Foreign operations and policies of Arcelor Steel Limited

About the company:

ArcelorMittal is amultinationalsteelmanufacturing corporation headquartered in Luxembourg. It was formed in 2006 from the takeover and merger ofArcelorbyMittal Steel. ArcelorMittal is theworld's largest steel producer, with an annual crude steel production of 98.1 million tons as of 2014. It is ranked 91st in the 2013Fortune Global 500ranking of the world's biggest corporations. Arcelor S.A.was the world's largeststeelproducer in terms of turnover and the second largest in terms of steel output, with a turnover of 30.2 billion and shipments of 45 million metric tons of steel in 2004. Arcelor is now part ofArcelorMittal.

OPERATIONS OF THE COMPANY:With its Americas' headquarters in Chicago, ArcelorMittal owns and operates 27 facilities,including mines, integrated steelmaking facilities, mini-mills and finishing operations. ArcelorMittal has an industrial presence in 13 of the United States and employs more than 20,000 nationally.

Foreign currency translations:

FOREIGN OPERATIONS AND FOREIGN CURRENCY TRANSACTIONS

ArcelorMittal seeks to manage each of its entities exposure to its operating currency. For currency exposure generated by activities, the conversion and hedging of revenues and costs in foreign currencies is typically performed using currency transactions on the spot market and forward market.

For some of its business segments, ArcelorMittal hedges future cash flows.

Substantial portion of ArcelorMittals assets, liabilities, sales and earnings are denominated in currencies other than the U.S. dollar (its reporting currency), ArcelorMittal has exposure to fluctuations in the values of these currencies relative to the U.S. dollar.

These currency fluctuations, especially the fluctuation of the value of the U.S. dollar relative to the euro, the Canadian dollar, Brazilian real, South African rand, Kazakh tenge and Ukrainian hryvnia, as well as fluctuations in the currencies of the other countries in which ArcelorMittal has significant operations and/or sales, could have a material impact on its results of operations.

Based on estimates for 2014, the table below reflects the impact of 10% depreciation during 2014 of the functional currency on cash flows expressed in the respective functional currencies of the various entities. An appreciation of the U.S dollar of 10% would have the symmetrical opposite effect.

Basis of PresentationThe consolidated financial statements have been prepared on a historical cost basis, except for available for sale financial assets and derivative financial instruments, which are measured at fair value, and inventories which are measured at the lower of net realizable value or cost. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and are presented in U.S. dollars with all amounts rounded to the nearest million, except for share and per share data.

Translation of Foreign CurrenciesThe functional currency of each of the major Operating Subsidiaries is the local currency, except for ArcelorMittal SA, OJSC ArcelorMittal Kryviy Rih, ArcelorMittal Lzaro Crdenas S.A. de C.V., ArcelorMittal Brazil, ArcelorMittal Galati S.A., and ArcelorMittal Temirtau, whose functional currency is the U.S. dollar. Following the merger of the flat and long operations in Brazil, the Company reviewed various indicators and concluded that the U.S. dollar represents most faithfully the economic effects of the merged entity operations.Transactions in currencies other than the functional currency of a subsidiary are recorded at the rates of exchange prevailing at the date of the transaction. Monetary assets and liabilities in currencies other than the functional currency are remeasured at the rates of exchange prevailing at the balance sheet date and the related transaction gains and losses are reported in the consolidated statement of income.Upon consolidation, the results of operations of ArcelorMittals subsidiaries and associates whose functional currency is other than the U.S.dollar are translated into U.S. dollars at the monthly average exchange rates and assets and liabilities are translated at the year-end exchange rates. Translation adjustments are recognized directly in equity and are included in net earnings only upon sale or liquidation of the underlying foreign subsidiary or associate.

Market Risk ExposuresEurope remains a key market for ArcelorMittal. The market is showing signs of recovery, but any unexpected shock in the Euro Zone remains a key risk for the company. There has been recent political unrest in Ukraine. Russia supplies the majority of natural gas needs of Europe. A further escalation of crisis can lead to increases in natural gas prices in the region. Since a lot of fuel is consumed in steel making process, it can lead to an increase in input costs for steel producers.So it becomes a major risk for the major Steel Producer as Market risk is concerned.

