ArcelorMittal S.A. – Annual report – 31 December 2022
Industry: manufacturing
(millions of U.S. dollar, except share and per share data)
NOTE 1: ACCOUNTING PRINCIPLES (extract)
1.2 Use of judgment and estimates (extract)
Judgements and estimates made in assessing the impact of climate change and the transition to a low carbon economy
The Company continues to develop its assessment of the potential impacts of climate change and the transition to a low carbon economy and has considered such impacts when preparing its consolidated financial statements. ArcelorMittal’s decarbonization strategy aims to achieve carbon neutrality by 2050 in line with the United Nations’ Paris agreement. By 2030, the Company is targeting a 25% reduction in its CO2 emissions intensity across its global steel and mining operations, with an increased European target of 35%. Both targets cover both scope 1 and 2. The decarbonization strategy involves switching where applicable from the BF-BOF (“Blast Furnace-Basic Oxygen Furnace”) to low-carbon steelmaking technologies through the DRI-EAF (“Direct Reduced Iron-Electric Arc Furnace”). It also includes Smart Carbon, which comprises bioenergy and carbon capture utilization and storage (“CCUS”) and requires availability of stable renewable energy infrastructures (electricity, hydrogen) at competitive prices and a fair competitive landscape that accounts for the global nature of the steel market, ensuring domestic production, import and exports are subject to equivalent greenhouse gas (“GHG”) reduction regulations. ArcelorMittal’s decarbonization strategy in each part of the world where the Company operates is now based on the same assumptions in terms of green hydrogen cost, CCUS or introduction of climate-friendly policies. In some countries, particularly in the EU and Canada, the Company sees sufficient policy incentives to enable it to ‘Accelerate’ its decarbonization plans. On February 17, 2023, the European Commission approved, under EU state aid rules, a €460 million Spanish measure to support ArcelorMittal España in construction of the new DRI installation in Gijón. Where these conditions do not yet exist, ArcelorMittal will continue to make improvements to ‘Move’ but it is difficult to ‘Accelerate’ without becoming uncompetitive in that market. Assumptions in respect of climate change and the transition to a low carbon economy may impact the Company’s significant judgements and key estimates and result in material changes to financial results and the carrying values of certain assets and liabilities in future reporting periods.
- Property, plant and equipment: Considering the expected date of retirement of some assets in particular certain blast furnaces, basic oxygen furnaces, sinter plants and coke plants following investments in low-carbon steelmaking technologies, the Company decreased estimates of residual useful lives of such items of property, plant and equipment for its flat carbon operations in the EU and in Canada.
- Impairment of tangible and intangible assets, including goodwill: Value in use calculations relating to flat carbon operations in the EU and in Canada include the impact of decarbonization; accordingly the Company developed assumptions in determining related capital expenditures which reflect announced commitments and initiatives in place, operating costs including commodity prices and carbon emission costs on the basis of historical experience and expectations of future changes. This requires to assess the future development in supply, technology change, production changes and other important factors. These assumptions may change, which could result in significant changes to value in use calculations in future periods and affects impairment assessments.
- Decommissioning costs: Over the next ten years, the retirement of certain above-mentioned assets in the context of the transition to low-carbon steelmaking infrastructures may lead to certain decommissioning costs. The Company considered such costs in its value in use calculations but it has not recognized decommissioning provisions related to decarbonization as the obligating event has not occurred yet. Decommissioning cost estimates are based on the known regulatory and external environment. These cost estimates may change in the future including as a result of the transition to a lower carbon economy.
Situation in Ukraine and collateral consequences
The Company’s operations in Ukraine consist of a steel plant, which produced 1.2 million tonnes of steel in 2022 (4.9 million tonnes in 2021), and (captive) mines that produced 4.9 million tonnes of iron ore in 2022 (11.7 million tonnes in 2021); the related property, plant and equipment had a carrying value of 0.6 billion (including impairment charge as discussed below) on the Company’s statement of financial position at December 31, 2022 (2.3 billion at December 31, 2021). In 2022, the Company’s Ukrainian operations (and in particular its Kryvyi Rih steel plant) recorded 1.1 million of steel shipments (4.6 million tonnes in 2021), generating 1.4 billion of sales (4.1 billion in 2021) including 0.4 billion of sales (0.9 billion in 2021) to customers located in Ukraine.
