Good morning and good afternoon, everybody. This is Daniel Fairclough from the Arsenal and Middle Investor Relations team. Thank you very much for joining us on this call today to discuss the Q4 and full year 2017 results. This call is being recorded. Hopefully, everybody saw the presentation and the detailed speaker notes and Q and A document that was published this morning.
You've all had a good chance to review these documents. So our intention now is to move directly to your questions around the results and the strategic progress of the business. And the intention is that the call should last about an hour. So if you do want to register a question, please do press star 1, and we'll take And with that, I'll hand over to Mr. Mitton 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 Ajay Patel Group, CFO and CEO of our European segment Simon Wandke, our Mining segment CEO Geminio, our Group Head of Finance and Daniel, Head of Investor Relations. Before we start our Q and 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 related to 2016. As an organization, we continue to prioritize further improvement in our safety performance and strive to 0 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 2 years, the total benefits from Action 2020 have been $1,500,000,000 which is halfway to our $3,000,000,000 target.
This is encouraging and I expect to see more progress in this area in 2018. We have also strengthened the financial foundations of the business over the past 2 years. Net debt has been reduced to $10,100,000,000 and would have been lower again had it not been for a negative ForEx impact of $700,000,000 $400,000,000 of premiums incurred on bond buybacks. Our net debt to EBITDA ratio is now 1.2 times. To put our financial progress in context, 2 years ago this ratio was 3 times.
Given this progress, we have today outlined a new capital allocation policy. Firstly, we will continue to prioritize deleveraging. We believe that a net debt level of $6,000,000,000 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 EBITDA and enhance future returns. And finally, we have reinstated the dividend at $0.10 per share.
Once we achieve net debt of 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 the steel demand outside China to accelerate in 2018 to a growth rate of between 3% 4%. This bodes well for our shipments and also for capitalization, which continues to head in the right direction.
With that, we are happy to take your questions.
Thanks, Mr. Mittal. So if I could remind everybody, if you want to ask a question, please do press star 1 on your keypad. And I'd like to ask everybody in the interest of time, if you could limit your questions to 2 questions in the first instance, and that will give everybody the opportunity to ask their questions. So we'll move to the first question, which comes from Mike Schallacher 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. And 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 to 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 to 18 months, how you think China would respond to that is my first question.
And 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? And also in terms of capital acquisition, we've had a debt target, which I think is hugely helpful to build a road map. We've had the change in CapEx, which is helpful, and obviously, it's a small dividend. But 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, very clear road map for their shareholder return structure?
Thanks very much.
Thank you, Michael. I'll answer on China and then we will move on to your second question on sector allocation. Clearly, Chinese demand in 2017 has been quite strong and it was stronger than we anticipated. At the same time, China has continued to reduce capacity, which is very encouraging. We have seen 115,000,000 tonne of capacity reduction against promise of 150,000,000 and the rest 25,000,000, 35,000,000 tonne is expected this year.
We have also seen that export in 2017 were lower by 30%. But this is very encouraging, but we still believe that China to begin with had 300,000,000 ton of ore capacity excluding the 120,000,000 tonne which has been shut down based on industrial induction furnaces, which was never accounted. So $152,000,000 remains to be shut. And I hope that Chinese government, as we move forward, we will continue to implement environmental laws and continue to deleverage their Chinese steel companies. So 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. But 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 fuel consumption forecast is more or less neutral to 2017.
And we think that they will continue for next 24 months also, I do not see a major change in China's consumption pattern. Praveen?
Avi? Sure. Great. Thank you. Good afternoon, Michael.
So in terms of capital allocation, we're not obviously going to comment on any specific opportunity. And you correctly laid out our priorities. Our priority number 1 is to continue deleveraging till we arrive at a net debt target of $6,000,000,000 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 returns. So CapEx is a good example.
M and A could be another example. As we've done in the past, we had been able to grow and continue to manage our balance sheet. Calvert is a good example. Uva is a good example. So I will 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're 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 road map 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 the level of $6,000,000,000 of net debt. To comment whether this would be like Aperam or not, I think at this point in time is inappropriate.
It's a discussion we continue to have with our Board of Directors. And 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. And just a 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?
Yes. So 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. So 2017 performance of Ilva is similar to 2016 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 complete by April and post that we would move to close.
