefrominvestmentsandindebtednessinsubsidiariesaredisclosedinnotes13and21respectively,andAnnexure2.
DirectorsExecutivedirectorsaredefinedaskeyseniormanagement.Detailsrelatingtodirectors’remunerationandshareholdings(includingshareoptions)inthecompanyaredisclosedinthedirectors’remunerationreport.
SenioremployeesDetailsrelatingtooptionandsharetransactionsaredisclosedinnote36.
ShareholdersTheprincipalshareholdersofthecompanyaredetailedinthe“analysisofshareholders”scheduleonpage198.
Corporateservicefee/managementfeeArcelorMittalSouthAfricapaidacorporateservicefeeofR135million(December2007:Rnilmillion)toArcelorMittalGroupforcorporateservicesrendered.
ArcelorMittalSouthAfricareceivedamanagementfeeofR176million(December2007:R153million)fromSaldanhaSteel(Proprietary)LimitedforArcelorMittalSouthAfricaemployeesthatworkatSaldanhaWorks.
34. POST-EMPLOyMENTBENEFITS
34.1 PensionsIndependentfundsprovidepensionandotherbenefitsforallpermanentemployeesandtheirdependants.Attheendofthefinancialyearthefollowingfundswereinexistence:
•MittalSteelSouthAfricaSelectorPensionFund(RegNo.12/8/35421)andMittalSteelSouthAfricaSelectorProvidentFund(RegNo.12/8/35423),bothoperatingasdefinedcontributionfunds.
•IscorEmployees’ProvidentFund(RegNo.12/8/27484),operatingasadefinedcontributionfund.•MittalSteelSouthAfricaPensionFund(RegNo.12/8/363),operatingasadefinedbenefitfund.Thisfundis
closedtonewentrants.•IscorRetirementFund(RegNo.12/8/5751),operatingasadefinedbenefitfund.Thisfundisclosedtonew
entrants.
Theassetsoftheseplansareheldseparatelyfromthoseofthegroupandcompany,infundsunderthecontroloftrustees.
AllfundsaregovernedbytheSouthAfricanPensionFundsActof1956.
178 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
34. POST-EMPLOyMENTBENEFITScontinued
34.1 Pensionscontinued
34.1.1 Definedcontributionplans
Membershipofeachfundat31December2008andemployercontributionstoeachfundforthe2008calendaryearrecognisedintheincomestatementwere:
Workingmembers Employercontributions
2008 2007 2008Rm
2007Rm
MittalSteelSouthAfricaSelector PensionandProvidentFunds
4487 4518 92 79
IscorEmployees’ProvidentFund 4029 4029 39 32
8516 8547 131 111
Contributionratesforactivemembersare7%and10%bythememberandArcelorMittalSouthAfricaLimitedrespectively.
Theonlyobligationofthegroupandcompanywithrespecttothedefinedcontributionplansistomakethespecifiedcontributions.
Nootherpost-retirementbenefitsareprovidedtotheseemployees.
34.1.2 Definedbenefitplans
MittalSteelSouthAfricaPensionFund
ThegroupandcompanyoperatetheMittalSteelSouthAfricaPensionFundwhichisawhollyfundeddefinedbenefitplanforqualifyingemployees.ThefundisadministeredbyCorisCapital(Proprietary)Limited.
At31December2008,thefundhad47(December2007:53)activemembersand8795(December2007:9083)pensionermembers.Thefundisclosedtotheadmittanceofnewmembers.
Contributionratesforactivemembersare7%and10%bythememberandArcelorMittalSouthAfricarespectivelyofthemember’spensionableearnings.
Thenormalretirementageformembersis63years.Amember’spensionentitlementiscalculatedasapercentagescaleoffinalaveragesalaryforeachyearofpensionableservice.Thepercentagescalerangesfrom1.7%to2.5%,andtheaveragefinalsalaryisthepensionablesalaryoverthe24monthswhichpreceedsthemember’sretirement.
Nootherpost-retirementbenefitsareprovidedtotheseemployees,otherthanforthatdetailedinnote34.2.
Thelaststatutoryactuarialvaluationwasperformedasat31December2007.Theactuarieswereoftheopinionthatthefundwasadequatelyfunded.
FordisclosurepurposesinordertocomplywithIAS19,Employee Benefitsvaluationshavebeenperformedbyindependentactuaries,usingtheprojectedunitcreditmethod.Rollforwardofprojectionsofpriorcompletedactuarialvaluationswereused,takingaccountofactualsubsequentexperience.
Theprincipalassumptionsusedforthepurposesoftheactuarialvaluationswere:
2008 2007
Discountrate 9.0% 8.2%
Expectedreturnonplanassets 9.7% 9.2%
Expectedrateofsalaryincrease 6.9%+meritincreases
6.4%+meritincreases
Generalinflationrate 5.9% 5.4%
ArcelorMittalSouthAfrica AnnualReport2008
179
34. POST-EMPLOyMENTBENEFITScontinued
34.1 Pensionscontinued
34.1.2 Definedbenefitplanscontinued
Amountsrecognisedinprofitorlossinrespectofthisdefinedbenefitplanare:
2008Rm
2007Rm
Currentservicecost 2 2
Interestcostonobligations 533 485
Expectedreturnonplanassets (727) (683)
Netactuarial(gains)/lossesrecognisedintheyear1
Adjustmentsforrestrictionsonthedefinedbenefitplanasset1 193 197
Sub-total 1 1
Lessmembercontributionspaidduringyear 02 01
Totalincludedin“Employeecosts–pensionandmedicalcosts” 1 11 Fund rules prohibit the realisation of the defined benefit surplus in the form of refunds from the plan or
reductions in future contributions to the plan. On partial and full liquidation of the fund any available surplus is apportioned to the sole benefit of the members.
2 Rounding to zero due to the use of numeric reporting scale format of one million.
Theamountincludedinthestatementoffinancialpositionarisingfromthegroup’sandcompany’sobligationinrespectofthisdefinedbenefitplanis:
2008Rm
2007Rm
Presentvalueoftheobligationat31December 6562 6870
Fairvalueofplanassetsat31December (7276) (8274)
Surplus (714) (1404)
Cumulativeunrecognisedactuarial(losses)/gains (747) 136
UnrecogniseddefinedbenefitassetoninitialadoptionofIAS191 963 963
Sub-total (498) (305)
Restrictionsondefinedbenefitplanassetrecognised1 498 305
Net(asset)/liabilityarisingfromdefinedbenefitplan1 Fund rules prohibit the realisation of the defined benefit surplus in the form of refunds from the plan or
reductions in future contributions to the plan. On partial and full liquidation of the fund any available surplus is apportioned to the sole benefit of the members.
Movementsinthepresentvalueofthedefinedbenefitobligationinthecurrentperiodwere:
2008Rm
2007Rm
Presentvalueofobligationat1January 6870 6739
Interestcost 533 485
Currentservicecost 2 2
Benefitspaid (722) (684)
Actuarial(gains)/lossesonobligation (121) 328
Presentvalueofobligationat31December 6562 6870
180 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
34. POST-EMPLOyMENTBENEFITScontinued
34.1 Pensionscontinued
34.1.2 Definedbenefitplanscontinued
Movementsinthepresentvalueoftheplanassetsinthecurrentperiodwere:
2008Rm
2007Rm
Fairvalueofplanassetsat1January 8274 8299Expectedreturn 727 683Contributions 1 1Benefitspaid (722) (684)Actuariallossesonplanassets (1004) (25)
Fairvalueofplanassetsat31December 7276 8274
Themajorcategoriesofplanassets,andtheexpectedrateofreturnatthestatementoffinancialpositiondateforeachcategory,are:
Expectedreturn Fairvalueofplanassets
2008%
2007%
2008Rm
2007Rm
Cash 7.1 6.6 439 494Equities 10.9 10.4 2437 2771Fixedinterest-bearingstock 8.7 8.2 3365 3826Foreigninvestments 10.9 10.4 1035 1178Otherassets 10.4 5
9.7 9.2 7276 8274
Theoverallexpectedrateofreturnisaweightedaverageoftheexpectedreturnsofthevariouscategoriesofplanassetsheld.Thedirectors’assessmentoftheexpectedreturnsisbasedonhistoricalreturntrendsandanalysts’predictionsofthemarketfortheassetinthenext12months.
TheactualnegativereturnonplanassetswasR277million(December2007:positivereturnofR658million).
TheplanassetsincludeordinarysharesofArcelorMittalSouthAfricaLimitedwithafairvalueofRnilmillion(December2007:fairvalueofR2million).
