Messages from our leaders

Dear stakeholders,

Welcome to ArcelorMittal’s annual review. This year we have attempted to take a first step towards integrated reporting, explaining the company’s ability to create not just financial value but also social, human and environmental value.

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2015: a tough year for commodities

2015 was a very difficult year for commodities globally – and that includes of course the steel and mining industries. Since 2008, the steel and mining industries have been faced with a chain of headwinds that have consistently impacted our profitability. The situation further deteriorated throughout 2015 with a convergence of factors resulting in a 2.2% contraction in global apparent steel demand; this is the first time we have seen negative apparent steel demand growth since 2009. We are living in extraordinary times where the only certainty is volatility and unpredictability. Global growth forecasts for 2016 have recently been downgraded by the OECD. The emerging market crisis continues, particularly in Brazil and Russia with only India out of the original BRICS managing to report higher growth prospects. Although China continues to report healthy growth levels by any other standard, it is clear its transition to a more consumer-led economy is causing particular challenges for the steel and other manufacturing industries where China has invested in massively expanding its own production base to a level where there is now considerable over-capacity. Then there is the increasing tension and instability in the Middle East and the resultant migrant crisis. The picture may be somewhat brighter in the developed world, but even there the picture is not entirely calm. Europe, which has recovered to some extent from its crisis point in 2011 – 2012, has to face the migrant challenge head-on and furthermore has been unsettled by the possibility of the United Kingdom leaving the EU. And the dissatisfaction of the US electorate, despite the US economy remaining robust, is evident from the emergence of non conventional candidates in the run-up to the presidential elections that will take place later this year.

$5.2bn 2015 Ebitda

In terms of the direct impact on the steel and mining industries, in 2015 we faced an even lower pricing environment for both raw material and steel prices with significant pressure on steel spreads - the differential between the raw material basket and steel price - particularly in the latter half of the year. Increasing levels of imports forced the price of steel down to very low levels, with trade tariffs slow to be implemented. As a result ArcelorMittal group Ebitda for 2015 reduced by 18.4% to $5.2 billion. Shipments remained relatively robust at 84.6 million tonnes, a decrease of 0.6%. Due largely to a number of required non-cash accounting charges, we reported a net loss of $7.9 billion. Irrespective of the non cash elements, this is undoubtedly a sobering and disappointing result. But I must highlight our success in considerably reducing the cash requirements of the business throughout the year and reducing net debt to $15.7 billion at the year end. This is a considerable achievement in such difficult operating conditions.

Nevertheless this is the lowest level of Ebitda that ArcelorMittal has reported since its creation and we are not satisfied with this level of performance. We have continually been adapting the business since 2008 and indeed on many levels have made excellent progress. But more often than not the gains we have made have been offset by further deterioration in the external environment. It is clear that we are facing a structural change, not simply a prolonged down-cycle. This type of environment requires a management team to take a long and hard look at the business and ensure they have adapted appropriately to the operating conditions and have a business model and strategy in place that can create value in the short and longer term. We have done exactly that.

Improving performance and driving long-term sustainability

1-1.5% 2016 apparent steel demand forecast

Steel remains a vital material for the world and over the long-term demand will continue to grow as emerging markets continue their, albeit not straightforward, path towards increasing prosperity. This year we are expecting a return to apparent steel demand growth of between 1 and 1.5%. Against that backdrop what is the optimum model for a steel company to position itself for both the short-term difficulties and the longer-term growth?

For ArcelorMittal, there are two clear imperatives which we believe are the foundations of long-term success. The first is to have an efficient asset base producing quality products – both in steel and mining - that is capable of delivering enhanced levels of returns; and the second is to have a strong balance sheet. We announced on the occasion of our full year results a roadmap to achieving this via a $3 billion capital raise and a new five-year strategic plan Action 2020.

2.2x Net debt to Ebitda ratio

$85 2020 Ebitda per tonne target

The capital raise was structured by way of a rights issue to prevent our existing shareholder base from being diluted. The Mittal family has taken up its full rights. Following its completion, and taking into account the $1 billion proceeds from the sale of Gestamp, the company will have a healthy net debt to Ebitda ratio of 2.2X.

