Hello, welcome to Aperam Q4 results call. My name is Priscilla, I'll be your coordinator for today's event. Please note, this call is being recorded, your lines will be on listen only. However, you will have the opportunity to ask questions at the end during the Q&A session. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero you'll be connected to an operator. I will now hand you over to your host, Mr. Timoteo Di Maulo, the CEO, to begin today's conference. Thank you.
Hello, good afternoon, and welcome to Aperam's Q4 conference call. I'm sure that you all have listened to our management podcast for the quarter, and we are well aware of how we see the state of Aperam business and the overall industry. If you still have work to do, the podcast remains available on Aperam website in investor section for your reference. As usual, we can start with the Q&A. I will be happy to answer to you.
Thank you, Mr. Tim. Ladies and gentlemen, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. We'll pause for a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Tristan Gresser from Exane BNP Paribas. Please go ahead, sir. Your line is open.
Yes. Hi. Just two questions, please, from my side. The first one is the guidance. You refer to a normal Q1 EBITDA. Is it fair to look at the legacy business at around maybe EUR 120 million on average with stainless and electrical alloys, et cetera, for Q1, and then add on top of that the recycling contribution? Could you remind us what you consider to be the recycling business's normal kind of earning power? I think I remember ELG was around EUR 55 million on an annual basis, but not sure about BioEnergia and recycling. Thank you.
Okay, thank you. When we refer in the guidance to an increase, we are referring to Q1 versus Q4. An increase is always something which has a certain relevance. And it will be, let's say, in line with the result of the previous, the acquisition of ELG, of course. But BioEnergia was already in the scope, you have not to count, double count the BioEnergia because it was already in the scope. It's clear that there are two elements that play on that. There will be less negative inventory impact. There is a lower cost of inflation and energy, which have been particularly strong in Q4.
At the same time, we cannot raise the volumes as a normal, let's say, Q1 for two reasons. One is the normal seasonal effect of Brazil, so this happens every year. The second one is that we have a longer standstill for the AOD. This will be a very long one, for which, we are, let's say we have anticipate to Q1 something that could have normally been done later to take maximum profit of the fact that we see the market still in a phase of destocking. Of course, this will imply at least two things. One is more than normal average inventories. Second, that the European volumes will not be at their maximum in Q1.
Okay. That's helpful. Normal legacy business and then the recycling business, but not the BioEnergia and recycle that were here prior. The second one please, this time on the net working capital guidance. I think in the slides you referred to less net working capital release in Q1, but still a release. I'm having a hard time reconciling it with the net debt being stable in Q1. Aside from the dividends, the taxes, and the EBITDA guidance, any other elements, maybe cash elements, that we need to be aware in Q1? Thank you.
Hi, Tristan. Sud here. Thanks for that question. Let me take that question up. To answer the first part of the question, right? When we say less net working capital release, this is compared to what we've done in the past, right? There's two reasons for that. One is the fact that we've stated extensively in our podcast that we have moved up first phase of our significant retooling of our asset in Genk. As a result, we started building inventories in Q4, and we'll continue to do it in Q1. This happens in Q2. That is one effect, which is the inventory buildup for the shutdown, right? This is something which you have to keep in mind.
The other one is the fact that nickel prices, for example, continue to be still high, and while some other prices have come down, raw material prices still are at a stable high level. As a result, if there is any sizable reduction in volumes also, or any small reduction in volumes also, it's going to be compensated by the price effect as it looks right now. Okay. That's the reason we mentioned in our guidance also. Nickel price will play a role going forward towards the end of the quarter, how that looks. Okay. That's the first part. The second part of the question, any other items you have to keep in mind for the cash guidance for Q1. I guess this is something which you may have noticed in our Q4.
There is a larger than normal other cash flow items effect, which is usually double the size of what we show. This about EUR 90 million, right? Of this EUR 90 million Q4 effect, slightly more than half, I would say around 50%-60% of that should revert back in the first half of the year. It comes specifically from a lot of small items, but primarily because of a factor that in Q4 we actually were started purchasing raw materials and building up inventory and preparing for all these major shutdowns we've had for 2023. There is a significant VAT payable component, which typically in Q4 increases because the shipments are low and we purchase in preparation for Q1.
