ArcelorMittal South Africa: Carbon Tax Concerns

1. ArcelorMittal South Africa Date: 14th of March 2018 Standing Committee: Finance Carbon Tax Concerns Mohamed Adam | General Counsel and Regulatory Affairs

2. Introduction ArcelorMittal South Africa Limited appreciates the opportunity granted to comment on the Carbon Tax Bill as it will have a significant impact on its operations and the sustainability thereof. Only the main concerns are highlighted in this presentation, and should be read together with AMSA’s written submission.

3. Johannesburg Vanderbijlpark Vereeniging Newcastle South Africa Durban Saldanha Cape Town Background: ArcelorMittal South Africa • Overview of Operations • Flat Steel Products • Vanderbijlpark Works – 2.3 Mtpa • Saldanha Works – 1.1 Mtpa • Long Steel Products • Newcastle Works – 1.5 Mtpa • Vereeniging Works – 0.0 Mtpa • Coke & Chemicals • Coke – 190 000 tpa • Tar - 76 000 tpa Pretoria Steel plants in close proximity to key markets

4. Background • Government has recognised that infrastructure development is key for economic growth • As a country, the existence of local steel producing capacity and capability will be a significant advantage in contributing to economic growth and infrastructure development in a cost effective manner, if the current industry challenges are managed in an appropriate manner. • In addition, the primary steel sector adds significant value to the economic growth and employment goals of not only the economy as a whole, but the industrial policy action plan of the DTI • Some of the positive contribution includes: • Economic growth engine • Enabler of South African development through supply of steel • Employer, job creator and skills developer • Catalyst for change in South Africa • Impact on local communities • Environmental footprint

5. National Factor Report Dashboard Employer, job creator and skills developer Supporting over 12,800 jobs in direct employment and 15,800 in indirect employment and 90 185 jobs economy wide impact Over 105,500 training seats provided with R202 million invested in training; 1,301 in learner pipeline R2.5 billion spent with QSE and EME: R2.8 billion on black-owned; R2.1 billion on black women-owned businesses R20 million invested for the first time in Enterprise and Supplier Development Impact on local communities 13 Mt (76% of all raw material) transported on local rail, reducing burden on roads 85% of new recruits employed locally 19% Procurement spent (R5.6 billion) with 1,079 local suppliers R12.6 million invested in CSI for local communities; majority spent on education at Science Centres Economic growth engine R27.6 billion (0.7%) in direct GDP and R15.2 billion (0.4%) in indirect GDP contribution. 883Kt of steel, valued at nearly R7 billion exported by ArcelorMittal South Africa R618 million paid in government taxes in 2015 including corporate, municipal and employee taxes R29 billion spent on 1781 B-BBEE suppliers; 51% of which were Level 1-4 Environmental footprint 1 128PJ of energy, 18.4BnL of water and 12.5Mt of raw materials consumed -R65 million invested in environmental capex improvements 13.6Mt of CO2 emitted 2.5Kt of dust and 21.5Kt of SO2 emissions 4.1Mt byproducts generated, 1.4Mt disposed; 618ha of land restoration Enabler of South African development through supply of steel 4.8Mt of steel produced with 61% of South African steel supplied; R24.3 billion of value added in beneficiation ArcelorMittal South Africa indirectly supports 1.2 million jobs and 12% GDP in key domestic industries as a result of steel supply R1.2 billion Capex spent on South African operations to boost ability to meet demand Catalyst for change in South Africa Improved LTIFR to 0.48 (2014:0.58) but two fatalities 10% Female employment, 63% HDSA employment and 36% youth employed B-BBEE Level 6 in 2015* up from Level 7 in 2014 Open disclosure of financial, environmental and social indicators; won awards for integrated reporting 1. Despite the negative outcome on the environmental footprint, progress has been made on this front as a result of the various project initiates to reduce carbon footprint. * According to old B-BBEE assessment (Source: BCG analysis) Improvement Neutral Worse Index: Comparison toprevious factor report

6. Importance of the steel industry:AMSA indicators as a basis, every 1 000 tons of steel produced domestically Adds R9.2m to South Africa’s GDP Provides 3 jobs directly and 3 jobs indirectly economy wide Beneficiates R5.3m of value from raw materials consumed Contributes R0.3m in taxes Enables domestic procurement spend of R6.8m … … of which SME spend of R0.2M (7% of total) Source: ArcelorMittal South Africa Factor Report 2016

7. Key Messages • As a responsible corporate citizen, ArcelorMittal South Africa is committed to operate its business in a sustainable manner • The company takes into account its impact on the environment and is actively taking steps to mitigate any negative impacts • However, there needs be an appropriate balance between the measures taken and their impact on both the objectives of reducing GHG emissions and generating revenues to support the development of a sustainable economy • The concern with the Carbon Tax in its current form is that it may have unintended and possibly irreversible consequences for the economy for the reasons explained in the next slide.