Action 2020 is the key to unlocking long-term improved performance from our company. The target is to reach an Ebitda per tonne level of greater than $85 by 2020 which would deliver $3 billion of structural Ebitda improvements on an annual basis and support greater than $2 billion of annual free cash flow generation. Each segment has its own set of unique actions to contribute to this group-wide target but they are constructed upon an underlying philosophy of ensuring we maintain and grow market share based on an optimised asset base, grouping assets appropriately to ensure maximum operational efficiency and rigorously reducing and controlling costs across the board. The size and scale of our business today means that the opportunity set is considerable as is reflected in our ambitious but fully achievable targets.

Action 2020 is based on the current economic environment and does not factor in any improvement in the pricing environment either. To the extent that we see the introduction of trade tariffs, or the reduction of capacity in China as now announced by the central government, there will be further upside potential.

Safety and our sustainability credentials

It is also important to have strong safety and sustainability credentials. We are living in an environment not only of economic volatility but also social and environmental change. The global population is expected to grow by a further one billion by 2025. More and more people are moving to cities in an expectation of more opportunities and a better quality of life. And as emerging markets continue to grow increasing investment in infrastructure will become essential. At the same time 2015 marked the important COP21 meeting in Paris that was broadly regarded as a success and marked a new global commitment to transitioning to a lower carbon economy, even if the path may not be entirely clear or straightforward. These trends throw up complex new challenges. Growth is positive but will result in increasing carbon emissions at a time of political determination to achieve the opposite. A billion more people on the planet will put increased pressure on natural resources such as water and the need to manage them wisely. These trends will not disappear, and the impact businesses have on such matters will come under enhanced scrutiny. Companies that are well prepared for these changes will have a strong competitive advantage. At ArcelorMittal we can see the increasing importance our customers and other stakeholders are putting on sustainability issues. It is important that we can convincingly demonstrate to these stakeholders that these issues matter for us as well and that they are integrated into the way we do business.

Safety has been our first priority since the creation of ArcelorMittal and remains an ever present challenge and a critical area of focus. Our lost time injury frequency rate improved to 0.81, from 0.85 in 2014. This is an encouraging result, although we clearly have more work to do in order to reach our target of zero injuries and fatalities. It is a daily challenge and relies on rigorously ensuring a safety focussed culture is implemented everywhere we operate and not only within our own employee base, but also with our contractors.

Safe healthy quality working lives for our people is the first of our ten sustainable development outcomes that are designed to ensure we are preparing and adapting to social and environmental trends more broadly. The outcomes are listed in full in the sustainable development section of this report. Of course some outcomes are more easily achievable than others. For example we have a strong position when it comes to the development of products that promote the sustainability agenda. Our high strength steels for the automotive sector are the most obvious example, but we are also developing innovative and transformational products for the white goods, construction and alternative energy industries. Our R&D team is continually pushing the boundaries of what steel can achieve. We are also showing leadership when it comes to supply chain transparency, signing up as a founder member of the new Responsible Steel Initiative designed to develop sustainability standards in the supply chain. The discussions are still in their infancy but we are pleased to be a leading contributor to the debate.

It is fair to say that when it comes to reducing our carbon footprint we have a tougher challenge. The chemical process for making steel requires using carbon to extract oxygen from iron-ore – therefore it should not be surprising we are a significant emitter of CO2. We are transparent about this as is reflected by our 99C ranking in the 2015 carbon disclosure project. The steel industry has done a lot to reduce emissions over the years; but we are coming close to what is technically possible. Steel is the most used material in the world on account of its longevity, versatility, flexibility and affordability; therefore it is unrealistic to think that it can be replaced in significant volumes by other materials. It also benefits from being infinitely recyclable and is therefore a genuine contributor to a circular economy (the concept of extracting maximum value from materials whilst in use, then recovering and regenerating them at the end of their useful lifecycle); important factors we believe should also be taken into account in legislation. Current systems that are on the surface designed to incentivise emissions reduction will not achieve their aim due to the global nature of the steel-making industry. Therefore we believe an approach is required that takes into account both the global nature and chemical process of steel-making and offers a real platform from which to incentivise new and potentially transformational technologies based on a fair and level-playing field.