This time that effect has been extra magnified because of the high price of raw materials, number one, but also because of the fact that, we have built this extra inventory to prepare for the shutdowns coming in Q2. That's the reason you say that. That's something which you should factor in going forward. Again, to be very clear and give you a clear guidance on that, not in Q1, but coming back in Q2. Is that clear?
Yes. 50%, 60% of the 90 to be reverted back, positively in H1, if I understood correctly. maybe on the first part, so do you expect a build in working capital?
We expect working capital to be on EUR basis, flat primarily.
Okay, flat. Okay, thank you. That's all for me.
Thank you. We'll move on to our next participant, Dominic O'Kane from JP Morgan. Please go ahead, sir. Your line is open.
Hello. just quick a question on the derivatives and specifically the nickel hedging. Could you maybe just give us.
Mm-hmm.
-some details of how to think about, how the book looks, the duration, and the kind of price exposure? Obviously, maybe the same question for FX, given FX moves have been quite volatile in the last couple of months.
I think, firstly, let me split out and say that of the EUR 90 million, I mentioned, about 10% of it is from realized derivatives, and it's gonna come back again over the next quarters. Okay? Just to connect it back, just in terms of cash flow. In terms of EBITDA, when you're looking at that large number, of that number, 80% of that effect is from unrealized derivatives just based on the MTM value on the 31st of December, right? Considering the MTM value on the 30th of September, if you look at it, there was a significant jump, close to 30%-40%, 40% jump in nickel price, and that's the part, right?
The remaining part, you can consider it as coming from derivatives, almost 50% from realized FX and 50% from unrealized FX. You have to keep in mind, that FX derivatives are to match our foreign exchange sales, so the revenues have been realized already. It's always been there, and it's just visible now in the ETR or in the EBITDA line items, P&L, just because of the significant jumps you've seen, right? The unrealized part is again, the MTM of the unrealized derivatives we carry. The structure of the nickel derivatives and FX derivatives, I can tell you, follows the same structure of our sales contracts, which we've given in the past. That's how we settle these derivatives going forward.
Okay. Thank you.
Again, just don't. Please, just to note, it is MTM values, right, on the P&L. 80% of that.
Yeah. Thank you.
Thank you. We'll move on to our next participant, Patrick Mann from Bank of America. Please go ahead, sir. Your line is open.
Good day. Thanks for the call. Two questions. One is just on the Leadership Journey. I mean, you've got to the run rates pretty much of, I think there's only EUR 28 million left to go of LJ4, which is only meant to end at the end of next year. How should we think about it? Is it gonna be just a EUR 28 million improvement for 2023? Or is the possibility that either you exceed your targets or you bring forward phase V? Just how should we think about that, and where you are in stage four, phase IV? That's the first question. Yeah, I'll wait to ask the second question after that.
First, Patrick, I know that since you've been following us for a long time, you know that we structure our Leadership Journeys on a three-year rhythm, and we would like to stick to that rhythm, right? What we have already done is that the investments for phase V, we've started announcing in 2021 already to bring them forward. What we have not yet announced, and we will do that in due course, towards the end of the year, is the fact how our phase V is going to look like. Our phase V investments, the details have been given to you. And typically, we set a benchmark of at least 15% IRR on our projects. That should give you a view on the investments we have announced in our capital market dates.
We've gone ahead and actually given out the CapEx sums for each of the divisions for this phase. You should be able to give a ballpark figure. We are designing phase V , knowing the fact that we are transforming Aperam, what we have communicated is a EUR 300 million program until the end of 2025. This will be a majority chunk of getting how do we get to phase V. Okay? On your question on the mathematics of; it there is only EUR 28 million left, there are two parts to the discussion. One, on a practical basis, the program was designed thinking about the fact that 2023 is going to be a year of a lot of investment standstills. Now that the market is also down, we have pulled forward some of these investments.
