Q2 2021 ArcelorMittal SA Earnings Call
So the focus is to discuss the results for the first half 2021, and the strategic progress from Oslo Mitchell and this was covered in depth in a detailed presentation published alongside our results. This morning. So as usual the format of this call will be some opening remarks from Mr. Mitchell in a ditch followed directly by a Q&A session.
So as such we should be able to complete this call in about 45 minutes to an hour.
First some housekeeping if you would like to join the queue to ask a question. Please press star 1 on your telephone keypad I'd also like to remind you of the disclaimer in our presentation and also the fact that this call is being recorded.
With that very brief opening.
I'll hand over to Mr. Mitchell.
Thank you Daniel Good day, everyone.
Thank you for joining today's call.
I hope, you're all keeping safe and well.
I am joined on this call by Mr. Lauer CEO.
<unk> CFO and head of mining Simon.
<unk> is an important date, we have reported our best set of results since 2008.
Keeping in mind the reduced scope.
Which is very satisfying to see.
We have also announced a new target for the group.
Reduce our carbon emissions by 25% by 2030.
These targets are very important.
Turning first to our financial performance.
I mentioned this was the best quarter since 2008 by some margin.
Performance improved in all of this deal segments.
Net income for the first half was $6.3 billion and includes a billion.
Contribution from GBS, highlighting strong performance that Arcelormittal Nippon steel, India and estimate the lupus team Gilbert.
Now I'll handover the floor now to us.
Okay.
Great. Thank you.
Good day to everyone.
Hope, you're all keeping safe and well.
Before I turn to.
Uh huh.
Second announcement of the day, which is the carbon report, let me first address our health and safety performance in the first 6 months of the year, we have reinvigorated, our global health and safety Council, which provides leadership and guidance to all of our segments.
We have done.
Done this because although we compare favorably with the industry, we're not satisfied with our safety performance.
All segments are adopting new initiatives and I am hopeful we will see improvement in our safety.
Performance as time progresses.
Despite the COVID-19 related turbulence of the last 18 months.
Our actions to streamline and optimize our business and balance sheet puts our metal on the strongest putting it has been for many years and positions us well to address 1 of the biggest challenges the global economy has faced decarbonization.
As we've talked about at the time of our 2020 results in.
In February our ambition is to lead our industry's efforts to decarbonize.
I hope as reflected in our second group climate Action report, which we have published today.
The report details the new group wide target of a 25% reduction in carbon emissions by 2030.
We.
We have also increased our European target to 35%.
These are ambitious targets and it will be a big challenge, but theres a lot of positive engagement across the company to show the world what steel is capable of as.
As you know engineers love a good challenge and there is arguably no greater than this.
We estimate capital investments of $10 billion to achieve these targets given the technologies that will enable these reductions are not yet competitive we're looking for equal support through targeted policy that takes into account both the initial capital spend and the higher operating costs during the transition period.
We're continuing to base our transition plans on the 2 technology routes, we've talked about previously I E innovative DRA and smart carbon.
But as it stands today, the 2030 target will lean more towards innovative <unk>, particularly in Europe, where national governments are prioritizing the availability of green hydrogen.
At competitive prices.
This underpins our recent exceptional announcement that <unk> style will become the worlds first full scale zero carbon emission steel plant by 2025.
There is a lot of information in the report about how Arthrometer, Decarbonize, which I hope.
Find useful.
Steel is already the material of choice due to its lower carbon footprint and infinite recyclability. The world will continue to need ever increasing amounts of steel that won't change, but the way steel is made well we.
We hope to be at the forefront of this change.
People in summary, we continue to enjoy strong market conditions and are doing all that we can to ensure that we take maximum benefit from them while simultaneously transitioning for longer term success. Thank you we're happy to take your questions.
Thanks for this year. So we do have a queue of questions for me.
So to repeat if you would like to join the queue. Please do press star 1 on your keypad.
And we will take the first question. Please from <unk> at Morgan.
Morgan Stanley go ahead of us.
Yes, hi, good afternoon, everyone I have 2.
2 questions. The first 1 is basically on your JV and associates. It seems that it doesn't matter how high the profits go any of your converts.
The market potential just ignore them.
I guess the attributable EBITDA in Q2 annualized alone is around 2 billion.
It's still not clear to me how you plan to convince the market to recognize the value of these assets with a partial listing they are an option or maybe a buyout of your partners whats your thinking there that's the first question.
Yes.
Thank you I appreciate the question.
I think it is not just a matter of the JV is right. If you look at the results today, the EBITDA performance level of shareholder return or even our net income I think overall.
We're being undervalued, so I think our improved disclosure on the JV.
It just helps emphasize what the jv's are worth but there is an overall value issue.
When you look at the company.
Thank you and my second question is on your dividend policy should we expect the semiannual capital returns to become the norm from here onwards, and then comes at year end.
I think you'd be very close if not enough cash are you starting to think about an update of your capital returns policy somewhere above the 50% that you've set.
Yeah.
Sure. Thank you.
We just announced.
Capital policy in February there's no plans to change our capital return policy I think it's quite effective I.
What you did in the second quarter demonstrates that we have also utilized the proceeds from the sale of M USA and return that to shareholders.
So as far as we're concerned the capital policy is well positioned works well.
Clearly we have strong visibility.
Cash flows in the second half.
And therefore, we decided to pre bone.
The dividend, but I would not read this into.
Anything other than that there is no plan to change that policy.
Thank you on the recurrence of the H, 1 or semiannual dividends.
Jim Mitchell 1 offs.
Yes.
As I just.
Instead of so we are not really reviewing the.
What date in the policy.
