Good morning and good afternoon, everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations Team. Thank you very much for joining us on this call today to discuss the fourth quarter and full year 2017 results. This call is being recorded. Hopefully, everybody saw the presentation and the detailed speaker notes and Q&A document that was published this morning. You've all had a good chance to review these documents. Our intention now is to move directly to your questions around the results and strategic progress of the business. The intention is that the call should last about an hour. If you do want to register a question, please do press star one, and we'll take the questions in the order that they are received. With that, I'll hand over to Mr. Mittal for some introductory remarks.
Thank you. Good morning. Good afternoon, everyone. Thank you for joining today's call to discuss ArcelorMittal's 2017 results. I'm joined today by Aditya Mittal, Group CFO and CEO of our European segment, Simon Wandke, our Mining Segment CEO, Jai Minocha, our Group Head of Finance, and Daniel, Head of Investor Relations. Before we start our Q&A session, I want to provide some opening comments on the results and our outlook for the year ahead. Starting with safety, the injury frequency rate in 2017 improved relative to 2016. As an organization, we continue to prioritize further improvement in our safety performance and strive to zero harm. Group EBITDA increased by 34% year-on-year and significant improvement in net income. The improved results reflect not only the strengthening market backdrop, but also the ongoing benefits from our Action 2020 plan.
After two years, the total benefits from Action 2020 have been $1.5 billion, which is halfway to our $3 billion target. This is encouraging. I expect to see more progress in this area in 2018. We have also strengthened the financial foundations of the business over the past two years. Net debt has been reduced to $10.1 billion and would have been lower again had it not been for a negative Forex impact of $700 million and $400 million of premiums incurred on bond buybacks. Our net debt to EBITDA ratio is now 1.2 times. To put our financial progress in context, two years ago, this ratio was three times. Given this progress, we have to outline a new capital allocation policy. Firstly, we will continue to prioritize de-leveraging.
We believe that a net debt level of $6 billion is an appropriate target to sustain investment-grade rating metrics and support positive free cash flow even at the low point of the cycle. Secondly, we will selectively invest in high-return projects that will increase the EBITDA and enhance future returns. Finally, we have reinstated the dividend at $0.10 per share. Once we achieve net debt at or below our target, we are committed to returning a portion of annual free cash flow to shareholders. Now to conclude with some comments on the outlook. Market conditions are favorable. We expect steel demand outside China to accelerate in 2018 to a growth rate of between 3% and 4%. This bodes well for our shipments and also for capacity utilization, which continues to head in the right direction. With that, we are happy to take your questions.
Thanks, Mr. Mittal. If I could remind everybody, if you want to ask a question, please do press star 1 on your keypad. I'd like to ask everybody in the interests of time, if you could limit your questions to 2 questions in the first instance, that will give everybody the opportunity to ask their questions. We'll move to the first question, which comes from Mike Shillaker at Credit Suisse.
Just on the China situation, clearly, the export cuts from China and the capacity reductions have been a huge help to the market in the last 18 months or so, I think you've been very vocal about the structural change that's taking place in China. I think one of the other things that's clearly been beneficial is demand has been very strong in China, also in the last 18 months or so. Can you now give us your roadmap for the next 12-24 months in terms of what you believe is going to happen in China, a, to capacity, b, to exports, and put that also, if you could, within the context of any risk that demand may slow in the next 12-18 months, how you think China would respond to that, is my first question. My second question on capital allocation.
Can you give us a sense of how your potential interest in Essar fits into this in terms of how that may shape the balance sheet with cash out/debt in and also future CapEx, in terms of how you've looked at that possible acquisition? Also, in terms of capital acquisition, we've had a debt target, which I think is hugely helpful to build a roadmap. We've had the change in CapEx, which is helpful and obviously a small dividend. Can you give us more sense of when you're likely to be ready to give us a greater sense of your likely dividend policy going forward, a la Aperam did a couple of years ago when they gave a very clear roadmap for their shareholder return structure. Thanks very much.
Thank you, Michael. I'll answer on China, then we will move on to your second question on capital allocation. Clearly, Chinese demand in 2017 has been quite strong, it was stronger than we anticipated. At the same time, China has continued to reduce capacity, which is very encouraging. We have seen 115 million tonne of capacity reduction against promise of 150, and the rest, 25-35 million tonne, is expected this year. We have also seen that export in 2017 were lower by 30%. This is very encouraging, we still believe that China, to begin with, had 300 million tonne of overcapacity, excluding the 120 million tonne, which has been shut down based on induction furnaces, which were never accounted.
