ISCOR LIMITED ANNUAL REPORT 2003 IN FULL COMPLIANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS

Transcription

1 ISCOR LIMITED ANNUAL REPORT 2003 IN FULL COMPLIANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS

2 CONTENTS 1 Vision and Mission 2 Values 3 Financial Summary 4 Business Objectives 5 Group Profile 6 Group Review at a Glance 11 Directorate and Management 17 Chairman s and Chief Executive s Report 23 Market Review 31 Operations 32 Flat Steel Products 38 Long Steel Products 43 Suprachem 45 Finance 57 Sustainability 58 Human Resources 65 Safety, Health and Environmental Management 71 Corporate Social Investment 72 Black Economic Empowerment 73 Corporate Governance 86 Risk Management 91 The LNM Group 95 Supplementary Information 96 Definitions 99 JSE Securities Exchange Statistics 100 Group Cash Value Added Statement 102 Selected Group Financial Data Translated into US Dollars and Euros 104 Reconciliation of Shareholders Equity and Earnings between IFRS and US GAAP 105 Group Annual Financial Statements 192 Analysis of Shareholders 193 Directorate and Administration 194 Information Relating to the Directors of Iscor who Retire by Rotation 195 Shareholders Diary 196 Notice to Shareholders Proxy Form Attached

3 ISCOR LIMITED South Africa s leading steel producer, with world-class steel production facilities in flat and long steel products. VISION Iscor strives to be one of the highest operating margin steel producers globally, while controlling the steel market in sub- Saharan Africa. MISSION Iscor is an African-based producer of carbon (flat and long) steel products and beneficiator of its by-products. This annual report is available on the company s website at Iscor Annual Report

4 VALUES We trust in our people s ability to implement our strategy and to realise our vision and mission. We enable our people to develop to their full potential and encourage them to participate in a responsible way to achieve our objectives. We reward innovation, performance and do not accept mediocrity. We believe the highest level of honesty and integrity must be demonstrated in everything we do. We create challenging, healthy and safe working conditions and are sensitive to the impact of our operations on the environment. We only operate in well-defined and focused core businesses that are internationally competitive. We continuously improve unit cost, quality and customer intimacy. We accept our social responsibility towards the communities in which we operate. We strive to improve all elements of sustainable development in every aspect of our business. 2 Iscor Annual Report 2003

5 FINANCIAL SUMMARY % change PHYSICAL ('000 tonnes) Liquid steel production Domestic sales Export sales FINANCIAL (Rm) Revenue EBITDA Net operating profit Flat products Vanderbijlpark Saldanha Steel 451 (247) Long products Suprachem Other (16) 17 Corporate (150) (104) (44) Headline earnings Normal net cash flow * 322 Total assets SHARE PERFORMANCE (cents) Headline earnings per share Dividends per share FINANCIAL RATIOS (%) Return on ordinary shareholders' equity (headline) 20,8 5,6 Net cash/(debt) to equity 5,9 (10,3) *Excluding unbundling transactions Iscor Annual Report

6 BUSINESS OBJECTIVES RETURN ON EQUITY COMPETITIVENESS CASH GENERATION SHAREHOLDER VALUE RELEASE Objective 20% return over the commodity cycle Remain in lowest quartile of global cost curve Positive cash flow throughout commodity cycle Share price to reflect at least underlying net equity value Achievement 21% for the past year Achieved at Saldanha Steel for the first time, but Vanderbijlpark s position has moved out as a result of currency strengthening Record positive cash flow for the past year Average share price of R20,24 fell short of net equity value of R28,73 despite record results Future initiative To regain target in 2004, after expected decline in international steel prices over the next six months, through growing regional market share and cost reduction To regain lowest quartile ranking at Vanderbijlpark and retain lowest cost quartile position at all plants despite currency strength, through new reorganisation and cost reduction initiative To focus on cost and working capital reduction during the difficult trading period over the next six months To achieve market rerating through better communication of future prospects to investors 4 Iscor Annual Report 2003

7 GROUP PROFILE NET OPERATING OPERATIONS PRODUCTS SALES PROFIT EMPLOYEES ( 000 tonnes) Rm Flat Products Vanderbijlpark Works (Gauteng) Slabs blast furnaces Plates electric arc furnaces Hot-rolled basic oxygen furnaces Cold-rolled 375 Galvanised 470 Tinplate 327 Colour coated 76 Saldanha Steel (Western Cape) Corex, Midrex continuous process Hot-rolled coil Long Products Newcastle Works (KwaZulu-Natal) Profiles Vereeniging Works (Gauteng) Billets, ingots blast furnace and forged 1 induction furnace Seamless tube 73 2 basic oxygen furnaces 2 electric arc furnaces Iscor Annual Report

