I S C O R ISCOR ANNU L i m i t e d A N N U A L R E P O R T AL REP O R T

Transcription

1 ISCOR Limited A N N U A L R E P O R T

2 CONTENTS FINANCIAL SUMMARY 2 BUSINESS OBJECTIVES 2 GROUP PROFILE 3 DIRECTORATE AND MANAGEMENT 4 CHAIRMAN AND CHIEF EXECUTIVE S REPORT 7 MARKET REVIEW 13 FLAT STEEL PRODUCTS 19 LONG STEEL PRODUCTS 27 SUPRACHEM 33 FINANCE 36 HUMAN RESOURCES 48 SAFETY, HEALTH AND ENVIRONMENTAL MANAGEMENT 57 CORPORATE SOCIAL INVESTMENT 65 LNM GROUP 68 DEFINITIONS 69 JSE SECURITIES EXCHANGE STATISTICS 71 GROUP REVIEW AT A GLANCE 72 GROUP CASH VALUE ADDED STATEMENT 77 SELECTED GROUP FINANCIAL DATA TRANSLATED INTO US DOLLARS AND EUROS 78 INCOME STATEMENTS, BALANCE SHEETS AND CASH FLOW STATEMENTS WITH PRO FORMA COMPARATIVES 80 CORPORATE GOVERNANCE 83 RISK MANAGEMENT 90 DIRECTORS RESPONSIBILITY FOR FINANCIAL REPORTING 93 GROUP ANNUAL FINANCIAL STATEMENTS 94 ANALYSIS OF SHAREHOLDERS 168 DIRECTORATE AND ADMINISTRATION 169 INFORMATION OF DIRECTORS WHO RETIRE BY ROTATION 170 SHAREHOLDERS DIARY 172 NOTICE TO SHAREHOLDERS 173 PROXY FORM ATTACHED

3 ISCOR LIMITED IS THE AFRICAN CONTINENT S PREMIER STEEL PRODUCER, WITH WORLD-CLASS STEEL PRODUCTION FACILITIES IN FLAT AND LONG STEEL PRODUCTS. Our growth strategy is underpinned by key factors: Our major steel operations are in the lowest quartile of efficient operating cash-cost producers in the world We own our iron ore resources, making Iscor a vertically integrated steel company We are a major player in the domestic market, where steel consumption is mostly inland Our earnings leverage potential is premised on a further recovery in international steel prices, continued growth in domestic demand, our ongoing emphasis on continuous improvement and the turnaround of our Saldanha Steel operation, which has, since year-end, achieved full design capacity HIGHLIGHTS Unbundling of our mining operations, releasing significant shareholder value Acquisition of full control of Saldanha Steel Securing an international strategic alliance with LNM Group through a Business Assistance Agreement Successfully completing a R1 670 million rights issue This Annual Report is available on the company s website at 1

4 FINANCIAL summary Net operating profit Flat products Saldanha Steel (247) Long products Suprachem Group (87) (77) (13) Headline earnings/(loss) 480 (163) Cash flows from operations Total assets SHARE PERFORMANCE Headline earnings/(loss) per share (cents) 139 (54) 357 Dividends per share (cents) 40 FINANCIAL RATIOS Return on ordinary shareholders equity (headline) % 5,6 (2,6) Financial gearing (debt to equity) % 10,3 19,1 * Pro forma excluding the mining operations * % Rm Rm change BUSINESS objectives RETURN ON EQUITY COMPETITIVENESS CASH GENERATION SHAREHOLDER VALUE RELEASE OBJECTIVE 20% per annum over Remain in lowest cost Positive cash flow throughout Share price to reflect at least commodity cycle quartile of global cost curve commodity cycle underlying net asset value ACHIEVEMENT 5,6% during worst steel Achieved at all plants except Achieved during worst steel Share price of R22,00 vs cycle on record Saldanha Steel cycle on record R24,90 net asset value, and major losses from was achieved after the Saldanha Steel unbundling of the mining FUTURE INITIATIVES operations Expect return of 20% for Saldanha Steel to reach Positive cash flow Expect share price re-rating medium term depending on lowest cost quartile during expectation for next year from the market price cycle 2002/03 2

5 GROUP profile as at 30 June 2002 MANAGED BUSINESSES OPERATIONS OWNERSHIP PRODUCTS TONS EXPORT EMPLOYEES % 000 % Flat products Vanderbijlpark 100 Slabs (Gauteng) Plates blast Hot rolled furnaces Cold rolled electric arc Galvanised furnaces Tinplate basic Colour coated 77 oxygen furnaces Saldanha Steel 100 Hot rolled coil (Western Cape) Corex, Midrex continuous process Total flat products Long products Newcastle and 100 Profiles Vereeniging Seamless tubes (KwaZulu-Natal Billets, ingots and and Gauteng) forged 1 blast furnace 2 basic oxygen furnaces 1 electric arc furnace Total long products Total steel sales Other Suprachem 100 Carbon (Gauteng) products Yskor Landgoed 100 Housing n.a 80 (Gauteng) INVESTMENTS Collect-A-Can 60 Beverage can (Gauteng) recycling De-tinning and TPS Consolidated 50 Wire products Wire Industries (Gauteng) Macsteel 50 International International trading and (Worldwide shipping offices) 3