150 still remains to be shut, and I hope that Chinese Government, as they move forward, they will continue to implement environmental laws and continue to deleverage their Chinese steel companies. All those actions, we think that should help them to moderate their production to demand. The demand could slow down, but we only hope that they could moderate their production to demand. Otherwise, they will increase their export, which will be unfair to the rest of the world. Looking today, net 2018, we think it is broadly stable. Last year there was a strong increase of 4%-5%, but this year we think that it will broadly stable for this year. Our 2018 apparent steel consumption forecast is more or less neutral to 2017.
We think that they will continue for next 24 months also, I do not see a major change in China's consumption pattern. Abhi?
Sure. Great. Thank you. Good afternoon, Michael. In terms of capital allocation, we're not obviously going to comment on any specific opportunity. You correctly laid out our priorities. Our priority number 1 is to continue deleveraging to arrive at a net debt target of $6 billion or lower, which would allow us to have investment-grade metrics through the cycle, high and low points, as well as generate free cash flow through the cycle. We would then be focused on opportunities with high return. CapEx is a good example. M&A could be another example. As we've done in the past, we have been able to grow and continue to manage our balance sheet. Calvert is a good example. Ilva is a good example. I would not necessarily take away from this discussion that we would now start and acquire companies and then delever the balance sheet.
The focus remains to delever the balance sheet. We are conscious of that, and we would plan growth, whether it's CapEx or acquisitions, with that priority in mind. In terms of the dividend question, I think we have laid out a roadmap in terms of what we intend to do. We're starting with $0.10. We would move to a percentage of free cash flow when we were to hit a level of $6 billion of net debt. To comment whether this would be like Aperam or not, I think at this point in time is inappropriate. This is a discussion we continue to have with our board of directors, at the appropriate time when we hit that target, we will let all of you know what our thoughts are.
That's great. Thanks very much. Just to follow up, as you mentioned it, is there any update on the Ilva situation, and also any thoughts on the profitability of Ilva in the current market situation?
Yeah. In terms of the Ilva situation, no update on the profitability. Ilva is still losing similar amounts of cash that they were losing in the year before. 2017 performance of Ilva is similar to 2016 and 2015. In terms of the situation, as you're aware, we are in phase 2 discussions with the European Commission in terms of the competition department. Phase 2 is expected to be completed by April, post that, we would move to close.
Okay. Thank you.
Thanks, Michael. We'll move to the next question from Alain of Morgan Stanley.
Yes. Good afternoon, gentlemen. Two questions from my side. One is on the group EBITDA per tonne outlook into Q1 and Q2. What are the different moving parts that we need to take into account while looking at the group profitability per tonne? The second question is on the shipments. You expect shipments ex China or steel growth ex China to be 3%-4%. Is that a good proxy for your own shipment growth into 2018, and how is that distributed between H1 and H2? Thank you.
(Marat).
Okay. Thank you. We have not provided specific shipment guidance for 2018. I think it's fair to assume that we would mirror global growth ex-China, because that's a good proxy for ArcelorMittal. Specifically to answer the question, we've not provided a shipment guidance. In terms of the moving parts, I think we have a good sense on how into Q1, how the demand pattern is for 2018. We're seeing demand ex-China at levels higher than 2017. In terms of the specific moving parts, I'm not sure I can provide more color unless you want to talk a little bit about what's happening by region.
Yes, please. By region, that's what I meant.
Okay. In terms of NAFTA, we should see a good increase of shipments in Q1. Q4 was light in terms of shipments. As you know, through in our earnings release, we faced some issues in our Mexican and Canadian operations in terms of outages. It costed some money, about $15 million-$20 million, and we lost about 200,000 shipments due to those effects. That should reverse. The market will obviously perform better because in Q4 we had a market slowdown in terms of demand volumes. Sorry. I think I lost my mic. I'm back. Shipments up in NAFTA, price marginally up in NAFTA in Q1. Moving on to Brazil. Brazil shipments are down in Q1 seasonally. Prices are slightly up, especially in the flat business. Europe shipments are rising marginally into Q1. Prices are up, but so are costs.
We saw a little bit of spread improvement towards the back end of Q4, but not really impacting Q1 results. Our spot spreads were actually stable into Q1. In terms of ACIS, shipments will have a seasonal factor. South Africa should be up. Prices clearly did very well in Q4, and we should have a roughly flat performance in terms of spreads. We also have a big loss from Sri Lanka and Ukraine, which will affect, to some degree, profitability in CIS operations.