2008Rm
2007Rm
2006Rm
2005Rm
2004Rm
Presentvalue ofdefined benefit obligation 6562 6870 6739 6355 6003Fairvalueof planassets (7276) (8274) (8299) (7318) (6610)Surplus (714) (1404) (1560) (963) (607)Experience adjustments onplan liabilities– gains/(losses) 121 (328) (590)Experience adjustmentson planassets– (losses)/gains (1004) (25) 1079
ArcelorMittalSouthAfrica AnnualReport2008
181
34. POST-EMPLOyMENTBENEFITScontinued
34.1 Pensionscontinued
34.1.2 Definedbenefitplanscontinued
InaccordancewiththetransitionalprovisionsfortheamendmentstoIAS19,Employee Benefits,inDecember2004,theexperienceadjustmentsabovearedeterminedprospectivelyfrom1January2006beingthedateofadoptionofthestandard.Thedisclosuresprecedingthetransitiondateareprovidedfortrendanalysispurposesonly.
ThegroupandcompanyexpecttomakeacontributionofR1million(2008:R1million)tothedefinedbenefitplanduringthenextfinancialyear.
Thefairvalueoftheplan’sassetsexceededthepresentvalueofthedefinedbenefitobligationsby10.9%(December2007:20.4%).Thepaymentofthefundedbenefitsbytheplandoesnotdependonlyonthefinancialpositionandinvestmentperformance,butalsoonthegroupandcompany’sabilitytomakegoodanyfundingshortfall.
Thegroupandcompanythereforeunderwritetheplan’sinvestmentandactuarialrisk.Despitethefallinthefundingsurplusforthereportingperiodended31December2008,duetothedetrimentalriskshockstofinancialmarkets,particularlyinthelastquarterof2008,thefundingcontinuestobeadequate.
Thelikelihoodthatthegroupandcompanywillberequiredtofundashortfallinthe2009reportingperiodisremote.
IscorRetirementFundThegroupandcompanyoperatetheIscorRetirementFundwhichisawhollyfundeddefinedbenefitplanforqualifyingemployees.ThefundisadministeredbyBambananiBenefitAdministrators(Proprietary)Limited.
At31December2008,thefundhad1431(December2007:1682)pensionermembersand39910(December2007:41065)contingentpensionermembers.Contingentpensionersareformeremployeeswholefttheservicebeforenormalretirementageandareentitledtoreceiveapensionifclaimed.Thefundisclosedtotheadmittanceofnewmembers.
Thenormalretirementageformembersis63years.Amember’spensionentitlementiscalculatedas43%ofnotionalpastservicecontributions,plus43%oftheemployer’sandmember’scontributions.
Thelastfullstatutoryactuarialvaluationwasperformedasat31December2007.Theactuarieswereoftheopinionthatthefundwasadequatelyfunded.
FordisclosurepurposesinordertocomplywithIAS19,Employee Benefits,valuationshavebeenperformedbyindependentactuaries,usingtheprojectedunitcreditmethod.Rollforwardofprojectionsofpriorcompletedactuarialvaluationswereused,takingaccountofactualsubsequentexperience.
Theprincipalassumptionsusedforthepurposesoftheactuarialvaluationswere:
2008%
2007%
Discountrate 9.0 8.2
Expectedreturnonplanassets 9.7 8.9
Generalinflationrate 5.9 5.4
182 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
34. POST-EMPLOyMENTBENEFITScontinued
34.1 Pensionscontinued
34.1.2 Definedbenefitplanscontinued
Amountsrecognisedinprofitorlossinrespectofthisdefinedbenefitplanare:
2008Rm
2007Rm
Currentservicecost
Interestcostonobligations 32 29
Expectedreturnonplanassets (44) (41)
Netactuarial(gains)/lossesrecognisedintheyear1
Adjustmentsforrestrictionsonthedefinedbenefitplanasset1 12 12
Sub-total
Lessmembercontributionspaidduringtheperiod
Totalincludedin“employeecosts–pensionandmedicalcosts”1 Fund rules prohibit the revaluation of the defined benefit surplus in the form of refunds from the plan or
deductions in future contributions to the plan. On partial and full liquidation of the fund, any available surplus is apportioned to the sole benefit of the members.
Theamountincludedinthestatementoffinancialpositionarisingfromthegroup’sandcompany’sobligationinrespectofthisdefinedbenefitplanis:
2008Rm
2007Rm
Presentvalueoftheobligationat31December 405 410
Fairvalueofplanassetsat31December (476) (513)
Surplus (71) (103)
Cumulativeunrecognisedactuariallosses (52) (8)
UnrecogniseddefinedbenefitplanassetoninitialadoptionofIAS191 90 90
Sub-total (33) (21)
Restrictionsondefinedbenefitplanassetrecognised1 33 21
Net(asset)/liabilityarisingfromdefinedbenefitplan1 Fund rules prohibit the revaluation of the defined benefit surplus in the form of refunds from the plan or
deductions in future contributions to the plan. On partial and full liquidation of the fund, any available surplus is apportioned to the sole benefit of the members.
ArcelorMittalSouthAfrica AnnualReport2008
183
34. POST-EMPLOyMENTBENEFITScontinued
34.1 Pensionscontinued
34.1.2 Definedbenefitplanscontinued
Movementsinthepresentvalueofthedefinedbenefitobligationinthecurrentperiodwere:
2008Rm
2007Rm
Presentvalueofobligationat1January 410 406
Interestcost 32 29
Currentservicecost
Benefitspaid (31) (57)
Actuariallosses/(gains)onobligation (6) 32
Presentvalueofobligationat31December 405 410
Movementsinthepresentvalueoftheplanassetsinthecurrentperiodwere:
2008Rm
2007Rm
Fairvalueofplanassetsat1January 513 519
Expectedreturn 44 41
Contributions
Benefitspaid (31) (57)
Actuarial(losses)/gainsonplanassets (50) 10
Fairvalueofplanassetsat31December 476 513
Themajorcategoriesofplanassets,andtheexpectedrateofreturnatthestatementoffinancialpositiondateforeachcategory,are:
Expectedreturn Fairvalueofplanassets
2008%
2007%
2008Rm
2007Rm
Cash 7.1 8.8 64 69
Equities 11.2 9.4 166 179
Fixedinterest-bearingstock 8.7 8.2 182 196
Foreigninvestments 11.2 9.4 60 65
Otherassets 11.2 9.4 4 4
9.7 8.9 476 513
184 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
34. POST-EMPLOyMENTBENEFITScontinued
34.1 Pensionscontinued
34.1.2 Definedbenefitplanscontinued
Theoverallexpectedrateofreturnisaweightedaverageoftheexpectedreturnsofthevariouscategoriesofplanassetsheld.Thedirectors’assessmentoftheexpectedreturnsisbasedonhistoricalreturntrendsandanalysts’predictionsofthemarketfortheassetinthenexttwelvemonths.
ThenegativereturnonplanassetswasR5million(December2007:positivereturnofR55million).
TheplanassetsincludeordinarysharesofArcelorMittalSouthAfricaLimitedwithafairvalueofRnilmillion(December2007:fairvalueofRnil).
2008Rm
2007Rm
2006Rm
2005Rm
Presentvalueofdefined benefitobligation 405 410 406 361
Fairvalueofplanassets (476) (513) (519) (451)
Surplus (71) (103) (113) (90)
Experienceadjustmentson planliabilities–gains/(losses) 6 (32) (54)
Experienceadjustmentson planassets–(losses)/gains (50) 10 68
InaccordancewiththetransitionalprovisionsfortheamendmentstoIAS19,Employee Benefits,inDecember2004,theexperienceadjustmentsabovearedeterminedprospectivelyfrom1January2006beingthedateofadoptionofthestandard.Thedisclosuresprecedingthetransitiondateareprovidedfortrendanalysispurposesonly.
Thegroupandcompanyexpecttomakenocontribution(2008:Rnil)tothedefinedbenefitplanduringthenextfinancialyear.
Thefairvalueoftheplan’sassetsexceededthepresentvalueofthedefinedbenefitobligationsby17.5%(December2007:25.1%).Thepaymentofthefundedbenefitsbytheplandoesnotdependonlyonthefinancialpositionandinvestmentperformance,butalsoonthegroup’sandcompany’sabilitytomakegoodanyfundingshortfall.
Thegroupandcompanythereforeunderwritetheplan’sinvestmentandactuarialrisk.Despitethefallinthefundingsurplusforthereportingperiodended31December2008,duetothedetrimentalriskshockstofinancialmarkets,particularlyinthelastquarterof2008,thefundingcontinuestobeadequate.