On a run rate basis, yes, our focus will be to sustain the gains which we have made in the last couple of years and get the EUR 28 million. If you're going to ask me, are we going to stop saving when we reach EUR 28 million, you know the answer from our track record. We will continue doing that.
Noted. Thanks a lot, Sud. The second question I wanted to ask is about this Botanickel investment in your venture fund. I mean, in the podcast, you said it could actually end up being quite a material contributor to your primary nickel, but obviously, you know, it looks like it's at pilot plant stage or? When do you think you'll have an idea of whether or not this is gonna work and it's gonna contribute meaningfully? Is it, you know, will we know in five years' time, or will we know in one year's time? How should we think about the time frames of whether this pays off?
We are very excited about this because we have proven the technology. The technology is proven. Now it is bringing this technology to a larger scale. What we have announced here is after that, we have already invested in launching industrial- scale pilots in a few countries. We are now, let's say, in a period of a couple of years in which we will ramp up this pilot in, at industrial scale. Then the deployment will come after we have all the learnings about the management of this kind of project on a larger scale. Okay?
You can imagine that there are a few things that have to be fine-tuned, especially in terms of; the management of the season, of the different; kind of ground, et cetera. I'm very confident that with this ramp up, we will be starting from the three years from now, having something which is relevant can be eventually reported, we will see later. With Knowing that of what we are sure is that this kind of nickel will be among the best in terms of competitiveness and will be the only one with the scrap to be at zero carbon, impact because you understand it's coming from biomass on the contrary. Biomass will also be used to produce green electricity for the local community.
Thanks. Okay, you're gonna have Bio-charcoal, Botanickel, BioEnergia. Yeah. Gonna be exciting.
Yeah. You have understood that we are really serious in investing in the circular economy and in a greener and greener production of the stainless steel. We have invested more than EUR 500 million in the scrap collection. We have invested in the forest. We have recently launched the purchase of new 50,000 hectares of forest in Brazil, which will add on top of the actual ones. We are investing in that. We are serious. This technology has let's say a serious future. We have invested, and it's years that we are collaborating with this university to fine-tune the process.
Now that the process is finalized, we are launching the at industrial scale.
Okay. Thank you. Gonna be interesting to see how this develops. Thanks very much.
Welcome.
Thank you.
Thank you. We'll move on to Maxime Kogge from ODDO BHF. Please go ahead, sir. Your line is open.
Yeah, good afternoon. The first question on the guidance for Q1, is it fair to assume that leaving aside positive, inventory valuation, EBITDA will be down in Q1 versus Q4, given that you will still have quite muted volumes and at the same time, lower pricing and higher costs? That's my first question.
You know, you have to Maxime. Hi, Sudhakar. Maxime, you have to just keep in mind the positive inventory valuation will also depend basically. I don't know if your model is taking into account of the fact that shipments been depressed in Q4. Some of the negative valuation, as long as you take time to ship material longer, you know we have had a second half of the year in which pretty much all producers have experienced due to the destocking in Europe, a reduction in shipments, right? This effect will move into Q1. If this moves into Q1, the inventory valuation effect, which you are expecting, is going to be subdued and not as high.
I can tell you just on an underlying basis, without the inventory valuation, if we look at it between Q4 and Q1, there will be a slight reduction, but not to the magnitude you're expecting.
Okay. Okay. Then I have a more general question about hedging, about nickel hedging. Basically, why do you still need to hedge LME in nickel? My understanding is that ferronickel is more or less now de-correlated from the nickel price on the LME, and this is the one you're buying actually. Perhaps related to that, are you still able to pass through, I mean, higher costs for nickel in your selling prices? I mean, you know the word, I mean, does the mechanism of alloy surcharge still work nowadays, I mean, on your activity in both in Europe and in Brazil?