Okay. Thank you.
Thanks,
Yes. Good afternoon, gentlemen. Two questions from my side. One is on the group EBITDA per ton 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 ton?
And the second question is on the shipments. You expect shipments ex China or steel growth ex China to be 3% to 4%. Is that a good proxy for your own shipment growth into 2018? And how does that how is that distributed between H1 and H2? Thank you.
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 our Svermethil. But specifically to answer the question, we're not providing 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. So in terms of NAFTA, we should see a good increase of shipments in Q1. Q4 was light in terms of shipments. As you may have read through in our earnings release, we faced some issues in our Mexican and Canadian operations in terms of outages. It costed some money about $15,000,000 to $20,000,000 and we lost about 200,000 shipments due to those effects.
So that should reverse the market. We'll obviously perform better because in Q4, we had a market slowdown in terms of demand volumes. And Yes, sorry, I think I lost my mic. I'm back. So so 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.
Spot spreads were actually stable into Q1. In terms of ASES, shipments will have a seasonal factor. South Africa should be up. Prices clearly did very well in Q4, and we should have a flat roughly flat performance in terms of spreads. And we also have a big blast furnace reland in Ukraine, which will affect to some degree profitability in CIS operations.
Thank you. Very clear.
Thanks, Alain. So we'll move to the next question from Jason at Bank of America.
Yes. Thanks, gentlemen. Thanks for the call. A bit of a big picture question for me. Over the years, we've seen different strategic initiatives and directions for Mittel.
We had aggressive and transformational growth through M and 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? And I really have to confess, I couldn't answer it. So how would you answer the question, what is your strategy now today? Where is this company 5 years from now?
Yes. So 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 1 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, our Suriname tool 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 ASUS division as well.
And 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. So 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 5 years.
We announced today the we announced it before, but we have highlighted the investment in Mexico. It's a brand new hot strip mill. We have a 4,000,000 ton slab operation in Mexico. You 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 anything we can be a strong player with our high quality steel. So 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 turnaround an operation. And 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 or ability to convert EBITDA into free cash flow is increasing and that provides a good value proposition for our shareholders and our key stakeholders.
D. J, so 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?
Yes. I think we've always been doing that, but I think it's good to exercise that routinely. So 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. So 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 because you simply are quite positive on the 2018 outlook. But 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 ASUS in Brazil because 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 that a little bit better. Thank you.
Sorry, I missed the last bit of your question. You said ASUS in Brazil and
The profitability improved quite substantially. Did you actually change something structurally? Or is the move predominantly market related?
Okay, clear. So in terms of visibility, Karsten, as you know, it's different by business and we're talking to order books here. So clearly, we have much longer order books in Europe and in our NAFTA business and much shorter order books in our ASUS business. And even I would argue that in our Brazilian business, our order books are much shorter as well. There's some contract business, but not to same level of proportion as NAFTA or EU.
So in terms of visibility, normally in Europe and NAFTA, we'll be taking 2nd quarter orders right now. In the other businesses, we're still taking orders for February, March. Maybe more March, but that's roughly how it works throughout our store, Mitel. In terms of ASUS in Brazil, yes, you're right, the market has also done well and that has set to our results, but there have also been structural improvements to the business. Just talking about ASUS, I think this has been a story which has not performed well in the past, but through all the actions turnaround in Kazakhstan.
Kazakhstan, as you know, hit its highest shipment ever. Production records were set. Ukraine continues to outperform. And 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 have not turned the corner.
So 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 Kazakhstan, because
Kazakhstan, because there were recently some news articles about emission problems in Permitao. Could that lead potentially to higher CapEx or and or production stops? Does it sound like it was like black snow and so on and so forth?
Yes. In Kazakhstan, we are continuing to invest. There is no additional investment program for these environmental initiatives. We already declined, 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 purines. The wind situation had dramatically changed due to very strong winter those couple of days. Then there's also a theory that there's also speculation that it could be caused by people in that area using lot of coal for heating as well as for cooking. And plus, there has been some change in the winter, which allowed the some of the dust could not dissipate. And there is 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. So we'll meet 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, but if you could tell us again what you're looking at now in terms of clearance. And also, I think you may be calling in newspaper, but there seem to have been some change in the group association you had with Marseiglia. I mean, 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. So I don't know what you're able to say about that. And 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? And then if not, are they becoming a little more in terms of the outlook? Thank you.
