Daniel, you can start now.
Thank you. Hi, good afternoon and good morning, everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. This morning, we published our results for the fourth quarter and full year 2019, alongside a Q&A document and a detailed presentation with speaker notes. The intention of today's call is not to go through that presentation again, but move directly to your questions that you may have. The whole call today should last about 45 minutes. If you'd like to join the queue to ask a question, please do press star one on your telephone keypad at any time. With that brief opening, I'll hand over to our Chairman and CEO, Mr. Mittal.
Thank you, Daniel. Good day and welcome, everyone. I am joined on today's call by Aditya Mittal, President and CFO, Simon Wandke, Head of Mining, Genuino, Head of Finance, and Daniel, of course, you know. Before we answer your questions, I would like to begin with a few remarks. As always, I will start by commenting on our health and safety performance. Our lost time injury frequency rate in 2019 was 1.21 times a deterioration compared with 2018, predominantly due to the inclusion of ArcelorMittal Italia. Excluding ArcelorMittal Italia, the rate was 0.75 times. Our aim is continuous progress, and we will be further strengthening our safety training and initiatives to further improve our performance. Turning to the financials, 2019 was a challenging year. We faced the headwinds of softening global economic growth, weak automotive demand, and supply chain destocking.
Demand in our core markets declined, putting pressure on prices and spreads. That we were able to achieve $2.4 billion of free cash flow in 2019 demonstrates the progress we have made in recent periods on our Action 2020 plan. This will continue, as we have identified a further $1 billion of cost improvement opportunities to be captured in the year ahead. We ended 2019 with net debt of $9.3 billion, its lowest ever level, and are now focused on reaching our target of $7 billion by end of this year. 2019 also marked the culmination of a 15-year journey to establish a meaningful presence in India. In December, we completed the acquisition of Essar Steel India in partnership with Nippon Steel. Now the new business is named as ArcelorMittal Nippon Steel India, AM/NS, provides us with a large and quality presence in the world's fastest-growing steel market.
It is already a well-run, profitable business, but one which we feel we can add value to and grow over the medium term. Looking ahead, there are some early signs of market improvement. Inventory levels are very low, which indicate the significant destock we witnessed throughout 2019 appears to be ending. This has supported the price rises we have seen in the U.S., European, and Brazilian market since the end of last year. Before we move to questions, I also want to provide you with an update on ArcelorMittal Italia. As you may remember, we signed a non-binding agreement with the government-appointed Ilva commissioners on 20th December to continue negotiations on a new industrial plan for Ilva, which would include substantial equity investment by the state. This is a complex matter that impacts thousands of people, so we should not be surprised that discussions are still ongoing.
I do not want to get drawn into answering detailed questions, but I can see that we are making progress, and we had a constructive meeting earlier this week with Prime Minister Conte. I would hope that we will make further progress over the course of today before the scheduled court hearing of tomorrow, as I believe we are all focused on finding a sustainable solution. With those remarks, we are now ready to take your questions. Thank you.
Thanks, Mr. Mittal. I think what worked very well last quarter was asking you guys to limit yourselves to one question at a time. You can always go back into the queue if you've got further questions later. If you do want to join the queue, please do press star one. We've got a decent queue already, and we'll take the first question from Jason at Bank of America.
Yep. Good morning, gentlemen. Thanks for the opportunity. Just on Essar, it looks like a very exciting opportunity. I'm just wondering how should we think about the timeframe for this new joint venture to actually generate a cash return for shareholders? Is this a five-year cycle of deleveraging and capitalization, or is this actually a multi-decade thing where we're not gonna see any cash flow at all?
I see you firmly, Jason, and thank you for your question. In terms of Essar, maybe just the big picture first. As you heard, we visited it in December again. I've been in constant touch with the team. Everything we have seen has impressed us. The company is on the right track. I mean, in January, it has hit production records. It's run rating at 7.4 million tons. When we started the due diligence, it was run rating at 5.2 million tons. That's a 40% increase in production with minimal CapEx. Our run rate EBITDA is $600 million, which is also higher than December, above our expectations. We see some easy wins this year. There's some commercial synergy that we can achieve in the first year of operations, perhaps increase from the record level that we had in January.