6 DIRECTORATE AND management NON-EXECUTIVE DIRECTORS Warren Clewlow (66) OMSG, CA(SA), DEcon (hc) Chairman Appointed chairman of Iscor Ltd on 26 November Member of human resources and remuneration committee. Non-executive chairman of Barloworld. Director of several companies. Non-executive director of Iscor Ltd since Aditya Mittal (26) BSc (Economics) Director Appointed director of Iscor Ltd on 16 January Member of the audit committee. Director, finance and head of mergers and acquisitions, Ispat International, vice-chairman of LNM Holdings NV. Director of several international companies. Lakshmi Mittal (52) BCom Director Appointed director of Iscor Ltd on 16 January Member of the human resources and remuneration committee. Chairman and founder of the LNM Group. Director of several international companies. Dolly Mokgatle (46) BProc, LLB, Higher Diploma Tax Law Director Appointed director of Iscor Ltd on 1 January Member of the safety, health and environmental (SHE) committee. Executive director of the Transmission Group in Eskom. Serves on several boards in South Africa including Pebble Bed Modular Reactor and is currently chairman of Wiphold. Khotso Mokhele (47) BSc (Agric), MS (Food Science), PhD (Microbiology) Director Appointed director of Iscor Ltd in February Chairman of the safety, health and environmental (SHE) committee and member of the human resources and 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. Khaya Ngqula (46) BAdmin, Executive Development Programme (Wits Business School) Director Appointed director of Iscor Ltd on 1 December Chairman of the human resources and remuneration committee. President and CEO of the Industrial Development Corporation of South Africa. Currently chairperson of Foskor and African Media Entertainment. Serves on several boards including Worldwide African Investment Holdings and Engen South Africa. 4

7 Johnson Njeke (43) BCom, BCompt (Hons), CA(SA), Higher Diploma Tax Law Director Appointed director of Iscor Ltd on 1 January Member of the audit committee. Deputy chairman of Kagiso Media. Director of numerous companies including First Lifestyle Holdings, NM Rothschild (SA), Compass Group (SA) and Teamcor. Jan van den Berg (66) BCom Director Appointed director of Iscor Ltd in Chairman of the audit committee. Director of companies. EXECUTIVE DIRECTORS Louis van Niekerk (52) BCom Hons, 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 Ltd on 1 July Davinder Chugh (46) 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). Willem Coertzen (47) BSc Engineering (Metallurgy), Darden Executive Programme Executive director, Flat Steel Products Joined Iscor Ltd in Appointed executive director 1 December Director of Macsteel International. Malcolm Macdonald (60) BCom, CA(SA), CIMA, AMP (Harvard) Executive director, Finance Appointed non-executive director of Iscor Ltd in Appointed executive director in January

8 DIRECTORATE AND management Abe Thebyane (42) BAdmin, Post Graduate Diploma (Wits Business School), Darden Executive Programme Executive director, Human Resources Joined Iscor Ltd in Appointed executive director on 1 December Martin van Wijngaarden (43) PhD (Metallurgical Engineering) Executive director, Long Steel Products Joined Iscor Ltd 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. MANAGEMENT Ras Alberts (60) BSc (Eng Electrical), AMP. General manager: Steel Technical Joined Iscor Ltd in Appointed general manager: Technology for Iscor Steel in Appointed general manager: Steel Technical for Iscor Ltd in Phaldie Kalam (48) BProc General manager: Corporate Affairs Joined Iscor Ltd in February Louise van der Bank (38) BSc Comp Sci, HED, Executive Development Programme (Virginia) General manager: Information Management Joined Iscor Ltd in Appointed general manager: Information Management in July Annamarie van der Merwe (38) BJuris, LLB, LLM; HDip (Construction Law) Company secretary Joined Iscor Ltd in February

9 CHAIRMAN AND CHIEF EXECUTIVE S report Dear Shareholder It is indeed a pleasure to report on an exceptional year in the history of Iscor. DELIVERING SHAREHOLDER VALUE The restructuring phase of our long-term re-engineering strategy was implemented during the year resulting in the following major developments: the unbundling of Iscor s mining assets into Kumba Resources Limited with effect from 1 July 2001 Iscor is now a focused steel company; our shareholders receiving shares in Kumba Resources which was listed on the JSE Securities Exchange South Africa on 26 November 2001; the retention of an undivided share of the Sishen mine s ore reserves entitling Iscor to 6,25 million tons per annum of iron ore at cost, maintaining Iscor s status as a vertically integrated steel producer; the acquisition in November 2001 of full control of Saldanha Steel which is now integrated into Iscor s flat steel products division (previously its results were 50% equity accounted); the conclusion of a Business Assistance Agreement with the LNM Group, the world s second largest steel producer, the objective of which is to further reduce operating costs by R700 million within the next three years. To the extent that this is achieved, LNM will earn up to 10% of Iscor s issued shares. As part of the agreement, LNM will also invest at least US$75 million in the purchase of Iscor shares on the open market by March By year-end, LNM had already acquired 30,74% of Iscor s issued shares, securing our participation in the international consolidation of the steel industry; and 7

10 CHAIRMAN AND CHIEF EXECUTIVE S report the successful completion of a rights issue for R1 670 million which was used to reduce a large portion of the company s post-unbundling debt. Being a cyclical resource company, this has positioned us with a very strong balance sheet. The doubling of Iscor s share price from R29 on 30 June 2001, to a combined net Iscor/Kumba Resources share price, after rights issue costs, of R64 on 30 June 2002, demonstrates the significant shareholder value that has been unlocked as a result of the unbundling strategy. We believe that the strategic partnership with a major international steel group, LNM, is a key factor in the future success of the South African primary steel industry, and this will play a significant role in the unlocking of further Iscor shareholder value. Our current business structure is as follows: ISCOR LIMITED Flat Steel Products Long Steel Products Suprachem Vanderbijlpark Saldanha Steel Newcastle Vereeniging Macsteel International 50% Yskor Landgoed Collect-A- Can 60% Consolidated Wire Industries 50% Ferrosure Insurance Companies Sishen undivided share of ore reserve 100% owned unless otherwise indicated FINANCIAL RESULTS Our financial results for the full year, prepared in terms of International Accounting Standards, were in line with expectations at the interim stage. 8