8 GROUP REVIEW AT A GLANCE * Rm Rm Rm Rm Rm Rm Rm GROUP INCOME STATEMENTS Revenue Net operating profit/(loss) Mining Steel (298) 601 Vanderbijlpark Saldanha Steel 451 (247) Long products Suprachem Corporate (166) (87) (77) (124) (131) (49) (79) Total Loss on scrapping of Ifcon plant (209) Net operating profit Investment and equity income/(loss) after tax Saldanha Steel (288) (526) (526) (473) Other Net financing costs (136) (388) (188) (459) (405) (389) (152) Taxation (excluding tax on equity income and disposals) Tax credit 208 Normal and deferred (1 201) (207) (127) (317) (124) (34) (448) Loss on disposal or scrapping of fixed assets added back Headline earnings/(loss) (163) Headline earnings/(loss) per share (cents) (54) Dividends per share (cents) CASH FLOW STATEMENTS Cash flows from operating activities Sale of assets Capital expenditure (1 176) (969) (901) (2 198) (1 248) (1 569) (1 635) Investments Saldanha Steel (228) (1 086) (1 086) Other 2 15 (67) (115) (44) (176) (761) Odd-lot share buyback (50) Take over of Saldanha loans (2 923) Rights issue proceeds Other (132) (21) (12) Decrease/(increase) in net debt (407) (1 596) 32 (589) (801) * Pro forma excluding the mining operations 6 Iscor Annual Report 2003

9 * Rm Rm Rm Rm Rm Rm Rm GROUP BALANCE SHEET ASSETS Non-current assets Property, plant and equipment Intangible assets Goodwill Investments in associates and joint ventures Financial assets Derivative instrument Current assets Cash and cash equivalents Intercompany loan Kumba Resources Other Total assets EQUITY AND LIABILITIES Capital and reserves Shareholders' funds Minority interest Non-current liabilities Interest-bearing borrowings Non-current provisions Deferred taxation Current liabilities Interest-bearing borrowings Other Total equity and liabilities Net cash/(debt) 750 (1 139) (1 183) (3 274) (2 128) (1 660) (1 071) * Pro forma excluding the mining operations Iscor Annual Report

10 GROUP REVIEW AT A GLANCE * Rm Rm Rm Rm Rm Rm Rm RATIOS Profitability and asset management Return on net assets (%) 25,6 9,1 (1,0) 6,8 2,2 4,9 11,9 Return on ordinary shareholders' equity (%) Attributable earnings 21,0 47,9 (19,7) (9,6) 0,7 3,4 8,8 Headline earnings 20,8 5,6 (2,4) 7,5 0,6 4,8 9,7 Return on invested capital (%) 27,4 9,6 (1,0) 7,1 2,3 5,2 13,0 Operating margin (%) 19,6 9,2 5,6 10,0 6,3 3,8 9,0 Net asset turn (times) 1,3 0,9 1,2 1,1 1,0 1,0 1,1 Solvency and liquidity Financing cost cover (times) 27,5 3,4 3,2 3,3 2,1 1,2 7,9 Current ratio (times) 1,6 1,1 1,7 1,2 1,5 1,9 1,7 Net cash/(debt) to equity ratio (%) 5,9 (10,3) (19,2) (49,7) (27,9) (20,8) (13,7) Cash realisation rate (%) 80,1 172,2 93,4 71,1 79,5 95,3 69,2 Number of years to repay interest-bearing debt (years) 0,0 0,9 1,1 2,6 2,6 1,9 1,5 Productivity Average number of employees ('000) 13,2 13,6 14,5 23,9 27,7 33,0 38,8 Mining 8,7 10,0 11,5 13,3 Steel 13,0 13,4 14,2 14,2 16,7 20,5 23,7 Group HQ 0,2 0,2 0,3 1,0 1,0 1,0 1,8 Average revenue per employee (R'000) Cash value added (Rm) n/a Prices (actual invoiced) US$/t C&F Hot-rolled coil export price Low carbon wire rod export price *Pro forma excluding the mining operations 8 Iscor Annual Report 2003

11 Five year annual compound Year ended 30 June growth rate % SOUTH AFRICAN STEEL MARKET ('000 tonnes) Country total (including imports) 2, Supplied by Iscor 4, Iscor market share (excluding re-rollers) % Ave ISCOR Liquid steel production ('000 tonnes) Vanderbijlpark (2,5) Saldanha Steel Long products (0,4) Pretoria 52 Total 1, Sales Local ('000 tonnes) Vanderbijlpark 2, Saldanha Steel Long products 1, Pretoria 6 Total 4, SA customers (%) Ave Export ('000 tonnes) Vanderbijlpark (7,9) Saldanha Steel Long products 0, Pretoria 5 Total 2, Export (%) Ave Year ended 31 December INTERNATIONAL CRUDE STEEL PRODUCTION (million tonnes) Worldwide 1, Asia 3, Europe (1,6) Northern America (2,4) Former USSR 3, Other 1, Iscor Annual Report

12 GROUP REVIEW AT A GLANCE * SHARE PERFORMANCE Number of shares in issue (million) Weighted average in issue (million) Earnings per ordinary share Attributable earnings basis (cents) 562, ,3 (441,9) (240,9) 19,7 90,5 225,3 Headline earnings basis (cents) 556,5 139,1 (54,2) 187,7 15,6 128,2 249,0 Cash equivalent basis (cents) 869,5 421,7 376,2 743,9 430,9 357,5 623,6 Dividend per ordinary share (cents) 200,0 40,0 50,0 100,0 Dividend cover (times) 2,8 3,5 3,0 2,9 Net equity per ordinary share (cents) Atributable cash flow per ordinary share (cents) 696,6 726,1 351,5 529,2 342,7 340,8 431,9 *Pro forma excluding the mining operations Note: Five year annual compound growth rate not applicable due to unbundling 10 Iscor Annual Report 2003