So I'll answer UHVA. Just on UHVA, I think what I had suggested was we're in Phase 2 negotiations with the European Commission, specifically with the Competition Department of the European Commission. So there's a Phase 2 investigation ongoing and that is expected to close in April. And post that, we would expect to close our EWA transaction. In terms of Marcegalia, 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 the matter has been it is recommendation has gone from Commerce Department to White House and it is being studied and hopefully that very soon we will have some results or some decision from White House soon. As ArcelorMittal, we always believe in fair trade and we will continue to fight wherever we see unfair trade. And as I said, while this is going on, we still see that the imports in U. S. Were all time high in 2017.
So 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. So we'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 blast furnace reline at Bremen and some maintenance cons 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 Q1?
2nd, looking at your European long 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 from your flat 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 loan margins, I'm not sure why you suggest that the loan business has been trailing. I think the loan 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 2 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.
But 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. And 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, but your margin has 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 long.
So that's why I was thinking maybe some of the pressure in the long business. Can you talk a little bit about where you see directionally your European margins going on the medium term throughout the European region? So 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?
Yes. So I can now understand what you're suggesting. I think what you have seen is that the loan business has not necessarily improved its margins over the last few years. So margins have remained relatively stable at decent levels. And at the same time, we have seen our flat business improve its margins as the transformation program has kicked through.
So yes, on a blended basis, you may draw that conclusion. But it's very clear to us when we look at our flat performance versus our peer group, we have done very, very well. We look at it on EBITDA per tonne, and you can see that the transformation program is kicking through and our business continues to perform very well. That's not changing. So I would expect the same phenomenon to continue into 2018 and beyond.
Great. Thank you very much.
Thanks, Stef. So 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 car of your at your coke battery in Belgium and whether there is anything we have to keep in mind with regards to the Q1 there and also whether you provision for anything here on the CapEx side in your budget? And then 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. And 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 last year. And 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 stepped on chlorzillas?
Thank you.
Okay, great. Thank you for the question. The coke fire in debt was very tragic, and it's unfortunate that it occurred. However, it was and it was very dramatic. So in case you saw an image, it was very dramatic, but the impact was very minimal.
I think we lost 20,000 tons of production and there has been no impact on the operating performance of the business. In terms of the rating, I mean, 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. And if it helps the rating agencies in their assessment rate.
In terms of the cost, I think fundamentally, if the 2 rating agencies, the 2Q rating agencies upgrade us to investment grade, as you know, all rating agencies are a positive outlook, The interest saving per year is about $20,000,000
Okay. Thank you. Thanks, Bastian. So we'll move to Nick at Exane, please.
It'd be possible to have a bit more color on Brazil, which to me seems one of the area where the reversal potential in terms of EBITDA per ton 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 what extent the recovery is impacting at this stage the flat business or the loan? Thank you.
Yes. I'm going to ask Gino to answer this.
Yes, Luca. So in Brazil, I think as we've been highlighting, if you remember our last fall, I mean, we were quite pleased with the recovery already in our flat business, which is doing already well. Which was positive in quarter 3, which remained positive in quarter 4. So overall, shipments in longs was kind of flat. So despite a weak first half that was offset in the second half And looking forward, looking at our currency consumption forecast for 2018, so the prospects for both business are are quite encouraging.
Thank you. If I may have a follow-up one on working capital requirement. I understand the volatile nature of a number of parameters, but 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?
Yes. 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, then there's an investment in working capital. It's not lost because of the value we're putting on our balance sheet.
So in terms of 2018, what we're seeing is increased demand of our products. We talked about global growth ex China. And so from that perspective, it's natural to expect more investment in working capital. Thank you.
Great. Thanks, Luke. So we'll move to a question from Kevin at Goldman Sachs.
Yes. 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 Oslo or Mittel? And also on auto contracts in general, how are they being negotiated for 2018 versus 2017 levels?
So 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. And 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. So on a like to like basis, maybe there is some loss just because of a mix perspective in NAFTA. But other than that, as I mentioned at the beginning of the call, Vincent and asked you 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. And these are advanced high strength steel, ultra high strength steel, exactly the strength and specialty of our Sverametho.
Thank you very much.