Thank you. Very clear.
Thanks, Alain. We'll move to the next question from Jason at Bank of America.
Yep. Thanks, gentlemen. Thanks for the call. Look, a bit of a big picture question for me. Over the years, we've seen different strategic initiatives and directions from Mittal. We had the aggressive and transformational growth through M&A. We had the moves into EM. We had vertical integration by building and buying mining assets. More recently, we've had the consolidation to the core developed market business of high-value add steel, and of course, we've got the focus on the balance sheet and balance sheet repair. The other day, an investor asked me, he said, "What is Mittal's strategy?" I really have to confess, I couldn't answer it. How would you answer the question? What is your strategy now today? Where is this company five years from now?
Yeah. I'm glad you asked the question because I hope next time someone asks you that you can answer it. From our perspective, it's very clear. We are the world leader in terms of technology and capability in the steel business. What does that mean? We make the most demanding products into the most demanding applications. 22 out of 23 OEMs rank us as number one from a technology perspective, and that's a growth market for us. As the world transforms itself, whether it's electrification or other areas, renewable energy, other transportation requirements, ArcelorMittal will continue to play a leading role. Number 2, we have very strong businesses in 3 core markets, Europe, NAFTA, Brazil. We also have very strong businesses in our ACIS division as well. Those businesses continue to outperform the competition. They continue to make progress.
As you know, we have a very strong transformation program in Europe, which will continue beyond Action 2020. The same in our NAFTA and Brazilian business. This is a business which is leading in terms of technology, high quality in terms of its performance, and the gap to competition should only improve over time. Thirdly, I believe we have very interesting growth opportunities, and that should create value over the next five years. We announced it before, but we have highlighted the investment in Mexico. It's a brand new hot strip mill, and we have a full orientation slab operation in Mexico. We can set up a hot strip mill, which can utilize the growth in the domestic market. It's an interesting market. It's got good margins, and we think we can be a strong player with our high-quality steel.
That's just one example of the things that we're doing. We also talked about Ilva. Ilva is another opportunity where we are able to bring our technical management and capability to turn around an operation. Ilva has strong prospects because this is a low-cost operation, a large scale, low-cost operation. Lastly, we have a very strong foundation, a very strong financial foundation where our interest costs keep on declining. Our level, our ability to convert EBITDA into free cash flow is increasing, and that provides a good value proposition for our shareholders and our key stakeholders.
Aditya, just, can I paraphrase it and tell me if this is the right way to think about it, that for choice you're moving up on the quality spectrum and you're becoming more focused. Is that a fair way to characterize it?
Yeah, I think we've always been doing that, I think it's good to emphasize that routinely. Yes, we are moving up the quality chain. We're becoming more focused. We're also capitalizing on high return growth opportunities, while at the same time ensuring that we continue to delever the balance sheet and return value to shareholders.
Okay. All right. Thanks for that. Appreciate it.
Sure.
Thanks. We'll move to the next question from Carsten at UBS.
Thank you very much. Two questions from my side. The first one is on the outlook statement, you simply are quite positive on the 2018 outlook. What is actually your visibility right now into the orders? Are you fully booked for the first half, or how much is still outstanding? That's the first one. The second one is more on ACIS and Brazil, that is what surprised me most. We see quite a bit of change in profitability in those two segments. What has changed? Is there more than market movements? Did you do something in the underlying business? Just try to understand it a little bit better. Thank you.
Sorry, I missed the last bit of your question. You said ACIS in Brazil,
The profitability improved quite substantially. Did you actually change something structurally, is the move predominantly market related?
Okay, clear. In terms of visibility, Carsten, as you know, it's different by business, we're talking order books here. Clearly we have much longer order books in Europe in our NAFTA business, much shorter order books in our ACIS business. Even I would argue that in our Brazilian business, our order books are much shorter as well. There's some contract business, not to the same level or proportion as NAFTA or EU. In terms of visibility, normally in Europe and NAFTA, we'll be taking second quarter orders right now. In the other businesses, we're still taking orders for February, March. Maybe more March, that's roughly how it works throughout ArcelorMittal.
In terms of ACIS and Brazil, yes, you're right, the market has also done well, and that has fed to our results, but there have also been structural improvements to the business. Just talking about ACIS, I think this has been a story which has not performed well in the past, but through all the actions and initiatives we undertook, putting in a new management team, I think we now see a turnaround in Kazakhstan. Kazakhstan, as you know, hits its highest shipment ever. Production records were set. Ukraine continues to outperform. South Africa has been an issue for us for the last 18 months. Again, we redoubled our efforts, and along with the management team in South Africa, had now turned the corner. South Africa, which was negative EBITDA in Q3, has become positive EBITDA in Q4.