See, the first thing is that, as put forward in our risk management policy, we do have hedges on a certain portion of our inventory, right? Based on nickel price, as it goes down, we use these hedges to manage the risk of inventory valuation on our inventory. Okay, number one. Number two is that we don't care if it's surcharge pricing or fixed pricing. It is an artificial construct. When you look at the total value, we always say that we price the price of nickel. Imagine when LME Nickel went to $48,000 in March of 2022. Even then, prices went up to even EUR 6,000 per ton in Europe. Okay? This is something which you have to keep in mind that there is a pass-through.
The pass-through may again depend on the demand cycle, but fundamentally for us the pass-through is still there.
Okay. Okay. Thank you. That's helpful, yeah. Perhaps a last question on Brazil. You're quite confident that the new duties imposed on the Indonesian imports will benefit your position. Is it possible to have some ideas about the market share so far of Indonesian production in Brazil? What will be now the price differential between Brazilian and Indonesian production after the duties have been introduced?
Fundamentally, fundamentally, Indonesia, as you know, when has no duty, is the price setter in the world, okay? Directly or sometimes with the margin, with some, let's say special circuit. This duty, which is around 19%, adds to the import duty, which we have already in Brazil for all the goods which are imported, which is 11.6%. You have something like we have a new protection which reach now 30%, which we consider something extremely important to avoid the price setter in Brazil being Indonesia, which has the most aggressive policy in the world. It is something relevant. The...
You can, let's say, immediately say that, from, the, for the same kind of price that, Indonesia do, usually there is a 19% difference and you can calculate.
Okay, now that's clear. Thank you.
Welcome.
Thank you. We'll move on to our next participant, Sandeep Peety from Morgan Stanley. Please go ahead, sir. Your line is open.
Thank you, operator. Good morning. I have two questions. Firstly, the company has built in total EUR 800 million in net working capital during 2021 and 2022. I understand that net working capital will be flat during 1Q. Can you give us some indication for the full year? Are you expecting this build to be at least partially released during the year? Second question is around what is the volume impact from the Genk revamp in 1H? Thank you.
First thanks, Sandeep. First thing, in terms of the EUR 800 million accounting, I hope you're doing it on the same scope without ELG, right? Of that EUR 800 million, there is two factors you have to keep in mind. One is the fact that, which we have shown as a clear chart in Q3, and I can ask you to refer back at that chart in our investor presentation, is there is a significant price effect in it. There are no structural volume effect in this EUR 800 million build, until when you talk about the end of H1 2022. Since then we've started releasing net working capital, right?
The second fact you have to keep in mind is that since you're taking 2021 start, which we also rightfully do to run our company, it starts with the COVID induced 2020, where there was a significant release in working capital because I just give you the numbers. There was a 19% reduction in activity during the COVID year. As a result, we had reduced inventory below normal levels by the same amount.
This is the reason in the 2020 year we could already return EUR 340 million of cash. Sorry, EUR 190 million of cash. Okay? These two things you have to keep in mind. There is a normalization to regular working levels inventory in a regular business year, plus enormous price effect. That is the explanation for your EUR 800 million build-up, and the bridge is there clearly, which we have shown. The second part you have to keep in mind is that we have announced a set of transformations. For this year, I just in the beginning of the question I was answering, Tristan, and I said that you can expect close to around EUR 40 million released during the year from the build-up.
This is something which I have already mentioned in the beginning of the year. However, this year will be a year where we build inventory in one quarter and release it in the next quarter as we do all these transformation projects towards our plan to go to EUR 300 million EBITDA plus in 2025. Does that give you some color?
No, perfect. After releasing this EUR 40 million, are you then comfortable with the inventory and account receivable and payable? Does it go back to normal levels?
Sandeep, again, just to give you an example, December 2022 to January 2021, nickel's gone up 81%, ferrochrome has gone up 27%, electricity has gone up 112%, natural gas has gone up 290%. Then you go to the smaller particles like ferrosilicon, molybdenum, everything what we pass through. If you look at this, these are price effects, and, we have said that as soon as the price effects come down, we'll automatically release. No structural change is needed on our parts. It completely depends on the price, raw material price.