Outlook and priorities for 2016

Of course sustainability starts with profitability and that is why delivering successfully on Action 2020 is so important to us. We must have a strong level of profitability in order to be able to invest adequately in areas such as R&D, environmental improvements and energy efficiency that will boost our long-term sustainability credentials.

Our focus for 2016 is to make good progress with the implementation of Action 2020, remain cash flow positive and of course to target improved safety performance

We know that 2016 will be another very tough year for our industries. Our focus is to make good progress with the implementation of Action 2020, remain cash flow positive and of course to target improved safety performance. Given the external environment, we have worked very hard to reduce the annual cash requirements of the business. In 2016, we are targeting a further reduction of $1 billion, which will lower the level of Ebitda we need to generate in order to be free cash flow positive to $4.5 billion. We are expecting Ebitda for 2016 to be in excess of $4.5 billion, assuming no improvement in operating conditions. Although this is less than 2015 we continue to be confident in our own actions and cautiously optimistic that the worst is behind us in terms of the pricing environment. The very low price environment experienced in the second half of the year was essentially caused by the oversupply in China. However at this price level China’s steel industry lost a minimum of $10 billion of cash in 2015 according to China’s Iron and Steel Association. This level of losses is not sustainable even in China and indeed we have started to see an improvement in Chinese steel spreads since their third quarter lows. Furthermore we have started to see positive rulings on the introduction of trade tariffs in various markets where we operate and expect further positive momentum in this regard throughout the remainder of the year.

In the longer-term we will have to wait to see what action China takes with regards to its significant over-capacity. However I am again cautiously optimistic that based on what the central government has stated and laid out in its most recent five year plan and given the real requirement for banking, labour and environment reform, we will start to see some movement in this regard in due course.

In the meantime our focus remains on doing everything within our means to deliver on our strategy and make ArcelorMittal a more efficient, more resilient and more profitable business that can create value even in these turbulent markets and that is well positioned to benefit from any upturn in the external environment.

Engaged and committed workforce

A critical enabler of our ability to succeed is of course our workforce. In February this year thousands of steel industry employees took to the streets in Brussels in a co-ordinated effort to raise their concerns about potential legislation that could impact the future sustainability of steel-making in Europe. This highlighted very strongly the alignment of our people from very senior management to those working on the shop floor. It also highlighted the value creation ability of the steel-industry beyond pure profitability; profit will always be important, indeed critical, but through job creation, the payment of local taxes, the investment in research and development and the development of new products the industry is also demonstrating its ability to create real social, human and environmental value.

In conclusion, on behalf of the Board of Directors, I would like to thank our executive management team and indeed all our employees as well as our stakeholders across the globe for their ongoing support. We are operating in extraordinary times but I remain confident that provided we can deliver on everything I have outlined above, ArcelorMittal has the ability to create considerable value for our stakeholders in both the short and long term.


Lakshmi N. MittalChairman and Chief Executive

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Dear stakeholders,

While it is difficult to present our 2015 financial results in a positive light given the significant headline loss, we have made significant progress in strengthening our balance sheet in recent years and ensuring we have a firm financial footing from which to return to a path of measured, sustainable growth.

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In particular, it is important to recognise that the underlying cash flow performance of the group in 2015 was resilient. This reflects our progress in reducing the cash needs of the business, something that will continue in 2016, ensuring that even in this extremely challenging environment we expect to generate positive free cash flow.

This, together with our strengthened balance sheet, leaves us very well positioned to implement our new five-year strategic plan, Action 2020. In time this plan will support higher levels of cash flow and provide the Board with the discretion to invest, return capital to shareholders or further reduce debt.