13 DIRECTORATE AND MANAGEMENT Iscor Annual Report

14 DIRECTORATE AND MANAGEMENT Khaya Ngqula (47) BAdmin, Executive Development Programme (Wits) Non-executive chairman Appointed non-executive director on 1 December 2001 and chairman of the board of directors in November President and CEO of the Industrial Development Corporation of South Africa. Currently chairperson of Foskor and African Media Entertainment Limited. Serves on several boards including Worldwide African Investment Holdings (Pty) Limited and Engen South Africa. 2 Rick Cottrell (67) CA(SA), FCA Non-executive director Appointed non-executive director in December Chairman of the audit committee. Consultant and director of several companies, including African Oxygen Limited, Glenrand MIB Limited and Nedbank Limited. 3 Sudhir Maheshwari (39) BCom (Hons), CA Non-executive director Appointed non-executive director in December Member of the audit committee. Chief financial officer of LNM Holdings N.V. Director of several companies within the LNM Group. 4 Aditya Mittal (27) BSc (Economics) Non-executive director Appointed non-executive director in January Member of the human resources & remuneration committee. Director, finance and head of mergers and acquisitions, Ispat International, vice chairman of LNM Holdings N.V. Director of several international companies. 12 Iscor Annual Report 2003

15 Lakshmi Mittal (53) BCom Non-executive director Appointed non-executive director in January Chairman and founder of the LNM Group. Director of several international companies. 6 Khotso Mokhele (48) BSc (Agric), MS (Food Science), PhD (Microbiology) Non-executive director Non-executive director since February Chairman of the safety, health and environmental (SHE) committee and of the human resources & remuneration committee. President of the National Research Foundation. Founding President, Academy of Science of South Africa. Member of the general committee of the International Council of Scientific Union. SA representative on the Executive Board, UNESCO. 7 Dolly Mokgatle (47) BProc, LLB, Higher Diploma Tax Law Non-executive director Appointed non-executive director of Iscor Limited in January Following her appointment as chief executive of Spoornet, she resigned as a director of Iscor Limited with effect 1 June During her term of office with Iscor, she was a member of the safety, health and environmental (SHE) committee and chairperson of the human resources & remuneration committee. Director of EDI Holdings. 8 Johnson Njeke (44) BCom, BCompt (Hons), CA(SA), Higher Diploma Tax Law Non-executive director Appointed director in January Member of the audit committee. Deputy chairman of Kagiso Media. Director of numerous companies including First Lifestyle Holdings Limited, NM Rothschild (SA) (Pty) Limited, Compass Group (SA) (Pty) Limited and Teamcor Limited. Iscor Annual Report

16 DIRECTORATE AND MANAGEMENT Louis van Niekerk (53) MCom, CA(SA) Chief executive officer Joined Iscor in Executive director, Finance Appointed managing director, Iscor Steel in March 1997 and chief executive officer of Iscor Limited on 1 July Davinder Chugh (47) BSc (Physics), LLB, MBA Executive director, Commercial Appointed executive director on 1 May Ex vice-president, purchasing of Ispat Europe Group S.A. (LNM Group). 3 Willem Coertzen (48) BSc Engineering (Metallurgy), Darden Executive Programme Executive director, Flat Steel Products Joined Iscor Limited in Appointed executive director 1 December Director on the boards of Saldanha Steel and Macsteel International. 14 Iscor Annual Report 2003

17 Malcolm Macdonald (61) BCom, CA(SA), CIMA Executive director, Finance Appointed non-executive director in Appointed executive director in January Abe Thebyane (43) BAdmin, Darden Executive Programme, Diploma Company Direction Executive director, Human Resources Joined Iscor Limited in Appointed executive director on 1 December Martin van Wijngaarden (44) PhD Engineering (Metallurgy) Executive director, Long Steel Products Joined Iscor Limited in Appointed executive director on 1 December Director on the boards of Consolidated Wire Industries and Macsteel International. Member of SA Iron and Steel Institute. Iscor Annual Report

18 DIRECTORATE AND MANAGEMENT Ras Alberts (61) BSc (Eng Electrical), General manager: Technology Joined Iscor Limited in Appointed general manager: Technology for Iscor Steel in Appointed general manager: Technology for Iscor Limited in Andries Joubert (50) BEng (University of Stellenbosch), Advanced Executive Programme (UNISA) General manager: Suprachem Joined Suprachem in Phaldie Kalam (49) BProc General manager: Corporate Affairs Joined Iscor Limited in February Louise van der Bank (39) BSc (Comp Sc), HED, Executive Development Programme (Virginia) General manager: Information Management Joined Iscor Limited in Appointed general manager: Information Management in July Annamarie van der Merwe (39) BJuris, LLB, LLM, Company secretary Joined Iscor Limited in February Iscor Annual Report 2003