Okay. Thank you.
Thank you. We'll move on to our next participant, Bastian Synagowitz from Deutsche Bank. Please go ahead. Your line is open.
Yeah. Hi. Good afternoon, all. I've got a couple of questions. Can I please follow up on the steel stand, which you plan for the new AOD in Genk? What will be the EBITDA impact which you take to that in the first quarter? I presume there will be one. Will that also be dragged into the second quarter? That is my first question.
We don't show this as an impact on EBITDA. What you have to take in mind that this kind of stainless steel is very important because it is something like six weeks of the melt shop stoppage that we have and that we will have to do the second one during the maintenance time in summer, which will then be at the beginning of the ramp up for September. We have prepared the company with inventories.
As it is the upstream, you have seen, and this is the question of everybody, yeah, why our inventory has been higher than normal in, at the end of Q4 and higher than normal in Q1. It is exactly because we need to prepare for the upstream. It is a long-standing steel we which has an impact. This impact is, by the way, it is a good moment because in fact we have profits also for a relatively low cost of the energy, which has been in a trough during the last, let's say, the last weeks.
A relatively good price of the raw material compared to what we have seen in the past. It is has been a good moment. There is an impact on the net working capital.
Thanks, thanks for clarifying, Tim. Maybe just to, just to follow up. I guess given the magnitude, I presume there's still like a certain OpEx effect on EBITDA as well. You've been talking about working capital, I'm sure there must be something on the earnings side as well. Is that at least set to assume even though you don't quantify it?
No, but...
pretty long.
The question is always, Bastian, on, this is a project which we have announced as part of our transformation to 2025. This is a CapEx project, and when we announced it, we said it is going to improve the mix. It is not a maintenance project. It is transforming the AOD footprint in Genk to produce higher- value products to connect it to the downstream. If you remember the discussion on how we will produce our downstream entity in France, in Gueugnon, to make not just one type of commodity, but three types of products. This is a transformation on the upstream side to accompany that to improve our mix. It's not capacity addition. As a result, it is not maintenance.
Okay, there might be negligible in the scale of a quarter's results effects on OpEx, but it is not, it is a CapEx project and it's in the CapEx by guidance we have given you.
Always with the, with the return, because this project is in line with the Leadership Journey®. There will be important economy of scale. For example, in closing an older converter that we are already using with a much less efficiency, cost of consumable, cost of energy, et cetera. There is a high level of savings in term of energy because we are putting the last technology to cogenerate and reduce the impact of the energy. The efficiency will be excellent and part of our Leadership Journey®. This will come when it will be fully ramped up. For the moment, we cannot disclose.
This is part of the normal Leadership Journey.
Yeah, no, thanks for that. I'm clear on what you're aiming to do there. I guess just when you take out an asset, on the upstream side with a lot of fixed costs, for six weeks, one would have expected that there is a certain cost impact, and that is what I was after. Seems like that is going to be, at least not as significant from what you're, from what you're telling us.
I understand what you say. Indeed, when you do it your logic, there is a lower production due to that. In fixed costs, there is a clear negative impact from this. There is a disruption of the flow, et cetera. We have to spend. We don't quantify externally. We know the figures carefully . We don't quantify the impact externally , but there is an impact and the link to that. You are right.
Yeah. Yeah. Okay. Okay, cool. We'll wait for it. We're gonna see it in the second quarter, I presume, then. Over to my next question, which is on your electrical steel project in Brazil, can you maybe firstly remind us what your current capacity is ? I think there have been a couple of movements. The last number I had in my mind is around 180,000 tons. I'm not sure that is still correct. Maybe you can also let us know where this number will go to as you're, I think, upgrading it. I thought you actually here increase your, also your volume capability, but maybe that's not correct.
Lastly, maybe if you can give us even a bit of color on how much that project will be contributing to the Leadership Journey, because I suppose electrical steel must be a pretty profitable business here, not just today, but also obviously with the outlook. If you could give us maybe a little bit more color on that'll be great.