In Brazil, we continue to make improvements on reducing the cost base of our business and improving our product mix as much as we can.
Very quickly on Kazakhstan, because there were recently some news articles about emission problems in Temirtau. Could that lead potentially to higher CapEx and/or production stops? Because it was like black snow and so on and so forth.
In Kazakhstan, we are continuing to invest. There is no additional investment program for these environmental initiatives. We already planned, which was approved by the local authorities. It was a very peculiar situation last winter, and still it's being investigated what could be the cause for such a black snow. There are some different theories. The wind situation had dramatically changed due to very strong winter those couple of days. There's also speculation that it could be caused by people in that area using a lot of coal for heating as well as for cooking. Plus, there has been some change in the winter, which allowed some of the dust could not dissipate. There's a discussion going on, and we are also investigating this matter, and I'm sure we'll put this to rest soon.
Okay, perfect. Thank you very much.
Thanks, Carsten. We'll move to the next question from Christian at SocGen.
Yes. Thank you, gentlemen. On Ilva, I couldn't quite hear the end of your guidelines for the timetable in Q1. If you could tell us again what you're looking at now in term of clearance. Also, I think maybe it was only in newspaper, but there seemed to have been some change in the group association you had with Marcegaglia. Are they still involved in that deal or is there a change? I think some of the newspaper articles were suggesting that you may be now having to sell one of your plants to them. I don't know what you're able to say about that. My second question is on NAFTA. Obviously, you're highlighting that prices are improving and volume outlook is favorable. In that context, do you feel that possible additional tariffs or Section 232 by the Trump administration are still necessary?
If not, are they becoming more a hindrance to the outlook? Thank you.
I'll answer ILVA. Just on ILVA, I think what I had suggested was we're in phase two negotiations with the European Commission, specifically with the Competition Department of the European Commission. There's a phase two investigation ongoing, and that is expected to close in April, and post that, we would expect to close our ILVA transaction. In terms of Marcegaglia, I think at this point in time, I'm not at liberty to make any comments. They have been, and they are as of date, a shareholder in the consortium which is acquiring ILVA. That may or may not change depending on our discussions with the competition authorities.
On Section 232, as we all know that recommendation has gone from Commerce Department to White House, and it is being studied and hopefully very soon we will have some results or some decision from either White House soon. At ArcelorMittal, we always believe in fair trade, and we will continue to fight wherever we see unfair trade. At the same, while this is going on, we still see that the imports in U.S. were all-time high in 2017. We believe that it's important to have some favorable decision from Section 232, but we do not know what will be the decision.
Thank you.
Thanks, Christian. I'll move to the next question from Seth at Jefferies.
Good afternoon. Just a couple of questions on your European business, please. In the course of Q4, you noted a blast furnace reline at Bremen, some maintenance costs at Galati as well. Can you help us better understand how to quantify the scale of those costs, and perhaps if we're going to see a reversal of that going into the first quarter? Second, looking at your European longs business, can you give us a sense of where you think realized margins or demand could go in that business looking forward, given that over the past couple of years, longs seem to be trailing some of your flats operations within the region? Thank you.
Sure. In terms of the benefit in Q1, it's more a shipment story. I would not forecast that much of cost reversal into Q1 versus Q4. In terms of the long margins, I'm not sure why you suggest that the long business has been trailing. I think the long business has performed quite well over the last few years. 2017 obviously has been harder, especially for integrated long, primarily because the cost of ore and coal was much more than scrap, but that has now normalized, and so integrated long business is doing well. In terms of long margins, I think there are two effects that we're seeing in 2018. We're seeing that the commodity side is doing better, and on the HAV side, we have not yet seen the full translation of the price pickup on the commodity side.
Suffice to say, relative to 2017, what we're seeing today is that the long business in Europe is doing better in 2018.
Great. Thank you very much. Just one last question, I guess, within the European business. You've spoken very positively about demand in that area for the last several quarters, your margin's been quite stable while many of your peers with pretty similar business models have seen sequential margin expansion within Europe. Many of those are more focused on the flat side than within longs, I guess that's why I was thinking maybe some of the pressure is in the longs business. Can you talk a little bit about where you see directionally your European margins going on the medium term throughout the European region? Sorry, your flat business through the European region. Is there a reason to think that you will not see the same scale of margin expansion that your peers have witnessed in recent quarters?