Our commitment as you know, we distribute 50% of our free cash to shareholders. So that is not changing now on the timing I mean as I. Just said, we just felt that at this point in time, it's linoleum grabs given our expectations for acceleration of free.
Cash flow generation in the second half, but as he said I mean, you should not read that we are at this point in time change our policy.
Thank you.
Thanks, a lot. So we'll move to the next question. Please from Jack at Goldman Sachs.
Okay.
Hi, good afternoon, thanks for taking the question.
Sure Paul.
Contract, which you imply.
Let's see today as it stands today, the combination of sort of annual pricing last quarter and current quarter and just interested.
Based on the strength in the market the extent to which you.
You could amend your contract structure going forward such that it.
More more predicated on spot prices. So that you don't leave on the table.
Okay.
Okay.
Joanna.
Yes Jackson.
So our focus is.
Really to make sure that once these contracts.
Come back come back up on the on the table for renegotiation and then we can we can see Q.
The spot prices that we are enjoying today right I mean, I think it's fair to say and we have been discussing that this year.
Contracts.
In terms of profitability there were of course lower than what we could see Q on the spot market. So you're absolutely right. So with that we'll be able to focus.
As we sit with the Oems to negotiate these contracts I mean, I guess, all we want is our products to be a fairly fairly valued.
But having said that at this point in time, we are not really considering changing the structure of the contracts.
So that's not really a high on our agenda at this point.
Okay.
Second question. Thank you.
Detailed.
Climate.
<unk> report update.
To read all about.
Your latest activities in Spain, and what that will entail.
You touched briefly a date yet.
On the on the fact that prices on a unit cost basis will be high can you can you give any color there.
Yeah.
On what we should expect.
Tom.
Sure.
Sam stops.
Yes, so we have not detailed it.
Specifically, but I can give you a sense of the trends. So you can model. It I think the first.
I must emphasize is that it depends on geography, because it's highly dependent on energy prices and the cost of iron ore et cetera et cetera.
So if you if you look at the European geography.
When you convert a typical coal based blast furnace into a.
Natural gas based <unk> facility, the energy cost increases because natural gas.
Used in steel processing is more expensive.
You also have to use a different type of metallics and then clearly that also comes at a higher cost and then on top of it you are using electric energy to melt. So those are the 3.
The.
3 input parameters, which change that's just assuming we.
You use a simple DIY E natural gas crude.
Roughly I think what we're suggesting is that when you look at the.
<unk> costs today.
In Europe, and the change in cost as a result of going down this new route.
Bush, so theres no real benefit based on existing CLO to pricing. So that gives you a kind of a guide clearly in some markets. It's more favorable if you have a smaller delta et cetera, et cetera, but that gives you an order of magnitude of how these things work.
And then if you don't go down to smart carbon route.
Is it.
It's a different set of economics it depends on what you get for your Biofuels or for your <unk>.
Provision of chemicals, biochemicals chemical sector et cetera, et cetera, but fundamentally when you look at these various routes to Decarbonize. There is an increase in opex and roughly speaking the.
The C O 2 benefit.
Does not create significant net benefits.
Okay. Thank you very much and just 1 final question just on the carbon border adjustment mechanism would love to hear your thoughts on.
On the pros and cons of.
You see it today.
Yes, so fundamentally the carbon border adjustment is critical because it creates a level playing field and the steel industry needs a level playing field to remain competitive.
If you look at the discussions that are ongoing in Europe that is the intent.
That is.
Clearly as the allocations reduce there will be a carbon border adjustment, which will.
Which would match the reduction so that there is a level playing field and this is important because then there is an incentive to decarbonize theres a market structure to decarbonize otherwise.
Producers.
We do not have a carbon cost can obviously undercut.
Companies, which are decarbonising on a macro basis I think this is this is good so.
So good development because it forces.
Other regions in other countries to also implement carbon plans and.
Similar systems like that exist in.
So that there can be.
They can have access to the European market, we see some developments like I think China has announced that they now have a carbon price and so I think the carbon border adjustment achieved 2 objectives, not only creating a level playing field.
On a regional basis, but also motivates others too.
In Europe, right, there, they're carbon decarbonization plans.
Okay. Thank you very much.
Thanks Jack.
Take the next question now from Tom at Barclays Go ahead, Tom.
Hi, everyone. Thanks, very much for taking my question 2 if that's okay I'll.
<unk>.
First of all just in the Decarbonization, you were talking a bit about differences in geography.
I'm wondering if you could.
Comment a little bit about.
Youll clients outside of Europe, maybe a breakdown of the 10 billion costs sort of what is your what is the rest of the world.
What are your thoughts on the level of government support that you might expect.
Well I think in the presentation in the appendix is there any specified Canada was somewhat.
It doesn't attractive regulatory environment.
Sure.
So Tom.
We have not.
Uh huh.
We have not detailed out the capex by region.
But I can give you a sense that fundamentally the majority of the Capex will be in Europe as the majority of the savings embedded in the report are on Europe.
Other than that when you look at the regulatory environment I will discuss 2 areas.
1 is obviously you mentioned, Canada, but Theres also Europe.
And if you look at the.
Relation in Europe today.
These various programs, whether it's <unk> or the innovation fund. There is also a change in state legislation and the intent is there.
That needs to be some level of support for hard to abate industries to Decarbonize and steel is 1 of them.
I think there is a recognition that today the capital spending.
Limited returns and therefore, there needs to be fiscal support to motivate and accelerate this capital spend at the end of the day I think regulators.
And industry players like us have a shared goal which is to decarbonize and.
We are sitting across the table and figure figuring out how best to do that based on the discussions we.
We have had so far I'm quiet.
Constructive I'm quite optimistic that we will find a path to share the cost of decarbonization.