1. Foreign currency exchange rate and interest rate risk

Exchange Rate RiskThe Company is mainly exposed to changes in values arising from foreign exchange rate fluctuations of raw materials, energy and freight. Normally, the Company invoices its customers in the functional currency of its Operating Subsidiaries.The Company uses forward purchases and sales of foreign currency, plain vanilla options, and foreign currency swaps to hedge foreign currency transactions at the majority of its subsidiaries. The Company also uses these instruments at the corporate level to hedge debt recorded in foreign currency other than the functional currency or the balance sheet risk incurred on certain monetary assets denominated in a foreign currency other than the functional currency.The general policy of the Company is to hedge its exposure to exchange rate risk transactions. However, as an exception to this general policy, for certain currencies and for risks and amounts that are clearly identified and authorized by management, the Company may either hedge in anticipation of future transactions or not hedge transactional risks. To hedge the above exposure to exchange rate risk, the Company had 2.5 billion of short positions in forward contracts and option arrangements against other currencies as of December31, 2008.

Interest rate riskThe Company utilizes certain instruments to manage interest rate risks in order to optimize its financial results. Interest rate instruments allow the Company to borrow long-term at fixed or variable rates, and to swap the rate of this debt either from the start or during the period of the loan. The Company and its counter party exchange, at predefined intervals, the difference between the agreed fixed rate and the variable rate, calculated on the basis of the notional amount of the swap. Similarly, swaps may be used for the exchange of variable rates against other variable rates.

2. Equity price riskIn the Longer term, once distortion created by financial investors works it way out of the system, it is the real economy that matters. At this time, you can expect long term prices to rise to $850 to $900; at this level the industry can invest in capacity expansion with an anticipated ROIC of 15%. Spikes over the long term prices must be expected because there will be a shortage caused by deferral of Brownfield and Greenfield capacity expansion projects.

How it is managing the above said risk?For Risk Management ArcelorMittal has implemented strict policies and procedures to manage and monitor financial market risks. Organizationally, supervisory functions are separated from operational functions, with proper segregation of duties. Financial market activities are overseen by the CFO, the Corporate Finance and Tax Committee and the GMB.All financial market risks are managed in accordance with the Treasury and Financial Risk Management Policy. These risks are managed centrally through Group Treasury by a group specializing in foreign exchange, interest rate, commodity, internal and external funding and cash and liquidity management.ArcelorMittal enters into transactions with numerous counterparties, mainly banks and financial institutions, as well as brokers, major energy producers and consumers.

Risk Management Policy As part of its commitment to sound corporate governance, ArcelorMittal has set up a process of risk identification and management. These risks include but are not limited to financial, legal and operational risk and risks concerning ArcelorMittals reputation and ethical standards. The board risk management committee (BRMC) assists the board of directors with the identification and management of risks to which the ArcelorMittal group is exposed. The Group Management Boards group risk management committee (GRMC) has oversight at executive management level. The chairman of the GRMC attends the meetings of the BRMC as a representative of senior management.

Foreign currency exchange rate risk management

Derivatives used are non exchange-traded derivatives such as over-the-counter swaps, options and forward contracts. ArcelorMittal has established detailed counterparty limits to mitigate the risk of default by its counterparties. The limits restrict the exposure ArcelorMittal may have to any single counterparty. Counterparty limits are calculated taking into account a range of factors that govern the approval of all counterparties. The factors include an assessment of the counterpartys financial soundness and its ratings by the major rating agencies, which must be of a high quality. Counterparty limits are monitored on a periodic basis. All counterparties and their respective limits require the prior approval of the Corporate Finance and Tax Committee. Standard agreements, such as those published by the International Swaps and Derivatives Association, Inc. (ISDA) are negotiated with all ArcelorMittal trading counterparties. ArcelorMittal uses derivative instruments to manage its exposure to movements in interest rates, foreign exchange rates and commodity prices. Changes in the fair value of derivative instruments are recognized in the consolidated statements of operations or in equity according to nature and effectiveness of the hedge. Derivatives used are nonexchange-traded derivatives such as over-the-counter swaps, options and forward contracts.