On a medium to long-run basis, the growth story is intact. I know the headlines around India was negative, such as automotive demand declining sharply, but apparently with consumption, India actually grew by about 4% in 2019, and we believe it will grow even stronger in 2020. As you know, India has the second-largest population, fastest-growing steel market. We see opportunity to not only improve the value add capability of our facility, i.e. automotive, but also in doing brownfield expansions at Hazira and potentially at Paradip. In terms of how you should think about it's not a de-leveraging story. It's a story in which we want to grow as the market grows in India and capture the value that is created.
I would think of it as the value that is embedded in ArcelorMittal in owning a 60% equity interest in a world-class facility in the world's fastest-growing steel market.
Just to come back to the question, Aditya, if I can push a little. In terms of cash returns to Mittal and then ultimately through to Mittal shareholders, it's not a cash story at all. It's just a growth story.
Every story has cash in the end, right? I don't think it's not a cash story at all. I think it's just a matter of balancing, do you take the cash and return to shareholders, or do you take the cash and invest in growth? As long as the growth story remains intact and the returns are better, then I would think that to maintain the quality of the business and the franchise of the business, the focus would be to invest to grow the business.
Okay. Thank you very much.
Thanks, Jason. We'll move to the next question, please, from Alain at Morgan Stanley.
Yes. Thank you, gents. My question is on the Q1 EBITDA, on the building blocks, if we're to look at the profit bridge. Do you mind giving us a bit of a qualitative guidance on the individual items that could move your EBITDA to Q1? A general overview of the market in Europe, given that one of your competitors today said that they have seen a very aggressive restock into Q1. Do you see the same thing, or should we think about it differently? Thank you.
Hi, Alain. This is Genuino. Let me try to walk you through the major blocks that we have seen for quarter one. Starting with shipments. We'll see typically, as you know, seasonally, our quarter one shipments, they are higher quarter on quarter. We will continue to see that in most segments, with the exception maybe of Brazil. In Brazil, as you know, typically in quarter one, we also restock in our flat business. I would not expect to see an increase in shipments in Brazil, but in NAFTA and Europe, we will see an increase in shipments quarter on quarter. In CIS, we would expect shipments to be relatively flat as we had some higher shipments coming from previous quarters. As we talked about last quarter, we had some cutoff issues. That will have an impact in quarter one. In terms of prices.
Prices, as you know, prices have been moving up recently. The segments more exposed to spot business, they will see an increase faster, and that's the case with Brazil, that's the case with CIS. Our European business, you need to take into account lag impact. In NAFTA, we would expect our selling prices to be relatively flat quarter on quarter.
Thank you.
Maybe just to finish in terms of cost, the raw material basket. We would expect our costs to continue to move down as we work through the higher-cost inventories that we still carry on our books. Costs should continue to go down as well.
Just quickly on the European market. As you know, we had announced a 4.2 million ton production cut in the second half. That was complete. As we start 2020, we have restarted furnaces in Germany at Bremen, in Asturias, in Spain, and last Friday, we announced the restart of Kraków. You're right, we are seeing a restock or the end of the destock. I think there was a significant destock that occurred in the second half of 2019. I'd like to characterize it as the end of the destock of 2019 in terms of what we're seeing in the marketplace at the beginning of 2020 in Europe.
Thank you.
Great. Thanks, Alain. We'll take the next question from Luke at JPMorgan.
Good afternoon. Just on your target to reach the $7 billion net debt by the end of this year. Can you quantify how much of that debt versus the year-end 2019 level is from M&A? Whether you assume the full $1 billion of working capital to be released in that estimate.
Sure. Let's start with free cash flow. As you know, we have reduced our cash requirements from $5 billion- $4.5 billion. Any bit that is excess of $4.5 billion, we'll work towards reducing our net debt. The second impact is improved efficiency in our working capital. Assuming current market conditions, we are expecting a release of $1 billion, and there should be some progress in terms of portfolio optimization. As you know, we did about half a billion in 2019. We have $100 million of that optimization in Q1, and the rest is work in progress. Our $2 billion plan, when it was announced in the second half or toward the end of second quarter 2019, is a two-year plan. It's not necessary that we achieve the full plan in 2020 for us to achieve our $7 billion net debt target.
Okay, thank you.
Thanks, Luke. We'll take the next question from Carsten at Credit Suisse.