19 CHAIRMAN S AND CHIEF EXECUTIVE S REPORT Iscor Annual Report

20 CHAIRMAN S AND CHIEF EXECUTIVE S REPORT Dear Shareholder The year to June 2003 has been the most successful in our history: headline earnings of R2,5 billion represented an all time record; net cash flow of R1,9 billion resulted in a year-end positive net cash position of R750 million; we successfully transformed our Saldanha Steel operation into a profitable business; and the LNM Group demonstrated its confidence in our company by increasing its shareholding to 47%. BUSINESS ENVIRONMENT International The introduction of new market safeguard measures by the United States and the European Union during 2002, combined with exceptionally strong Chinese steel demand, led to significant steel price increases between February 2002 and March 2003, particularly for flat products. However, this was followed by a steep fall, precipitated by a supply glut in China, with some prices declining by as much as 32%. By mid June prices had stabilised and have since started firming. Domestic Following two years of strong domestic growth up to December 2002, steel demand declined sharply to the extent that the 11% growth rate for the first half, was reduced to 4% for the full year. This reversal, precipitated by the strengthening rand and the lagged effect of the series of interest rate hikes during 2002, had a particularly severe impact on the competitiveness of secondary steel exporters. 18 Iscor Annual Report 2003

21 The South African Reserve Bank s decision to start reducing interest rates in June 2003 is expected to reverse deteriorating business conditions although we only expect to see the positive impact on steel demand in the first half of STRATEGY Cost reduction, efficient cash management and operational excellence are the foundation of our strategy to remain one of the lowest operating cash-cost and high quality steel producers in the world. Hence, the magnitude of the currency strengthening during the second half has put our competitive position under threat and brought a new urgency for further cost reduction. To address this, we are embarking on a major reorganisation of our business structure and have already launched a new cost reduction drive. The reorganisation involves the collapsing of all our operations into a single business unit in order to unlock significant synergies in support services. This is being driven with urgency and the investigation should be completed by June Our marketing efforts are focused on promoting the growth of our domestic business and expanding our share of the steel market in sub-saharan Africa. We continue to look for opportunities to optimise our asset base and are currently investigating the viability of recommissioning some of our surplus coke making capacity. It has become clear that rail tariffs hold the key to unlocking the feasibility of this project and we are currently in negotiations in this regard. We fully support the principle of domestic steel industry consolidation to unlock synergies and improve our competitiveness in a rapidly consolidating global steel industry. To this end, we will continue to explore opportunities that will add value for shareholders and have created the financial capacity to do this on a significant scale. CORPORATE GOVERNANCE The recent spate of international and local corporate governance scandals is placing increasing focus on this aspect of business management. We are pleased to report that we comply in all material respects with the recommendations of the King II Report on Corporate Governance, considered one of the best international benchmarks in this regard. Iscor Annual Report

22 CHAIRMAN S AND CHIEF EXECUTIVE S REPORT SUSTAINABLE DEVELOPMENT Last year we reported on our adoption of the triple bottom line management approach focusing on the environmental, social and financial dimensions of our business activities. Each year we set targets to ensure improved performance in these areas and we can report having made considerable progress in this regard during the past twelve months. We completed the environmental master plan for our Vanderbijlpark mill, entailing a holistic assessment of environmental issues and a realistic, all-encompassing strategy to achieve our environmental management objectives. The environmental plans for our Newcastle and Vereeniging plants are already being implemented. All our operations are scheduled for ISO environmental management certification within the next six months, while our Saldanha Steel plant is considered a model for environmental friendliness in the steel industry. With regard to the safety of our employees, we continue to improve on our injury frequency rates. Our measurement criteria are based on international standards and our rates are among the lowest in South Africa. No fatal injuries were recorded during the year, but we regret to report the occurrence of three fatalities since our financial year-end. This has galvanised us into focusing even more on safety training and incentives. Our board approved the second phase of our HIV/Aids strategy, aimed at pro-actively containing the spread of the disease and mitigating its impact on our employees. Voluntary testing forms the nucleus of this programme. With respect to our endeavours to create and promote greater economic opportunities for previously disadvantaged people and businesses, we have approved a more pro-active affirmative business enterprise (ABE) policy and aim to procure at least R500 million in goods and services from ABE s during the next twelve months, representing a 40% increase on the past year. In 1994, we formalised our social investment programme with the establishment of the Iscor Foundation, underpinning our commitment to invest in the welfare and development of the communities in which we operate. Our focus is primarily on education, training and job creation initiatives. We have contributed over R173 million to a range of community development initiatives since the Foundation s inception. 20 Iscor Annual Report 2003

23 OUR PEOPLE We wish to pay special tribute to all our employees for their continued support and commitment to the organisation and thank them for their sterling contribution to our success during the past year. One of our key objectives is to foster strong relationships with all our employees and labour unions and our past record of limited industrial action is evidence of our success in this regard. We were therefore particularly disappointed when the National Union of Metal Workers of South Africa (NUMSA) declared a dispute in relation to back pay a demand which had no legal foundation. This led to a three-week strike by some of the union s members during May and June of this year, resulting in considerable financial loss to the participating strikers on the basis of our "no work, no pay" ruling. Our differences with NUMSA on the matter have since been amicably resolved. The support to the company by the non-striking labour unions and our non-unionised employees during this period was most encouraging. Transformation and diversity within the company continues to receives high level attention. Our employment equity targets have been agreed to with our labour unions and steady progress has been made in moving towards the targets, with the exception of the technician category, where a general shortage of skills exists in South Africa. To reduce this scarcity, our training and bursary programmes are now almost entirely focused on building engineering and related skills capacities among the country s learners. BOARD OF DIRECTORS At our last annual general meeting in November 2002, our chairman, Warren Clewlow and Jan van den Berg, a non-executive director and chairman of the audit committee, resigned from the board. Both were appointed directors of the company in 1989 at the time of Iscor s privatisation. We would like to thank them for their invaluable contribution to the success of the company, particularly for their wisdom and guidance during Iscor s re-engineering and subsequent unbundling. The board elected Khaya Ngqula, an existing Iscor director, as chairman after Warren Clewlow s departure. Following her appointment as chief executive of Spoornet, South Africa s rail utility, Dolly Mokgatle also resigned from the Iscor board. In her brief capacity as a director, she made a significant contribution and we wish her well in her new role. Iscor Annual Report