Okay very clear.
Second just if you wouldn't mind, giving an update.
Thank you you have to do on regionally for order books.
Thanks.
Exactly interested on Acis, where theres, a little bit a little bit more weakness in spot pricing and whether or not we might expect to see that already in Q3 or if it's more of a Q4 phenomenon.
Okay.
Take this 1 so.
So why don't we talk a little bit about the drivers for Q3.
Overall, I mean, not only <unk>. So maybe that is helpful for everyone.
So.
Starting with shipments. So so our expectation is that we should see shipments in Q3 and relatively stable with slightly higher at group level.
We have not really seen.
We don't expect to see a lot of seasonality in Europe.
Typically we've seen a recovery year such as this year 2021. So she I ask continues to do well I mean in terms of shipments and.
We actually.
We saw a nice recovery also in our South African operations this quarter.
So we don't expect weakness in terms of shipments and see I guess the rest of the division is also doing quite well there.
Xu as we continue to run full and also announced for NAFTA.
Prices.
As you know because of.
Backs, we expect prices continue to rise and it should it should be the case in all of our segments.
But at the same time.
<unk> are also rising.
But when we put altogether spectation is that.
<unk> ability should should expand.
Of course, you have to take into account also the disruptions that we had in our mining division.
And that we don't expect to reoccur as we move into Q3.
But on the Flipside you you probably.
You saw that we had a positive result in our segment orders.
And this is primarily linked to the fact that we had the disruptions in our mining divisions and some of the inventories that we have you know steel division.
<unk> got consumed not replenished by supply is coming.
From mines, Canada and.
In Liberia.
So as operations come back to normal then we would expect that also true to reverse as we move into Q3 and in.
In Q4.
Thank you.
Just to follow very quickly with Europe and NAFTA.
The late booking now well into Q4, but what led to the order books, looking especially safety Yeah order books continue to grow.
As we speak and so.
We don't see signs of weakness.
Order book, we are booking well into Q4 and in Europe and in NAFTA.
Yeah.
Okay. Thank you I'll turn it back.
Thanks, Tom.
We will move to the next question. Please from Luc at J P. Morgan.
Hi, Thanks for taking.
A question first.
First on decarbonization, and obviously to the detail around the $10 billion Capex to Decarbonize about 2030.
Just thinking about the 'twenty 'twenty 5 target were around 35% of that $10 billion.
Planning to be spent.
Can you give us a bit of a framework around how that capex will be deployed to can we sort of think around day sort of divide it by.
4 years remaining 8 to 900 million per annum run rate.
Obviously on a 100% share shifting and.
And whatever the government spends will be a benefit.
But broadly around that level and then historically I think you said 3 billion capex.
Dining was the base in line with DNI. So should we be thinking 3 billion plus 8 to 900 million. So towards 4 billion. It is.
Relevant.
<unk> level, obviously again before any governmental support.
That's my first question.
Let me take this question so soon.
So as you know I mean, it's not really our policy to guide through annual Capex beyond beyond the current year right.
But I can help you frame your.
Spectation. So I think number 1 so you have is the basis of our Capex guidance for this year right $3.2 billion.
So this is basically covering the sustaining capex as well as the strategic projects that we have underway.
We have also provided as you know our strategic up.
You always hope its $1.5 billion through 2024, so basically for years and for that we expect about 1.6 billion in inhibitor benefits. The projects as you know you're talking about completion of the Hudson.
Hot strip mill in Mexico.
Our project in Brazil, the expansion of Vega.
And from urea.
We do have some interesting high return capex opportunities within the portfolio. So our expectation is that this envelope will not get smaller as we complete.
Mexico, we will have some other projects. So in reality I believe we can actually expect as ever locked you should.
Right.
But if and when some of these are strategic projects pass through the appropriate approval process.
<unk> explained the projects.
And then on top of this I mean, clearly we have the carbonization Capex and we have said this 10 billion through 2013.
Which.
Been 5 to be spend through 2025.
This is of course, a gross number as you know as you said so you should assume some some of these are supported by public funding, but we will update you as and when does this this is approved.
So I think in conclusion, you should not expect up.
Picks to be it should be declining so we have to funded the carbonization transition and we have some interesting I'm going high return opportunities within the portfolio.
Okay, Great that's really useful and then.
Just on to a prior question number.
Sure.
3 fives and carbon border adjustment mechanisms from changes to the Etfs with the decarbonization.
Decarbonization.
Carbonization framework now into 2025, and then ultimately to 2030.
How how should we be thinking around exposure to cob.
Carbon costs I think in the past you'd indicated.
The very short term there was minimal impact from pricing all carbon costs, increasing from current levels, but now given the sort of more aggressive change in targets in Europe does that in anyway affect.
And could you be thinking about that that exposure to C. O..2 thank you.
That's really the challenge that we have in front of US right. So and that's why we very much focus on progressing.
We thought about decarbonization.
Absolutely right so.
How express and the free allowances.
We do use that puts pressure on us to also reduce all emissions. So that we can offset.
This impact right I mean, that's the challenge and that is that also.
A lot yet has to be has to happen right. So these proposals stay mileage and we.
As we collect a lot of debate discussion so it's probably a little bit too early but we know that what is the direction right. So we know that the second phase of <unk>.
So, we'll see and we'll experience declines in free allowances, so it's up to us to.
Sure.
So a similar rate as.
As possible although emissions. So that we can we can offset that I did talk about also you cannot look in isolation.
So I think you have to also take into account.
We bought it acts as like at a sad.
All about having the right level.
<unk> field.
We exercise so looking aggregate looking what we have in terms of plans.
I'm confident that we're going to be able to do that.