Thank you very much. One question with regard to the Asian situation at the moment. We all know that the coronavirus is currently a big discussion point. Do you see any risk to your outlook statement based on the outbreak there? Here I refer specifically to iron ore, which weakened in recent weeks in a period where we usually see iron ore price increase. What is the risk for your business here in particular, and could there be a risk on the steel prices going forward? Thank you.
In terms of coronavirus, clearly the human cost is very significant. We have employees in China. Thankfully, all of our employees are safe. When I look at the level of production in January, it was more or less on plan. February will be more difficult, not because we can't produce. We can produce. There's some concern on outbound logistics. There'll be more clarity, I think, as the Chinese New Year ends. In terms of outlook, you were specifically asking regarding iron ore. Look, last year, iron ore prices moved up. Markets were weaker. It was hard for us to pass on the cost increase. There's no reason to think that the opposite could not happen in 2020. Looking at the marketplace, clearly spreads are already compressed.
To the extent that there's some relief on the raw material basket, that might not be such a bad thing.
Okay, perfect. Thank you.
Thanks, Carsten. We'll move to Phil at KeyBanc.
Hey, thanks very much. When I look at contracts, automotive or fixed price contracts for Europe and the U.S. this year, how should I think about those in terms of being margin accretive or margin dilutive or holding the course? Just trying to understand because those are big assumptions for you all this year.
Sure. In terms of automotive, clearly the pricing of automotive has to also reflect what is happening in the broader marketplace in terms of steel. Nevertheless, as you appreciate, we have a very strong franchise in terms of the products that we sell and the capability that we provide. Overall, I would expect that the profitability of automotive would depend primarily on what happens to the raw material basket. Especially in Europe, it's a spread. To the extent that the raw material basket is weaker, profitability would be similar. To the extent that raw material prices are at present levels, overall spreads would be weaker than 2019.
Thanks very much.
Thanks, Phil. We'll move to Seth at Exane.
Good afternoon. Thanks for taking the questions. Just to get a little bit more color with regard to the working capital, obviously you strongly beat in Q4. Can you give us a little bit more color on what ultimately drove the outperformance versus your own guidance from just last quarter? Perhaps dividing that split between seasonal and more structural elements. Going ahead to 2020, you're targeting another $1 billion release. Is that achievable if your guidance for recovery on apparent demand is ultimately realized and if recent price trends persist? Thank you.
Hi, Seth. In terms of the results, the 2.6 release in quarter four, I think it's important, too, to say that we never really provided a guidance on working capital other than to say that we would return the $1 billion that we overspent in 2018, right? We were not surprised with the level of release in quarter four, given how selling prices evolved during the quarter. That's regarding the overperformance, let's say. We believe that it's sustainable. That's why we are guiding for further release. We believe that there is further potential to optimize our position. In terms of days, we are still a little bit ahead of where we were at the end of 2017 and 2016. There is still some potential, and that's what we are guiding to right now.
Also clearly, we are seeing how the raw material basket is evolving. We are confident that should the raw material basket remain as it is, there should be some upside coming from that as well, from optimization, from days, and the evolution of the raw material basket right now.
Thank you very much.
Thanks, Seth. I'll move to Alain at Jefferies.
Thank you. In terms of the mining division, could you please share with us your expectations around volumes for 2020? Also just on the cost there, if you're seeing any pressures, whether inflationary or deflationary.
Thanks, Alain. Yeah. Look, essentially we're saying same guidance for 2019 to 2020. We're obviously pushing hard in the current pricing outlooks that we saw last year, which have only just started to collapse in recent days. There's enough on the supply side to suggest that there may be some shortages, particularly around higher grade products that would force us to see what we can push harder in terms of productivity outputs in 2020. Volume guidance is flat, but efforts are there to push hard where we can, particularly in the higher grade marketable assets, of course. In terms of costs, not a significant influx in the uncontrollables that we're seeing around the typical oil-based and other parts which are coming typically from steel side in terms of coke consumption and pellet plants, et cetera. Not too much above normal. Efforts continue.
We're working hard as usual, continuous improvement, productivity gains, and squeezing capacity. That's basically what our goal is as an integrated business with the steel group, is that we run full throughout the cycles, and run above installed capacity where we can.
Okay, thank you.
Thanks, Alain. We'll move to the next question from Rochus at Kepler.