24 CHAIRMAN S AND CHIEF EXECUTIVE S REPORT During the year, two new directors were appointed to the board and the audit committee: Rick Cottrell, former executive officer of the Financial Services Board of South Africa, retired senior partner of the South African arm of international auditing firm Coopers & Lybrand and director of a number of listed companies, and Sudhir Maheshwari, chief financial officer of the LNM Group. CHANGE IN YEAR-END We decided to change our financial year-end from June to December in order to align ourselves with the LNM Group. Our next reporting period will accordingly cover the six months to December PROSPECTS International flat product selling prices for September/October delivery have improved by some $35 per tonne from the low point of the June quarter price collapse. However, average prices for the next six months are not expected to exceed the average we experienced for the past financial year. The domestic market is expected to remain flat for the remainder of 2003 and only start picking up in 2004 as the stimulatory effects of lower interest rates start filtering into the economy. The international steel market is essentially a US dollar-based business and the rand/dollar exchange rate plays a critical role in our reported rand earnings. Given the volatility in the exchange rate, it is very difficult to predict our rand earnings with any level of confidence, although the September quarter earnings will be particularly severely impacted by the combination of low prices, weak domestic demand and the current strong currency. In US dollar terms, our earnings for the half year to December 2003 will not match the level achieved during the past year. Khaya Ngqula Chairman Louis van Niekerk Chief Executive 22 Iscor Annual Report 2003

25 MARKET REVIEW Iscor Annual Report

26 MARKET REVIEW INTERNATIONAL MARKET Overview International steel prices have shown a significant upswing since February 2002, triggered by safeguard measures introduced in the United States (US), the European Union (EU) and China as well as the closer realignment of international steel supply and demand. While the US market led the steel price recovery towards the end of 2001, almost a year later steel prices softened in that market in response to sluggish demand combined with rising domestic production. In contrast, production restraints in Western Europe kept steel prices firm, notwithstanding the lacklustre steel demand in the region. Prices in the Far East rose sharply on the back of strong Chinese demand reaching a peak during the first quarter of 2003 after a speculative price bubble. This market corrected in April and bottomed out in June with the re-emergence of Chinese buyers. Supply and demand Global steel consumption increased by 6,2% year-on-year in calendar 2002, peaking at 9,2% in the final quarter. This slowed to 7,0% for the first quarter of 2003, and is expected to ease further to 4,5% for this calendar year. Consumption growth outside of Asia has been fragile, with other factors driving prices upwards, mainly production restraints, stockpiling in anticipation of the strong price movements, and strong demand from China, which added a further 37 million tonnes to the total 49 million tonnes increase in global steel consumption in calendar Finished steel consumption by region (million tonnes) EU NAFTA Asia Others 24 Iscor Annual Report 2003

27 Global supply of primary steel products, measured in crude steel production, increased by 6,3% to 886 million tonnes during 2002 and by 8,8% year-on-year in the quarter ending March In China alone, production increased by 31 million tonnes in 2002 and by an additional 8 million tonnes in the first quarter of calendar The knock-on effect from this strong steel demand in China is leading to higher freight rates and iron ore and coke prices. World trade actions Worldwide protectionism continues unabated as restructuring of the global steel industry gains momentum in the light of excess capacity. The following anti-dumping duties currently affect us: Country Product Margin Status Argentina Hot Rolled Coil 55% Final Canada Hot Rolled Coil 30,2% Final Europe Hot Rolled Coil 5,2% Appeal pending United States Hot Rolled Coil 14,6% Final Thailand* Hot Rolled Coil 128% Final Pakistan Tinplate 27,3% Final *Our exports to Thailand are not affected as we sell in-bond to re-exporters. Safeguard actions introduced by the US, Canada, the EU and China have fortunately not impacted our exports, due to South Africa s World Trade Organisation classification as a developing country, the proviso being that volumes must not exceed 3% of total steel imports by product into the importing countries. The safeguard measures introduced by the EU, however, do include South African hot and cold rolled sheet imports in its safeguard quotas with excess volumes being levied with duties of 16% to 18%. During the past year we were successful in defending the following cases: US cold rolled anti-dumping: no injury finding November 2002 hot rolled countervailing sunset review: case rescinded June 2003 Canada galvanised products appeal: won with costs November 2002 cold rolled products appeal: won with costs March 2003 Iscor Annual Report