It is a transition phase.
Thanks, a lot.
Yes.
Thanks, Mike.
Now to Phil.
At Keybanc go ahead Phil.
Sure.
Hey, Thanks very much my.
My question broadly is just on automotive obviously, there's been some production cuts and some expectations that have been more muted as the years gone on given supply chain challenges.
I mean, what are your expectations.
For that end market.
Moving ahead.
Yeah. Thanks for the question I think Jamie when I talked about it right.
We're very focused on getting fair value for our products. These contracts had been very painful this year.
Because they were negotiated when the price environment was very different from what it is today.
We still have these contracts in our business some of it is coming off in the second half we have contract lag effects in the second half, but our focus my.
Our focus remains to get fair value for our business as we enter these negotiations.
It was more so the question was just on the demand side in terms of what you're seeing not not necessarily on contract pricing.
Sure.
Sure. Thank you so on the demand side.
There is some impact of the <unk>.
Chip shortage, but overall automotive volumes clearly are better than they were last year.
The visibility remains limited into 2022, because everyone is.
Still working through the chip shortage, and it's slightly different OEM to OEM, but fundamentally the trends remain very strong.
Thank you and if and if I could do 1 more here just on the net working capital side.
I know, that's a little bit of a elusive because the market keeps evolving.
But is the expectation in the third quarter that you will.
You'll see a similar build that you saw in the first half in terms of rate or.
Should we anticipate that that rates slows.
I mean.
Okay.
We don't really provide a very specific guidance numerical guidance.
As we have been saying I mean, the message is basically the same so we continue to you know.
Before we are focused on making sure that we retain efficiencies that we work very hard to achieve.
Thousand.
So so far an H 1.
I'm sure you saw $3.5 billion of investments.
It is really a function of the higher prices higher shipments of high raw material prices.
So of course, we see it as liquid investment and avoided right. So going forward I mean, it really depends.
On your on your assumptions. So if you have between the second half.
Then I think you should assume that will continue to be in.
<unk> working capital.
But clearly as we know.
The last part of December because of the holidays typically.
We have some Lola.
Lower levels of activity. So you have to take that into account.
But if your assumption is high beta levels in the second half then.
You should expect.
Investments in working cap.
Thank you.
Thanks, Phil.
So we'll move to the next question. Please from Patrick at Bank of America.
Good day, everybody. Thank you very much I just wanted to follow up maybe on the capital allocation on the share buyback.
A question from earlier so <unk>.
You've brought forward.
From 2022.
To.
This quarter.
Is it possible that at Q3, you could look at how the business is doing and possibly look at something like that again.
Just move it up or is this a.
This is a till the end of the year now.
Yes, Patrick.
So I think it's so we have a lot now on our plate right. So we just announced this $2.2 billion program.
It's much higher than the previous 4 programs that we have completed.
So so we are giving ourselves 5 months to complete this this new program. So.
We should not underestimate the work that we have in front of us right, especially because we have some technical limitations in terms of the volumes that we can bind the prices that we can buy.
So it's not that straightforward right. So it's early to talk about launching a new buyback in Q3, let's see.
Progress.
How do we do.
How fast we can complete this 1 what is the situation, but as I data set at the beginning of <unk> to read.
This is a change that we are going to be announcing is on a quarterly basis.
Okay got it. Thank you that's very clear and then just 1 more follow up please.
How we'd be autos outlook so is.
There's a bit of a.
Narrative around that maybe the Oems are still taking delivery of steel even if production is being slowed down because of.
Chip shortages and so you know when they rebound with the chip shortages eased it might not be the.
On the kind of increased volumes from steel that we might be expecting have you seen any evidence of kind of the.
The auto companies stocking up on steel or should we think about it that the volumes out of U R.
Exactly matched to kind of what the.
This production profile.
Yeah. Thank you. So it's exactly matching we have just in time delivery systems.
There are <unk> interfaces, we are connected to specific platforms.
So.
It's it's a it's an integrated supply.
OEM, almost and so to build inventory in the system.
To try and achieve that is very difficult and so we have not seen any evidence of that.
Brilliant. Thank you very much thank you.
Thanks, Patrick So we will move now to Tristan at Exane go ahead.
Yes, hi, thank you.
Taking.
Question.
Okay.
The guidance you don't expect demand to deteriorate you see positive momentum on spreads.
Severe seasonality.
How should we really took the debt such do you believe the market right now maybe even more.
More sustainable footing today as it has in the past 1, but maybe to the metal spread in margins.
It can be higher than in the past.
How do you view the sustainability of the cycle.
Sure. Thank you.
So.
I think it goes back to the first question.
Visuals on valuation on <unk> and I responded by just looking at the fundamental valuation of Arcelormittal.
In terms of market dynamics look today.
Demand is robust in all the markets in which we operate.
We issued revised apparent steel consumption numbers I know recently.
You guys a lot of information this morning, but for anyone who is interested its on page 30 of our presentation.
Where you can see double digit growth in almost all the markets in which we operate and global apparent steel consumption, excluding China growing at 12% to 13%.
I was asked on automotive inventory, where we don't see any buildup. The same is true more or less across the board. We have not seen the restocking of inventory. So these apparent steel growth numbers match, well with a real real steel demand growth.
And I think there was a lot of discussion as a business we have not seen the full impact.
Pact of spot pricing.
Contract lag effects will come in the second half on.
In the medium term to macro look.
It's always.
Dangerous to 2 expected to forecast.
But fundamentally if you if you look at a macro snapshot if you look at the past 10 years and you don't get the.
The question is I see.
There are 3 changes that are worth mentioning are the.
The first has been the change in China.
There has been real action to.