Yeah, thanks for taking the question. Briefly on Europe, I guess you mentioned that your containment plans for European steel production has ended and some of the blast furnaces which were previously idle have already restarted. How do you think about the market balance going forward? Clearly we have some restocking now, and probably other competitors who are going to follow in the same direction. How should we think about the market balance over the course of the year?
I can't specifically comment on what our competitors would do, or in terms of market balance. I can just repeat what we're seeing. Clearly in 2019, there was a significant de-stock. Now we see that de-stock ending. We see, as you know, we published our numbers, 1%-2% growth in apparent steel consumption in Europe. To achieve that level of demand for 2020, we felt it was appropriate to restart the furnaces that I had mentioned. Do also recognize that we do have a large reline in 2020. We have one of our furnaces in Ghent, which is undergoing a reline. Some of this blast furnace production, specifically Kraków, some of that can be used to build slabs, for the upcoming reline in the second half of 2020.
Okay. Got it. Thanks. Maybe just briefly, what is your view on the current review of the European safeguard measures? What kind of improvements shall we expect in the coming months here?
In terms of European safeguards and overall trade, as everyone is aware, the market share of imports continues to rise. As we have said before, we feel that the safeguards were largely ineffective in Europe because they had the quotas rising, in spite of the decline in apparent steel consumption. I think there's some review scheduled on further increase of that. We would expect that to reflect current market reality. As we know more and as these developments become definitive, we would update you.
Okay. That's clear. Thank you very much.
Thanks, Rochus. We'll move to next question, please from Myles at UBS.
Great. Thank you. Maybe just on your CO2 reduction plan that was announced in December. You're targeting a 30% reduction by 2030, and turning carbon neutral by 2050. Is this an aspirational plan or is a clear detail that supports those targets? What does it mean in terms of your met coal consumption by 2030? Is that 30% reduction driven by technologies that reduce the amount of met coal, or is it driven by carbon capture? How should we think about how this plays out? What sort of CapEx is needed to achieve that 30% reduction in CO2? Thank you.
Okay. Maybe just a quick broad brush comment, and then I'll get into the specifics of your question. This applies to our European business. It's a target that we have to reduce our CO2 by 30% by 2030, and the ambition is to be carbon neutral in Europe by 2050. I think ArcelorMittal is very well-positioned to achieve this. As you know, we're the technology leader and the industrial leader, and we have a large R&D budget, and 2/3 of our researchers are here positioned in Europe. It's a three-pronged approach. I won't go into detail because we have published an extensive report which covers exactly how we want to achieve this. The headlines are circular carbon, smart carbon, which is circular carbon or smart carbon, and then it is clean energy, which is using hydrogen or renewables. Then obviously the third is carbon capture and storage.
We have a lot of CapEx in different facilities on pilot stages or development stages to see how we can make further progress. To achieve real success here, you need the combination of a level playing field, that's why we have been talking a lot to the European Commission about a border adjustment. I like to call it border equalization. That the cost that we have in Europe is the same cost for anyone who wants to trade with us in Europe. That would provide a basis to enhance the level of CapEx. Simultaneously, there is a green fund, as you know, that the EU has announced, and that would support. Fundamentally, as you know, the steel industry is capital short, there has to be appropriate incentives created for us to invest this CapEx to achieve our target.
What kind of level of CapEx are we talking about on a gross basis before any subsidies from the green fund?
Yeah. It's a complex question to answer because it's linked quite directly to the level of support or subsidies that are received from green funds. Today in Europe, for new technologies, you can get up to 70% or 80% of funding. At this point in time, I don't want to get into that detail. I think, clearly it's work in progress, and as there'll be more clarity on border equalization and how the green fund will actually work, we can provide you with more updates.
Okay, thanks.
Thanks, Myles. We'll move to Christian at SocGen.
Thank you, good afternoon. On Ilva, I know you're obviously negotiating at the moment on the subject, when you give us your estimates for net debt in 2020, at $7 billion year end, do you assume that the amount of losses at the bigger level for Ilva, which I think are around EUR 800 million , are these equal next year, or do you assume they disappear? Just one second question on Liberia. Is the investment in the mining and the port and the railway in Liberia part of your CapEx guidance? Thank you.