8. Summary of Concerns • The current Bill, by not imposing the tax on imports, is creating an unfair playing field to the detriment of SA manufacturing • SA will continue to need and consume the same amount of steel so it will just be imported at lower prices (there being a price advantage due to the carbon tax not being applicable) • The result is more emissions per ton of steel due to scope 3 transport emissions • Given the current economic weakness in SA, the impact on industry at this stage will be significant • The consequent threat to the primary steel industry in SA will likely result in the loss of critical steel making capacity and jobs • Currently, no industrial carbon-free technology solution to produce steel exists; the ability to reduce emissions through behavioural changes is very limited • The carbon tax imposed on steel-making cannot be passed on to steel consumers due to : • the fair pricing principles agreed with government • Lower import costs without the Carbon tax • There may be an additional impact if inputs are also taxed – e.g. electricity

9. ArcelorMittal South Africa SPECIFIC COMMENTS/CONCERNS Siegfried Spänig Group Manager: Environment

10. Level playing field • 1. The industry would be exposed to imports not subject to a similar tax, making the South African industry potentially uncompetitive or not viable at all. Imports will also result in higher emissions due to transport (scope 3). The severe economic hardship experienced by the iron and steel sector is well known. • The ability to pass on the Carbon Tax to customers is limited, especially for the export market thereby reducing potential export revenue for South Africa. The allowance for trade exposure does not sufficiently address this concern. • Significant amounts of steel also enter our borders in the form of finished goods and such imports are difficult to control. The fact that steel is present in so many finished goods further adds to the argument that more relief (such as taxing imports) should be granted for the iron and steel sector in terms of trade exposure (10% not adequate).

11. Disproportionate to earnings • 3.The tax load will be highly disproportionate to the earnings potential of iron and steel manufacturers, even with the allowances being considered. In the case of ArcelorMittal South Africa, when considering 2016 and 2017 financial figures, the estimated carbon tax payable would have affected EBITDA figures by very significant levels which is cause for concern. • Hypothetical case of being best performer globally – still app. R100M/a payable • Offsets don’t come at zero cost • Due to assessed losses, 12L and other tax incentives are of no benefit • Payment of tax without any benefit?? • Loss making companies to be exempt • Accumulated tax losses to be reduced with annual Carbon Tax liability

12. No alternative technologies • 4. There is no alternative technology that can be used to produce steel and reduce emissions to the extent required, so the effect of the Carbon Tax would not incentivise a change in behaviour but rather be a penalty – which is contrary to the main purpose of the Carbon Tax. • Carbon relied on as a reductant to convert ore to iron & steel • Global demand cannot be satisfied by the EAF route, therefore the integrated carbon intensive production route is necessary. • Integrated route could save some emissions by using higher quality raw materials – imports - should not be an option?

13. Complexity 5. The complexity of the tax. The fact that an emitter needs to distinguish between process, energy or combustion and fugitive emissions adds to the complexity. These emissions often occur in a combined manner and one emission type often may not take place without the other as part of the production of steel. The higher allowances for process and fugitive emissions should be applicable to the total emissions of an emitter and not only to the portion characterised as process and/or fugitive emissions. It should also be noted that the higher tiers provided for in the IPCC guidelines do not in all cases supply sufficient guidance to distinguish between the emission types.

14. Issue of Choice • Choice regarding energy sources. A consumer of electricity for instance, does not have a choice other than ESKOM as a supplier and cannot exercise any influence to change its emission behaviour. • The issue of choice not only relates to electricity, but also to fuels and products where the manufacturers will/may pass on the costs.

15. Timing • Timing of the tax. • South Africa has already achieved significant emission reductions due to the high cost of electricity and the availability thereof in the past. Weak economic growth further contributed to this phenomenon. • Further, a balanced approach to sound environmental management should also be considered as the proposed tax will significantly impact on profitability of producers and hence less funds may be available to address other pressing issues namely air quality and water. • The global playing field regarding a price being levied on carbon is far from being level yet, and closer scrutiny, where implemented, reveals that the iron and steel industry is grandfathered to prevent unintended consequences.

16. Carbon Tax Bill – other concerns • Carbon Tax cannot be added to fuel prices – fuels are often used in equipment where 10MW (th) threshold is not exceeded. • Many manufacturers will not be able to pass on the carbon costs – why is only one sector being singled out for assistance? • Why not follow the other implementation examples – free allocations or exemptions for the initial implementation period?

17. Conclusion • In the event of the Carbon Tax legislation being implemented, the following should be considered: • Ensuring a level playing field for South African manufacturing and in the absence thereof, exemption to be considered • Focusing on the global emissions from acquiring a ton of steel for SA • Finding the right balance to ensure a path of economic growth • Tax treatment of loss making companies to be investigated further • The timing of the proposed tax should be reviewed • The Bill and the methodologies proposed to calculate a company’s Carbon Tax liability should be made significantly simpler • The failure to do so would result in significant negative consequences for the iron and steel sector and the SA economy as a whole

18. Thank you