28 MARKET REVIEW Anti-dumping actions against countries dumping in South Africa include: Plate & hot rolled sheet from Russia: 81,7% Ukraine: 94,8% Cold rolled sheet from Russia Severstal: 27,4% other producers: 76,1% Prices Although the overall global demand and supply balance is fundamentally supportive of firm steel price levels, the US market is currently suffering from an inventory overhang. In the US, inventory cover at over four months is back at peaks last seen towards the end of calendar In Europe and Japan, stock levels have not increased to the same extent while the Chinese market has just emerged from its inventory overhang. This distorted short-term situation puts the steel market into a period of oversupply, leading to softer global pricing for the duration of International steel prices, which continued to increase strongly into the first quarter of calendar 2003, weakened in the second quarter in the main steel producer/consumer regions of North America, the European Union, the Far East and Eastern Europe although there are variations by region and by product. In Asia, steel prices increased substantially in January and February on the back of real demand but extensive speculative buying caused demand in China to increase even more. Underlying demand in China has been, and remains, exceptionally strong. During the period of strong price movement, Chinese importers built inventories and rationed forward sales in support of an ongoing aggressive push on prices. This trend collapsed in April in the face of full warehouses and a shortage of cash, which forced the importers to simultaneously release substantial volumes of steel into the market. This sudden availability of steel, combined with the exhaustion of the tariff-rate quotas introduced by the Chinese government, had an immediate impact on the psychology of the market in which, by any account, prices were being held at artificially high levels. Most importers then delayed purchase decisions waiting for the market to settle at a new level. Sheet products were most affected, resulting in an $80 to $130 per tonne price drop depending on the product, with hot rolled sheet worst affected. In contrast, long product prices in the region showed a much smaller contraction with billet and rebar prices dropping only $40 to $45 per tonne as a result of firm demand and more stable supply conditions. The weakening of prices bottomed out during the latter part of June with the re-emergence of Chinese buyers and price increases of more than $35 per tonne have been recorded with order intake for September and October delivery. 26 Iscor Annual Report 2003

29 In the United States mediocre steel demand and increased supply by previously idled steel mills caused prices to drop from spectacular highs achieved during the December 2002 quarter to the lowest paying region in the world. The disparity between the US and third country prices enticed some US steel mills to take substantial export orders for China and Europe, an initiative undoubtedly designed, in part, to relieve the pressure created by lacklustre demand in their home market. Steel sheet in this region is currently trading at price levels below those in Europe, but once stock levels have been worked-off, the US market is expected to resume its position as the highest paying region towards the end of Steel sheet prices in the European Union began to drop in July 2003 in reaction to the negative global trend after six consecutive quarterly price rises brought about by disciplined supply. The price pressure is likely to remain for the rest of calendar 2003 as a result of weak domestic demand, the strong Euro and rising imports. In Eastern Europe and the CIS, steel markets have been positive. Demand has been growing faster than production in support of the relatively healthy economic growth in the region. Although, steel prices are largely determined by Asian steel demand, which kept prices high up to March 2003, the inventory crisis in China caused prices in the region to contract. With the re-emergence of Chinese steel buying in June, steel prices have now bottomed out. Looking ahead, steel prices are forecast to improve towards the end of calendar 2003 as economic conditions pick up. Steel price cycle (Nominal US$/t C&F) Actual Invoiced Iscor Export Prices Adapted CRU FY Forecast 2002/3 2003/ HRC Low carbon wire rod Iscor Annual Report

30 MARKET REVIEW DOMESTIC MARKET Demand The first half of the financial year was characterised by ongoing buoyant demand driven by large resource projects, construction activity and secondary exports which had become more competitive with the weaker currency. South African domestic deliveries, up 16% in the first six months since the previous year, were further boosted by an 11% drop in steel imports to the very low level of 3,8% of consumption. The robust steel consumption growth experienced throughout most of calendar 2002 started to slow down in December and dropped sharply in the first quarter of 2003 due to weakening growth in manufacturing production. The current lower steel demand is evident in all the steel consuming sectors and can be attributed to: a slowdown in the domestic demand for durable consumer goods following the four hundred basis points increase in bank lending rates during 2002; weaker international demand for South African manufactured products in a somewhat hesitant global economy; and a decline in the price competitiveness of local exporters and import-competing industries due to the substantial strengthening of the exchange value of the rand since the end of Steel despatches dropped by 14% year-on-year during the second half of 2002/3. Imports of carbon steel for 2002/3 are estimated at 4,8% of steel consumption, 16% down on 2001/2. However, with the declining international price trend and expected increase in distressed cargos, imports into the country will probably move back to the historical level of around 6% in future. Notwithstanding the severe drop in steel industry despatches experienced in the second half of the financial year, steel consumption for the full financial year matched that of the 2002 year. Growth in capital outlays by private business enterprises remained strong during the year, although it slowed somewhat during the second half. The increase in capital expenditure was evident in all the sectors but particularly in the platinum mining sector. 28 Iscor Annual Report 2003

31 Despite the current downturn, which is expected to continue for the remainder of 2003, economic fundamentals in South Africa remain sound and steel consumption is expected to maintain the sustainable long-term growth trend which commenced in South African quarterly steel consumption ( 000 tonnes) Quarterly consumption Consumption trend Our steel deliveries are spread across a wide cross-section of the domestic economy as illustrated: Domestic sales for 2002/3 H1 H2 Construction 32% 27% Plate and sheet 13% 13% Tube and pipe 15% 15% Packaging 11% 12% Cables and wire 10% 12% Automotive 9% 11% Other manufacturing 5% 5% Mining 5% 5% H2 Iscor Annual Report