Following the war outbreak on February 24, 2022, the Company idled its Ukrainian operations on March 3, 2022 but restarted blast furnace No.6 (one of the three blast furnaces representing approximately 20% of Kryvyi Rih capacity) on April 11, 2022 to resume low levels of pig iron production. Iron ore production was approximately at 55% of capacity during the first half of 2022. During the third quarter, iron ore production was temporarily suspended due to weaker demand and logistic constraints but restarted in early October 2022 at approximately 25% level. ArcelorMittal continued to exercise control over its Ukrainian operations and key production assets have not been seriously damaged at the date of this report (as a result of the missile strike at the plant premises on December 5, 2022 the building of the rolling shop #2 finished goods warehouse was partially destroyed). In addition, despite the lower level of activity, none of the assets are held for sale or were discontinued. In the context of the annual impairment test of intangible assets, including goodwill, and tangible assets, the Company revised its future cash flow projections and considering that there is significant uncertainty about the evolution of the geopolitical context in Ukraine and the timing and ability for the Company to resume production to a normal level, which resulted in a substantial increase in the discount rate, ArcelorMittal recognized a 1,026 impairment loss of property, plant and equipment and intangibles (see note 5.3).
The increased geopolitical risks induced by the war in Ukraine have adversely impacted global macroeconomic conditions leading to inflationary pressure, rising interest rates and energy costs. As of October 1, 2022, when goodwill is tested for impairment, discount rates applied for value in use calculations include a higher risk-free rate as compared to October 1, 2021. While rising energy costs have weighed on the Company’s profitability in the second half of 2022, the Company has taken mitigating actions, as it has adapted production levels, optimized energy consumption and has been able to announce and will implement certain increases in steel selling prices.
NOTE 5: GOODWILL, INTANGIBLE AND TANGIBLE ASSETS (extract 1)
5.1 Goodwill and intangible assets
The carrying amounts of goodwill and intangible assets are summarized as follows:
Goodwill
Goodwill arising on an acquisition is recognized as previously described within the business combinations section in note 2.2.3. Goodwill is allocated to those groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose and in all cases is at the operating segment level, which represents the lowest level at which goodwill is monitored for internal management purposes.
Goodwill acquired in business combinations for each of the Company’s operating segments is as follows:
Intangible assets are recognized only when it is probable that the expected future economic benefits attributable to the assets will accrue to the Company and the cost can be reliably measured. Intangible assets acquired separately by ArcelorMittal are initially recorded at cost and those acquired in a business combination are initially recorded at fair value at the date of the business combination. These primarily include the cost of technology and licenses purchased from third parties and operating authorizations granted by governments or other public bodies (concessions). Intangible assets are amortized on a straight-line basis over their estimated economic useful lives, which typically do not exceed five years. Amortization is included in the consolidated statements of operations as part of cost of sales.
ArcelorMittal’s industrial sites which are regulated by the European Directive 2003/87/EC of October 13, 2003 on carbon dioxide (“CO2”) emission rights, effective as of January 1, 2005, are located primarily in Belgium, France, Germany, Luxembourg, Poland and Spain. In Ontario, Canada, ArcelorMittal’s operations have been subject to output based pricing system regulations since January 1, 2019 but effective January 1, 2022, they are regulated on carbon pricing under the Ontario Emissions Performance System (“OEPS”). In South Africa, a CO2 tax system was introduced in 2019.
Emission rights allocated to the Company on a no-charge basis pursuant to the annual national allocation plan are recorded at nil value and purchased emission rights are recorded at cost.