Thelikelihoodthatthegroupandcompanywillberequiredtofundashortfallinthe2009reportingperiodisremote.
34.2 Medicalbenefits
34.2.1 Thegroupandcompanycontributetomedicalaidschemesforthebenefitofthoseretiredemployeesandtheirdependants,wherethosequalifyingretireesacceptedearlyretirementin1994.At31December2008therewere59qualifyingretirees(December2007:67).
Onthebasisofcurrentpractice,whichisreviewedannually,theactuariallydeterminedpresentvalueofpost-retirementmedicalaidobligationshasbeenprovidedinnote28.Thisobligationisunfunded.Thegroupandcompanyhavenofurtherpost-retirementmedicalaidobligationsforcurrentorretiredemployees.
Detailsofthemovementduringtheperiodinthenetliabilityaredetailedinnote28.
34.2.2 Thegroupandcompanyalsocontributetomedicalaidschemesforthebenefitofpermanentemployeesandtheirdependants.ThecontributionschargedagainstincomeamountedtoR88million(2007:R76million).
ArcelorMittalSouthAfrica AnnualReport2008
185
35. CONTINGENTLIABILITIES
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
Contingentliabilitiesatstatementoffinancial positiondate,nototherwiserecognisedin thesefinancialstatements,arisingfrom:
–Facevalueoffinancialguaranteecontracts issuedinthenormalcourseofbusinessfrom whichitisanticipatedthatnomaterialliabilities willarise 1 32 69 82
–Amountsinlegaltrustaccounts 12 12 12 12
–Litigationandclaims 692 1015 692 951
“Litigationandclaims”consistof:
Taxationdispute–BusinessAssistanceAgreementDuringthefirstquarterof2008,theAlternativeDisputeResolution(ADR)processwiththeSouthAfricanRevenueServiceswasfinalisedwithsettlementbeingreachedonthedisputepertainingtothetaxdeductibilityofpaymentsmadeintermsoftheBusinessAssistanceAgreement.FullandfinalsettlementwasreachedforanamountofR100million.ForthefinancialyearendedDecember2006,aprovisionalobligationofR80millionwasrecognisedintermsofthesettlementoffermadeduringtheADRhearing.AfurtherR20millionwasrecognisedasanexpensein2008,bringingthetotalobligationsettledtoR100million.
Inthecomparativeperiod,R323millionandR259millionwasdisclosedasacontingentliabilityforthegroupandcompanyrespectively.
AllegedcontraventionofCompetitionActHarmonyGoldMiningCompanyandDRDGoldLimitedlodgedacomplaintwiththecompetitionauthoritiesallegingthatthecompanycontravenedtheCompetitionActinthatitabuseditsdominantpositioninsofarasitspricingpoliciesareconcerned.TheCompetitionTribunaldeterminedon27March2007thatthecompanydidcontravenesection8(a)oftheCompetitionActbychargingexcessivepricingforitssteelproductstocustomers.
TheTribunalhandeddownitsdecisionregardingtheremedieson6September2007.Insummarythedecisionconcludedthat:•theimpositionofresaleconditionsonsteelmerchantsandthosedomesticcustomersthatreceivearebateoffthe
domesticprice,thusreducingthesupplyofmaterialofflatsteelproductstothedomesticmarket,wasanabuseofdominanceintermsofsection8(a);
•ArcelorMittalSouthAfricamaynot(i)impose,or(ii)reachagreementwithcustomersonconditionsfortheuseorresaleofflatsteelproducts;
•ArcelorMittalSouthAfricaisorderedtowaiveinwritinganyconditionsinanyagreementregardingconditionsontheuseorresaleofflatsteelproducts;
•ArcelorMittalSouthAfricaisorderedtomakeknowninthepublicdomainthefulldetailsofitspricelistsforflatsteelproducts;
•ArcelorMittalSouthAfricaisorderedtopayanadministrativepenaltyofR692millionwithin20daysoftheremediesdecision;and
•ArcelorMittalSouthAfricaisorderedtopaythecostsofthecomplainants.
186 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
35. CONTINGENTLIABILITIEScontinued
ArcelorMittalSouthAfricafiledanoticeofappealtotheCompetitionAppealCourtagainsttheremediesdecision.TheCommissionerattheCompetitionCommissionrespondedon11September2007thattheCommissionwouldnotinstituteproceedingsfortherecoveryoftheadministrativepenaltypendingtheoutcomeoftheappeal.
TheCompetitionAppealCourton8November2007grantedanordersuspendingtheordersmadebytheTribunal.
AnappealshearingattheCompetitionAppealCourttookplaceon23and24October2008,theoutcomeofwhichisexpectedinthefirstquarterof2009.
ApplyingtheapplicableaccountingpoliciesandthemeasurementandrecognitioncriteriaofIAS37,Provisions, Contingent Liabilities and Contingent Assets,noprovisionhasbeenraised.Thisisconsistentwiththeaccountingtreatmentinthecomparativeperiod.
InanothercasebroughtbeforetheCompetitionTribunal,BarnesFencingIndustries(Proprietary)Limited(BarnesFencing)filedacomplaintthatthecompany’spricingpracticesinvolvinglowcarbonwirerodproductsamountedtopricediscrimination.Itisallegedthatthecompanychargedthecomplainantssubstantiallymorefortheproductandthatotherrespondentsalsobenefitedfrommorefavourablepaymentterms.
BarnesFencingappliedforordersforthecompanytoterminatethesepracticesandappliedfortheimpositionofanadministrativepenaltyof10%tobeleviedonthe2006localrevenueoflowcarbonwirerodproducts.
ThecompanysuccessfullyopposedthefirstreferralmadebyBarnesFencingandasaresult,theCompetitionTribunalagreedtoamendthefoundingdocumentsaccordingly.Thecompanysubsequentlyfileditsansweringaffidaviton26April2007.
BarnesFencinghassinceappliedforinterventionintheprocessbyincludingadditionalcomplaintsagainstthecompanyconcerningallegedcontraventionofsection5andsection8intermsoftheCompetitionAct.
TheinterventionapplicationhearingwasheardinFebruary2008.TheCompetitionTribunalgrantedleavetointervenebyincludingadditionalcomplaints,namely:prohibitedvirtualpracticesandabuseofdominance.However,therequestfora10%administrativepenaltywasdisallowed.
Nodateshavebeensetforthepre-orthemainhearing.
Basedonthecurrentstatusofthelitigation,noprovisionhasbeenraisedandnocontingentliabilityquantified.
Contingentassetretirementobligation
Asdescribedinnote28,IAS37,Provisions, Contingent Liabilities and Contingent Assets,requiresthatthepresentvalueofthefuturecostofretiringanoperatingsiteanditsconstituentproperty,plantandequipment,shouldbeincludedinthecarryingamountofthesite’sfixedassets.Thesecostsaredepreciatedovertheusefullifeofthespecificassetsconstitutedonanoperatingsite.
Otherthanforcertainclearlydeterminableinstances,futurecoststoretireoperationalandtheirunderlyingassetscannotbereliablyestimated.Thestrategicplansunderpinningthefutureoperationofsitesaregenerallyevergreeninnature.
ArcelorMittalSouthAfrica AnnualReport2008
187
36. SHARE-BASEDPAyMENTS
36.1 Cash-settledshareparticipationrights
In2007thegroupandcompanygrantedshareparticipationrightsto30keyemployeesforretentionpurposes.
Duringthecurrentyearaliteralinterpretationrelatingtotherights(previouslytermed“shareappreciationrights”)wasclarified.Followinglegalclarification,therightsentailacashpaymentpricedofftheaveragedailyclosingpriceofanArcelorMittalSouthAfricaLimitedshareoverthe60-daytradingperiodimmediatelyprecedingtheexpirydate.
TheincreaseinthecarryingamountoftheshareparticipationrightsfromR1milliontoR28millionbetween31December2007and31December2008islargelyattributabletothelegalclarificationoftherightsattachingtotheinstruments.
Detailsofthetwograntsandtheirvaluationat31December2008areasfollows:
Grant1
Numberofrights 310605
Numberofparticipants 17
Exercisedate 31August2009
Totalfairvalueofrightsat31December2008(Rm) 29
Timeapportionedfairvaluerecognisedasaliabilityat 31December2008(note26)(Rm) 23
Timeapportionedfairvaluerecognisedasaliabilityat 31December2007(note26)(Rm) 1
Totalfairvaluechargedtoearningsfortheyearended31December2008(Rm) 22
Grant2
Numberofrights 101728
Numberofparticipants 13
Exercisedate 31March2010
Totalfairvalueofrightsat31December2008(Rm) 9
Timeapportionedfairvaluerecognisedasaliabilityat 31December2008(note26)(Rm) 5
Timeapportionedfairvaluerecognisedasaliabilityat 31December2007(note26)(Rm) 01
Totalfairvaluechargedtoearningsfortheyearended31December2008(Rm) 51Rounding to zero due to the use of numeric reporting scale format of one million.