11 Compared with last year s pro forma (excluding the mining operations) results: revenue increased by 30% to R14,2 billion; net operating profit of R1 308 million increased by 115%; headline earnings of R480 million reflect a significant turnaround from last year s loss of R163 million; and net debt of R1,1 billion at year-end is equivalent to a debt-equity ratio of 10%. These results were achieved in a very difficult international steel market. BUSINESS ENVIRONMENT The year was characterised by extraordinary competitive conditions which prevailed in world steel markets. The first half of the year saw steel prices trading at its lowest in 30 years, caused by global steel oversupply and lacklustre demand, aggravated by the events of 11 September The comprehensive safeguard measures taken by the United States (USA) to protect its domestic steel industry from global overcapacity and plummeting steel prices, followed by similar measures taken by the European Union (EU), has resulted in a cutback in world steel production. This, together with the improving international economic outlook, has resulted in steel prices recovering sharply. In the USA, steel prices have increased by 80% since November last year and, since the first quarter of this year, by over 30% in the EU, with Asian prices now improving to EU levels. Prices for the second half of calendar 2002 are expected to remain firm. Thereafter, the trend will be determined by the growth in consumption and the degree of discipline on the part of steel producers to constrain output. The growing trend towards consolidation in the world steel industry is likely to assist in the latter. BUSINESS STRATEGY Within these market conditions, we are continuing the aggressive implementation of key value drivers at the operations: achieving full best practice benchmarks at Vanderbijlpark during the coming year; achieving original project design levels at Saldanha Steel in respect of output and product specifications during the first six months of the new financial year; 9

12 CHAIRMAN AND CHIEF EXECUTIVE S report realising the full synergies from the integration of Saldanha Steel and Vanderbijlpark Works within the next 12 months; achieving the full LNM Business Assistance Agreement cost saving targets by December 2004; continuously moving up the value-added chain through the production of premium quality products and excellence in customer service; and driving our continuous improvement programme to ensure that we stay at the lower end of the global production cost curve. Our overall objective is to remain one of the lowest operating cash-cost quality steel producers in the world. We will also continue to pursue opportunities for rationalisation within the domestic steel industry, where this makes commercial sense, and will add value for our shareholders. SUSTAINABLE DEVELOPMENT We recognise the importance of sustainable development and have adopted a triple bottom-line management approach focused on environmental, social and financial issues that support the best interests of the company and our stakeholders. Our strong commitment to the highest international safety and health standards is underscored by the leading edge systems we employ to manage these aspects. It is with deep regret, however, that we have to report the occurrence of seven fatalities during the year, notwithstanding the fact that our disabling injury rates are among the lowest in South Africa. Each serious incident is thoroughly investigated and corrective action taken, where possible, to avoid a re-occurrence. Presentations are made by management to members of the safety, health and environment (SHE) committee of the board on each fatality. The issue of employee and contractor commitment to safety is receiving attention through ongoing training and awareness programmes. In respect of the environment, we are committed to achieving full ISO certification at all our plants by December To this end, we have detailed action plans in place which have been agreed with the relevant accreditation bodies. Our approved capital expenditure programmes will bring our environmental operating standards, at all our plants, in line with world s best practice within the next five years. 10

13 We are committed to the welfare and development of the communities in which we operate, with emphasis on education and job creation initiatives. We invested more than R8 million on a range of community initiatives during the year. In addition, our commitment to sustainable development is underpinned by strong corporate governance structures and practices. Further information, including reports on our safety, health and environment and social investment initiatives is available in this report. THE BOARD The board was extensively restructured after the unbundling. Five of our directors transferred to the Kumba Resources board, and four new executive directors, together with five non-executive directors, were appointed. The board now comprises 14 members of which eight are non-executive. For the first time, the board includes senior international steel executives. Details of the board are set out on pages 4 to 6 and 83. We would like to thank the former directors, Hans Smith, Tom de Beer, Len Konar, Colin Fenton and Jurie Geldenhuys, for their invaluable contribution in overseeing the transformation of Iscor into a globally competitive company in both steel and mining, and the very successful unlocking of shareholder value through the unbundling. Specific tribute must be paid to Hans Smith, Iscor s former executive chairman, for the key role he played in driving the extremely challenging restructuring process of the company over a period of seven years. OUR PEOPLE Subsequent to the unbundling of the mining assets there has been significant change in the management structure. The operational heads of the two steel divisions, together with the human resources general manager, have been promoted to board level, and a commercial director has been appointed. The new team reflects South Africa s transformation and is a blend of youthfulness and experience, to drive the unlocking of further shareholder value. Details of the management team, including executive directors, are set out on pages 5 to 6. 11

14 CHAIRMAN AND CHIEF EXECUTIVE S report Transformation remains a key priority and employment equity targets have been agreed to with employee and union representatives for all operating divisions. Specific action plans are in place, for the first four layers of management, to achieve the targets for the designated groups by December The executive management team, reporting directly to the chief executive, has already achieved the employment equity targets, indicative of the high-level priority that the transformation process enjoys in the company. The success of the past year is a tribute to the focus and sustained efforts of all employees to translate our strategies into actions. We wish to express our sincere gratitude to our staff and the board for their support and dedication in making this an exceptional year in the history of Iscor. PROSPECTS Both international steel prices and domestic steel demand are expected to remain at buoyant levels for the 2003 financial year. Although the rand/us dollar exchange rate, which has a significant impact on our results, is difficult to predict, given its recent volatility, the earnings for the year ahead should show further significant improvement. Our strategy is to remain a positive earnings and cash generator throughout future steel price cycles. Warren Clewlow Chairman Louis van Niekerk Chief executive officer 12