Eliminate the export rebate. It was first just on hot band. This morning, It's also been announced on cold rolled and hot dip.
Next time, there's a lot of chatter in China on reducing export of steel because.
Why have excess carbon production within China and exports of steel.
Chatter on export taxes.
Russia has done that actually they have implemented Russia export taxes.
So the change in the Chinese steel.
Great I think can be very significant oh over the next 5 to 10 years.
Simultaneously, we spent a lot of time talking about our decarbonization plans.
Which clearly we want to lead the steel industry, we have the capability to do that but there were also effects on the demand supply balance of the global steel industry.
We see new pockets of demand this is renewable energy.
Either it's wind or solar, but also I think the whole energy infrastructure.
We'll have to be rebuilt.
And clearly that's a positive for for steel demand and in terms of supply I think there's limited and interest of anyone to just grow steel capacity.
I think clearly their focus is to decarbonize.
As you see from from our announcement.
This morning, So I think that's that's another positive trend and I think we all saw post COVID-19 the amount of stimulus funding that has been.
That has started in various markets.
Again.
As you know steel is very tied to infrastructure. So we see a lot of investment in infrastructure again, that's positive for overall steel demand so.
So that just provides an overall perspective.
We think that the next 10 years should be better than what we saw in the last 10 years.
And clearly.
And Kate environment presently remains very strong.
Alright. Thank you that's very helpful and I, probably just have a quick follow up changing topics and going back to ETS.
There are some peers in Europe.
To implement.
Carbon surcharge.
Is it something also you would be comfortable.
Considering.
Yeah I think.
That's a fair question at this point in time, we have not come to a.
The definitive decision clearly at this point in time, we're not doing that our focus is not so much as a coven surcharge, but our focus is how do we decarbonize.
As our business effectively.
And Thats, what we are trying to achieve with a report. This morning for example in Europe, we have accelerated our ambition.
From a 30% by 2030% to 35% and that includes scope too as well before it was scope 1 scope, 1 and $2.35 per cent reduction of a 2000.
2018 baseline. We also are in the market with various X car products. So our next scar product fundamentally is moving towards carbon neutral steel. We have 2 products..1 is green steel certified where a customer buys.
A green steel, which is new product from us which is certified.
To be carbon neutral so they get the benefit of their scope 3 emissions.
And we have recycled and renewable steel.
And based on all the discussions we're having with our customer base across various segments. I think there is a very high level of interest and we had been very positively surprised by the interest.
The market has and the products that we have to offer.
Alright, thank you.
Thanks system, So we'll move now to Oh.
Jefferies go ahead, though.
Thanks, I just had 1 left is on the hot strip mill in Mexico that it's going to be wrapped.
Interesting.
The guidance, you've given around kind of a $250 million contribution up to ramp up I'm, assuming is under more normalized spread assumptions that was operating now what do you think it could generate.
Yeah. So I think you guys know the price of hot band.
<unk> you guys know that price.
Slabs, so the margin would be.
Quite significant.
And so look we're focused on getting it up and running.
It's a great project and not only for this market environment, but for the foreseeable future because not only for.
The EBITDA that we would create but.
But it will change the profile of our Mexican flat business, we did that successfully in <unk> in Brazil. So if you looked at our business in Brazil, 10, 15 years ago. It was primarily a slab producer.
To date is amongst the largest domestic players so.
From a $2.5 million tonnes.
On slide producer 2 days to 75 million tons slapped producer.
Hot strip mill with the capability of 5 million tons that has automotive capability and.
And clearly we are an important player in the domestic market and the same applies to Mexico apart from the EBITDA I think that is a strategic change because what we're doing is we're changing the profile of the business from an export or.
Semi finished steel to aid.
Downstream finished steel manufacturer.
But I, but I get what youre, saying and if it was 6 months earlier, we'd be even more thrilled.
Okay. Thank you very much.
<unk>.
Thanks, Alan So we'll move now to.
Brokers at Kepler.
Yes, thanks for taking the question I.
I have first 1 question on the <unk>.
EBITDA outlook for Q3, I think you explained most elements what I'd like to understand.
To what extend you have been benefiting from windfall gains and new distribution.
Fusion business in the second quarter like most of the peers and how shall we think about directionally whether to what extent this number will be lower in the third quarter.
Brokerage business, a little bit too specific.
So I think in my in my in my message.
Trying to you're trying to help you guys to model quarter, 3 we talk about the big drivers right in fact that was.
Dictation is that profitability should continue to improve.
Improve right.
Not really see any any any significant impact in our distribution.
<unk> business and the overall picture of the group.
Doesn't make such a large impact.
To change your.
How are you modeled results.
Okay Fair enough and then can you also update us on the.
Overall envelope for yours.
Cash needs on Texas, and others as Uh Huh.
Obviously, the <unk> expenses will go up and can you remind us on your kind of normalized tax rate to be show consider for 2021.
Yeah.
Yeah. So so we talk about the Capex right.
So that's 1 change.
And then we are not really changing our guidance for the interest component that remains of the $300 million.
And then and really the only or the moving part of course is taxation has just said and we continue to believe that for the year you should assume.
June you should assume that.
Our ETR should be in the range of between.
Between 15% to 20% right.
And in the past, we have always said that.
For the extra beta that you take compared to last year, you can apply as it is.
With fans.
15% to 20% of that is in line with our Oh expectations for each year.
This year.
Okay, great and.
Coming back to the 10 billion Capex you're flagging.
Context, just a decarbonization.
What's the rough split how that applies to.
The investments into them HDR, I and how much will be.
The reserve choice could be reserved for smart carbon and other elements and in that context can you give us a sense.