Just very quickly, on Ilva, clearly the $7 billion net debt target assumes Ilva. It's the continued operation of Ilva. I think your loss amount is larger than what we have for 2019. Clearly in 2019, there were one-off events, which had a significant impact on the profitability of Ilva. I think there was uncertainty on blast furnace two. We also had the Pier four seizure, which prevented full raw material discharge. The level of output of Ilva was lower than what we would have liked. We see recovery already in January. As you may know, in January of this year, we got a positive ruling on blast furnace two, which is good news, and we should be able to increase raw material discharge also by Q1 of this year.
The level of our forecast, at least for the level of loss of Ilva, is reduced. The level of CapEx assumes, in case we were to go ahead with Liberia, it's part of our $3.2 billion forecast.
Thank you.
Thanks, Christian. We'll move to the next question, please, from Bastian at Deutsche Bank.
Yes. Good afternoon, gentlemen. My question is on the updated Action 2020 plan and then also a quick follow-up on Ilva in that context. Could you please let us know how much contribution you have been baking in for Ilva into the Action 2020 plan? Also in that context and without going into detail on things like equity contribution, I think if I understood it right, the annualized EBITDA loss at Ilva has been around $ 800 million, at least in the last quarter. If we put on top, obviously, CapEx and reline, we're looking at a cash burn of around $ 1.3 billion on that basis. I guess there's no doubt that you as a company and as well as shareholders cannot be financing such a cash drain.
There seems to be no quick fix to reverse at least all of that, even if you get to an agreement with the Italian government and obviously change some of the parameters. Is there a red line which you have drawn for yourself while saying, "Whatever happens, we won't accept that cash drain to exceed a certain level"? Maybe give us any color on what that red line is. Thank you.
You ask the right question. Clearly, in our minds, that's not a cash drain because in Q4, there were exceptional events that I spoke about, in terms of Pier four and blast furnace two. If you remember, we were taking down that furnace because we could not operate that furnace. It was under various court processes, and that got clarified in January. Other than that, also the market situation is better, in terms of spreads as well as demand environment. I don't agree with the overall cash drain amount. Clearly, that's not something I can provide guidance on, just on areas where that will be changing. Simultaneously, clearly we are in discussions and negotiations with Italian government to find a more sustainable solution. That may also have a positive impact on the level of cash drain that you are forecasting.
As we mentioned at the beginning of the call, we are in the middle of these negotiations, so it's very difficult to comment further, but that's how I would think about it today.
Okay. Thank you. Could you give us any color on how much have you baked, at least, into the 2020 number in terms of cost-cutting other than the exceptional events and so on?
Yes. That I can. That's easy. Out of the $1 billion in terms of Action 2020, one third is fixed cost and two thirds is variable. Without giving you a breakdown of how much of your value is fixed and variable, about 25% of the $1 billion of Action 2020 is coming from Ilva. About $250 million.
Got it. The variable cost improvements, which are the larger part, as you said, is that basically just the assumption that raw material prices will keep coming down, or is it actually the efficiency improvement on raw materials, i.e., better use, better mix, and not just basically following the market trend of commodity price deflation?
Exactly. It's the latter, which is improved efficiency, consumption factors, yield, quality, and all the processes that we have to improve the efficiency of our operations.
Okay. Very clear. Thank you.
Sure.
Thanks. We'll move to the next question, please, from Francisco at Banco de Sabadell.
Yes, hello, good afternoon. Coming back to working capital, well, the performance was impressive, obviously. One would think that once you restart facilities and maybe staffing comes back, this should increase. At the same time, you've given quite a good number even for next year, potentially. Just to understand if there's any specific issue that you have worked on or anything else that you can give us some color on to understand the good performance you're having. Just a quick one, in your $7 billion net debt guidance, is this linked to any asset sale in 2020 or not? Thank you.
Maybe talk a little bit more about Q4 performance. It's very clear to look at our balance sheet and look at our average selling price, you can see a significant decline in selling prices this quarter. We have reduced shipments were also lower. That of course, helped with our working capital. On top of that, we also did better in terms of collection, particularly in NAFTA. We collect more, so we reduce also the number of trade receivables. That is on account of selling prices, lower shipments, and better collection. Of course, also the decline of our overall costs with raw material baskets. Going forward, I think I did not address this point in the first question on working capital.
We are forecasting for improvement in apparent steel consumption, and that is part of our guidance today. That's our assumption, that as demand improves, we will keep our market share, and that is part of the guidance today. Then, of course, the improvements or increases in production that we talked about already are also part of our $1 billion guidance.
