Please go ahead, Daniel.
Thank you. 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, which for your information, is being recorded. This morning, we published our results for the second quarter and first half of 2017. We also published a presentation of these results together with our strategic progress, and this was accompanied with detailed speaker notes and a Q&A document as well. We hope that you've had a good chance to review these documents, and we intend to move directly to your questions on this call today. Given the call should last about an hour, I would like to ask that you limit yourselves to two questions in the first instance.
If you would like to ask a question, please do feel free to press star one on your telephone at any point. With that, I will hand over to Mr. Mittal for some introductory remarks.
Thank you, Daniel. Good morning, good afternoon, everyone. Thank you for joining today's call to discuss ArcelorMittal's first half 2017 results. I am joined today by Aditya Mittal, Group CFO and CEO of Europe, Simon Wandke, CEO Mining, Genuino , 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 remainder of 2017. Starting with safety, the injury frequency rate in the first half of 2017 was essentially stable compared with last year. However, we continue to prioritize further improvement in our safety performance and strive for zero harm. Our financial results in the first half of 2017 were the best since the first half of 2012.
Group EBITDA increased by 61% year-on-year, and we delivered twofold increase in net income and a healthy return on equity. This reflects not only the improved market backdrop but also the ongoing benefits from our unique Action 2020 plan. Given the improved macroeconomic environment, we have today increased our forecast for global steel demand by 200 basis points. The strong demand backdrop is helping to support robust steel spreads. Aside from our stronger financial performance, we have made progress on a number of strategic fronts. First, our balance sheet continues to strengthen. At 1.5 times, our net debt to trailing 12 months EBITDA is at its lowest level since 2009. This will improve further over the remainder of the year as we continue to make progress towards an investment-grade credit rating. While further deleveraging remains a priority, we are also capitalizing on growth opportunities.
This includes our investments to support our continuous shift towards high added value products, as well as the recently announced acquisition of Ilva in Italy. Ilva is an exciting opportunity to create value for shareholders. Contrary to perceptions, this is a Tier 1 asset. It has a scale, a deepwater port, and very high-quality finishing operations. That we can add this asset to our portfolio without compromising our balance sheet is a great use for our shareholders. Finally, we continue to make good progress on Action 2020. I think many of you will have attended our recent site visits to Ghent, where you had the opportunity to see firsthand the ongoing transformation that is underway. We are now operating from a more efficient, resized footprint, and we are utilizing the latest technologies to enhance operations, to drive productivity improvements, and support maintenance excellence.
To finish, the strengthening market backdrop suggests that shipments in the second half of 2017 will be at or above first half levels. Together with healthy steel spreads, this provides a supportive outlook for the second half of the year. With this, now I'm happy to take your questions with my team.
Thanks, Lakshmi Mittal. We'll take the first question, please, from Mike Shillaker at Credit Suisse. Go ahead, Mike.
Thanks a lot, Daniel. Thank you for taking my questions. My first question, in terms of the outlook, it all sounds pretty rosy. Can you give us a little bit more color? There's obviously a lot of moving parts with seasonal volumes on one hand, spreads should remain very good. If you're actually talking about volumes coming in inline or actually potentially even better H2, H1, does that mean we actually ignore seasonality completely? Given where spreads have moved through the year, does that mean that H2 actually could be at least as good if not better than the first half? Within that context, a sub-question, are there any areas that you're particularly worried about? Certainly, could we have some comments on U.S. autos?
That has been something that has come up on a number of conference calls, I think recently in terms of the risk to the demand from the U.S. auto sector. My second question, a bigger picture question really is, if you look at what's happening in the world of resources at the moment, companies do seem to be getting rewarded for deleveraging. Aperam was a great example, but now you've got Rio, Anglo focusing very much on balance sheet, and getting debt down similar before they move to shareholder returns. Is there any reason why you wouldn't now follow the same approach post-Ilva and focus 100% on deleveraging, unless of course another asset like Ilva came up. In the absence of that, would you focus completely on balance sheet deleveraging?
Also in that context, are there any assets that you have that you think could be non-strategic? I'm thinking maybe Erdemir or China Oriental or something similar that you could think of disposing to actually accelerate that deleveraging process. Thanks a lot.
Okay, great. Michael, thank you for all your questions. I think you've asked a lot, let's try and get through some of them, then, if you want, feel free to ask in more detail. Just in terms of outlook and spreads, I think we have improved our outlook for global apparent steel growth 2017 by 2%. If you look at the breakdown, this is more a China effect than a CIS effect. We have actually reduced outlook for the U.S. and have moved to the upper end range of our European outlook. Brazil is also down, actually. Outlook is better, which points to a better steel environment, and that's how I would read it. I would not read it as a better outlook in terms of underlying core demand. Our core demand still remains very healthy. PMI is at a five-year high.