<unk> about the timeframe you expect until a regulatory framework in place, which would allow you to start with the actual capex you are considering.
Yes sure.
So in terms of the Capex I think.
Can you get the most capex intensity is really the D E F.
So a significant part of the Capex is dear I guess the other benefits of.
Our investments are electric furnace capability or scrap processing capability.
Can enhance the use of scrap and then we all.
Also have solutions, which don't require that much of capex to decarbonize.
In terms of smart carbon.
It is part of the overall capex envelope, but it is not a significant.
Clearly as the idea of IEA fruit and again, that's driven by.
The majority of those technologies.
<unk>.
The value that we can create out of those technologies in the regulatory support as well surrounding those technologies.
In terms of when we can start look we're very focused on hitting the ground running we talked about 30% to 35% of the capex in the first half of this decade.
Talked about the style, where we want to be ready with a full scale zero carbon emission steel facility by 2025.
So we're working with all key stakeholders on that timeline.
Okay.
<unk>.
Is it possible that you share with us kind of a rough.
I'll figure toward extend their 35% decarbonization target for 'twenty Saudi.
Is being achieved by the usage of <unk> and <unk> and Douglas tools.
Yes, so that's a fair question so just for everyone else.
Recall, the global number is 25% in the European number is 35% so that.
No.
Yeah, just to make sure if you go through the carbon report.
I know, it's quite extensive and we just published this morning.
There is a nice waterfall and it's also in our investor.
Also on reputation I think on page 9.
And where you can see our key key initiatives that we have which basically show the global 25% carbon reduction.
So a significant portion of this is Steve Mackey transformation.
Which is primarily D E F using.
Using natural gas, we're not planning.
Yes of course, we will be using some hydrogen but this plan is not based on the.
The success of this pilot is not based on hydrogen it's based on the other initiatives that we've outlined on this chart. So this is clean energy scrap use.
Energy transformation offsetting residual emissions as well as steelmaking transformation.
Okay. Thank you very much thank you.
Yeah.
Great. So we'll make some next question please from Bastian.
Yes, thanks, good afternoon gentlemen.
Then I wanted to ask 2 quick follow ups on the decarbonization Capex as well if I may.
So if we look at your positioning as a company here with presence in many countries and lucky's, you've got probably 1 big advantage for POC as a starting point until you can basically pick and choose and you can go and start decarbonization wherever you see most supported that hopefully.
He puts you with a whole lot of pressure on the government's wherever you operate in basically puts these governments also in competition. So when you look at the 10 billion program is the funding support which we should expect here for.
For the 2 companies, there's some capex similar to what we've seen at this point.
Do you expect the governments.
To absorb there.
They'll see I'll say, 50% she as was seen in the past project.
Yes, the visibility is probably better on the 3.45 billion part, which you expect to be spending until mid 2025, but maybe you can give us your early if you want on the OE program. Please.
This is my first question.
Yeah sure so.
Maybe a few points fundamentally when you go through our carbon report we have also broken up the regions into accelerate regions, which we think are accelerating in the regions in which we're moving which we define as move and so a lot of our D car carbonization capex intensive investments or in the regions, which are accelerating.
King.
On your second point I agree with you I am I'm convinced that our similar can lead the way.
Not only do we have the best talent in the steel business their diverse committed motivated, but we have been and are the technology and R&D leader.
We have size and scale advantage and as you mentioned, we have a head start we have launched Rx.
X X card product suite, we have launched our ex Carb innovation fund.
We have investments under the smart carbon route and we are the largest ear I producer in the world.
So we know how to run D. Ray we also know how to run E. S..20% of our overall group production is so the electric.
Its route.
The regulatory support.
I think youre right.
We are starting off and clearly there is greater visibility in the medium term, but we believe that.
Based on the conversations we are having.
But there is a shared interest and there is a recognition of that capital.
Turns on <unk> investments are limited and therefore, there needs to be appropriate regulatory support.
But it's probably too early to say whether you're on average.
Basically you get close to that 50% ratio.
Our focus is 50% funding support.
Alright.
That's what you're seeing in terms of.
Legislation support or intent.
And if you looked at the renewable sector I mean for about 10 years of a significant support provided to the renewable sector.
Okay. Thanks, and then my second question is just so small.
Typically 1 actually a related technical also.
So the decarbonization kept us obviously will flow through your Capex line is the gross number and then separate to that you will have to funding support <unk> et cetera. So we trust.
This cost then that's obviously more of like a mitigating items, where should we expect those mitigating items Andy grants to flow.
Go through in all the technically easing of the Capex burden in your F. C. F definition or were they possibly flow through your cash flow statement below that to I E. The financing line. So maybe you can give us. So some got some early guidance because obviously that will determine your free cash flow probably would feel be handing back to shareholders as well.
Yeah.
Yeah go ahead Jeremy.
I was wanting to address it's a technical question so.
So to the extent that you have the grants and the grants are specific to the particular project and most likely what you're going to see is <unk>.
Capex for Massimo.
They're going to have the gross minus minus the benefits. So it's going to depend a lot on the form of the grant.
But always Spectation is as I said to the extent that they are clearly linked then you're going to see on intermodal.
Okay. So you net it all directly quite okay. Thanks, gentlemen.
Sure.
So well now move to <unk>.
Greenberg intelligence.
Hi, good afternoon. Thank.
Good afternoon.
Yeah, I'm going to change gears slightly just slightly more detailed question.
Just on the cost line in steel Europe.
I noticed you.
Consolidated ilva.
And I would've thought that the cost will go down if you could just sort of.
Maybe just give us a little bit more color on the dynamics of how the cost involved.
Steel Europe.