15 MARKET review INTERNATIONAL SUPPLY AND DEMAND SITUATION The steel price recovery, post the Asian economic crisis, resulted in producers increasing production sharply. Unfortunately, this coincided with a general fall-off in demand and the consequent oversupply affected the rising price cycle in the last quarter of calendar 2000, leading to prices falling sharply by the end of 2001, to their lowest levels in 30 years. With the exception of China, steel mills worldwide have responded by cutting back on production. During meetings of world trade representatives at the Organisation for Economic Cooperation and Development (OECD) in Paris, during September and December 2001, leading steel producing countries reached a tentative agreement to cut at least 61 million tons of steel making capacity by 2003, a further 9,5 million tons by 2005 and another 23 million tons by TOTAL WORLD CRUDE STEEL PRODUCTION Million tons per month Million tons per annum (Seasonally adjusted annual rate) Annual rate Monthly rate WORLD TRADE ACTIONS Global excess capacity initiated unprecedented trade actions during 2001/02 as governments endeavoured to protect themselves against low-priced steel imports. 13

16 MARKET r eview The main user countries are the USA, the EU, India, Argentina, Canada, Australia and Brazil, with the USA accounting for 44% of all steel anti-dumping investigations. Anti-dumping duties currently affecting us: Country Product Anti-dumping margin Canada Hot rolled sheet 36,9% EU Hot rolled coil 5,2% USA Hot rolled sheet 14,6% Argentina Hot rolled sheet 83,0% A number of cases are also pending, viz: Country Product Status Safeguard cases Canada 9 steel products Outcome pending EU 9 steel products Outcome pending Anti-dumping cases USA Cold rolled coil Pending investigation Pakistan Tinplate Under investigation Thailand Hot rolled coil Under investigation During the year, we were also successful in having cases against us withdrawn, or were able to maintain our exports to these markets: Country Product USA Cold rolled coil USA Wire rod USA Oil covered tubular goods USA Section 201 China Safeguards On 5 March 2002, the USA announced the imposition of safeguard measures, which entails blanket tariffs ranging from 8% to 30% on virtually all steel products as part of a three-year programme of import restrictions. In order to protect itself from foreign steel diverted from the USA, the European Commission imposed safeguard measures consisting of provisional blanket quotas for steel imports and tariffs of 15% to 26% on imports above specific determined 14

17 quotas. The product-by-product quotas are based on average imports for the past three years plus 10% and will be in place for up to 200 days from 29 March 2002 until 28 September 2002, while the Commission investigates what definitive safeguard measures to take. While the tariffs set by the EU are lower than those of the USA, they are considered sufficient to protect the European market, as prices in the USA have increased markedly in the first half of Following the EU action, the Chinese government announced safeguard measures consisting of import tariffs ranging from 7% to 26% imposed on nine products including plate, sheet products, slab, rod and sections with effect from 24 May 2002, which will be in place for 180 days. As a developing country, South Africa has been exempted from the USA, EU and Chinese safeguard measures in terms of the World Trade Organisation (WTO) rules, provided that volumes account for less than 3% of total steel imports by product to those countries. We are currently lobbying in the USA, for the principles of the Africa Growth and Opportunity Act to be applied in practice, which if successful, could result in higher import levels to the USA market. We are also negotiating with the European Commission to review existing tariffs in order to gain a higher access level to the EU market. PRICES The announcement of trade restrictions, combined with a reduction in steel capacity by the USA, has led to a sharp recovery in USA steel prices, since November last year. Their domestic prices, for hot rolled coil, have improved by more than 80% and by June 2002 was trading around the US$400/ton range, a level last seen at the peak of the steel cycle in early Steel prices in Western Europe followed suit, although the improvement has not matched that of the USA. By June 2002, hot rolled coil was trading at US$270/ton, some 35% above the low levels recorded in the first quarter of A more modest recovery was experienced in long product markets. Leading economic indicators in Europe point to further price rises in the second half of calendar 2002, provided that producers contain production levels. 15

18 MARKET r eview Steel prices in Asia have also increased sharply since March The main driver has been the strong growth in China, which has outperformed the global economic growth trend. Hot rolled coil is currently trading at the same price levels as in Europe with a US$80/ton (33%) improvement on first quarter 2002 levels. Looking ahead to 2002/03, steel prices are forecast to improve further in all regions as economic conditions pick up. HOT ROLLED COIL WEIGHTED AVERAGE EXPORT PRICE ACROSS ALL REGIONS USD/ton net FOB Durban Q3 ACTUAL FORECAST The CRU prices are converted to a net FOB Durban base Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 03 Q2 Iscor CRU MESH WIRE ROD WEIGHTED AVERAGE EXPORT PRICE ACROSS ALL REGIONS USD/ton net FOB Durban Q3 ACTUAL FORECAST The CRU prices are converted to a net FOB Durban base 97 Q4 98 Q1 98 Q2 98 Q3 98 Q4 99 Q1 99 Q2 99 Q3 99 Q4 00 Q1 00 Q2 00 Q3 00 Q4 01 Q1 01 Q2 01 Q3 01 Q4 02 Q1 02 Q2 02 Q3 02 Q4 03 Q1 03 Q2 Iscor CRU QUO VADIS THE STEEL INDUSTRY? The inherent problem of the world steel industry is its fragmented nature and inability to effectively control an underlying capacity overhang, inherited from the collapse of the communist bloc in the 1980s. Consolidation in the industry appears 16