32 MARKET REVIEW Prices For the first three quarters of the current financial year domestic steel prices increased on the back of the very strong surge in international prices, which more than offset the significant strengthening in the currency. The average net transaction price for hot-rolled coil increased by 26% year-on-year. This rising trend turned during the last quarter as international prices slipped and the currency continued to strengthen. The average domestic flat product prices booked for quarter four decreased by 3,4% and for long products by 2,5%. African steel trade The African market is our primary focus as it offers us a natural competitive advantage in terms of logistics. We increased our Africa sales by 51% during the past year as part of a very focused drive, increasing this share of export sales from 15% to 20%. We aim to continuously improve this higher margin business in future. Our sales on the African continent now constitutes 68% of our total sales volume. Geographic sales distribution South Africa* 60% 59% Africa 6% 9% Total Africa 66% 68% Far East 17% 20% European Union 5% 3% North America 4% 4% Middle East 4% 3% Other 4% 2% * Includes secondary exports - via Duferco Steel Processing 6% 8% - other 6% 6% Iscor Annual Report 2003

33 OPERATIONS Iscor Annual Report

34 OPERATIONS Flat Steel Products Our flat steel products division comprises an inland integrated steel works at Vanderbijlpark, south of Johannesburg and the Corex/Midrex-based hot strip mill, Saldanha Steel, on the South African west coast. Our Vanderbijlpark mill currently produces 3,1 million tonnes per annum of a wide range of flat products from slab to colour coated sheet, and Saldanha Steel 1,2 million tonnes of thin gauge hot-rolled coil per annum. Product distribution Tinplate 8% Slab 7% Plate 4% Hot rolled coil ex Vanderbijlpark 30% Hot rolled coil ex Saldanha 25% Hot rolled P&O ex Vanderbijlpark 4% Hot rolled P&O ex Saldanha 1% Cold rolled sheet 8% Galvanised sheet 9% Colour coated sheet 2% Electrogalvanised sheet 2% INTEGRATION OF SALDANHA STEEL Saldanha Steel was established in 1997 as a joint venture with the Industrial Development Corporation (IDC) and was managed as an independent business. In November 2001, we purchased the IDC s 50% interest and now manage the operation as part of our flat steel products division. 32 Iscor Annual Report 2003

35 OUR MARKETS We supply 84% of South Africa s flat steel market covering the full spectrum of economic sectors, with no single sector dominating. Local market segmentation 2002/3 Agriculture 1% Plate and sheet 13% Roofing and cladding 14% Tube and pipe 22% Packaging 13% Appliances 2% Automotive 15% Other manufacturing 3% Mining 4% Building and construction 13% We actively promote the growth of South Africa s secondary exports through our export rebate scheme. During the year we passed on R136 million in export rebates to our customers. Our exports are spread across a wide international customer base on five continents. The African export market, however, remains a key focus area as it offers us a natural competitive advantage in terms of logistics. We increased our exports to the region by 63% during the past year, raising its share of our export sales from 15% to 22%. We aim to further improve on this higher margin business in future. Geographic sales distribution for 2002/3 Domestic 61% Far East 20% Africa 9% North America 5% Western Europe 2% Middle East 3% Iscor Annual Report

36 OPERATIONS FLAT STEEL PRODUCTS MARKET OVERVIEW Domestic Domestic demand, which had shown solid growth during the previous financial year, continued to expand strongly for the first half of the past year with sales volumes up 25,7% on the previous six months. However, the cumulative impact of domestic interest rates hikes in 2002 and the sudden strengthening of the exchange rate during the second half, had a severe impact on domestic demand, particularly on secondary exporters, resulting in a 29,3% drop in our second half despatches. For the full year domestic sales volumes improved by 9,1%. The domestic market is still overstocked and is unlikely to show improved despatch levels before the end of calendar Domestic prices rose sharply during the year, continuing the trend that started in February 2002 with the up-turn in the international steel price cycle, offsetting the negative impact of the stronger rand in the second half of the financial year. International International export prices improved since the February 2002 turn in the steel cycle until March 2003, when the speculative buying bubble in the Chinese market burst. The last quarter of the financial year saw a price collapse in flat products in non-eu and US markets. US prices had already come off sharply in October 2002 due to recommissioning of idled capacity in a weak market. The EU market, which is tightly controlled, never realised the full extent of the price spike, and eased back slightly. Overall prices achieved for the year were well up despite the 11% year-on-year strengthening of the average US dollar exchange rate. By year-end, prices had bottomed and orders for hot-rolled coil delivery in September/October were being taken at prices up to $35 a tonne higher. The protectionist measures introduced by the US in February 2002, and shortly after by the EU, China and certain other countries, have restricted the free flow of international steel trade. 34 Iscor Annual Report 2003