You are right. We are very excited with this story of the electrical steel, because electrical steel has a brilliant future in not only for... Because everybody's talking about the electrical car, electrical vehicle in general, but it is also distribution. We have the two lines. One line is the oriented grains, which is more a niche, but they are extremely important and profitable products because they are on the transformer. This, of course, with the more and more use of electricity, there is a big demand already today. Second, for the electrical car, for all the application in in electrics.
Electrical steel are very important for Brazil because remember, we have a capacity, total capacity, which is around 700,000-800,000 tons out of it. The Brazilian market is only in the range of 300,000-305,000 tons. We are not aiming to export stainless. You have the complement, which is in large majority is electrical steel, both for grain-oriented and non-grain-oriented, which is the common, let’s say, electrical steel used for electric car. On this kind of non-grain-oriented, we are, I would say, at the top of technology with the possibility to serve already easy grades whenever there is a demand.
By the way, with an impact, with something which is interesting because as our production is based on charcoal, it is the lowest, CO2 content in the world.
Can I, Tim, thanks for that. Can I just follow up, sorry, I didn't really follow all of the numbers correctly. I thought you had around 180,000 tons of electrical steel capacity taking both GO and non GO together. How is this going to move? Is this going to
So-
to 300? Sorry, I was not able to follow that.
In term of capacity and what we serve, it is more complex than this because it depends a lot, a lot of the mix, okay?
Yeah.
You have a hot rolling mill, which is around 800, 850 or 900,000 tons. You have fundamentally stainless steel, which is nearly 40%. Electrical steels, which are a big part of the complement, and the rest is some special carbon steel. You might have seen some numbers which depends also on the mix, where there is the major constraint is on the grain-oriented, which are limited. On non-grain-oriented, we have capacities which are much higher, and we are developing with the new investment, but we are developing more on qualities.
We are upgrading the level of quality of our electrical steel instead of increasing the volumes.
That's really.
The magnitude is in the, in a little bit is more in the range. Probably you're referring to figures which are on the sales. You have some yield, you have some part.
Okay. Okay, thanks for walking us through that. Very last question on the new nickel venture. I already tried hard with Thorsten, but I didn't get anything out of him. Could you let us know maybe how much CapEx you plan to invest during the pilot phase in the next couple of years? How much is this going to be?
It is part of what we keep the most secret, so we will not give guidance on this. The fact that we are not declaring big numbers means that there are not huge, huge, huge numbers. What is important is the know-how. We are working since years in R&D, and we deal with our partners, and the technology will be developed. We will deployed now that is the technology has been developed.
Okay. Understood. Thanks so much.
Thank you. Once again, ladies and gentlemen, if you have a question, kindly press star one on your telephone keypad. Let's move on to our next participant, Krishan Agarwal from Citibank. Please go ahead. Your line is open.
Hi, team. Thanks a lot for taking my question, and apologies for the croaky voice. Most of the questions have been answered. I mean, if I can ask you on the, you know, market situation in terms of, you know, the chart which you have given on the slide five, inventories are coming down and imports are at normal levels or record low levels. I mean, if I think from a, you know, purely from a market perspective, this is the kind of ideal setup where production is running low, imports are lower and inventories are normalizing. Would you like to share some kind of an anecdote from your order book, as in, have you started seeing those, you know, early trends of, you know, market underlying demand improving or the restock happening, where the lead times are?
Just a broader view on how the things are looking like from the market point of view.
You, thanks for the question. You know, you know that our market is unfortunately once again a market which has been submitted to the very high volatility which has been created by the special condition of the Asia of nickel, et cetera. These special conditions are very unique, okay? I've never seen in my life that such a big mass of imports have arrived in Europe in a so short term. We are in the final phase of the destocking, and this destocking has not yet finished, but you see that there are not any more of the condition to import, which is a good sign because this means that the destocking will happen. There is a couple of question mark about the market.