19 to be the most effective way to address the problem, as a limited number of large players can control production more efficiently. This process has already commenced with a number of major mergers in the EU and Japan, with indications that this will soon spread to the USA. Successful rollout of this trend will give the industry far more pricing power and should lead to a less volatile steel price cycle in the future. DOMESTIC MARKET DEMAND Although domestic economic growth slowed during the first half of the financial year, the economy started picking up in the second half and throughout most of the period, fixed investment in gold and platinum mining, civil construction, government infrastructure and secondary export production showed strong growth, the latter driven by the undervalued currency. LOCAL DESPATCHES OF CARBON STEEL PRODUCTS BY PRIMARY STEEL PRODUCERS tons x / 81 * Estimate 81/ 82 82/ 83 83/ 84 84/ 85 85/ 86 86/ 87 87/ 88 88/ 89 89/ 90 90/ 91 91/ 92 92/ 93 93/ 94 94/ 95 95/ 96 96/ 97 97/ 98 98/ 99 99/ ISCOR FINANCIAL YEAR 01/ 00 00/ 01 02* IMPORTS AS PERCENTAGE OF DOMESTIC CONSUMPTION % Q1 96 Q2 96 Q3 96 Q4 97 Q1 97 Q2 97 Q3 97 Q4 98 Q1 98 Q2 98 Q3 98 Q4 99 Q1 99 Q2 99 Q3 99 Q4 00 Q1 00 Q2 00 Q3 QUARTER 00 Q4 01 Q Q2 Q3 Q4 02 Q1 17

20 MARKET r eview As a result of the steep fall in the value of the rand during December 2001, the level of steel imports dropped to below 5% of consumption during the first quarter of 2002, further benefiting local steel despatches. The government s consistency in the application of its open market-orientated economic policy, has laid a solid foundation for a period of sustained economic growth in South Africa, after the poor GDP growth rate of only 1,5% per annum over the period 1981 to Given the statistical long-term correlation between steel consumption and economic growth, our domestic steel demand is expected to show a moderate increase over the long term, in contrast to the declining trend experienced since The significant turnaround in the economic fortunes of Mozambique is a further positive aspect for our regional longer-term steel demand growth prospects. The domestic primary steel producers, through the South African Iron and Steel Institute, actively promote the secondary steel export industry by supplying primary rolled steel products, which would otherwise have been directly exported, to domestic manufacturers at prices, which enable them to compete in the international markets. It is generally anticipated that the global economy, which has suffered a marked slowdown during the past twelve months, will experience a modest recovery later in This should boost demand for South African secondary manufactured goods. PRICES Since 1994, our domestic steel prices have been determined by import parity pricing and is adjusted in line with international price fluctuations. Average prices for the new financial year will be substantially higher than for the past year, given the significant international price movement during the first half of calendar 2002 and the expectation that these prices will improve further in the year ahead. 18

21 FLAT STEEL products MANAGEMENT TEAM Willem Coertzen Executive director Rick Reato General manager Vanderbijlpark Johan Fourie General manager Saldanha Steel Johan van Rooyen General manager Sales and Marketing Edwin Basson General manager Strategic Initiatives OUR BUSINESS Our flat steel products division is managed as a strategic business unit, comprising Vanderbijlpark Works and Saldanha Steel. These plants, previously managed independently, are currently being integrated in order to capture the maximum synergy benefits in management, marketing, product range, procurement and information technology. Since the integration process only commenced in the last quarter of the financial year, and Saldanha Steel was only fully owned for part of the year, we report on the two operations individually. Vanderbijlpark currently produces 3,5 million tons per annum (mtpa) of liquid steel and supplies 84% of South Africa s flat steel requirements. At Saldanha Steel, we produce ultra thin hot rolled coil for stringent applications in selected export markets in North America, Europe and Asia. To date, this state-of-the-art plant has produced below its design capacity, as a result of a design deficiency in the cooling system of the Corex liquid iron making plant. During the last quarter of the financial year, we successfully completed an upgrade of the cooling system concurrent with a refractory repair project, funded by the manufacturer. This will enable Saldanha Steel to ramp up to its design capacity of 1,25 mtpa of hot rolled coil. The initial performance of the Corex plant after the reline is extremely positive. We have, over the past number of years, embarked on an extensive re-engineering programme at Vanderbijlpark, leading to improved operational efficiencies and the modernisation of technologies and steel making processes, making it one of the most cost-effective producers of quality products globally. 19

22 FLAT STEEL products INTEGRATION OF SALDANHA STEEL On 28 November 2001, we purchased the Industrial Development Corporation s (IDC) 50% share in Saldanha Steel (Pty) Ltd, which was ratified by the Competition Tribunal on 21 February We are currently in the process of unlocking the significant synergistic benefits that exist between the two operations. The transfer of all thinner gauge production for both domestic and export markets from Vanderbijlpark to Saldanha Steel will free up an estimated tons of capacity, which Vanderbijlpark can then more profitably direct to alternative markets. This will also save further capital expenditure in due course, were Vanderbijlpark to continue servicing its own thin gauge market. Significant procurement benefits will be realised by covering Saldanha Steel s requirements for goods and services through existing Iscor contracts. Integration of administrative functions, information technology services and management will result in further savings. TRADING CONDITIONS The global steel industry, during the first six months of the financial year, was characterised by an oversupply situation, aggravated by a slowdown in the economies of major steel consuming countries, causing steel prices to drop to their lowest level in 30 years. With the exception of China, where both production and consumption surged at an exponential rate, mills worldwide have responded by cutting production. The announcement of USA trade restrictions, combined with a reduction in their steel capacity and recovery in the economy, has led to a sharp recovery in USA flat steel product prices towards the end of the year, with prices in Western Europe and Asia following suit, although not to the same extent. Since March 2002, the main driver of the increase in steel demand has been the strong growth in China s economy. The domestic demand for flat products, which dropped steeply during the latter half of the previous financial year, recovered significantly during 2002 with a year-onyear increase of 12%. This was based on a buoyant demand for durable goods, a strong increase in secondary exports that benefited from the weak currency, and new developments in the mining industry. Secondary exports remain a major focus of our business, through which we supply primary steel products to local customers, who export value added products at internationally competitive prices through an export rebate scheme. During the year, secondary export rebates totalling R103 million were made available to our customers in order to grow the industry. 20