Okay.
Perhaps there was a question on the-
I'm sorry.
Net debt target. The net debt target has three components, as I mentioned earlier. Free Cash Flow, the Working Capital, plus proceeds from portfolio optimization.
Okay, thank you.
Thanks. I think we're going to move now to follow-up questions. Thanks guys, for those that limited themselves to one initially, and we'll go back to Carsten at Credit Suisse.
Thanks very much, Daniel, but all my questions have been answered.
Okay, thanks, Carsten. Alain at Morgan Stanley?
Yes. Thanks, Daniel. My question is on the CO2 impact on 2021. As we move into the ETS phase, the final phase, how should we think about the P&L and the cash flow impact, given your position on CO2 allowances for 2021 and 2022? Thank you.
Alain, so we don't expect any significant impact coming from Phase 4. As you know, that is a progressive decline. We do not expect any significant impact from 2021 compared to 2020 at this stage. Of course, Aditya talked about our targets, our reduction targets, so we are focused on achieving that. Initially, we do not expect any significant impact.
Okay. Thank you.
Great. Thanks, Alain. Back to Phil at KeyBanc.
Thank you. Out of the $1 billion in incremental savings from Action 2020, you mentioned 25% of that is related to Ilva. Any color in terms of the rest of the 75% in terms of where we may see the segment split?
I don't want to get down into that much of detail, but fundamentally, a large majority of it on the variable cost side is in our Europe and NAFTA business, and the fixed cost side is on a global basis.
That's helpful. One more, if I could, just for clarity. With your $7 billion net debt target kind of in sight here in the next several months, how much of that, which is predicated on asset sales, I know you've got $1.4 billion left, how much out of that $1.4 billion are you suggesting you need to hit to get to that seven? Is it all, is it part? That's it for me. Thanks.
Sure. As I said earlier, we don't need all of it to hit the $7 billion net debt target, but it is part of our calculation to achieve the $7 billion net debt target. I'm afraid I can't get into more detail than that. As I mentioned earlier, there are three components, free cash flow, working capital use of $1 billion, plus proceeds from portfolio optimization.
Thanks. Every story has cash at the end.
Yep.
Thanks, Phil. We'll go back to Jason at Bank of America.
Yep. Maybe just a little bit of a philosophical one, and I guess Mr. Mittal started the call, talking about the challenges of the year, and Ilva figure is a big part of the challenges. As an organization, have you done any kind of introspection or self-analysis on how you got Ilva so wrong? I guess any learnings from Ilva that we might expect to be applied to Essar or indeed to any future acquisitions that you might be considering?
I'll give you context that in last couple of years, we have made four acquisitions. One in Votorantim, Calvert, Ilva, and Essar. I must say that all three of them have been excellent acquisition. It helped to improve our values, improve the value of the company, bring strength to our business in the region, like Brazil market share. In case of Calvert, we not only got the volume, but we also got the quality, and we are the leader, and we remain the leader in terms of quality for the steel. Look, Essar, I just explained to you the growth opportunities and the market and the country as a whole. Everything has been so far, this all are positive side. Ilva, we definitely started with very positive assumptions that we have a great assets on a largest market to largest single site production, with modern assets.
On top of this, it is on the port and it has the market. All these things are right. We got into some of the situations which were not anticipated, like the change in the government changing the law on immunity, which was never expected in a developed market like Europe. There has been some old legal case which we were confronted of like seizing of blast furnace two in the sense of closing down the furnace. We got into some accident due to unexpected typhoon and everything. We got into a situation where, and the market spread squeezed much larger than we anticipated in 2019.
Now we are in a situation where we understand these issues, and we are trying to address We cannot address the market issue, but definitely we can create an ecosystem which would be very positive. We believe that that should bring the sustainability, including our discussions, one thing which I said in my speech, including the state participation in our business going forward. We believe that all these actions should help us to bring sustainability to future of Ilva. I must say that it is a good asset, but we need to create an ecosystem which will help us to bring sustainability and create value. Clearly, you do not anticipate those kind of external situations or the macro situation suddenly come at one point and in one year to see suddenly that there is a big loss in Ilva.
Okay. Thanks very much for that, Mr. Mittal. I appreciate your thoughts.
Great. Thanks. We'll move to take a follow-up from Seth at Exane.