37 While South Africa, as a developing country, is not affected by the safeguard measures, our accessible import volumes are limited and we face specific anti-dumping duties on hot-rolled coil in the EU, the US and Canada, resulting in an increased share of our exports being allocated to other markets. A comprehensive report on the international steel market is covered in the Market Review on pages 24 to 27. OPERATING RESULTS Vanderbijlpark Saldanha * Revenue (Rm) Operating profit (Rm) (510) Capital expenditure (Rm) Liquid steel production ( 000 tonnes) Sales volumes ( 000 tonnes) domestic export Domestic sales (%) Number of employees *Saldanha s own results: Iscor share was 50% for the first five months Operating profit at both Vanderbijlpark and Saldanha Steel improved sharply, driven by the turnaround in steel prices and higher volumes, which offset the negative impact of the stronger rand/us dollar exchange rate, the weaker domestic market and cost pressures. The results at Saldanha were particularly pleasing. Full design capacity output was achieved after the successful repair to the Corex unit during the last quarter of the previous financial year, and the percentage thin gauge material (<1,6mm), on which a premium is earned, improved from 27% to 38%. The operating profit improvement would have been greater but Iscor Annual Report

38 OPERATIONS FLAT STEEL PRODUCTS for a once-off charge of R157 million, incurred as part of an extended negotiation process to replace the commodity-linked Saldanha power supply agreement with a more favourable megaflex tariff structure. CAPITAL EXPENDITURE Capital expenditure for the year increased by 14% Rm Rm Value adding projects Replacements Environmental Total While replacement expenditure decreased by 16%, environmental expenditure increased significantly with the implementation of the Vanderbijlpark environmental master plan, and the commencement of two major value-adding projects at the Vanderbijlpark mill the upgrading of the sinter plant and hot strip mill. CONTINUOUS IMPROVEMENT Our continuous improvement drive delivered positive results with our cost saving initiatives yielding a 6,5% saving on total cost per tonne at Vanderbijlpark, and a very significant 19,6% at Saldanha, assisted by the 35% increase in output. Notwithstanding this, total cost per tonne at Vanderbijlpark still increased by 5,3% as a result of sharp cost rises in administered prices (rail, port, power), certain commodities (coking coal, fuel, gas) and the lag effect of the benefit of the stronger exchange rate on directly, and especially, indirectly US dollar linked input costs. At Saldanha, total cost per tonne decreased by 7,8%, the benefits of the cost savings being significantly diluted by sharp rises in the cost of imported pellets in addition to the same costpush factors applicable to Vanderbijlpark. 36 Iscor Annual Report 2003

39 Saldanha Steel moved into the lowest quartile of the global cost curve as measured by the Commodity Research Unit s 2002 survey. While Vanderbijlpark s position dropped, the survey did not capture certain important second half breakthroughs made in increasing throughput and driving down costs at the sinter plant and hot strip mill. Looking ahead, of concern is the impact of the stronger currency on our competitive position. As we cannot rely on our position being restored by a weakening of the currency, a companywide reorganisation and cost reduction initiative is being launched aimed at a quantum reduction in our US dollar cost per tonne. PROSPECTS Operating returns for the remainder of calendar 2003 expressed in US dollar terms will be lower than the level achieved during the past year due to depressed domestic demand and first quarter prices, and the strong currency. Iscor Annual Report

40 OPERATIONS Long Steel Products Our long steel products division comprises an integrated steel works at Newcastle in the KwaZulu-Natal Province and an electric arc furnace-based steel works in Vereeniging, south of Johannesburg. The two steel mills are managed as a single business to exploit operational, technical and market synergies and to provide enhanced customer service. We produce a comprehensive range of long products including rolled and forged carbon, alloy and stainless steel profiles such as rod, bar, light, medium and heavy sections, window and fencing profiles, billets and blooms as well as an extensive range of hot-finished and cold-drawn seamless tubes. We have a capacity to produce approximately 2 million tonnes of finished products per annum and for the past year produced at a level of approximately 1,8 million tonnes. Our operations remain among the lowest cash cost producers of steel in the world. Our competitive cost position, extensive product range and capability to manufacture high-quality, value-added products places us in a prominent position in both the South African and global steel markets. Product distribution Billets, blooms and ingots 15% Forgings 2% Rails 1% Bars 20% Seamless tubes 4% Sections 17% Windows and fencing 4% Wire rod 37% 38 Iscor Annual Report 2003

41 OUR MARKETS We aim, by first intent, to fully satisfy the demand of the South African long products market. Directly, and indirectly through the merchant industry, we service customers in the manufacturing, construction, mining, automotive, agricultural and petrochemical industries and enjoy approximately a 50% share of the total domestic long products market. Local market segmentation Agriculture 3% Automotive 5% Building and construction 30% Manufacturing 45% Mining 4% Petrochemical 1% General engineering 6% Other 6% We strongly support the secondary steel export industry through an export rebate scheme. During the past year, secondary export rebates totalling R113 million was made available to our customers. Through our export programme we aim to supply a full range of products to sub-saharan Africa and to selectively export value-added steels to long-term customers in offshore markets. This past year, we shipped approximately tonnes to 57 countries on five continents. Approximately 60% of our sales to the international steel market consisted of value-added steels and more than 80% of all exports were sold to long-term repeat customers. Geographic sales distribution EU 7% Africa 7% Far East 16% Middle East 1% South America 5% South Africa 55% North America 9% Iscor Annual Report