Competitive Threats

The steel industry has seen dramatic changes in the last decade. The improvements in quality and gains in market share of the mini-mills in the U.S.; the financial crisis and subsequent global recession; and the rise of China as a major manufacturing economy and its massive consumption of raw materials have all created game-changing challenges for the business.

Despite the steps taken to strengthen the industry and the Company since 2000, the Great Recession of 2008-2009 demonstrated the Company’s vulnerability and provided an opportunity to further evaluate the business. ArcelorMittal recognized the need to identify continued challenges and develop a long-term strategy that will create a business that is sustainable through the ups and downs of the business cycle.

Competitive Threat 1: Threat of the Mini-Mill

Competitive Threat 2: Cost Price Squeeze

Competitive Threat 3: Additional Competition in Slow-Growth USA Market

Competitive Threat 4: Macro-Economic Factors

Competitive Threat 5: Rising Labor Costs

Competitive Threat 1: Threat of the Mini-Mill

ArcelorMittal USA produces approximately 90 percent of its products from blast furnaces. As recently as 1995, blast furnace production accounted for about 60 percent of all steel produced in the USA. In the last 15 years, mini-mills have steadily increased their share of USA raw steel production, from about 40 percent in 1995 to more than 61 percent in 2010. Mini-mills have produced more tons per year and enjoyed higher levels of market share than integrated producers every year since 2002. Mini-mills have the flexibility of being able to adapt production to meet demand very quickly, which keeps costs low and results in shorter lead time, helping to meet customer demands in days versus the weeks that it takes integrated producers. This is increasingly important when the industry operates at such low levels of capacity.

In addition, mini-mills have moved beyond commodity products and less sophisticated grades of steel. In many circumstances, mini-mills are now competing head-to-head with integrated producers on almost all grades of steel including automotive applications. Productivity, flexibility, variability and short lead times drive the competitiveness of mini-mills and have become the standard of successful companies in the American steel industry.

It’s important to note that there is an inherent role for integrated steel producers in the steel industry through the conversion of raw materials to steel. Certain steel markets outside of North America are scrap-constrained as EAF producers rely on access to quality scrap steel produced by an integrated mill.

Competitive Threat 2: Cost Price Squeeze

Raw material costs—chiefly iron ore and coal—are another challenge facing today’s steel industry. The significant increases in Chinese production have increased demand, sent prices up and changed the nature of the relationship between integrated steel mills and their suppliers. High input prices for iron ore and coal are creating a cost price squeeze between input costs and the prices that customers are ultimately willing to pay for a product. This, combined with the volatility of both prices and costs, makes it very difficult to plan for the future.

Steel is a cyclical business, and the cycles have not been good for ArcelorMittal USA. The adverse impact includes financial stress, reducing cash available for the investment in facilities and equipment which must be the goal of a successful vision in the steel marketplace. Hoping for long periods of high steel prices to make up for these changes is not the answer. While everyone welcomes prices that cover the cost to produce steel, provide good returns on investments and sustainable jobs, high prices occur at only small, temporary parts of the business cycle. The threat of imports makes certain price thresholds detrimental to domestic steelmakers by making it more advantageous for imports from international markets to enter U.S. markets. To be sustainable, there must be a healthy balance between reliable supply, end user demand and prices that provide a solid return. The goal is a level of performance that discourages imports because domestic customers get a superior product from U.S. suppliers at good prices. A part of the solution to this problem involves holding the government accountable to enforcing existing trade laws and placing domestically made products on a level playing field with imports.

Competitive Threat 3: Additional Competition in Slow-Growth USA Market

The current threat to ArcelorMittal USA also includes significant competition in the USA and Mexico, often from companies receiving government subsidies such as ThyssenKrupp and Severstal which are focused on the same customer base ArcelorMittal serves today. Additionally, competitors like Nucor, Severstal and Gerdau are investing in and expanding existing operations to serve markets where ArcelorMittal has a vested interest. For example, in January 2012, Nucor announced some $1 billion in capital expendutires including upgrades at its Berkeley, S.C. facility to increase its share of the North American auto market.

The business challenge includes the Long Carbon segment (where mini-mills are dominant) for wire rod, rail and structural shapes (most often for construction). ArcelorMittal is a relatively small participant in a very competitive segment where demand is presently weak.

Competitive Threat 4: Macro Economic Factors

There are also macro economic factors that ultimately shape the business. To date, global growth is driving the global recovery with China leading the way. Given significant inflationary pressures in China (and India), China’s central bank has recently put into effect a number of tightening moves to cool the economy. If their economy slows too much it could threaten the global economic recovery and may lead to increases in Chinese exports that would threaten local markets.

Uncertainty in the global economy is also a challenge for the industry. Americans were rattled in 2008 by the global financial crisis, thus curtailing the business and consumer spending needed to recover from a recessionary period. Lack of consumer confidence continues today with the European debt crisis. Other factors such as higher oil prices, historically high unemployment and a higher savings rate continue to dampen the role of consumer spending in the economic recovery.

Competitive Threat 5: Rising Labor Costs

Below is a sampling of data that supports the challenge of rising labor costs facing ArcelorMittal USA. For additional data, visit page 23 of the Fact Book.

Average Labor Costs
Despite a challenging economy, the average cost of a represented employee to ArcelorMittal USA since 2008 was $75.40 per hour, including payroll, benefits and post-retirement costs. According to 2010 data from the U.S. government, the average manufacturing worker earns $34.74 per hour, including benefits and social insurance programs. The 2011 average employment cost for a represented employee at ArcelorMittal USA was more than $170,000.

Total Labor Costs
ArcelorMittal USA's total cost for its represented workforce in 2011 was more than $2.2 billion, nearly $300 million higher than pre-crisis levels.

Medical Costs
ArcelorMittal USA paid a total of $208 million in medical costs for active, represented employees in 2011. The cost of medical coverage has increased by 32 percent since 2005 with an average increase of 4.8 percent per year, despite a decline in the number of employees enrolled. ArcelorMittal USA’s health care costs per represented employee are nearly double the costs of its peers in both the manufacturing industry and the Aon Hewitt Health Value Initiative (HHVI) database, which captures health care cost and benefit data for 371 large U.S. employers.

Retiree Costs
Like many businesses in the U.S., ArcelorMittal funds its retiree benefit obligations in accordance with minimum legal requirements. This gives the company flexibility to invest in its business operations. High rates of natural attrition due to the company’s aging workforce, competitive forces, government regulations and market realities make retirement obligations part of today’s challenge.