188 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
36. SHARE-BASEDPAyMENTScontinued
36.2 Equity-settledshareoptionplan
Thecompanyandgroupoperatethemanagementsharetrust,consistingofanoption,apurchase,adeferredpurchase,andapaid-upshareplanforthebenefitofthegroup’sandcompany’sseniormanagement,includingexecutivedirectors.
Thetransactionadministrationwithparticipantsisoutsourcedtoserviceprovider,CompensationTechnologies(Proprietary)Limited.
Plantypes
“Legacy Option Plan”(25 October 1989 to 30 April 2002) Optionswereofferedatthemarketpriceontheoptiongrantdateandwerereleasedinfiveequalannualtranchescommencingonthesecondanniversaryoftheofferdateandexpiringafternineyears.Thisplanwasclosedasfrom30April2002andwillrunoutonceallrightshavebeenexercisedortheexerciseperiodexpires.
“Legacy Deferred Purchase Plan” Shareswereofferedatthemarketpriceonthegrantdateand,iftakenupintermsoftheplan,werereleasedunlessdecidedotherwisebythedirectors,infiveequalannualtranchescommencingonthesecondanniversaryoftheofferdateandexpiringafternineyears.Thisplanwasclosedasfrom7May2002andwillcontinueuptotheexpirydate,onwhichdatetheparticipantsshouldpayfortheshares.
“Legacy Loan Purchase Plan” TofacilitateIscorLimited’sunbundling,participantswereofferedaonce-offchoicetotransferalloffersaccepteduptoNovember2001totheLoanPlan.Theoriginalvestingrules,dependingonthedateoftheoriginaloffer,continuedtoapplyasdidtheexpirydateonwhichtheloanshouldbesettled.
“30:30:40 Option Plan” (effective 7 May 2002 to 11 December 2005) Shareoptionswereofferedatmarketprices,onthegrantdateandwerereleasedinthreeannualtranchesof30%,30%and40%respectively,commencingonthefirstanniversaryoftheofferdateandexpiringaftersixyears.Thisplanwasclosedasfrom11December2005andwillrunoutonceallrightshavebeenexercisedortheexerciseperiodexpires.
“33.3/10: 33.3/10: 33.4/10 ArcelorMittal Group – Type Option Scheme” (effective from 12 December 2005 to present) Shareoptionsareofferedatmarketpricesonthegrantdateandarereleasedinthreeannualtranchesof33.3%,33.3%and33.4%respectively,commencingonthefirstanniversaryoftheofferdateandexpiringafter10years.Thisisanopenplan.
Theoptionplansareequity-settledaseachshareoptionconvertsintooneordinaryshareofArcelorMittalSouthAfricaLimitedonexercise.Theoptionscarryneitherrightstodividendsnorvotingrights.Optionsmaybeexercisedatanytimefromthedateofvestingtothedateoftheirexpiry.
Thenumberofoptionsgrantediscalculatedinaccordancewiththeemployee’srole-gradingwithinthegroupandcompanyasapprovedbytheRemunerationCommitteeofArcelorMittalSouthAfricaandasincorporatedwithinthetrustdeedofthemanagementsharetrust.Uponresignationtheshareoptionslapseimmediately.Upondeath,theoptionslapsewithinsixmonths.
Fortheoptionsgrantedduring2008,thekeyinputsutilisedtodeterminethegrantdatevaluationwere:•discountrate:11.07%(2007:9.54%);•annualvolatilityrate:42.08%(2007:31.5%);•earlyexercisemultiple:2.5timesstrikeprice(2007:2.0timesstrikeprice);•continuousdividendyield:4.62%(2007:3.37%);and•expectedattritionrate:8.9%(2007:6.8%).
Theaveragefairvalueperoptiongrantedforthereportingperiodended31December2008amountedtoR77.67(2007:R45.59).
ArcelorMittalSouthAfrica AnnualReport2008
189
36. SHARE-BASEDPAyMENTScontinued
36.2 Equity-settledshareoptionplancontinued
Million
Existing share distribution and shares available for future distribution
NumberofsharesavailableforutilisationintermsoftheArcelorMittalSouthAfrica managementsharetrustasat1January2008 41.2
Add:Sharereleases,forfeituresandresignations 0.7
Less:Shareoffers (0.8)
Numberofsharesavailableforfutureutilisation,asat31December2008 41.1
OptionsLoanpurchaseandpaidup/
deferredpurchaseplan
2008Million
2007Million
2008Million
2007Million
Outstandingatbeginningofyear 3.4 3.1 01 0.1
Issued 0.8 1.2
Exercised (0.6) (0.7) (0)1 (0.1)
Lapsed/cancelled (0.1) (0.2) 01
Outstandingatendofyear 3.5 3.4 01
Theaverageremainingcontractuallife indaysattheendoftheyearis:
Averagedaysuntilfullyvested 1057 563
Averagedaysuntilexpiry 2977 1928 558
Theaveragepricesapplicableper transactiontypeare:
Issued(R/unit) 92.61 121.12
Exercisedstrikeprice(R/unit) 55.65 57.33 7.93 9.51
Lapsed/cancelled(R/unit) 105.38 58.13 8.05
Outstanding(R/unit) 92.40 57.72 7.771Rounding to zero due to the use of numeric reporting scale format of one million.
190 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
36. SHARE-BASEDPAyMENTScontinued
36.2 Equity-settledshareoptionplancontinued
OptionsLoanpurchaseandpaidup/
deferredpurchaseplan
2008 2007 2008 2007
Detailsofoutstandingoptionsduringtheyearare:
1. ArcelorMittal Group-type option plan
Latestexpirydate 2018 2017
Exercisepricerange(R) 53.38–250.00 53.38-138.25
Numberofoutstandinginstruments 3300759 2799102
Totalproceedsifoutstandinginstruments wereimmediatelyexercised(Rm) 381 129
Totalintrinsicvalueofout-of-the-money optionsat31December(Rm) (48)
2. 30:30:40 option plan
Latestexpirydate 2011 2011
Exercisepricerange(R) 29.62–57.99 14.32-57.99
Numberofoutstandinginstruments 243023 584664
Totalproceedsifoutstandinginstruments wereimmediatelyexercised(Rm) 10 58
3. Legacy option plan
Latestexpirydate 2011 2011
Exercisepricerange(R) 9.71-10.10 9.71-13.79
Numberofoutstandinginstruments 4974 13142
Totalproceedsifoutstandinginstruments wereimmediatelyexercised(Rm) 02 2
Detailsofoutstandingloanpurchase andpaidup/deferredpurchaseplans areasfollows:
Latestexpirydate 2010
Exercisepricerange(R) 2.78-9.71
Numberofoutstandinginstruments 17360
Totalproceedsofsharesissued(Rm) 2
Closingprice R88.45 R136.50 R136.501 Excludes out-of-the-money options.2 Rounding to zero due to the use of numeric reporting scale format of one million.
ArcelorMittalSouthAfrica AnnualReport2008
191
36. SHARE-BASEDPAyMENTScontinued
36.2 Equity-settledshareoptionplancontinued
OptionsLoanpurchaseandpaidup/
deferredpurchaseplan
Exercisepricerange
R Outstanding
Exercisepricerange
R Outstanding
Termsoftheoptionsandshares outstandingatyear-endare:
Foryearended31December2008
Expirydate
2009 53.38 50250
2010 29.62–83.88 69520
2011 9.71–133.50 241072
2015 53.38 540436
2016 54.19–83.88 1066518
2017 97.72–140.00 810741
2018 73.75–250.00 770224
Total 3548761
Foryearended31December2007
Expirydate
2007 9.71 1230
2008 16.15 176359 2.78-3.99 14040
2009 14.32–18.42 15659
2010 25.62–57.99 75100 4.32-9.71 2020
2011 9.71–57.02 330688
2015 53.38 710792
2016 54.19–83.88 1233198
2017 97.72–138.25 855112
Total 3396908 17290
192 ArcelorMittalSouthAfrica AnnualReport2008
Notes to the group and company annual financial statements continuedfortheyearended31December2008
37. COMMITMENTS
Group Company
2008Rm
2007Rm
2008Rm
2007Rm
Capitalcommitments
Capitalexpenditurecontractedforproperty, plantandequipment 930 1232 866 1075
Capitalexpenditureauthorisedbutnotcontracted forproperty,plantandequipment 1227 1397 1154 1296
Operatingleasecommitments
Equipmentandvehicles
Thefutureminimumpaymentsundernon-cancellable stand-aloneandembeddedoperatingleasesare:
–Lessthanoneyear 79 46 76 44
–Morethanoneyearandlessthanfiveyears 77 116 72 107
Total 156 162 148 151
38. RENTALAGREEMENT
Adepotandoff-loadingfacilityownedbythegroupandcompany(includedundernote18)isleasedtoathirdpartyintermsofa14-yearrentalagreementending30June2013.Intermsoftherentalagreement,thelesseedoesnothavetheoptiontopurchasethefacilityatanystageduringorafterthecompletionofthecontract.