That would be my first 1 and then the second 1 is just on the Capex I know, it's a small number in the.
Your scheme of things, but is that just simply too.
For higher refurbishment and and more sustaining capital because of the higher activity or you actually just are you you're adding a little bit.
Or you're debottlenecking certain areas of your production base. Thanks.
Thanks very much.
Oh great.
So on the first part of your question on the costs in Europe, and the dynamics that we are saying I mean, if you go back you will see that I don't know if prices continue to they have been rising now for a number of quarters.
We saw also a call also moving up this quarter scrap prices energy.
And that takes some time for the impact of these costs.
2 impact.
Our results the same way as selling prices right. So yeah inventor is so it takes a little bit.
All the time, so what you see in Europe is pretty much similar to what Youre.
We're seeing other parts of our business as well.
So you have this higher cost is also flowing through.
Our results right.
In terms of in terms of Capex. So this is really it's.
It's not really a new debottlenecking or.
So.
Based on our previous Spectation. So we're not assuming that we would be running all of our facilities, who are only around right and thats exactly what you what we see right now.
As a result, I think we have to allows some.
Some higher maintenance capex, so that we can keep production stable, we can maximize production in and try to.
Benefits from this strong markets that we are enjoying right now.
Okay. Thank you. So just just on the costing in Europe, So basically what you're saying is the.
Cost benefit that you you would have got from deconsolidation yoga was totally overwhelmed by the increase in the raw material costs.
Well I mean.
You are in terms of costs.
Yeah. So that's.
That's probably a good way to see it I mean.
Causes are rising and they are rising across the board. So so there is an offsetting element to that.
Okay, great. Thank you very much.
Great. So we'll take the next question please from Christian at Socgen.
Thank you.
Jimmy just going on which were the thing.
Uh huh.
Desktop.
We seem to be seeing a.
Quite impressive.
Impressive cost.
Cost reduction I'm thinking about you're close to executing raw materials, you know what I'm seeing.
Like 30, 40% in the second quarter, maybe in the quarter have you had some.
Specific elements, which which support.
Cost of a T V T or is this something we should be looking at it.
A new cost base.
You saw that with the more expensive part of the business.
That's 1 aspect of Christian but that happened already in so I don't know what is the reference so what it appears that you are comparing.
But in Q1, I mean, as we highlighted we had some some issues because of the.
The winter also impacted our productions in something.
In Mexico and at that point in time, we said that there was about $30 million impact. So that is of course not.
Reoccurring again.
And after of course, they have some level of integration to I don't know, what especially in Mexico right that you don't really have in Europe. So you won't have that Ncis.
But that's really.
But then the other daughter items.
The units that are exposed to raw.
Raw materials, such as the fast food.
So the trends will be will be similar.
Compared to Q2 would be no.
No more kind of cause some violent.
Based on your well I mean, so and so.
At the same trends right. So it depends what happens to I don't know prices. So we closed Q2 with an average of 200, let's see we have.
Prices going in at a bit higher.
Coal prices, specifically high although that should not really impact so much our NAFTA operations did see them because we have yearly contracts.
But it's that's what you should take into account.
Okay.
A separate question on the Joy, because it's so youre going.
Cynthia Hi, 9 Spain, you you could 1 and.
Hamburger think when in Quebec.
Saying, you're the largest operator and you're going to get you're going to get to 1 for free I. Suppose you know he said if we go forward in time as you are potentially convert more of your blast furnaces is the idea that he should be located next to the next.
Gonna have wafer furnace is the most cost efficient or should we expect you would perhaps to Asia.
From I would say, though another location, where you can produce the eye for whatever needs you may have.
Yes sure.
There are.
Advantages of having the electric furnace.
You already are having Lydia right next to the electric furnace.
Clearly like hot charges of Deer is 1 that we're doing in some of our facilities, where we have deer right next to our E. F. And then you have to look at the energy balance as well I mean energy is very expensive, making steel then maybe situate the tier I somewhere else and then.
Next day, there is a market for <unk>. So you can always enter the market and buy it.
Depending on.
Depending on your overall metallics requirement. So I don't think and as you go down. This path. There is 1 size that fits all I think you look at your marketplace you look at where your facilities located if you look at.
Sadly the logistics you look at raw material energy costs, and then you make the appropriate decisions.
This is very clear and very very difficult to tell you you seem to be mistaken.
Can you become a little more positive on the outlook for Chinese interference you need world market.
So on supply.
To put it in time, you would have a vacuum with visa on China would come in so should we see that in the future you you've got to have great confidence that China would be a much lesser.
<unk> and global markets.
I think if you look at the actions that China has has taken so far I think thats a safe.
Conclusion, right because it removes the export rebate.
The they are there's a lot of discussion on reducing the level of steel production in China. There is a carbon market in China that is developing.
So I think when you look at the totality of what Theyre trying to achieve I think.
Yes.
And our ability to actually install capacity in other countries like Vietnam, and Indonesia, and so on it seems to be a lot less clear than what they could do it on the domestic market right.
Yeah, I think that that potential exists, but now you'll have any carbon border.
Adjustments so it will be very difficult for such new capacity to penetrate some of the markets in which we operate on top of it I think.
If those producers are used to sell steel into China, and then China exports are low carbon I think fundamentally that will also not work.
Because.
That will be trying to circumvent the legislation so I think finally.
Everyone has to play on the same.
Basis right. That's the concept of a level playing field and legislation will evolve and improve to achieve that.
Great very clear thank you very much.
Thank.
<unk>.
Thanks, Christian So we'll move now to Carsten at credit Suisse.
Thank you very much just 2 questions left 1 is just on taxation have you seen any increase in recent discussions with government concerning tax increases to finance a COVID-19 built they've seen.