Yeah. I can now understand what you're suggesting. I think what you have seen is that the long business has not necessarily improved its margins over the last few years. Margins have remained relatively stable at decent levels. At the same time, we have seen our flat business improve its margins as the transformation program has kicked through. Yes, on a blended basis, you may draw that conclusion. It's very clear to us when we look at our flat performance versus our peer group, we have done very well. We look at it on EBITDA per ton, and we can see that the transformation program is kicking through and our business continues to perform very well. That's not changing, I would expect the same phenomenon to continue into 2018 and beyond.
Great. Thank you very much.
Thanks, Seth. We'll move to the next question from Bastian at Deutsche Bank.
Yes. Good afternoon, gentlemen. My first question is in Europe. I just was curious whether there was any cost impact from the fire at your coke battery in Belgium, and whether there is anything we have to keep in mind with regards to the first quarter there. Also whether you provisioned for anything here on the CapEx side in your budget. My last question is just briefly on your debt rating. Clearly, your efforts to improve both your cash flow as well as your balance sheet metrics have been very visible. I guess although we can certainly debate on the macro side, it's quite hard to be agnostic to the fact that there has been some sort of improvement in steel fundamentals compared to what we've had the last years.
I remember that was one of the main, say, critical points for the rating agencies as well. Given what you have delivered so far, as well as the capital allocation policy which you just laid out today, which seems to be very rating friendly, is it fair to assume that an upgrade of the rating agencies could be more or less imminent in such an event? Also, would there be any impact on your financing cost in terms of step-up clauses? Thank you.
Okay, great. Thank you for the question. The coke fire in Ghent was very tragic, and it is unfortunate that it occurred. However, and it was very dramatic. In case you saw an image, it was very dramatic, but the impact was very minimal. I think we lost 20,000 tons of (post-production), and there has been no impact on operating performance of the business. In terms of the rating, I guess two points. The first is the capital allocation policy announcement today was not for the rating agencies. This is what we believe is the right strategy and the audience is our shareholders and our broader stakeholders. If it helps the rating agencies in their assessment, great.
In terms of the cost, I think fundamentally if the two key rating agencies upgrade us to investment grade, as you know, all the rating agencies are positive outlook, the interest saving per year is about $20 million.
Okay. Thank you.
Thanks, Bastian. We'll move to Luc at Exane, please.
It would be possible to have a bit more color on Brazil, which to me seems one of the areas where the mini reversal potential in terms of EBITDA margin is probably the greatest within the group, given the, let's say, positive signs we are seeing in the economy there. Could you maybe frame a bit more what you're seeing on the ground and to what extent the recovery is impacting at this stage, the flat business or the long? Thank you.
Yeah, I'm going to ask Genuino to answer this.
Yeah, Luc. In Brazil, I think as we've been highlighting, if you remember our last call, we were quite pleased with the recovery already in our flat business, which is doing already well against the consumption up by almost 10%, driven by automotive. We also highlighted already some improvement in construction, which was positive in Q3, to remain positive in Q4. Overall, shipments in longs was kind of flat. Despite a weak first half, that was offset in the second half. Looking forward, looking at our apparent consumption forecast for 2018, the prospects for both businesses are quite encouraging.
Thank you. If I may have, let's say, a follow-up one on working capital requirement. I understand the volatile nature of a number of parameters. Is it fair to assess that this year should see more investment in working capital requirement, even if hopefully of a smaller magnitude than the one we saw in 2017?
Yeah. Fundamentally, I think you're right, and perhaps I will provide some more color as to how I think about it. Clearly, as if the business is growing, raw material prices are moving up and there's an investment in working capital. It's not lost because its value is sitting on our balance sheet. In terms of 2018, what we're seeing is increased demand of our products. We talked about global growth ex China, from that perspective, it's natural to expect more investment in working capital.
Thank you.
Great. Thanks, Luc. We'll move to a question from Kevin at Goldman Sachs.
Yeah. I just had a quick question on automotive. A lot of your U.S. competitors are talking about ramping up more volumes to the automotive market. Are you seeing any fierce competition here, and what is your outlook on that market for ArcelorMittal? Also, on auto contracts in general, how are they being re-negotiated for 2018 versus 2017 levels?