Thanks, Kevin. So we'll move to the next question from Naved at Cowen.
Thanks for taking my questions. So on your segments, so we saw pretty significant improvements in EBITDA year over year for all segments except for NAFTA. So I just wanted to see what can be done on this front to kind of get the needle moving. Clearly, the step up in prices in flats should help in 2018. But is it necessary to see a prohibitive Section 232 relative to imports or other measures to really see a step change in this segment?
And then 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, of
NAFTA and then I'll get
time 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 perform prudently. But clearly, when we look at it on a global basis, it's an outlier. In terms of NAFTA, we I mentioned earlier on and 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 is DRI based.
So 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 naphtha 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. And so there's a small impact of that.
But 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. So yes, in terms of 2017, it's flat, but we have a much more constructive perspective on our NAFTA business into 2018.
Thanks. And then just on the iron ore side,
on the cost side? Sure.
Simon here, Naved. So I
think if you sort
of step right back, we're still maintaining our statement that we'll be cash flow breakeven, dollars 40 CFR China on the pricing. That said, we still have pressures on our costs. We have inflation costs, input costs, exchange rates. So 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 5,000,000 ton rate already as we speak in Q4 end of Q4 and into Q1. Those costs are moving down sharply from where we were at lower volumes with a lower strip ratio higher FE, no silica, faulty product. And then if you go to the big assets like AMMC, we've got quite significant programs underway focused heavily on debottlenecking, both mobile 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. And a lot of these projects under Action 2020, some of those are around just maybe simple, but a very big outcome in terms of the standard deviation of feed to the concentrator, giving us smoother outputs, lower costs and less surprises. So a lot of work going on and really the headline statement still stays that we will be maintaining the cash flow breakeven of $40
Great. Thank you.
Great. So we'll move to the next question from Kishan at Citi.
Thanks a lot. My question is on your cash needs for 2018. 1, I mean, how much of the CapEx do you have considered in your EUR 3,800,000,000 number guidance? And second is the cash need for other businesses, others is increasing from SEK 0.8 billion to SEK 1,200,000,000 predominantly on taxes. So can you give us some ideas which of the regions are contributing into higher cash taxes?
And does it take into account the impact of lower tax rate in U. S? So what was your first question on the CapEx? How much of the Ilva CapEx you have taken in $3,800,000,000 Okay. So Ilva CapEx is $200,000,000 $200,000,000 So without Ilva, it would be $3,600,000,000 And in terms of the change in other cash requirement, so a portion of timing differences because you end up paying in 2018 some of the taxes of 2017 in some jurisdictions, others that's in the same year.
In terms of the U. S, there is no significant pronounced effect into 2018 or into 2017 for various reasons. And if you're really keen, we can get into it. But 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, so I hope they go buy more cars, which is more steel.
Yes. Thanks. Thanks, Kijan. So we'll move to the next question from Rojas at Kepler. Can we take your question, please?
Can you hear me?
Yes, we can.
Okay. Sorry. I have a question again on your acceleration in the CapEx. I think you kept saying that the deleveraging €26,000,000,000 remains a top priority. At the same time, after a couple of years of high CapEx discipline, you're not considerably stepping up your CapEx.
And 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 Sailchon venture or anything which could elsewhere happen in India. So can you maybe elaborate a bit deeper how we shall see the €6,000,000,000 net debt targets? 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. So in what destinations shall we believe or shall we think that you could outgrow the market because of your specific initiatives?
Okay. So thank you for your question. So let's talk a little bit more about the CapEx. So if you look at the CapEx, there's a $1,000,000,000 increase. I would say net is $800,000,000 which is $100,000,000 is carryover from 2017.
So 2017 was actually supposed to be $2,900,000,000 but we ended up reporting $2,800,000 And the remainder $100,000,000 is ForEx. So this is the year of strengthening. So as a result, our European CapEx translates back into dollars as more dollars. So that's $800,000,000 I would then deduct $200,000,000 for Eeva because that's a new acquisition. So 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 then the CapEx starts to tick in.
So then we get to $600,000,000 delta. Out of the $600,000,000 delta, dollars 3 $50,000,000 so the lion's share is really Mexico. And I did talk about Mexico a little bit, but maybe we can talk about it more. So we have a high quality slab facility, which is on the coast of Mexico, electric furnace based. It has its own palletizer.