NOTE 5: GOODWILL, INTANGIBLE AND TANGIBLE ASSETS (extract 2)
5.3 Impairment of intangible assets, including goodwill, and tangible assets
Net impairment charges/(reversals) were as follows:
Impairment test of goodwill
Goodwill is tested for impairment annually, as of October 1 or whenever changes in circumstances indicate that the carrying amount may not be recoverable, at the level of the groups of cash-generating units (“GCGU”) which correspond to the operating segments representing the lowest level at which goodwill is monitored for internal management purposes. Whenever the cash-generating units comprising the operating segments are tested for impairment at the same time as goodwill, the cash-generating units are tested first and any impairment of the assets is recorded prior to the testing of goodwill.
The recoverable amounts of the GCGUs are mainly determined based on their value in use. The value in use of each GCGU is determined by estimating future cash flows. The 2022 impairment test of goodwill did not include the GCGU corresponding to the Mining segment (as from April 1, 2021, ArcelorMittal implemented changes to its organizational structure – see note 1.1) as goodwill allocated to this GCGU was fully impaired in 2015. The key assumptions for the value in use calculations are primarily the discount rates, growth rates, expected changes to average selling prices, shipments and direct costs during the period. Assumptions for average selling prices and shipments are based on historical experience and expectations of future changes in the market. In addition, with respect to raw material price assumptions, the Company applied a range of $70 per tonne to $110 per tonne for iron ore ($71 per tonne to $112 per tonne in 2021) and $170 per tonne to $268 per tonne ($144 per tonne to $240 per tonne in 2021) for coking coal. Cash flow forecasts adjusted for the risks specific to the tested assets are derived from the most recent financial plans approved by management for the next five years. Beyond the specifically forecasted period, the Company extrapolates cash flows for the remaining years based on an estimated growth rate of 2%. This rate does not exceed the average long-term growth rate for the relevant markets.
The Company considered its exposure to certain climate-related risks which could affect its estimates of future cash flow projections applied for the determination of the recoverable amount of its GCGUs and CGUs. With the switch to electric vehicles and the move to wind and solar power generation, the Company sees additional opportunities as customers deepen their understanding of embedded and lifecycle emissions of the materials where steel compares favorably. ArcelorMittal’s most substantial climate-related policy risk is the EU Emissions Trading scheme (“‘ETS”), which applies to all its European plants. The risk concerns the Company’s primary steelmaking plants which are exposed to this regulation and yet unprotected against competition from imported steel. The Company is committed to the objectives of the Paris agreement and announced its ambition to reduce carbon emissions by 35% in Europe and 25% group-wide by 2030 and achieve group-wide carbon neutrality by 2050. These announced goals will require significant long-term investments which require global level playing field, access to abundant and affordable clean energy, facilitating necessary energy infrastructure, access to sustainable finance for low-emissions steelmaking and accelerated transition to a circular economy. In addition, the Company considered the legal obligation of carbon neutrality by 2050 effective within the EU and in Canada following adoption of the Climate Law and the Net Zero Emission Accountability Act, respectively. Accordingly, with respect to its flat steel operations in the EU and in Canada, ArcelorMittal concluded that future decarbonization capital expenditures, which correspond essentially to the construction of DRI-EAF facilities, are necessary to maintain the level of economic benefits expected to arise from the assets in their current condition and should therefore be included in the Company’s assumptions for future cash flows of the recoverable amount of the respective GCGUs and CGUs. At the same time, the Company is engaged in developing in the near to medium term a range of innovative low-emission technologies for the transition to decarbonized steel including the Smart Carbon route and the Hydrogen-DRI route and required investments are considered either in the Company’s future cash flow projections or in the context of joint ventures, as an element of the Company’s best estimate of capital expenditures which are committed and/or being implemented. The Company acknowledged that CGUs and GCGUs applying the blast furnace basic oxygen furnace “BFBOF” route in other jurisdictions than the EU and Canada will apply decarbonization at a different pace. They may also not yet be subject to a legal obligation of carbon neutrality, as a result of which future decarbonization capital expenditures may not be included in their value in use calculations. Accordingly, the Company increased risk premiums included in their discount rates until they are able to accelerate their decarbonization strategy to meet the 2050 carbon neutrality objective and a legal obligation arises in the relevant jurisdiction. Additionally, the Company’s assumptions for future cash flows include an estimate for costs that the Company expects to incur to acquire emission allowances, which primarily impacts the flat steel operations in the EU and in Canada. The assumption for carbon emission cost is based on historical experience, implementation of decarbonization strategies to mitigate or otherwise offset such future costs and information available of future regulatory or operational changes. Due to economic developments, uncertainties over the pace of transition to low-emission technologies, political and environmental actions that will be taken to meet the carbon reduction goals, regulatory changes and emissions activity arising from climate-related matters, the Company’s assumptions used in the recoverable amount calculations, such as capital expenditure, carbon emission costs and other assumptions are inherently uncertain and may ultimately differ from actual amounts.