As you know, we are always relatively guarded in terms of our comments on pricing. I think when you look at the business from a margin perspective, we're very comfortable when you look at the overall margins of automotive 2018 into 2017. That comment applies to both our NAFTA as well as our Europe business. In terms of volumes, also, we mirror how the market shapes. There has been some change in the mix of automotive, less passenger vehicles. We have a little bit more exposure to passenger vehicles. On a like-to-like basis, maybe there is some loss just because of a mix perspective in NAFTA. Other than that, as I mentioned at the beginning of the call when someone asked me about our strategy, we remain the leader in terms of automotive capability. Having the best products to offer in the world.
We also have, if you go through our presentation, some nice slides on electric vehicles, and some discussion on how some new electric vehicles that are being produced and manufactured historically were using all aluminum and now are using a combination of primarily steel. These are advanced high-strength steel, ultra-high strength steel is exactly the strength and specialty of ArcelorMittal.
Thank you very much.
Thanks, Kevin. We'll move to the next question from Navid at Cowen.
Thanks for taking my questions. On your segments, we saw pretty significant improvements in EBITDA year-over-year for all segments except for NAFTA. I just wanted to see what can be done on this front to get the needle moving. Clearly, the step-up in prices in flats should help in 2018. Is it necessary to see a prohibitive Section 232 relative to imports or other measures to really see a step change in this segment? The second question was on the iron ore side. You guys provided iron ore market price shipment guidance forecasting up 10% in 2018 year-over-year. I was just wondering if you guys can give any comments on the cost side of the equation. Thank you.
Sure. I'll talk about mining. Sorry, NAFTA. I'll get Simon to talk about mining. In terms of NAFTA year-on-year, I think you're right. We have had flat EBITDA in 2017 versus 2016. Clearly, there's a level of dissatisfaction on that performance. I'll walk you through the reasons. When I say dissatisfaction, I'm not suggesting that on an operating basis we performed poorly, clearly when we look at it on a global basis, it's an outlier. In terms of NAFTA, I mentioned earlier on when we talked about long business in Europe, that integrated long business has suffered in 2017 relative to its EAF-based counterparts. As part of our NAFTA results, we have a significant long business which is integrated. This is our Mexican business and to some degree, our operations in Canada as they are DRI based.
Those businesses have performed much worse in 2017 versus 2016. Clearly, the prognosis for 2018 is much better. Secondly, we've had some mixed effects in our NAFTA business in 2017 versus 2016. More slab production than in the past. The other effect that you don't see is that some of the EBITDA that is in Calvert gets recycled into the equity income line. There's a small impact of that. Fundamentally, when we look into 2018, we see increase in shipments into Q1. We see prices improving in the NAFTA environment, the positive impacts of our Action 2020 feeding through. Yes, in terms of 2017 it's flat we have a much more constructive perspective on our NAFTA business into 2018.
Thanks. Just on the iron ore side, on the cost side.
Sure. Simon here, Navid. I think if you sort of step right back, we're still maintaining our statement that we'll be cash flow breakeven at $40 CFR China on the pricing. That said, we still have pressures on our costs. We have inflation costs, input costs, exchange rates. Really what you're seeing is efforts across the suite in terms of more structured cost reductions. The 10% promise on 2018 above the 2017 marketable shipments, most of that's Liberia and that's new production from the Gangra mine. It's at 5 million ton rate already as we speak in end of Q4 into Q1. Those costs are moving down sharply from where we were at lower volumes with a lower strip ratio and higher FE low silica quality product.
If you go to the big assets like AMMC, we've got quite significant programs underway focused heavily on debottlenecking, both mobile and fixed plant. We've got autonomous drills commencing operation this year. Productivity gains are very focused on across how we operate. We have our next generation program in place in terms of fleet optimization movement around the pits. A lot of detailed projects under Action 2020. Some of those are around just maybe simple, but they're very big outcome in terms of the standard deviation of feed to the concentrator, giving us smoother outputs, lower costs, and less surprises. A lot of work going on and really the headline statement still stays that we will be maintaining the cash flow breakeven at $40.
Great. Thank you.
Great. We'll move to the next question from Kishan at Citi.
Thanks a lot. My question is on your cash needs for 2018. One, how much of the CapEx do you have considered in your $3.8 billion number guidance? Second is the cash need for other businesses, others is increasing from $0.8 billion to $1.2 billion predominantly on taxes. Can you give us some ideas on which of the reason are contributing into higher cash taxes and does it take into account the impact of lower tax rate in U.S.?
Sure. Kishan, what was your first question on the CapEx? How much of the Ilva CapEx you have taken in $3.8 billion?
Okay. Ilva CapEx is $0.2 billion. The $200 million. Without Ilva, it would be $3.6 billion.
Okay.