23 V ANDERBIJLPARK WORKS MARKETS Vanderbijlpark is committed to supply quality value-added products to various segments in both the domestic and international markets. Our aim is to supply the domestic market by first intent, directly and indirectly, through merchants servicing the tubular, building and construction, automotive and beverage can industries. MARKET SEGMENTATION Plate and sheet metal works 14% Tube and pipe 19% Appliances 2% Mining 3% Other 5% Packaging 15% Automotive 10% Roofing and cladding 18% Building and construction 14% GEOGRAPHIC DISTRIBUTION Africa overland 2% Duferco 5% Far East 13% USA 4% South Africa 68% European Union 2% Africa 2% Middle East 3% Other 1% Approximately 32% of our products are exported, with the Far East being the most prominent destination. Our presence in the USA and EU markets has been maintained, despite protectionist measures, as a result of South Africa s status as a developing economy under World Trade Organisation (WTO) rules. PRODUCTION Production conditions for the year were characterised by operational stability and a notable improvement in product quality. 21

24 FLAT STEEL products Liquid iron production was limited due to instances of shortages and poor quality of input material, mainly coke and sinter. However, the shortfall was compensated for via the electric steel making route. The market s increasing demand for thinner gauge material, required an improvement in the utilisation of the rolling mills in order to increase through yields. Continuous improvement initiatives, which focused on improving yields and quality performances, enabled us to produce sufficient tonnages to satisfy the increased domestic demand. PRODUCT DISTRIBUTION Colour coated 3% Electro-galvanised 4% Galvanised 17% Cold rolled 13% Plates 9% Tinplate 15% Hot rolled 39% OPERATING RESULTS % change Revenue (Rm) Net operating profit (Rm) Sales volumes ( 000 tons) Local Export Percentage local Liquid steel production ( 000 tons) (1) Capital expenditure (Rm) (17) Revenue for the year increased by 17%, following strong growth in domestic demand and the impact of the devaluation of the currency. This was partially offset by depressed export prices, with the price of hot rolled coil approximately 15% below 2001 levels. Following the improvement in revenue, operating profit increased by 83%, assisted by cost savings from the final stage of the re-engineering programme, continuous improvement savings, as well as the benefit from the Sishen iron ore procurement deal. 22

25 CAPITAL EXPENDITURE Rm Rm Value-adding Replacement Environmental Total Major capital projects that commenced during 2002 and, which will continue during 2003, include: replacement of Oxygen Steel Making process automation equipment, with a total project value of R113 million; installation of the SAP sales and distribution module of R33 million; installation of roll change equipment on the Cold Mills South of R30 million; installation of inspection facilities between the Temper Mill and Electrolyticgalvanising Line of R58 million; and installation of new water and gas cleaning systems at the Coke Ovens of R183 million. The first two projects are aimed at maintaining the current production facilities, whereas the remainder will result in improved operating conditions and lower operating costs. The installation of the new water and gas cleaning systems at the Coke Ovens will also alleviate environmental issues that are of concern. Total anticipated capital spending for 2003 amounts to approximately R700 million. RE-ENGINEERING AND CONTINUOUS IMPROVEMENT The Vanderbijlpark re-engineering process, completed during the third quarter of the financial year, released cumulative savings of R1 480 million over a four-year period. Our continuous improvement (CI) initiatives have assisted us in reducing our manpower and costs significantly over the past year: 23

26 FLAT STEEL products KEY PRODUCTIVITY FACTOR Number of employees Hot rolled coil cash cost* (US$/ton) Continuous improvement savings (Rm) Prime output (%) On-time delivery (%) * Total cash cost We have now extended our CI process at Vanderbijlpark to include the initiatives identified together with the LNM Group in terms of the Business Assistance Agreement. Specific focus areas identified have the potential to capture substantial cost savings over the next three years. DEVELOPMENT STRATEGY Blast furnace optimisation We have launched two separate initiatives to optimise the blast furnace operations. The first initiative is to increase the capacity of the sinter plant, to improve the blast furnace yield and thereby significantly reduce the cost of iron production. The second is to defer the furnace reline, which involves a substantial capital outlay on one of the furnaces, from 2005 to Improvement in throughput Initiatives will be developed in order to increase through-yield, by improving the utilisation of the Basic Oxygen Furnace and by increasing volumes through the Electric Arc Furnaces. Increased percentage of value added products In order to increase the ratio of our value added products in our sales mix, an initiative has been launched to increase the through-yield of the Hot Strip Mill, reducing the volume of slabs and increasing the volume of hot rolled coil available for sale. SALDANHA STEEL MARKETS Saldanha Steel exported approximately 78% of its hot rolled coil production, while the remaining 22% was despatched to Duferco Steel Processing (Pty) Limited, an adjacent manufacturer adding value to hot rolled coil. 24

27 GEOGRAPHIC DISTRIBUTION Africa 13% Duferco 22% South America 5% North America 1% Middle East 14% European Union 8% Far East 37% PRODUCTION Unstable operating conditions at the Corex plant had a negative effect on liquid iron production for the year. Despite the problems experienced in the iron-making environment, hot rolled coil production increased as a result of improved stability and yields at the Thin-slab Caster and Hot Strip Mill. Product quality improved to new record levels. OPERATING RESULTS % change Revenue (Rm) Hot rolled coil production Sales volumes ( 000 tons) (2) Net operating loss* (Rm) (510)* (682) 25 Number of employees Capital expenditure (Rm) * First five months (R263 million) accounted for as part of equity loss. Last seven months accounted for as net operating loss (R247 million). Revenue increased by 21% for the year. This improvement was achieved on the back of the currency s weakness, notably during the second and third quarter of the financial year when sales volumes were robust. The negative impact of the strengthening of the currency, during the last quarter of the year, was countered by forward rate agreements at favourable terms. Although the full year net operating loss of R510 million represents an improvement over 2001, the result was negatively influenced by the extended production stoppage for the Corex refractory reline. Had this repair not taken place, hot rolled coil production would have been some tons higher. 25