Some markets are, let's say, under pressure because of the high interest rate, and typically in construction and consumer goods. Other markets are solid, like automotive, food and beverages, and also increasing and improving significantly in the capital goods. We are confident that at the end of the destocking phase, which is happening, we should be at the end very soon, as you can see from the figures, there will be a recovery of the demand. Now, for us, it is not so bad or not so impacting that the final consumption is ±5%. This is not a problem because with ±5% or even 10, we can live.
We have enough capacity to variabilize our cost and to adapt our capacity to the real demand. What has been destroying the market in the second half of the year has been this massive imports, with I don't know if you have seen the figures, but in the first half of the year, imports have reached, in some months, incredible levels, up to 50% of the market. This has been the part which is bad for the market. The normalization I'm sure, will come. We have in front of us Ancora, at least, still, I don't know, a few weeks, and we are fully in line with our, let's say, industrial plan also. We are stopping at the right moment, et cetera.
At the end of destocking, the possibility of recovery of the market to normal level is there.
Yeah. Okay.
Is it clear, this answer?
Yeah, yeah. I mean, that's a fantastic update. If I can try my luck with the Sud a little bit. There's a lot of, you know, positive and a negative of, you know, inventory impact, particularly on the stainless and electrical and recycling. Is there any way you can help us, you know, guide on the magnitude of both the negative and the positive, just to make the modeling for the Q1 a little easier?
Sorry. I mean, the thing is that we were talking about very high double digit effects for the last two quarters in different directions. I mean, if prices of raw materials remain the same there, they'll be probably, I would say mid double digit. Yeah.
Okay. Okay. That's fantastic, sir. Seems like I have luck on my side today. Thank you, sir.
Thank you. We'll move on to our next participant, Tristan Gresser from Exane BNP Paribas. Please go ahead. Your line is open.
Yes, hi. Maybe just one quick follow-up on the import situation in Europe. I think in your prepared remarks, you shared quite a positive message there. We've seen Asian prices relatively stable with European prices picking up with higher raw material. Just wanted to confirm that is still your view that the moment with current market conditions, the door is now not slightly open again? Also, I think in your prepared remarks, you also flagged that some potential additional measures the European Commission could take. Could you tell us a little bit more, is that ongoing cases or new cases you're potentially looking at? Thank you.
Thank you for the question. It is very simple to see this in one of our slide, the page 107, where you can see that the gap versus Asia price in US dollar per ton has been extremely high from the second half of last year to, let's say, April of this year. This incredible gap has been, let's say, the fruit of many reasons. The top reason of linked to the logistic, the very high cost of logistic, the gap between the correlation of the LME to the normal nickel used by stainless steel producers.
The situation of Asia, where the lockdown has increased a lot the inventory, unsold inventory in China, which has been a big push to sell in Europe. A lot of reason for which, for which the wind of imports has been extremely high in between the second half of last year, 2021, and the first half of 2022. Now, the gap of price is normal, so you have the normal premium that is asked for an import. You have the cost of the transport cost. The service is high.
On top, when the volatility of the market is also high and there is not the booming expectation that we had at the beginning of the year, people are much more careful and tend not to invest in inventory and trying to speculate. On top, I think, there has been some bad surprises for some of the people which were importing, because at the end, even if they have imported much lower prices at a certain moment, some imports have arrived at a much higher price than the price for of European. I'm quite confident that the situation that we see today of a very low level of imports is structural.
Compared to what was in the past, the measure, the trade defense measure are extremely powerful and will be effective in a normalized market.
Okay. That's very helpful. Thank you.
Thank you, Tristan. It appears there is no further... Sorry. We have another participant, Rochus Brauneiser from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Thanks for taking the question. Sorry, I'm a bit late on the call, so I'm not sure whether this has been answered before. I'd like to understand how we shall think about directionally for the European part of the stainless business. I would guess that Europe segment was loss-making in Q4 for the first time in many years. Would you already expect it to turn positive in Q1 again, or is that more a Q2 story?