In terms of the change in other cash requirements, a portion is timing differences, because you end up paying in 2018 some of the taxes of 2017 in some jurisdictions. Others, it's in the same year. In terms of the U.S., there's no significant pronounced effect into 2018 or into 2017 for various reasons. If you're really keen, we can get into it. I think the headline is that there's no major impact on our business. I think the major impact is really, hopefully this spurs more investment in the U.S., more consumers. I read about all the tax bonuses, I hope they go buy more cars, which is more steel.
Yeah. Thanks.
Thanks, Kishan. We'll move to the next question from Rochus at Kepler, please. Hi, Rochus, can we take your question, please?
Can you hear me?
Yes, we can. Thanks.
Okay. Sorry. I have a question again on your acceleration in the CapEx. I think you kept saying that the deleveraging towards the $6 billion remains a top priority. At the same time, after a couple of years of high CapEx discipline, you're now considerably stepping up your CapEx. It's not just the Ilva, the Mexican project, the various things you do in context with Action 2020, and we still haven't heard about the potential engagement with the SAIL joint venture or anything which could elsewhere happen in India. Can you maybe elaborate a bit deeper how we shall see the $6 billion at net debt target? Is this now something which can stretch further into the future because you have made this progress now? The second question is, you didn't give any volume guidance, and you implied that the market growth would be a good indicator.
At the same time, you're saying Action 2020 is also strongly geared to the volume. In what destinations shall we believe, or shall we think that you could outgrow the market because of your specific initiatives?
Okay. Thank you for your question. Let's talk a little bit more about the CapEx. If you look at the CapEx, there's a $1 billion increase. I would say net is $800 million because $100 million is carryover from 2017. 2017 was actually supposed to be $2.9 billion, but we ended up reporting $2.8 billion. The remainder $100 million is ForEx. This is the EUR strengthening. As a result, our European CapEx translates back into USD as more USD. That's $800 million. I would deduct $200 million for Ilva because that's a new acquisition, that was flagged. Before we had just put it in because we are assuming a closure in the latter part of the first half, and the CapEx starts to tick in. We get to a $600 million delta.
Out of the $600 million delta, $250 million, the lion's share, is really Mexico. I did talk about Mexico a little bit, but maybe we can talk about it more. We have a high-quality slab facility, which is on the coast of Mexico. Electric furnace-based. It has its own pelletizer. It has two DRI modules, and it has linkages to ownership in our own operation, which supplies pellets, as well as iron ore locally that is available. A low-cost slab operation out of Mexico. As you know, Mexico is a growing market. Mexico is importing a lot of hot band at prices similar to or even higher than the U.S. marketplace.
If you think of a business which is exporting slab and has the opportunity to convert that slab into hot band for a domestic market, which has price levels similar to NAFTA, that's a good business proposition. We didn't do it before because we were very focused on deleveraging the balance sheet. We'll continue to deleverage the balance sheet, but we thought that this was the right time to begin that investment. I guess the message I'm trying to suggest to you is, don't think that these CapEx that we are starting now is because of the cycle. These are not cycle-based CapEx. These are CapEx which will return value and create value for ArcelorMittal, whether we are in a high cycle or a low cycle environment. The remainder is about $250 million.
This is accelerating the journey we have begun in Europe and in NAFTA on improving our leadership when it comes to HAV and what we have called downstream optimization in Europe. This is above and beyond Action 2020. This is EUR 250 million. There are some examples of some of the projects that we are doing. It's really getting ready for the new demanding products. It's further optimizing our downstream operations in Europe, in making sure that we have bigger scale operations than what we have today. We began the clustering of those operations about two years ago, and now we're moving to the next phase of making sure that the downstream operations have larger scale. A EUR 250 million increase, excluding Ilva Mexico, ForEx, and carryover on a EUR 2.8 billion CapEx is not that significant.
The other area where some of this EUR 250 million is going is things like digitalization, where we're making a lot of progress on taking our business forward. We did have a good investor discussion and investor meet back in our facility in Belgium, in Ghent in the summer, where we walked through some of the technologies that we're deploying. We can spend more time on that so that you have a better flavor of what we're doing. Moving on to your next question. Sorry, that was a long-winded answer, but I thought it'd be good to give everyone a flavor of how we are responsibly investing our capital and making sure it's really high return projects up or down cycle. In terms of when we achieve that net debt target, we have not provided a timeline.