28 FLAT STEEL products Capital expenditure for the year was R137 million, comprising the Air Separation Unit upgrade (R25 million), the purchase of a 280 ton Caster Bay crane (R16 million) and the construction of the Slag Granulation plant (R30 million). The expected capital expenditure for 2003 is R166 million. We have embarked on a continuous improvement programme, similar to the reengineering projects that were undertaken elsewhere in Iscor. This focuses on reducing production costs and increasing through-yield in excess of design capacity. During 2002, the average cash cost of hot rolled coil decreased, with further improvements expected, as a result of the implementation of savings ideas generated during the re-engineering project. KEY PRODUCTIVITY FACTOR Hot rolled coil cash cost* (US$/ton) Through-yield (%) Prime output (%) * Total cash cost DEVELOPMENT STRATEGY One of our primary objectives is to capture the benefits from the repaired Corex plant in order to reduce coke consumption and increase the quality and quantity of liquid iron produced. Production of thin gauge material (less than 1,6 mm thick) will be increased by 25% from the current production levels over the medium term. Long-term contracts will be negotiated with key export customers in order to stabilise and strengthen trading relationships. THE YEAR AHEAD FOR FLAT STEEL PRODUCTS A significant increase in revenue is expected, driven by the improvement in the price cycle, increased production and domestic volumes remaining buoyant. Improvement initiatives should assist in capturing the bottom-line revenue benefits. We expect further performance improvement at Vanderbijlpark, and for Saldanha Steel to contribute to profits for the first time. 26

29 L ONG STEEL products MANAGEMENT TEAM Martin van Wijngaarden Executive director Erich Heine General manager Newcastle Jake Olivier General manager Vereeniging Andre Moolman Manager market Strategy Pieter Conradie Manager Information Management Rudolph Torlage Manager Financial Advisory Services OUR BUSINESS The long steel products business comprises the integrated steel works at Newcastle and the electric-arc furnace-based steel works at Vereeniging. The two steel mills are managed as a single business to exploit operational, technical and market synergies and to provide enhanced customer service. The business produces a comprehensive range of long products, comprising rolled and forged carbon, alloy and stainless steel profiles such as rod, bar, light, medium and heavy sections, window and fencing profiles, billet and blooms, as well as an extensive range of hot-finished and cold-drawn seamless tubes. The long products business has a capacity to produce approximately 2 million tons of finished products per annum and, for the past year, produced at a level of approximately 1,7 million tons. Our operations are among the lowest cash-cost producers in the world. This competitive cost position, extensive product range and capability to manufacture high-quality value-added products, ensure we have apre-eminent position in the South African, as well as global steel markets. 27

30 L ONG STEEL products PRODUCT DISTRIBUTION Billets, blooms and ingots 8% Forgings 2% Wire rod 34% Rails 1% Bars 25% Windows and fencing 4% Sections 21% Seamless tubes 5% MARKETS Our main objective is 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, petrochemical and armour industries and enjoy approximately a 50% share of the total domestic long products market. LOCAL MARKET SEGMENTATION Petrochemical 2% Agriculture 9% Mining 11% Automotive 5% Manufacturing 32% Building and construction 41% We strongly promote the domestic industry to grow secondary exports of value-added products by providing primary steel products at internationally competitive prices through an export rebate scheme. During the year, secondary export rebates totalling R85 million were made available to our customers. Our export programme aims to supply our full range of products to sub-sahara Africa and to selectively export value-added steels to long-term customers in the international market. In this financial year, we shipped approximately tons 28

31 to 57 countries on five continents. Sixty five percent of our sales to the international market consisted of value-added steels and more than 90% of all exports were sold to long-term repeat customers. GEOGRAPHICAL SALES DISTRIBUTION North America 8% European Union 9% Africa 6% South Africa 59% Far East 12% Middle East 2% South America 4% MARKET OVERVIEW DOMESTIC An exceptionally strong demand across almost all industry segments resulted in total South African long product despatches increasing by approximately 20% year-onyear. With our unutilised capacity and ability to quickly respond to changes in demand, we were able to capitalise on this unexpected growth, resulting in local sales increasing by approximately 30%. As a result of the strong domestic demand, longer lead times from other South African steel mills and a significant depreciation of the rand, domestic steel prices recovered strongly during the year. INTERNATIONAL During the first half of the financial year, extremely weak international market conditions were experienced. This situation occurred mainly due to the recession in the USA and general lacklustre demand in most other regions, aggravated by an oversupply in steel. Prices in all regions declined sharply, with the price of lowcarbon wire rod reaching levels of US$170 per ton free on board (FOB). Fortunately, the strong domestic market and reduced export allocation, sheltered our business from the full impact of this global downturn. 29

32 L ONG STEEL products Since the beginning of the second half of the financial year, a modest recovery in demand and prices has been experienced. This price recovery has been led by the USA, followed by most other regions. The price recovery for long products is expected to gain further momentum in the next financial year. We have not been affected by the safeguard measures announced by the USA and EU. However, we will continue to export responsibly and control our export tonnage to ensure that South African long steel products remains within import threshold levels. OPERATING RESULTS % change Revenue (Rm) Net operating profit (Rm) Sales volumes ( 000 tons) Local Export (20) Percentage local Liquid steel production ( 000 tons) Capital expenditure (Rm) The excellent improvement in operating income was achieved on the back of strong growth in domestic demand and prices, the impact of the depreciating rand on export revenue, cost savings realised through our continuous improvement programme and the Sishen iron ore price benefit. This was partially offset by the impact of the weaker rand on dollar-based input costs, as well as an unfortunate production loss of approximately two weeks at Newcastle s blast furnace where cold furnace conditions were experienced, following a planned maintenance shutdown. Notwithstanding this, liquid steel production increased by 1,2% for the year. During the financial year, R216 million was spent on capital projects of which 57% went towards maintaining operational capacity and 21% towards environmental projects. Expenditure on new projects was limited to 22%. The refurbishment of the Coke Ovens, aimed at eliminating the import of expensive coke and meeting ISO environmental standards, commenced during the second half of the 30