Thank you. Question with regards to the European portfolio. As you move to restart some of these assets, can you comment on how that'll impact your fixed cost base in the region? Obviously, some of those facilities you took down were higher cost assets relative to peers within the EU. How do you expect to progress moving forward, recognizing at the same time you do have a cost savings program? Similarly, what would be the impact on your mix? Is there a risk this is ultimately degrading your mix on a relative basis as you reenter the commodity grade spot market? Thank you.
Hi, Seth. As we increase production, clearly we'll see a benefit of cost absorption. That will mitigate some of the bringing back some of the production there. Benefits cost absorption. Of course, as we have discussed before, we are seeing an improvement in pricing that justify bringing back this capacity that also mentioned the reline, that is being planned for the second half. We do not see that this will, of course, we will not do it if it would
Reduce our level of profitability. That is number one. In terms of the mix, we are not expecting significant change to the mix.
Thank you very much.
Great. We'll move on to Myles at UBS.
Great. Thank you. Just going back to M&A and the A part of M&A. Over the last few years when you seem to start getting closer to a net debt target, there's been a super compelling acquisition opportunity. Is it fair to say now that you're comfortable with the current portfolio, those acquisition opportunities aren't there, and it's realistic that we will hit that net debt target by the end of the year? Just in terms of the cash flow from 2021 onwards, should we assume now that the vast majority will be returned from shareholders from this time next year?
No. Thank you for your question. In terms of M&A, I think what's interesting is the slide that we have posted, which shows that the net M&A spend over 2018 and 2019 is about $200 million. I'm not sure exactly which page it is in the presentation. So in spite of spending $1.6 billion for Essar Steel India and making the first lease installment, we had various portfolio divestment initiatives which reduced that M&A outspend. Nevertheless, your point is valid. I don't see that much of M&A in the horizon. I think, as you know entering the Indian steel market was something that we were planning for 15 years. Ilva, we started about five years ago. When I look out in terms of the landscape, in terms of the A in M&A, I don't see that much of activity.
It's fair to say that the cash that we generate would be used to de-lever. The quantum of how much of that cash would be returned to shareholders, clearly is a discussion that we'd like to have with all of you this year, and then with our board, so that we can match everyone's aspirations appropriately.
Okay.
The slide that Aditya was referring to is number 11 in the presentation deck. We'll move to last couple of follow-up questions. The first from Alan at Jefferies.
Thank you. Just one more on Ilva. We talked about the one-offs you faced in Q4, and then also kind of the worst safety standards that were recorded there. If you were to remove those one-offs and if Ilva had operated in line with your kind of benchmark safety standards across the rest of the portfolio, do you have a sense how much less of a drag Ilva would've been on EBITDA in 2019?
We have a slide where we wrote about the delta of Ilva's performance, which is about $600 million in 2019 relative to 2018. Does that help answer your question?
What I'm trying to get at is, if Ilva had just faced the headwinds from a weakening market last year and not the safety-related issues and the one-offs you mentioned in Q4, what would the drag have been then?
I don't want to come out with an estimate like this. I think it would be inappropriate. I think perhaps you can come up with some numbers, if I provide you with the framework. I think the biggest issue has been that we had a seizure in Pier four. That's the main pier, which allows for raw material discharge. That happened basically in the summer of 2019. Simultaneously in the fourth quarter, we had issues in terms of blast furnace two and its operating capability. The easiest way to think about that impact, there was some variable cost impact because we had to arrange raw materials from other ports, but is the volume loss. Roughly, I think you have a sense of how much volume loss occurs in Europe and what that drag is.
Roughly it's 1.5 million tons of volume loss that occurred as a result of this, on an annualized basis, obviously concentrated in third and fourth quarter. On top of it, when you're not able to produce at the right level of capacity and throughput, it's harder to implement all of our turnaround plans. That also gets impacted. I don't know if I provided you enough with the framework, but it gives you a sense that there was volume issues, which was the lion's share, some variable cost increases associated with not being able to use our main port and clearly a slowdown in our ability to improve the variable cost of that business as our turnaround plans slow down.
Okay. I think I've got enough to get a rough sense. Thank you very much.
Perfect. We're going to move to last three questions now, the first of which we'll take from Christian at SocGen.