Rochus, hi. No, we did not answer this question, so I'm glad to take this one. Europe was, if you take out inventory valuation effect on operational basis, was positive also in Q4. Just to give you an idea. Okay? The second thing is the fact that in Q1, if the inventories or raw materials continue to be priced the same, it will be with and without inventory valuation positive.
Okay. Is it fair to assume that the earnings improvement you're guiding for, that's primarily coming from the inventory valuation swing? Is that correct?
Depends, because end of the day, we do have inventory valuation effect, but like I answered question, it's close to the mid-double digit improvement, right? There is also an operational improvement coming from Europe, which is basically at very low levels of destocking, and which is gaining back in Q1.
I mean, I think the question could be answered, more clearly in this way. You know that Brazil is in the low season.
Mm-hmm.
It will not be the normal support for the profitability of the company. Europe is recovering in the sense that some headwinds that we have had during Q4, for example, the very low volumes or the very high impact of the energy, are much lower. On top we have the inventory valuation. Fundamentally, the structural result of Europe will improve and the structural result also of the service and solution will improve. All the other division will be in line with their normal seasonality. Brazil is a fundamental piece in our story. When you have Brazil, which is in low season, this mechanically reduce the result of the company.
Okay, that makes sense. I have another question on your, on your balance sheet. On the balance sheet line where you have your trade receivable and payables, that is ended the year with something like 20% of sales. Thinking directionally for the whole year of 2023, would that kind of level be sticky or would you expect that the level of inventory in the system are coming back to levels you have recorded, maybe two or three years ago, which was more in the magnitude of 15%? Is that something you can achieve within a year, or is this something which is more like a multi-year story, if at all?
Rochus, this is a question I answered Sandeep already, so I can repeat that.
Oh, sorry.
You have to keep in mind. No, that's fine. I'm glad to answer because it's important to understand. See, like, there's three structural changes compared to 2021 to or two, three years ago what you're mentioning. First is that there is a significant add in inventory and a net working capital just because of our recycling unit, which for net working capital purposes should be modeled like a trading unit. We've sold, mentioned this before. A significant part of our business in our recycling business is 6-8-week rotation, scrap blending, you know, collection activity. This is a significant add, right? You remember that we guided when we acquired that inventory or net working capital, there alone was EUR 600 million.
That's a networking capital portion you have to pull out of this if you're comparing to two, three years ago. Number two is the fact that raw material prices, I did read out this especially nickel, ferrochrome, and also capitalized raw material in form of inventory... Sorry, electricity and the energy cost effects have significantly jumped. I'm talking about above 30%, 50%, and 80% compared to those positions you're talking about comparables. Third and the last one is that if you're exactly taking two years ago, it was a COVID phase where we had a 19% reduction in market demand. Volumes back then, and as a result, networking capital had also been reduced. You know how quick we are in reacting to market changes and releasing networking capital.
That's why we started releasing already in Q3 2022. There is a volume effect also coming back to normal. We do tend to forget that although this destocking is bad, we are nowhere near the crash that happened when COVID happened.
Okay. Okay.
Those are the three effects, just to be clear. I don't know if I gave you enough information to work on.
No, no, it makes perfect sense. Okay, great. Thank you very much.
Thank you, Rochus. It appears there is no further questions at this time. I'd like to turn the conference back to Mr. Tim for any additional closing remarks. Thank you.
Okay. Thank you very much. Thank you very much for your question and the lively discussion as always. We have been able to convey you the message that we see the draft behind us. The very bad situation that we have lived in in 2022 at the second part, which was exactly the opposite of the fantastic situation that we have had in the first part. All in all, the year was good, but we are looking ahead at the year with some challenges, but with a lot of possibility for us to demonstrate that our business model is resilient and will translate into a solid cash flow and earnings for our shareholders.
We will be on the road by March, and the preliminary schedule are very rich, so I'm happy that there is an interest for us. I wish you a good weekend, and see you soon around the roadshow. Thank you very much, and bye-bye.
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