33 financial year. The project is planned for completion over a four-year period, with an estimated expenditure of R240 million, of which R47 million, was spent during the current financial year. CONTINUOUS IMPROVEMENT % change Number of employees (1) Total cash cost of billets (US$/ton) Cost savings (Rm) (17) Following the successful completion of the re-engineering process at both Newcastle and Vereeniging, we have embarked on a continuous improvement programme aimed at improving cost and operational efficiency and achieving world-class standards in all areas of the business. During the financial year, cost savings of R146 million were achieved through the implementation of over 230 ideas, encompassing most business aspects. As a result of these cost savings, assisted by the strong depreciation of the rand, total cash operating costs of billets reduced to US$135 per ton. The number of employees increased slightly as a result of a higher operating activity, necessitated by increased sales volumes and an increased percentage of value-added product sales. However, labour cost as a percentage of turnover decreased markedly. The continuous improvement programme is expected to gain further momentum, following the Business Assistance Agreement entered into with the LNM Group. DEVELOPMENTS During the year, a comprehensive range of a corrosion resistant steel grade profiles, known as 3CR12, were developed under licence from Columbus Stainless and introduced onto the domestic market in close co-operation with Trident Midrand. The product satisfies an important requirement in the domestic market and is regarded 31

34 L ONG STEEL products as the first stage of a process aimed at introducing a full range of stainless steel long products to the domestic market. Excellent progress has been made with the introduction of a private internet marketplace, which allows for electronic integration with our customers and establishes a platform for unlocking huge business benefits for our customers and Iscor. During the last quarter, gas injection was successfully introduced at the blast furnace at Newcastle. This project has been implemented in co-operation with Sasol Gas and is aimed at replacing expensive imported coke with locally available gas, opening considerable opportunities for the utilisation of surplus natural gas, potentially available from Sasol s Pande gas project. THE YEAR AHEAD FOR LONG STEEL PRODUCTS Prospects for the next financial year are positive. We expect that markets will continue to improve and that domestic prices and demand will remain strong. Additional cost savings from our continuous improvement programme, now strengthened by the collaboration with the LNM Group, are expected to further contribute towards improved financial results. 32

35 suprachem MANAGEMENT TEAM Andries Joubert General manager Gerhard van Greunen Finance manager Johannes van Zyl Commercial manager Henk Cronjé Operations manager Theo Mey Human resources manager OUR BUSINESS Suprachem s core business comprises the processing of Iscor s coke battery byproducts and operating certain coke batteries at Pretoria and Vanderbijlpark, no longer applied in the steel manufacturing process. Operations include four business units: Coke, Tar, Hydrochloric Acid and Ferrite Powders. Our main products are market coke and coal tar pitches, which are supplied to the ferroalloy and aluminium industries in the southern African region, while the full production volume of ferrite (magnetic) powders is exported to Europe. MAJOR EVENTS Suprachem, previously a wholly-owned subsidiary, became a division of Iscor Limited on 2 January 2002 and is as an integral part of Iscor s portfolio of assets. We continue to operate under the name of Suprachem and have retained our mission and market focus. This year saw the delivery of full production quantities of coal tar pitch to the Mozal aluminium smelter, which increased our export volumes of high value products. Progress was also made in ramping up production of the newly commissioned ferrite powder plant. 33

36 suprachem OPERATING RESULTS % change Revenue (Rm) Net operating profit (Rm) Number of employees Sales volumes ( 000 tons) Export Local Capital expenditure (Rm) (40) OVERVIEW We experienced stable operating conditions during the year, together with higher Coke Battery throughput; resulting in increased sales volumes of 14%. The significant increase in revenue (41%), operating profit (81%) and cash flow (43%) is largely the result of our product price structure being import parity based. Profits for the year were also boosted by some R30 million, as a result of stock reductions and additional coke making capacity made available at Vanderbijlpark. CONTINUOUS IMPROVEMENT Building on a successful re-engineering programme completed in the previous year, we introduced a continuous improvement capability to ensure costs continue to be driven down in real terms. CAPITAL EXPENDITURE The major focus of our capital expenditure is on increasing capacity and maintaining reliable production facilities. At Pretoria, we are in the process of a major repair programme of R30 million to replace the refractories of Coke Battery 5, as well as replacing the gas collecting main system. At Vanderbijlpark, we embarked on a R50 million, three-year programme to rebuild the Coke Battery we operate at the mill, to extend the life expectancy of the unit considerably. 34

37 STRATEGY Our operational strategies for the medium term will focus on maintaining stable operations and deriving maximum savings from the continuous improvement programme. We will also endeavour to increase feedstock quantities and production capacities, to supply more volumes to the rapidly growing ferroalloy and aluminum industries in southern Africa. THE YEAR AHEAD FOR SUPRACHEM The current strong domestic demand, which exceeds domestic supply by a large margin, affords us the opportunity to capture a greater portion of this market. During the coming financial year, an additional tons of coke making capacity will be made available to us at Vanderbijlpark, for the production of market coke, for supply to the ferroalloy industry. Market conditions are expected to remain favourable due to the imbalance in supply and demand. Net operating profit should be maintained at approximately current levels, with the higher sales volumes compensating for the once-off profits due to stock reductions during the financial year. 35