2008Rm
2007Rm
Thetotalrentalsreceivedfortheyearended31December2008amountedto R23million(2007:R25million).Thefuturegrossoperatingrentalstobereceived inaccordancewiththeagreementare:
Grossoperatingrentals
Notlaterthanoneyear 21 23
Laterthanoneyearbutnotlaterthanfiveyears 62 77
Laterthanfiveyears 8
Total 83 108
ArcelorMittalSouthAfrica AnnualReport2008
193
Percentageholding
Groupcarryingamount
Companycarryingamount
Functionalcurrency
Numberofshares
held2008
%2007
%2008
Rm2007
Rm2008
Rm2007
Rm
Year-endotherthan
31Dec
JOINTLyCONTROLLEDENTITIES
unlistedshares
•Collect-a-Can (Proprietary)Limited ZAR 2400000 60 60 17 15 2 2
•ConsolidatedWireIndustries (Proprietary)Limited ZAR 1999999 50 50 90 60 14 14
•EnsimbiniTerminals (Proprietary)Limited ZAR 1000 50 50 12 16 10 10 30June
•MacsteelInternational HoldingsBV USD 35001 50 50 1802 1003
•Microsteel (Proprietary)Limited ZAR 2000 50 50 36 36 30June
•PietersburgIronCompany (Proprietary)Limited ZAR 4000 50 50 (1) 3 6 6
Associate
unlistedshares
•ToyotaTsushoSouthAfrica Processing (Proprietary)Limited ZAR 20 20 20 12 12 16 16 31March
Totalinvestment 1968 1109 84 48
Directors’valuationof unlistedsharesinjointly controlledentitiesand anassociate 2001 1184
Wheretheaboveentities’financialyear-endsarenotco-terminouswiththatofthegroupandcompany,financialinformationhasbeenobtainedfrommanagementaccounts.
Annexure 1: Unlisted equity-accounted investments
194 ArcelorMittalSouthAfrica AnnualReport2008
Annexure 1: Unlisted equity-accounted investments continued
Theincomestatement,statementoffinancialpositionandcash-flowitemsinrespectofthejointlycontrolledentitiesare:
2008Rm
2007Rm
STATEMENTOFFINANCIALPOSITIONS
Non-currentassets 1001 620
Currentassets 7230 5538
Totalassets 8231 6158
Shareholders’equity 3771 2208
Non-currentliabilities
Borrowings 205 221
Other 7
Currentliabilities
Borrowings 1428 871
Other 2827 2851
Totalequityandliabilities 8231 6158
INCOMESTATEMENT
Revenue 44261 26769
Operatingexpenses (43790) (26341)
Netoperatingprofit 471 428
Netfinancingcosts 105 (28)
Gainsandlossesonchangesinforeignexchangeandfinancialinstruments (102) 32
Otherincome 217 (13)
Incomefrominvestments 154 3
Incomefromequity-accountedinvestments 238 217
Profitbeforetaxation 929 639
Taxation
–Normal (115) (93)
Netprofitattributabletoordinaryshareholders1 814 546
STATEMENTOFCASHFLOwS
Netcashflowsfromoperatingactivities 410 62
Netcashflowsfrominvestingactivities (46) (124)
Netcashflowsfromfinancingactivities 266 332
Foreigncurrencytranslations 199 (13)
Netincreaseincashandcashequivalents 829 2571 Indicative, amounts were translated at the average ZAR/USD exchange rate for the year and not at monthly exchange rate as per note 20.
The amounts will thus not agree with amounts in note 20.
ArcelorMittalSouthAfrica AnnualReport2008
195
Theincomestatement,statementoffinancialpositionandcash-flowitemsinrespectoftheassociateare:
2008Rm
2007Rm
STATEMENTOFFINANCIALPOSITIONS
Non-currentassets 119 120
Currentassets 184 153
Totalassets 303 273
Shareholders’equity 53 58
Non-currentliabilities
Borrowings 92 92
Other 123
Currentliabilities
Borrowings 55
Other 103
Totalequityandliabilities 303 273
INCOMESTATEMENT
Revenue 483 135
Operatingexpenses (461) (135)
Netoperatingprofit 22
Netfinancingcosts (26) (15)
Lossbeforetaxation (4) (15)
Taxation
–Normal
Netlossattributabletoordinaryshareholders (4) (15)
STATEMENTOFCASHFLOwS
Netcashflowsfromoperatingactivities (43) 19
Netcashflowsfrominvestingactivities (8) (126)
Netcashflowsfromfinancingactivities 50 106
Netdecreaseincashandcashequivalents (1) (1)
196 ArcelorMittalSouthAfrica AnnualReport2008
Annexure 2: Investments in subsidiaries
Countryof
incorporation1
Functionalcurrency
Issuedcapital
(unlistedordinary
shares) Interestofcompany
Shares Indebtedness
2008R
2007R
2008Rm
2007Rm
PROPERTy
YskorLandgoed(Proprietary)Limited RSA ZAR 4000 4000 4000 (94) (94)
MANuFACTuRING
IscorBuildingSystems(Proprietary)Limited RSA ZAR 100 100 100
SaldanhaSteel(Proprietary)Limited RSA ZAR 2000 1009 1009 4082 50542
SERVICE
Ferrosure(SouthAfrica)InsuranceCoLimited RSA ZAR 1000 3000000 3000000
Ferrosure(IsleofMan)InsuranceCoLimited3 IOM USD 70 12011246 12011246
MSSAInvestmentsBV NEH USD 134669 241105200 241105200 5
PybusFifty-Seven(Proprietary)Limited RSA ZAR 1 1000 1000 402 378
VicvaInvestmentsandTradingNine(Proprietary)Limited RSA ZAR 1 1000 1000
DombotemaMiningInvestments(Proprietary)Limited RSA ZAR 1 100 100
ArcelorMittalSouthAfricaDistribution(Proprietary)Limited4 RSA ZAR 1 100 100
ArcelorMittalAfricanInvestments5 Mauritius USD 100 716 716 179 116
ArcelorMittalPipesandTubes(Proprietary)Limited RSA ZAR 1 1 1
Totalinvestmentsinsubsidiaries(note21) 256124472 256124472 4569 5459
1 RSA – Republic of South Africa, IOM - Isle of Man and NEH - The Netherlands.2 This amount includes the shareholders’ loan of R8 billion (December 2007: R8 billion) and intercompany advances of
R4 billion (December 2007: R3 billion).3 Issued capital is non-voting redeemable preference shares.4 The name of the company was changed from Mabwetema Mining Investments (Proprietary) Limited as from 5 June 2008.5 The company was registered on 25 January 2007.
ArcelorMittalSouthAfrica AnnualReport2008
197
Countryof
incorporation1
Functionalcurrency
Issuedcapital
(unlistedordinary
shares) Interestofcompany
Shares Indebtedness
2008R
2007R
2008Rm
2007Rm
PROPERTy
YskorLandgoed(Proprietary)Limited RSA ZAR 4000 4000 4000 (94) (94)
MANuFACTuRING
IscorBuildingSystems(Proprietary)Limited RSA ZAR 100 100 100
SaldanhaSteel(Proprietary)Limited RSA ZAR 2000 1009 1009 4082 50542
SERVICE
Ferrosure(SouthAfrica)InsuranceCoLimited RSA ZAR 1000 3000000 3000000
Ferrosure(IsleofMan)InsuranceCoLimited3 IOM USD 70 12011246 12011246
MSSAInvestmentsBV NEH USD 134669 241105200 241105200 5
PybusFifty-Seven(Proprietary)Limited RSA ZAR 1 1000 1000 402 378
VicvaInvestmentsandTradingNine(Proprietary)Limited RSA ZAR 1 1000 1000
DombotemaMiningInvestments(Proprietary)Limited RSA ZAR 1 100 100
ArcelorMittalSouthAfricaDistribution(Proprietary)Limited4 RSA ZAR 1 100 100
ArcelorMittalAfricanInvestments5 Mauritius USD 100 716 716 179 116
ArcelorMittalPipesandTubes(Proprietary)Limited RSA ZAR 1 1 1
Totalinvestmentsinsubsidiaries(note21) 256124472 256124472 4569 5459
1 RSA – Republic of South Africa, IOM - Isle of Man and NEH - The Netherlands.2 This amount includes the shareholders’ loan of R8 billion (December 2007: R8 billion) and intercompany advances of
R4 billion (December 2007: R3 billion).3 Issued capital is non-voting redeemable preference shares.4 The name of the company was changed from Mabwetema Mining Investments (Proprietary) Limited as from 5 June 2008.5 The company was registered on 25 January 2007.