The assumptions used in the value in use calculations are inherently uncertain and require management judgment. The Company’s process includes specific consideration given to the most recent short, medium and long-term price forecasts and discount rates consistent with external information, expected production and shipment volumes and updated development plans, operating costs and capital expenditure plans. While in the first half of 2022, operating margins, supported by a continuation of the buoyant market conditions in which the Company was operating throughout 2021, benefited from a continuing strong price environment and favorable supply demand balance following a prolonged period of destocking, in the second half of 2022, operating margins were significantly lower as a result of negative price-cost effect, elevated energy costs and lower steel shipments. Due to the non-recurrence of the destocking effects that weighed on demand particularly in the final months of 2022, apparent steel consumption is expected to recover in 2023 and the Company expects growth in steel shipments.
Management estimates discount rates using pre-tax rates that reflect current market rates for investments of similar risk. The rate for each CGU, including beta, cost of debt and capital structure was estimated from the weighted average cost of capital of producers, which operate a portfolio of assets similar to those of the Company’s assets and CGU specific country risk premiums were applied. GCGU weighted average pre-tax discount rates were as follows in 2022 and 2021:
Once recognized, impairment losses for goodwill are not reversed.
There were no impairment charges recognized with respect to goodwill following the Company’s impairment tests as of October 1, 2022 and October 1, 2021. The total value in use calculated for all GCGUs decreased overall in 2022 as compared to 2021 primarily as a result of higher discount rates.
In validating the value in use determined for the GCGUs, the Company performed a sensitivity analysis of key assumptions used in the discounted cash-flow model (such as discount rates, average steel selling prices and shipments). As of December 31, 2022, the Company believes that reasonably possible changes in key assumptions could cause an impairment loss to be recognized in respect of the ACIS segment.
ACIS produces a combination of flat and long products. Its facilities are located in Africa, Ukraine and the Commonwealth of Independent States. ACIS is significantly sufficient in raw materials. The Company believes that sales volumes, prices and discount rates are the key assumptions most sensitive to change. ACIS is also exposed to export markets and international steel prices which are volatile, reflecting the cyclical nature of the global steel industry, developments in particular steel consuming industries and macroeconomic trends of emerging markets, such as economic growth. Discount rates may be affected by changes in countries’ specific risks; such risk premium increased significantly in 2022 in Ukraine in the context of the war with Russia. The latter also led to substantially lower levels of production, shipments and revenue at ArcelorMittal Kryvyi Rih and such conditions are expected to continue throughout 2023. The ACIS value in use model anticipates a limited increase in sales volumes in 2023 (8.3 million tonnes) as compared to 2022 (6.4 million tonnes) with stable shipments after 2024. Average selling prices in the model are expected to decrease steadily over time. The table below describes the amount by which the value assigned to a key assumption must change in order for the recoverable amount to equal the carrying amount.