Some governments coming forward already so that's my first question.
Okay.
Yeah, I think that taxation exist right, because theres a significant carbon price.
Companies are paying I mean, if you look at the European steel industry as an example.
The allocation system is only.
Only providing roughly 85% coverage. So when you look at the 15% that is uncovered and you multiply that by volumes and and the price of carbon is there a significant amount.
You can call it a tax or whatever that's carbon costs that exist in the system.
<unk>.
That was more on the general tax rate because we are.
Increase the tax rate.
Yeah, No I appreciate it I appreciate the question.
But I think it's let us see what what happened so far.
And Mccann is them to pay for Decarbonization I do.
Do believe is try there.
Cost of carbon or C band, maybe it's through higher taxes, but so far.
At least my framework is that that's how.
The system will work.
Now it could be different geography by geography I appreciate that.
That's what we're seeing.
He's in the European context.
[laughter] good other Christian I have.
We see in China, right now is actually a lower their effective cost base for the manufacturers of steel goods.
Could we not see a commonly cuts by China just exporting.
In finished goods.
So refrigerators.
How many phases et cetera, et cetera, and by that actually circumventing the carbon border adjustment.
Yes, I think those are.
Those issues will remain.
Right.
And.
At the end of the day.
The carbon border adjustment will evolve to ensure that such types of leakage or such types of circumvention is prevented I think we saw this in the past right. We did we started the antidumping action and then they would be circumvention.
The dumping actions through different mechanics.
And then the action would improve and capture that circumvention.
So clearly.
Clearly that will.
That will evolve and that will continue.
But fundamentally I think if you if you think of decarbonization.
It is also a function of a technology capability first mover.
The ability to use size and scale.
So I see no reason why we will not be competitive as a steel company and Decarbonizing our business.
Perfect.
Last question, maybe on Liberia.
You have to shipment issue there.
Is it soft and maybe you can give us a quick update when those operations will be back to normal.
Sure Simon.
Yeah. Thanks, Carsten, so in Liberia them up to the island.
We were down a couple of logos and replace.
That's just been procured.
Expect those to be on site in.
Early September and then back up to.
Our normal capacity around 5 million tonnes per annum.
Perfect. Thank you very much.
Yeah.
Thanks, Carsten So we'll move now to Myles at UBS.
Okay great.
Great. Thanks, just on the 25% our global collagen for Decarbonization are you going to tie that into management remuneration suppose question.
Yeah absolutely.
We will be releasing those details at the end of the year, but the idea is to tie to exact randomization.
Okay that makes sense and then just thinking about.
So China cutting steel production.
And yes prioritizing so.
Cannibalization do you think this could drive a decoupling between the iron ore price and the steel price and yes.
Northern Chinese steel.
The potential to see.
Super Super cycle for spread sectors final prices, no stock because of China, but still.
Steel prices stay high because theres less imports is that.
How realistic is that potential scenario.
[laughter].
I think today, we see the decoupling right because there's a different price of steel in China and has a different price are still outside.
Uh Huh clearly the world is changing I think it's too early to sit here on the call and speculate as to how the world evolves.
I think I think we should we can talk about the 3 trends that we're seeing clearly there's a shift in China. I think you have asked the same question others have as well.
See that as well so I can confirm that.
Number 2 decarbonization will throw up opportunities as well.
Whether it's on the demand side.
As in the supply environment.
That's a fair assumption and clearly the stimulus impact that is also flowing through the steel cycle is also very positive.
So so the next 10 years will be different in the last 10 years and.
And I think thats, the exciting part and as I mentioned earlier and as.
We all talked about I think <unk> is a key role a strategic role to lead the industry in terms of Decarbonising. We are a first mover and I think that implies that we will build our competitive advantage in and that finally and that will mean.
Federal returns for all.
Okay.
Thank you.
Thanks, Myles so we're going to make time for a couple of follow up questions.
But first of which we can take from Ferro.
Keybanc go ahead.
Hi, Thanks, very much just a just a follow up on the Mexico Hot strip mill investment.
It looks like it's.
Coming on later, this year and probably going to be.
Helpful to next year, but.
Is this just a pure pure mix change from your standpoint or should we assume that your volumes in NAFTA, we're going to go up as well I just wanted to be clear.
Yes in terms of NAFTA volumes.
It's primarily a mix change.
Because you are moving from export a slab to domestic hot band there.
Could be some incremental increase in the throughput of our Mexican facility. So then you would have increase in production as well as in volumes.
Okay. Thank you.
Sure.
Great. So we can move to the final question, which we can take from as a follow up from Lucas J.
J P Morgan.
Hi, Thanks for the follow up just a quick 1 on iron ore seaborne volumes in the past.
Keeping <unk>.
Got.
For the mining Division I was just wondering whether you could give a sense of.
Volumes will be.
For this year and maybe whether you Scott bringing back the guidance.
So.
Luke.
Yeah. Thanks, Yeah.
At this point, we're not giving any guidance I mentioned Liberia.
1 point.
Seeds back on track.
Disruption led to disruption.
And so.
That's in terms of capacity.
And in Canada.
But at this point no guidance for the balance of the at the top that later.
Sure. Thanks.
Great.
Thanks, Simon So thats our final question Mr. Mittal, So I will hand, the floor back to you.
Yeah.
Thank you very much and thank you Daniel Thank you I'll get in.
Jimmy Annoying Simon.
And so thank you everyone for participation participating I.
So very useful discussions very interactive discussion on climate change.
On our performance.
And so you also saw our excellent features so thank you for joining and I wish you and families are happier and most importantly, safe summer and look forward to speaking that's useful.
Okay.
Okay.
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