198 ArcelorMittalSouthAfrica AnnualReport2008
Analysis of shareholders
RangeofshareholdersNumberof
shareholders % Holdings %
1 – 100shares 6672 22.10 337784 0.08
101 – 1000shares 21057 69.74 4699279 1.05
1001 – 50000shares 2174 7.20 15170852 3.40
50001 – 100000shares 117 0.39 8451535 1.90
100001 – 10000000shares 170 0.56 95153983 21.35
10000001andmoreshares 4 0.01 321938699 72.22
30194 100 445752132 100
Typeofshareholders %shareholding
Corporateholdings 61
Pensionfunds 14
Unittrusts 9
Insurancecompanies 5
Othermanagementfunds 4
Otherfunds 5
Unclassifiedandbelowthreshold 2
100
Geographicalholdingsbyowner %shareholding
Switzerland 52.02
SouthAfrica 35.1
USA 6.1
Othercountries 4.5
Belowthreshold 2.28
100
Shareholdingsofmorethan5% Holdings %
MittalSteelHoldingsAG 231876454 52.02
PublicInvestmentCorporation 39874583 8.95
IndustrialDevelopmentCorporationofSouthAfrica 39167364 8.79
Publicandnon-publicshareholders
MittalSteelHoldingsAG 231876454 52.02
PublicInvestmentCorporation 39874583 8.95
IndustrialDevelopmentCorporationofSouthAfrica 39167364 8.79
310918401Non-publicshareholders 310918401
Publicshareholders 134833731
445752132
ArcelorMittalSouthAfrica AnnualReport2008
199
Information relating to the directors
DrKDKMokhele (53)Academicqualifications: BSc(Agric),MS(FoodScience),PhD(Microbiology)Occupation: Independentnon-executivedirectorExperience: Non-executivedirectorsinceFebruary1998.ChairmanofArcelorMittal
SouthAfricasince1January2007andChairmanoftheTransformationCommittee.
Othercurrentdirectorships: Non-executivedirectorof:ImpalaPlatinumHoldings,AfricanOxygen,ZimplatsHoldings,TigerBrandsTrustee:HansMerenskyFoundation
CPDCornier (56)Academicqualifications: MSc(ÉcolePolytechniqueandÉcoledesMines)Occupation: Non-executivedirectorExperience: Appointednon-executivedirectoron14May2008.Memberofthe
ArcelorMittalGroupmanagementboardresponsibleforAsia,AfricaandIndia,steelgreenfieldprojects,equipmentmanufacturingandinvestmentsandallocations.HeisalsoArcelorMittal’sChiefTechnologyOfficer.Previouslyexecutivevice-presidentofFCSCommercialAutoandchiefexecutiveofficerofSollacMediterranee.
Othercurrentdirectorships: OtherArcelorMittalGroupcompanies
SMaheshwari (45)Academicqualifications: BCom(Hons);CACSOccupation: Non-executivedirectorExperience: Appointednon-executivedirectorinDecember2002.Executivevice-president
ofArcelorMittalGroup,memberoftheArcelorMittalGroupmanagementboard,responsibleforbusinessdevelopmentandmergersandacquisitions.
Othercurrentdirectorships: OtherArcelorMittalGroupcompanies
AMHOPoupart-Lafarge (43)Academicqualifications: GraduateEngineer,MSc(Economics)Occupation: Non-executivedirectorExperience: Appointedalternatenon-executivedirectoron24July2008and
non-executivedirectoron30November2008.Executivevice-presidentofArcelorMittalGroupandmemberoftheArcelorMittalGroupmanagementboardresponsibleforAfricaandCIS.
Othercurrentdirectorships: OtherArcelorMittalGroupcompanies
HJVerster (42)Academicqualifications: BCom(Hons),MBL,ExecutiveManagementProgramme(DardenBusinessSchool)Occupation: ExecutiveDirector,FinanceExperience: AppointedExecutiveDirector,Finance,on17February2006.Previously
generalmanager,corporatetreasuryatMittalSteelNV.Othercurrentdirectorships: Non-executivedirectorofMacsteelInternationalHoldingsBV,
Ferrosure(IsleofMan)InsuranceCompany,otherArcelorMittalGroupcompaniesanddirectoroftheNationalBusinessInitiative.
200 ArcelorMittalSouthAfrica AnnualReport2008
DIRECTORSChairmanDrKDKMokhele#†■
ExecutivedirectorsNMCNyembezi-Heita(ChiefExecutiveOfficer)HJVerster(ExecutiveDirector,Finance)LGJJBonte(President)‡
Non-executivedirectorsDKChugh◆#■
CPDCornierEKDiack*•
SMaheshwari◆LPMondi•■DCGMurray*#†MJNNjeke*•
NDOrleyn#■
AMHOPoupart-Lafarge
COMPANySECRETARyCSingh
AuDITORSDeloitte&Touche
REGISTEREDOFFICEVanderbijlparkSteelRoomN3-5,MainBuildingDelfosBoulevardVanderbjlpark
POSTALADDRESSPOBox2Vanderbijlpark,1900Tel:016889-9111
Directorate and administration
COMPANyREGISTRATIONArcelorMittalSouthAfricaLimitedRegNo1989/002164/06
INTERNETADDRESShttp://www.arcelormittal.com/southafrica
TRANSFERSECRETARIESComputershareInvestorServices2004(Pty)Limited70MarshallStreet,JohannesburgPOBox61051Marshalltown,2107Tel:0113705000Fax:0116887721
uNITEDSTATESADRDEPOSITARyTheBankofNewYorkADRDepartment101BarclayStreet,22ndFloor,NewYork,NY10286UnitedStatesofAmerica
Tel:0912128155133Fax:0912128153050
Internet:www.bankofny.com
*Member of Audit Committee•Member of Risk Committee#Member of Human Resources & Remuneration Committee†Member of Safety, Health and Environment Committee
(SHE)■Member of Transformation Committee‡Citizen of BelgiumCitizen of France◆Citizen of India
ArcelorMittalSouthAfrica AnnualReport2008
201
Shareholders’ diary
Yearend 31December
FinancialresultsforDecember2008 11February2009
AnnualGeneralMeeting 12May2009
Firstquarterresults2009 29April2009
Interimresultsfor2009 29July2009
Thirdquarterlyresults2009 28September2009
202 ArcelorMittalSouthAfrica AnnualReport2008
Notice to shareholders
Twenty-firstannualgeneralmeetingNoticeisherebygiventhatthetwenty-firstannualgeneralmeetingofmembersofArcelorMittalSouthAfricaLimitedwillbeheldatTheHilton,138RivoniaRoad,Sandton,Johannesburg,onTuesday,12May2009at11:00,toconductthefollowingbusiness:
Ordinarybusiness1. Toreceiveandconsidertheannualfinancialstatementsforthecompanyandthegroupfortheyearended31December2008,
includingthedirectors’reportandthereportoftheauditorsthereon.
2. Toelectdirectorsintheplaceofthosewhointermsofarticles15.2and16.1ofthecompany’sarticlesofassociationretirebyrotationand,beingeligible,offerthemselvesforre-election:
• DrKDKMokhele • CPDCornier • SMaheshwari • AMHOPoupart-Lafarge • HJVerster
Refertopage199ofthisreportforabbreviatedcurriculumvitaeoftheabove.
3. Toapprovethenon-executivedirectors’feesfortheyearended31December2008(refertopage62).
4. Toapprovethefollowingannualfeesasthemaximumnon-executivedirectors’feespayablefortheperiod1May2009untilthenextannualgeneralmeeting.