Impairment test of property, plant and equipment and intangibles (excluding goodwill)
At each reporting date, ArcelorMittal reviews the carrying amounts of its intangible assets (excluding goodwill) and tangible assets to determine whether there is any indication that the carrying amount of those assets may not be recoverable through continuing use. If any such indication exists, the recoverable amount of the asset (or cash generating unit) is reviewed in order to determine the amount of the impairment, if any. The recoverable amount is the higher of its fair value less cost of disposal and its value in use.
In estimating its value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. The cash-generating unit is the smallest identifiable group of assets corresponding to operating units that generate cash inflows. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, an impairment loss is recognized. An impairment loss is recognized as an expense immediately as part of cost of sales (see note 4.2) in the consolidated statements of operations.
In the case of permanently idled assets, the impairment is measured at the individual asset level. Otherwise, the Company’s assets are measured for impairment at the cash-generating unit level. In certain instances, the cash-generating unit is an integrated manufacturing facility which may also be an operating subsidiary. Further, a manufacturing facility may be operated in concert with another facility with neither facility generating cash inflows that are largely independent from the cash inflows of the other. In this instance, the two facilities are combined for purposes of testing for impairment. As of December 31, 2022, the Company determined it has 46 cash-generating units as compared to 58 as of December 31, 2021 mainly as a result of the amalgamation of certain CGUs in Europe).
An impairment loss, related to intangible assets other than goodwill and tangible assets recognized in prior years is reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. However, the increased carrying amount of an asset due to a reversal of an impairment loss will not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately as part of operating income in the consolidated statements of operations.
Impairment charges and reversals relating to property, plant and equipment and intangibles (excluding goodwill) were as follows for the years ended December 31, 2022, 2021 and 2020:
2022
In 2022, the Company recognized a 1,026 impairment charge related to property, plant and equipment (1,020) and intangibles (6) with respect to ArcelorMittal Kryvyi Rih (Ukraine) in the ACIS segment as a result of the ongoing conflict in Russia, which resulted in low level of production, sales and net income and created significant uncertainty about the timing and ability of operations to return to a normal level of activity. Adverse geopolitical conditions, which resulted in a substantial increase in the discount rate applied by the Company in its recoverable amount (value in use) calculation, deteriorated further during the fourth quarter of 2022 following attacks against Ukrainian power infrastructures causing additional operational issues for ArcelorMittal Kryvyi Rih and the concerns about an intensification of the conflict in connection with the announcements of delivery of heavy military equipment by western countries. The Company applied separate discount rates over the discrete projections period, including a higher country risk premium for 2023 cash flow projections and a return to pre-war country risk premium in the course of 2024 and for the terminal value calculation as value in use is sensitive to a difference in country risk for different periods.
2021
In the second half of 2021, in connection with the Company’s annual test for impairment of goodwill, property, plant and equipment was also tested for impairment at that date. The Company reversed 218 of impairment charges which had been recognized in 2015 for the Sestao facility in Spain following idling for an indefinite timing. The impairment reversal results from improved future cash flow projections following restart of operations and the Company’s decarbonization strategy in Spain.
2020
In 2020, the Company recognized a 133 net reversal of impairment including impairment charges of 92 and 104 related to the permanent closure of the coke plant in Florange (France) and the permanent closure of part of a blast furnace and steel plant in Krakow (Poland), respectively. In addition, the Company recognized an impairment loss of 331 relating to its plate business in the Europe segment classified as held for sale at December 31, 2020 and for which the held for sale classification was discontinued in 2021 following the termination of the divestment process.
In the third quarter of 2020, the Company reversed 660 of impairment charges of property, plant and equipment previously recognized for ArcelorMittal USA as a result of the increase in the recoverable amount. The Company calculated the fair value less cost of disposal using a market approach with market multiples derived from comparable transactions, a Level 3 unobservable input. ArcelorMittal USA was sold to Cleveland-Cliffs as described in note 2.3.1.
Accounts examples 