It has 2 TRI modules and it has linkages to ownership in iron operation, which supplies pellets as well as iron ore locally that is available. So 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. And so if you think of a business which is exporting slab and has the opportunity to convert that slab into hot band for domestic market, which has price levels similar to NAFTA, that's a good business proposition. We didn't do it before because we're very focused on deleveraging the balance sheet. We'll continue to delever the balance sheet, but we thought that this was the right time to begin that investment. So 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 us from it though whether we are in a high cycle or a low cycle environment. The remainder is about $250,000,000 and 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. So this is above and beyond actually in 2020. And this will this is $250,000,000 but there are some examples of some of the projects that we are doing.
It's really getting ready for the new demand in products. It's further optimizing our downstream operations in Europe and making sure that we have bigger scale operations than what we have today. We began the clustering of those operations about 2 years ago, and now we're moving to the next phase of making sure that the downstream operations at larger scale. So a $250,000,000 increase, excluding Ilva, Mexico, ForEx and carryover on a $2,800,000,000 CapEx is not that significant. The other area where some of this $250,000,000 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 and Ghent in the summer. We walked through some of the technologies that we're deploying. And we can spend more time on that so that you have a better flavor of what we're doing. So moving on to your next question, sorry, that was a long winded answer, but I thought it would 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 time line.
I think you have a good sense of how the steel markets are performing, what our earnings potential is, 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 $700,000,000 impact in 2017 because of ForEx. Maybe there will 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 $4,000,000 in premiums for bond buybacks. I'm not suggesting that we won't pay any premiums, but perhaps the amount is not that significant.
So 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 $2,000,000,000 the earnings potential. Yet at the same time, we remain focused on those priorities that we've talked about. So I can't give you a guidance as to when we achieve it, but that gives you a feel of how we're doing as a business.
And on the volume?
On the volume, no change. We yes, on the volume action No,
I mean because of Action 2021.
Yes. So in terms of volume, at this point in time, we have not provided a regional breakdown. I think I'll discuss it with Daniel as to how best we do that because there are there is also a competitive impact if we talk about increasing in certain markets, volumes versus another market. So we just need to walk through that. But 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 match growth and that is not a given.
And so that's what we can say at this point in time on volume.
Okay. No, that's fair enough. Maybe a brief follow-up on the debt. When you say you would feel comfortable with the SEK 6,000,000,000 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've asked me?
I was saying, if you now guide for a €6,000,000,000 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?
So maybe I have not understood the question, but I think the takeaway is that we are suggesting that when we hit a net debt level of DKK 6,000,000,000, we would then begin dividends, which would be a percentage of free cash flow. It's we're not suggesting that we stop at $6,000,000,000 to the extent that we have excess cash flow. I think there is a high likelihood that we'll continue to delever as well. Maybe the last point of clarification is that the $6,000,000,000 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. So that was the idea behind the $6,000,000,000 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 will be other.
Okay. That's clear. Thank you very much.
Thanks. So we'll move to the last question actually, which is from Phil at KeyBanc.
Thanks very much. Odisha, when we think about the pickup in coal consumables, iron ore pellets and naphtha, how should we think about the magnitude of the increase in per ton costs in 2018 versus 2017?
So in terms of core, in terms of NAFTA, as you know, we enter into long term contracts. So 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 is has been previously disclosed. If you want, one of us can walk you through it again.
This is just a proxy of market, both of it's a 3rd, a 3rd, a 3rd roughly the way I think about it. There is market price of iron ore and then there is also the market price of band,
Okay. I think I'm good on that. I appreciate it. And then on the timing of action 2020, how much benefit of that remaining $1,500,000,000 because I think you said you're about halfway done right now is baked into the year 2018 view?
So with 3 years left and $1,500,000,000 to go. So without being very specific about it, if you were to just do a simple division, I think that kind of captures the spirit of AT.
And my last one here is just more of a kind of a strategic or philosophical question. And basically, are you concerned that the NAFTA free trade agreement right now is going to 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 Mexico and Canadian negotiations will evolve and there are a lot of moving parts here in this time. But we believe that our Mexican investment was planned much before this NAFTA negotiations became. And 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 Martha's conclusion.
Thanks a
lot, Ashish. I 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.