Annualretainer
Attendancefeeper
meeting
Chairman R700000 –
Director R132000 R10000
AuditCommitteechairman R22000
AuditCommitteemember R10000
Committeechairman R20000
Committeemembers R10000
ShareTrustchairman R20000
ShareTrustmember R10000
5. ToappointMessrsDeloitte&Toucheasthecompany’sexternalauditorsandMrRyanMichaelDuffyastheauditpartner.
6.Resolvedthat5%(fivepercent)oftheauthorisedbutunissuedsharecapitalofthecompanybeplacedunderthecontrolofthedirectorsofthecompanyuntilthenextannualgeneralmeeting,withtheauthoritytoallotandissueallorpartthereof,forthepurposeofimplementingagroupbonusschemeandashareincentivescheme,onsuchtermsandconditionsastheymaydeemfit,subjecttotheprovisionsofsections221and222oftheCompaniesAct61of1973,asamended,theArticlesofAssociationoftheCompanyandtheJSELimitedListingsRequirements.
Specialbusiness7. SpecialResolution:“Resolvedthatintermsoftheauthoritygrantedinthearticlesofassociationofthecompanyand/
oranysubsidiaryofthecompany,thecompanyand/oritssubsidiariesbeandareherebyauthorised,bywayofageneralapproval,toacquirethecompany’sownordinaryshares(shares),uponsuchtermsandconditionsandinsuchamountsasthedirectorsofthecompany(and,inthecaseofanacquisitionbyasubsidiary(ies),thedirectorsofthesubsidiary(ies)),mayfromtimetotimedecidebutsubjecttotheprovisionsoftheCompaniesAct61of1973,asamended(theAct)and
ArcelorMittalSouthAfrica AnnualReport2008
203
theJSELimited(JSE)ListingsRequirementsandanyotherstockexchangeuponwhichthesharesofthecompanymaybequotedorlisted,subjecttothefollowingconditions:
(a) thatthisauthorityshallbevaliduntilthenextannualgeneralmeetingofthecompany,orfor15monthsfromthedateofpassingofthisresolution,whicheverperiodisshorter;
(b) thatanyrepurchasesofsharesintermsofthisauthoritybeeffectedthroughtheorderbookoperatedbytheJSEtradingsystemanddonewithoutanypriorunderstandingorarrangementbetweenthecompanyandthecounter-party,suchrepurchasesbeingeffectedbyonlyoneappointedagentofthecompanyatanypointintime,andeffectedonlyifaftertherepurchasethecompanystillcomplieswiththeminimumspreadrequirementsstipulatedintheJSEListingsRequirements;
(c) thattheacquisitionsinanyonefinancialyearshallbelimitedto10%(tenpercent)oftheissuedsharecapitalofthecompanyatthedateofthisannualgeneralmeeting,providedthatanysubsidiary(ies)mayacquiresharestoamaximumof10%(tenpercent)oftheissuedsharecapitalofthecompanyatthedateofthisannualgeneralmeeting,providedthatanysubsidiary(ies)mayacquiresharestoamaximumof10%(tenpercent)oftheaggregateofthesharesinthecompany;
(d) thatanyacquisitionofsharesintermsofthisauthority,maynotbemadeatapricegreaterthan10%(tenpercent)abovetheweightedaveragemarketvalueofthesharesoverthe5(five)businessdaysimmediatelyprecedingthedateonwhichtheacquisitioniseffected;
(e) therepurchaseofsharesmaynotbeeffectedduringaprohibitedperiod,asdefinedintheJSEListingsRequirementsunlessarepurchaseprogrammeisinplace,wheredatesandquantitiesofsharestobetradedduringtheprohibitedperiodarefixedandfulldetailsoftheprogrammehavebeendisclosedinanannouncementoverSENSpriortothecommencementoftheprohibitedperiod;and
(f) thatanannouncementcontainingfulldetailsofsuchacquisitionsofshareswillbepublishedassoonasthecompanyand/oritssubsidiary(ies)has/haveacquiredsharesconstituting,onacumulativebasis,3%(threepercent)ofthenumberofsharesinissueatthedateoftheannualgeneralmeetingatwhichthisspecialresolutionisconsideredand,ifapproved,passed,andforeach3%(threepercent)inaggregateoftheinitialnumberacquiredthereafter.
ReasonforandeffectofthespecialresolutionThereasonfor,andtheeffectofthisspecialresolutionistograntthedirectorsageneralauthorityintermsoftheActand,subjecttotheJSEListingsRequirementsandanyotherstockexchangeuponwhichthesharesofthecompanymaybequotedorlisted,toapprovetheacquisitionbythecompanyoroneofitssubsidiaries,ofthecompany’sownsharesonthetermssetoutabove.
Thedirectorsofthecompanyhavenospecificintentiontoacquireanyofthecompany’sshares,apositionwhichwill,asandwhenrequiredbythedirectors,bere-examinedhavingregardtoprevailingcircumstancesand,afterconsideringtheeffectsofamaximumrepurchase,thedirectorsareoftheopinionthat:
(a) thegroupandthecompanywillbeabletopayitsdebtsastheybecomedueintheordinarycourseofbusinessforaperiodof12(twelve)monthsafterthedateofnoticeoftheannualgeneralmeeting;
(b) theassetsofthegroupandthecompany,willbeinexcessoftheliabilitiesofthegroupandcompanytheforaperiodof12(twelve)monthsafterthedateofnoticeoftheannualgeneralmeeting.Forthispurpose,theassetsandliabilitieswillberecognisedandmeasuredinaccordancewiththeaccountingpoliciesusedinthelatestauditedannualfinancialstatements;
(c) theissuedsharecapitalandreservesofthegroupandthecompanywillbeadequateforordinarybusinesspurposesforaperiodof12(twelve)monthsafterthedateofnoticeoftheannualgeneralmeeting;and
(d) theworkingcapitalofthegroupandthecompanywillbeadequateforordinarybusinesspurposesforaperiodof12(twelve)monthsafterthedateofnoticeoftheannualgeneralmeeting.
ThecompanywillensurethatitssponsorprovidesthenecessarylettertotheJSEontheadequacyoftheworkingcapitalintermsoftheJSEListingsRequirements,priortothecommencementofanypurchaseofthecompany’ssharesontheopenmarket.
204 ArcelorMittalSouthAfrica AnnualReport2008
Notice to shareholders continued
Thedirectors,whosenamesaregivenonpages10and11oftheannualreport,collectivelyandindividuallyacceptfullresponsibilityfortheaccuracyoftheinformationgiveninthatreportandcertifythattothebestoftheirknowledgeandbelieftherearenofactsthathavebeenomittedthatwouldmakeanystatementfalseormisleading,andthatallreasonableenquiriestoascertainsuchfactshavebeenmadeandthattheannualreportcontainsallinformationrequiredbylawandtheJSEListingsRequirements.
Thecompanyisnotawareofanylegalorarbitrationproceedings,includinganyproceedingsthatarependingorthreatenedthatmayhaveorhavehadintherecentpast,ieatleasttheprevious12months,amaterialeffectonthefinancialpositionofthegroup.
Shareholders’attentionisdrawntothefollowinginformationthatisrequiredtobedisclosedandwhichiscontainedinthepagesoftheannualreportreferredto:• independentnon-executiveandexecutivedirectors:pages10and11• majorshareholders:page198• directors’interestsinsecurities:pages62and63• sharecapitalofthecompany:page131
Anymemberentitledtoattendandvoteattheannualgeneralmeetingisentitledtoappointaproxytoattend,speakandvoteinhisstead.Thepersonsoappointedneednotbeamemberofthecompany.Proxyformsshouldbeforwardedtoreachthecompany’stransfersecretariesbynolaterthan11:00onFriday,8May2009.Thecompletionofaproxyformwillnotprecludeamemberfromattendingtheannualgeneralmeeting.
Pleaserefertothenotestotheproxyformonpage206foradditionalguidanceoncompletionoftheproxyformandattendanceattheannualgeneralmeeting.
Beneficialshareholderswhosesharesarenotregisteredintheirownnamebutinthenameofanother,forexampleanominee,mustnotcompleteaformofproxyorattendtheannualgeneralmeetingunlessaformofproxyisissuedtothembytheregisteredshareholder.ThiswillincludeshareholderswhoseshareshavebeendematerialisedinthenameofanomineeofaCSDP,abrokerorComputershareNominees(Proprietary)Limited.BeneficialshareholderswhoarenotregisteredshareholdersshouldcontacttheregisteredshareholderortheArcelorMittalSouthAfricaShareCareLine(0800006960or+27113707850ifyouarecallingfromoutsideSouthAfrica)forassistanceinissuinginstructionsonvotingtheirsharesorobtainingaformofproxytoattendtheannualgeneralmeeting.