When I refer to PMI, I'm talking about the ArcelorMittal weighted PMI based on the markets in which we operate. That's just in terms of the outlook in terms of steel consumption globally. In terms of volumes, we are saying that the second half would be equal to or better than the first half. I'm not suggesting that it's clear that the second half will be better than the first half, but equal to or better. Slightly better is a much better way of paraphrasing our remarks. In terms of regions, you talked about dismissing seasonality. I will not dismiss seasonality. There still is a seasonal effect. When you look at our first half shipments, they were relatively weaker than what they should have been. The weakness is primarily in long products. It was in Brazil.
It was in Ukraine because we had a blast furnace outage. In terms of Europe, we had some weakness in some of the higher added-value products in long. As a specific product, rail is a good example. We expect some of that to reverse in the second half. What does all of this mean? Roughly, NAFTA is flat. Europe, flat steel will be down, but long steel will be up. Overall, roughly flat as well. ACIS will be up for the reasons I just spoke about, so will Brazil. That's our rough expectation when we provide you with this framework. In terms of spreads, I think you can calculate spreads yourself. I will not comment. You know how spreads are changing, first half versus second half, what's happening to contracts lag, as well as the cost of raw materials.
In terms of U.S. auto, yes, demand has weakened, the overall level is still quite healthy and sustainable. I would expect that in the medium term, even if this demand level is still very good for the steel industry, it's much higher than what we've seen in the past and is not something that I'm overly concerned about. In terms of focus on deleveraging, you're right, we are focused on deleveraging. We believe it is the right decision for the company. We think we end up lowering our cash requirements, lowering our cost to become that much more competitive. What really ends up happening is, the percentage of EBITDA to free cash flow rises.
I think we see some of that effects already now, where we have lowered our cash requirements from $5 billion for the year to $4.6 billion, which implies EBITDA to free cash flow has just moved up by that amount. I'm not going to comment on our specific investments. We like the investments that we have. I hope I've answered all your questions.
Yeah. Is there any sort of mix reason? If volume is at least as good in H2 and we can calculate spreads, then we can come up with our own assumption as to whether H2 is as good or better than H1. Is there any mix issue, either product mix or region mix, that we may not think about that could mean that H2 would be weaker than H1?
Yeah. You're trying to box me into guidance, Michael. I don't think we have said H2 will be better or worse than H1 or equal to in terms of EBITDA. The only discussion is on volumes. In terms of mix effects, I don't see any significant mix effect into H2 versus H1. I think Brazil will export the same amount, maybe slightly lower as the domestic market recovers. That would be the only area that I would point out. I think the rest, hopefully, we have the pickup in HAV in longs in Europe. HAV generally is fine, just in longs, we had weakness in rails. Maybe there'll be pickup there. Other than the effects reversing of first half into second half, I'm not seeing any big mix changes.
Okay. Very clear. Thanks a lot.
Thanks, Mike. We'll move to the next question, please, from Yannis at RBC.
Good afternoon, gentlemen. Two questions on my side. First, on the cash requirements. When you originally guided EUR 1 billion working capital investment in February, iron ore was at EUR 90. Now it's EUR 20 lower. My question here is twofold. The incremental EUR 500 million of working capital investment, is it exclusively due to better volumes in the second half, or is there anything else included? Also, have you changed your implicit iron ore price forecast to arrive at the working capital guidance? Secondly, if I just want to ask you on the FX movements we've seen recently, a recent trend is the appreciation of the euro. In the short term, I guess that has a positive FX translation impact from your European earnings.
If this trend persists, could it lead to some loss of competitiveness for the European steel operations and also some of your end users, like the automotive sector? We are now at 1.17, and if that trend continues, just want to hear your thoughts on potential mitigation measures that you can take to offset any loss in competitiveness. Thank you.
In terms of working capital, we are seeing a net build-up of EUR 1.5 billion for the year. You're right, that is higher than what we had outlined a few months ago. Overall, volumes are better, but overall, the price level, even if you look at iron ore, it is not as high as it was a few months ago, but it is still higher than what you would expect as the long-term average for iron ore. Some of that is reflected in our revised working capital guidance. I would also add that this is an estimate, and clearly the investment could change based on changes of prices for steel or prices for raw materials, but this is roughly our expectation for the remainder of 2017. In terms of earnings and the euro effect, you're right.
At the end of the day, a strengthening euro has positives and negatives. Let me just address the positives. I mean, normally a currency strengthens because demand environment is good. It demonstrates that the macro fundamentals are strong. From that perspective, I'm not concerned because a stronger euro is also a reflection that the Eurozone economies are doing better. Clearly, the negative effect is what you pointed out, that Europe, relative to the rest of the world, has higher costs. All companies which are based in Europe, including us, are focused on that. We have, at least at ArcelorMittal, very clear plans on improving productivity, reducing our costs, and clearly those pressures only increase when the euro is strengthening. I would imagine our customer base, such as automotive, would also have similar plans.