I think you have a good sense of how the steel markets are performing, what our earnings potential is. You know our cash requirements. You can do the math. I think there's some differences in 2018 versus 2017. One is, if you look at the net debt, we had a EUR 700 million impact in 2017 because of ForEx. Maybe there'll be a ForEx impact in 2018, but perhaps not at the same level, because that reflects the euro moving from 1.05 to 1.2. The other thing is we paid EUR 400 million in premiums for bond buybacks. I'm not suggesting that we won't pay any premiums, but perhaps the amount is not that significant.
That gives you a sense of how the net debt number is actually coming down in spite of an investment of working capital of almost EUR 2 billion, the earnings potential, yet at the same time, we remain focused on those priorities that we've talked about. I can't give you a guidance as to when we achieve it, but that gives you a flavor of how we're doing as a business.
On the volume?
On the volume, no change. Oh yes, on the volume.
No, I mean because of Action 2020.
In terms of volume, at this point in time, we have not provided a regional breakdown. I think I've discussed it with Daniel as to how best we do that because there is also a competitive impact if we talk about increasing in a certain market or volumes versus another market. We just need to walk through that. I think ignoring any change in share, just participating in the growth that we are seeing in demand in some of these markets, I think is an important achievement because that requires the ability of assets to ramp up to match growth, and that is not a given. That's what we can say at this point in time on volume.
Okay. No, that's fair enough. A brief follow-up on the debt. When you say you would feel comfortable with the $6 billion of net debt even on the trough of the cycle, do you have already kind of a sense what the average net debt figure should be going forward through the cycle?
Sorry, what was the question you asked me?
I was saying, if you now guide for a $6 billion target net debt figure, which would be also good enough for a low point in the cycle, do we have a sense of an average net debt figure through the cycle between the ups and downs where you feel comfortable?
Maybe I've not understood the question, but I think the takeaway is that we're suggesting that when we hit a net debt level of $6 billion, we would then begin dividends, which would be a percentage of free cash flow. We're not suggesting that we stop at $6 billion. To the extent that we have excess cash flow, I think there is a high likelihood that we'll continue to de-lever as well. Maybe the last point of clarification is that the $6 billion number is arrived at because when we looked at credit metrics, investment grade credit metrics, we found that at that level, we have investment grade ratios in all years during the crisis that we have seen. That was the idea behind the $6 billion, as well as the fact that we'll be generating positive free cash flow in all those years as well.
it was like, how do we make sure we have a business which is generating positive free cash flow in all environments, down cycles, up cycles, and you arrive at that number. Investment grade ratios was the other.
Okay. That's clear. Thank you much.
Thanks. We'll move to the last question actually, which is from Phil at KeyBanc.
Thanks very much. Aditya, when we think about the pickup in coal consumables, iron ore pellets in NAFTA, how should we think about the magnitude of the increase in per ton costs in 2018 versus 2017?
In terms of coal, in terms of NAFTA, as you know, we enter into long-term contracts. The impact in 2018 versus 2017 is not significant. In terms of iron ore, we have a long-term purchase contract, as you know. The details of how that works has been previously disclosed. If you want, one of us can walk you through it again. It's a proxy of market. It's a third, third, roughly the way I think about it. There is market price of iron ore. Then there is also the market price of band, hot band.
Okay. I think I'm good on that, I appreciate it. On the timing of Action 2020, how much benefit of that remaining $1.5 billion, because I think you said you're about halfway done right now, is baked into your 2018 view?
With three years left and $1.5 billion to go, without being very specific about it, but if you were to just do a simple division, I think that kind of captures the spirit of 2018.
My last one here is just more of a kind of a strategic or philosophical question. Basically, are you concerned that the NAFTA free trade agreement right now is gonna be altered based on the president's commentary and some of the investments that you've made or are making in the Mexican sheet business right now? Is that a way for you to hedge against any, call it, future disruption? Thank you.
We do not know in what way the Mexico and Canadian negotiations will evolve, and there are a lot of moving parts here in this time. We believe that our Mexican investment was planned much before these NAFTA negotiations began. We clearly believe that in view of our slabs, very competitive situation in terms of price, cost, and quality, and converting those slabs into high-value added products through downstream investment is the right decision irrespective of NAFTA conclusion.
Thanks, Lakshmi. Much appreciate it. I'm sorry?
There have been no other question. I'd like to thank you all for your attention and interest. As I mentioned in my opening remarks and from the discussion on this call today, it is clear that we continue to head in the right direction. The industry backdrop has structurally improved. The market trends are positive, and ArcelorMittal is making progress both financially and strategically. Thank you once again, and talk to you next quarter. Thank you. All the best.