ShareholdersholdingdematerialisedsharesinthecompanythroughaCSDPorbroker,otherthanwithan“ownname”registration,musttimeouslyadvisetheirCSDPorbrokeroftheirintentiontoattendandvoteattheannualgeneralmeetinginorderfortheirCSDPorbrokertoprovidethemwiththenecessaryauthorisationtodoso,orshouldtheynotwishtoattendtheannualgeneralmeetinginpersonbutwishtoberepresentedthereat,theymusttimeouslyprovidetheirCSDPorbrokerwiththeirvotinginstructioninorderfortheCSDPorbrokertovoteinaccordancewiththeirinstructionattheannualgeneralmeeting.
Theformofproxymustbelodgedat,postedorfaxedtothetransfersecretaries,ComputershareInvestorServices(Proprietary)Limited,at70MarshallStreet,Johannesburg(POBox61051,Marshalltown,2107)orfaxedto+27116887721tobereceivednolaterthan48hoursbeforethetimefixedfortheannualgeneralmeeting(excludingSaturdays,SundaysorSouthAfricanpublicholidays).
Byorderoftheboard
CSinghCompanySecretary
13March2009
ArcelorMittalSouthAfrica AnnualReport2008
205
Form of proxy
ArcelorMittalSouthAfricaLimited(IncorporatedintheRepublicofSouthAfrica)(Registrationnumber1989/002164/06)JSECode:ACLISIN:ZAE000103453(“ArcelorMittalSouthAfricaLimited”or“thecompany”)
Formofproxyforuseatthetwenty-firstannualgeneralmeetingofthecompany,tobeheldonTuesday,12May2009at11:00inTheHilton,138RivoniaRoad,Sandton,Johannesburg.
Only registered shareholders who are registered in the register of members of the company under their own name may complete a form of proxy or attend the annual general meeting. This includes registered shareholders who have not dematerialised their shares, ie who still hold their ArcelorMittal South Africa share certificate/s, or shareholders who have dematerialised their shares in their own name.
Deliverto or Mailto or FaxtoComputershareInvestorServices(Pty)Ltd70MarshallStreetJohannesburg
ComputershareInvestorServices(Pty)LtdPOBox61051Marshalltown,2107
+27(0)116887721
I/We
(nameinblockletters)
of(address):
beingtheholder/sof sharesinthecompanydoherebyappoint(seenote1)(numberofshares)
1 or,failinghim/her,
2 or,failinghim/her,
thechairmanoftheannualgeneralmeeting,asmy/ourproxytoactforme/usatthetwenty-firstannualgeneralmeetingofthecompanywhichwillbeheldinTheHilton,138RivoniaRoad,Sandton,Johannesburgon12May2009at11:00andatanyadjournmentthereof,andtovoteforme/usonmy/ourbehalfortoabstainfromvotingasindicatedbelow:
For Against AbstainOrdinarybusiness1 Adoptionof2008financialstatements
2 a)Re-electionofKDKMokhele
b)Re-electionofCPDCornier
c)Re-electionSMaheshwari
d)Re-electionofAMHOPoupart-Lafarge
e)Re-electionofHJVerster
3 Approvalofnon-executivedirectors’fees
4 Approvalofnon-executivedirectors’futurefees
5 Reappointmentofauditfirmandauditpartner
6 Authoritytoissueunissuedshares
Specialbusiness7 Authoritytorepurchaseshares Signedat this dayof 2009
(Signature) Assisted by me (where applicable)
Pleaseseenotesonreverse
206 ArcelorMittalSouthAfrica AnnualReport2008
Notes
1. Onlyregisteredshareholderswhoareregisteredintheregisterofmembersofthecompanyundertheirownnamemaycompleteaformofproxyorattendtheannualgeneralmeeting.Thisincludesregisteredshareholderswhohavenotdematerialisedtheirshares,iewhostillholdtheirArcelorMittalSouthAfricasharecertificate/s,orshareholderswhohavedematerialisedtheirsharesintheirownname.
2. Beneficialshareholderswhosesharesarenotregisteredintheirownnamebutinthenameofanother,forexample,anominee,mustnotcompleteaformofproxyorattendtheannualgeneralmeetingunlessaformofproxyisissuedtothembytheregisteredshareholder.ThisincludesshareholderswhoseshareshavebeendematerialisedinthenameofanomineeofaCSDP,abrokerorComputershareNominees(Pty)Limited.BeneficialshareholderswhoarenotregisteredshareholdersshouldcontacttheregisteredshareholderortheArcelorMittalSouthAfricaShareCareLine(0800006960or+27113707850)ifyouarecallingfromoutsideSouthAfrica)forassistanceinissuinginstructionsonvotingyoursharesorobtainingaformofproxytoattendtheannualgeneralmeeting.
3. ShareholdersholdingdematerialisedsharesinthecompanythroughaCSDPorbroker,otherthanwithan“ownname”registration,musttimeouslyadvisetheirCSDPorbrokeroftheirintentiontoattendandvoteattheannualgeneralmeetinginorderfortheirCSDPorbrokertoprovidethemwiththenecessaryauthorisationtodoso,orshouldtheynotwishtoattendtheannualgeneralmeetinginpersonbutwishtoberepresentedthereat,theymusttimeouslyprovidetheirCSDPorbrokerwiththeirvotinginstructioninorderfortheCSDPorbrokertovoteinaccordancewiththeirinstructionattheannualgeneralmeeting.
4. AnArcelorMittalSouthAfricashareholdermayinsertthenameofaproxyorthenamesoftwoalternativeproxiesofhis/herchoiceinthespaceprovided,withorwithoutdeleting“thechairmanoftheannualgeneralmeeting”.Thepersonwhosenamestandsfirstontheformofproxyandwhoispresentattheannualgeneralmeetingwillbeentitledtoactasproxytotheexclusionofthosewhosenamesfollow.
5. AnArcelorMittalSouthAfricashareholder’sinstructionstotheproxymustbeindicatedbytheinsertionintheappropriateboxprovidedoftherelevantnumberofordinarysharesinrespectofwhichhe/shewishestoexercisehis/hervotes.Failuretocomplywiththeabovewillbedeemedtoauthorisethechairmanoftheannualgeneralmeeting,ifheistheauthorisedproxy,tovoteinfavouroftheordinaryresolutionsattheannualgeneralmeeting,oranyotherproxytovoteortoabstainfromvotingattheannualgeneralmeetingastheproxydeemsfit,inrespectofalltheArcelorMittalSouthAfricashareholder’svotesexercisablethereat.
6. Thisformofproxymustbelodgedat,postedorfaxedtothetransfersecretaries,ComputershareInvestorServices(Pty)Limited,at70MarshallStreet,Johannesburg(POBox61051,Marshalltown,2107)orfaxedto+27116887721tobereceivednolaterthan48hoursbeforethetimefixedfortheannualgeneralmeeting(excludingSaturdays,SundaysorSouthAfricanpublicholidays).
7. Thecompletionandlodgingofthisformofproxywillnotprecludetheordinaryshareholderfromattendingtheannualgeneralmeetingandspeakingandvotinginpersonthereattotheexclusionofanyproxyappointedintermshereof,shouldsuchshareholderwishtodoso.
8. Thechairmanoftheannualgeneralmeetingmayrejectoracceptanyformofproxywhichiscompletedand/orreceivedotherwisethaninaccordancewiththesenotes.
9. Documentaryevidenceestablishingtheauthorityofapersonsigningthisformofproxyinarepresentativecapacitymustbeattachedtothisformofproxyunlesspreviouslyrecordedbythecompany’stransfersecretariesorwaivedbythechairmanoftheannualgeneralmeeting.
10. Anyalterationorcorrectionmadetothisformofproxymustbeinitialedbythesignatory/ies.
11. Acompanyoranyotherbodycorporatewishingtovoteonashowofhandsshouldensurethattheresolutionrequiredbysection188oftheSouthAfricanCompaniesAct,1973(Act61of1973),asamended(theAct),toauthorisearepresentativetovote,ispassedbyitsdirectorsorothergoverningbody.Resolutionsauthorisingrepresentativesintermsofsection188oftheActmustbereceivedbythecompany’stransfersecretariesnolaterthan48hourspriortothetimefixedfortheannualgeneralmeeting(excludingSaturdays,SundaysorSouthAfricanpublicholidays).
PROOF 8a – 16 MARCH 2009
BASTION GRAPHICS
PROOF 8a – 16 MARCH 2009
http://www.arcelormittal.com/southafricaArcelorMittal South AfricaRoom N3-5Main BuildingDelfos BoulevardVanderbijlpark 1911South Africa
ArcelorMittal South Africa Lim
ited Annual Report 2008