$11.7 billion net debt on pro-forma basis

It is worth pausing to reflect on the notable progress we have made in restoring our balance sheet strength. As recently as 2008 our net debt stood at $32 billion. Following our successful $3 billion rights issue and the $1 billion from the sale of our minority stake in Gestamp, on a pro-forma basis, it is $11.7 billion. During this period we have navigated the business first through the effects of the global economic crisis, then the Eurozone crisis, and we are now dealing with slowing growth globally and most critically considerable overcapacity in China and its impact on global steel pricing.

The improvements that we have achieved have been made possible through a relentless focus on financial discipline and capital allocation. We have successfully reduced costs through asset optimisation, workforce rationalisation and by driving efficiencies. And we have curtailed spending by acutely analysing investment decisions in order to ensure that capital expenditure is allocated in a manner that meets stringent return on capital criteria.

$1.2 billion reduction in cash requirements

Over the past four years, there has been a $2.6 billion reduction in our annual cash requirements. In 2015 alone, we reduced cash requirements by $1.2 billion. This was achieved by significantly lowering capital expenditure by investing only in projects that secure and grow our position in higher-margin markets, and a lower net interest expense made possible by the significant inroads we have made into reducing net debt in recent years. We expect to make further progress in 2016, cutting our annual cash requirements by another $1 billion as a result of further reductions in capital expenditure, lower net interest and suspending the dividend for the 2015 financial year.

Given the highly challenging environment and the need to preserve cash, suspending the dividend was a necessary decision for the Board to take. The Board intends to maintain the dividend suspension until our net debt to Ebitda ratio falls below 2 times.

It is important to place our financial results in context. A substantial portion of our net loss consisted of impairment charges, many of which were in our mining segment. This is very much a sector-wide issue that is necessary due to the decline in iron ore prices we have witnessed over the past two years. We also booked a $1.3 billion exceptional charge as a result of the rapid decline in global steel prices in 2015. Excluding these exceptional charges and other non-cash items our net loss was $0.3 billion, which, while still a disappointing result, is a fairer reflection of our performance in the year.

>$4.5bn 2016 Ebitda forecast

This is reflected in the resilient cash flow performance in 2015. Delivering a cash flow neutral result was a respectable achievement given the headwinds faced during the year. The steps we have taken to further reduce cash requirements mean that we have lowered the level of Ebitda we need to generate to be free cash flow breakeven in 2016 to $4.5 billion. Given we have guided to Ebitda of greater than $4.5 billion, that means we should be free cash flow positive in 2016.

Looking across our segmental performance in 2015, all of our steel businesses suffered due to the fall in international steel prices driven by the unsustainably low-price environment in China. Despite this, our Europe segment displayed resilience, generating Ebiitda marginally above that achieved in the previous year, which is ongoing evidence of the benefits of our European asset optimisation programme. Conditions in the USA were very tough, with demand impacted by a significant inventory build-up at the end of 2014. We know we need to improve our performance in NAFTA and our planned optimisation of downstream assets, combined with an anticipated increased contribution from AM/NS Calvert, has an important role to play in delivering that improvement.

In Brazil, domestic market demand was very weak due to the severe recession the country is experiencing, but a weak domestic currency boosted our Brazilian operations’ export competitiveness, helping to sustain volumes. Conditions were also challenging for our ACIS segment, with domestic market weakness impacting results. The combination of trade tariffs and a more competitive iron ore supply contract will support performance improvement in South Africa, while currency devaluation in the CIS region alongside operational efficiency gains will deliver progress.

20% reduction in mining costs

Finally, our mining segment performed well when you take into consideration the fact that iron ore prices fell to their lowest levels since spot pricing was introduced. It proved successful in reducing costs by 20%, above the 10% target we set at the start of the year.

There is no doubt that market conditions will remain challenging in 2016. However, I am confident that the actions we have taken provide us with a very solid platform on which to deliver the targets we have set in our Action 2020 plan and return the group to sustainable profitability.

As recently as 2008 our net debt stood at $32 billion. Following our successful $3 billion rights issue and the $1 billion from the sale of our minority stake in Gestamp, on a pro-forma basis, it is $11.7 billion.

Aditya MittalCEO ArcelorMittal Europe and Group CFO

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