Thank you very much. In 2019, you got some costs in NAFTA, which were those tariffs, which were imposed internally on your shipments from Mexico and Canada. I think these have now been removed. Can you give us a feel for how much benefit that is going to be in 2020 versus 2019? In fact, whether there was some impact already in the fourth quarter of 2019. Thanks.
That is the theory, if I remember correctly. They were removed in May. The impact you will see year-on-year. Up to May, we paid about $30 million-$40 million in tariffs. That's the benefit that you should see.
Okay. Thank you.
Great. We'll take the ultimate question from Rochus at Kepler.
Yes, thanks. On your global shipments, I think you're guiding for higher apparent steel consumption, so I would expect a corresponding increase on your own shipments. How shall we think about evolution of cold steel production? Would this be still a bit more flattish, in order to get to your $1 billion working capital release you're aiming for in 2020?
Rochus, as we said, there is still potential for some improvements in rotation days. Yes, I would not say flattish, but we're going to be focused on achieving these improvements. As I said, in our guidance, we are forecasting, or we agree with you to the extent that the demand grows, our market, we would expect at least to keep our market share stable. There will be an improvement in shipment, and we would expect that. We hope that with our improvements and with the movement of the raw material basket, still we get to the $1 billion reduction.
All right. Thank you.
Great. Thank you. We'll take the last question, please, from Bastian at Deutsche.
Yes, thanks, guys. I just have a very quick follow-up on Essar. Essar is basically growth case, and I guess there are plenty of resources which are not being run as they should, and therefore you can probably still extract pretty much a lot of growth from those, but still ultimately growth needs capital. What is the CapEx budget which is drafted basically for 2020 in the Essar entity? Maybe you can also give us the exit run rate for the net debt at the end of the fourth quarter, please.
I don't think by entities we're giving individual CapEx numbers. I think it's not appropriate from a competitive standpoint. I can still provide you with some framework numbers. As you heard, perhaps in the beginning of the call, our run rate EBITDA is about $600 million. We see some quick wins, commercial synergies, and potentially the Indian market would be stronger, both primarily from a price perspective and what we're seeing in January. That's basically EBITDA. Maintenance CapEx is quite low in India. You do see that in the benefit in terms of labor arbitrage. The outstanding CapEx is actually not that significant. You very easily see that this company is cash flow positive on a monthly basis. It has been also in the fourth quarter. Our expectation is that it will be cash flow positive on a monthly basis in 2020.
In terms of the growth case, I also want to emphasize that the idea is not to be sending cash to the company as well. We think the company should be able to finance its own growth either through its own balance sheet plus its own earnings. That is how we want to run the facility, and to the extent that we announce specific investments, we would update you and obviously provide you with more color on what exactly is the cash impact of the balance sheet of Essar. Today, Essar balance sheet has some cash because of the equity injection that we have made. I think you have a sense of the level of net debt as well based on our 2:1 debt-equity ratio.
Thanks for those comments. Let me just follow up and maybe just ask in a different way. If you look at the current balance sheet versus cash flow, as you pointed out, you're positive or you're cash flow generative. I guess still the net debt level against that is maybe still somewhat elevated. In the initial phase, would you accept that that leverage will go or will continue to go up in the near term because maybe you have to do some initial investments, purchase of the slurry pipeline or something like that? Would you basically keep that fairly balanced and really try to keep it balanced and work it down over time instead of increasing the net position in financial?
I think that's a good question. I think when you look at the level of net debt, I don't think it's being impacted by slurry pipeline, and we are also in the middle of acquiring a small power plant through bankruptcy court, which is adjacent to the facility and stuff like that. All of that is part of the plan. The company started with $1 billion in cash, because that's the equity infusion. It generated some cash through this process, that number actually grew. These small acquisitions that we're doing in terms of the slurry pipeline or the power plant still keep it in a net cash position very close to that number. Obviously not as high as $1 billion, not that far off as well.
The company still has a good level of cash balance post these deals, and therefore has the potential to deploy some of that in terms of growth or other strategic actions.
Okay, perfect. Thank you.
There being no other question, thank you all for your attention today. I think it is clear from today's call that despite the challenges we faced in 2019, we have, as a company, made significant progress. As a management team, we are all focused on continuing that progress in 2020 and fully achieving the targets we have set ourselves. With that, I will bring this call to a close by wishing you all the very best, and thank you very much.