That is how we would mitigate. I think a strong euro at the end of the day is not only negative news.
Thank you very much. Just a quick follow-up, if I may, just on the taxes and pension payments, that you're guiding them lower now. Given the strong earnings outlook, I'm a bit surprised that you're guiding lower cash taxes. Could you please elaborate on that and also on the pensions, what's driving the lower payments? Thank you very much.
The taxes is a forecast and really what is happening is we have more income in countries where we have higher net operating losses. The cash tax effect as a result is less. I don't know if that's clear to you, but in some countries, we don't have any NOLs because of the profits we have made over the last five years. In other countries, we do, and the increase in earnings is more weighted towards the countries in which we have higher NOLs. In terms of pension payments and others, I think this is a combination of rates, the growth in terms of our cost, as well as better management of the plan, and changes on the discount rate. Does that answer your question?
It does.
Sir, we cannot hear you.
That answers my question. Thank you very much.
Sure. Thank you.
Thanks, Yannis. We'll move to Alain at Morgan Stanley, please.
Yes. Good afternoon, gentlemen. Just one question from my end. Do you mind commenting a bit on the apparent demand in Europe and the risk of a potential destock in the second half? It looks like the apparent demand was very strong in the first half. Where do your inventories stand, and where do you see the risk there? Thank you.
I'm not sure where you see apparent demand very strong in Europe. My number for apparent demand in Europe is 1.2% growth versus the first half 2017 versus first half 2016. Perhaps we're looking at slightly different data points. As I pointed out, we are now for the year at the top end of our range. Our range for Europe is 0.5%-1.5%, so top end implies 1.5% for the year.
Thank you.
Thanks, Alain. We'll move to Seth at Jefferies, please.
I have two questions. First on a top-down question for China, and second in your Brazilian business. With regards to China, I was wondering if you can give us a sense of your confidence in sustainability of current margin strength. I think it was roughly a year ago, you flagged in one of these calls the risk of the Chinese steel spreads over-earning and the need for some normalization. What's your degree of confidence that current Chinese strength is today more sustainable? Separately on the Brazilian market, I was wondering if you can give us an update on any signs of a domestic demand recovery in the region, and then also from a product mix perspective, Q2, you shifted more towards more lower margin exports. I do expect this mix drag to continue into H2.
Where do we expect the Brazilian market to go over that timeframe? Thank you.
Okay. In terms of China, just talking about steel spreads for a moment. As you know, our range of steel spread, this is hot rolled price minus the cost of raw materials, is between EUR 130-EUR 170. If you look at the first half of China, it was at EUR 160. If you look at where spot spreads are, as you pointed out, they are higher than this range. Clearly we do see downside risk to this level. How would the downside risk manifest itself? I think if Chinese growth slows, then we have a downside risk. So far what we're seeing is that China is actually outperforming. We see that in terms of the real estate sector as well as the machinery sector. Clearly the downside risk exists.
In terms of what does it mean for ArcelorMittal, I would not say there's a direct translation of this spot spread into our markets. I think the EUR 160 that existed in the first half reflects the spreads that we had in the first half. Today, if you were to look at just spot spreads, for example, the delta between Southern European prices and China are much lower than they have been in the past as well. Our end markets have not really reflected this increase in Chinese spreads. In terms of Brazil, I'm going to get Genuino to answer the question. Thank you.
Yes. In terms of Brazil, we see already a good development in second quarter versus first quarter in terms of higher shipments domestically. This is true both for flat and longs. Flat even better because you also see growth year-on-year and you see quarter-on-quarter. Longs, you see an improvement quarter-to-quarter to some extent are seasonal. Year-on-year, we are still down and primarily because of construction. Construction is weaker than what we had initially anticipated. One of the reasons why we are bringing down our apparent steel consumption demand for Brazil. Going forward, we would expect the trend to continue. We would expect domestic shipments to continue to improve. It's a positive development from that angle.
Thank you. If I can just ask one follow-up question with regards to China. You highlighted the downside risk coming from the demand side. Do you give much credibility to the supply side reform and capacity closures, both blast furnace and induction furnace we've seen year-to-date, or is that still not enough to offset where you see utilization rates in the region?
Yes, Seth, that's a very good question. From our point of view, China has 300 million tons of overcapacity. Year-to-date, there's about 105 million tons of capacity that has been shuttered. We think that they should shutter another 200 million tons that achieves a high level of capacity utilization, so they still have some way to go in achieving those numbers. Their number is about 150, according to the Chinese, they have about 45 million tons to go. The delta between our number and their number could just be that they have a much higher growth forecast or a demand forecast for Chinese domestic production. If so, maybe the right number is something in between. Your question was more how does that impact spreads.
At this point in time based on the capacities that they have taken out, 105 million, we have not revised our range of 130-170.
Great. Thank you very much.
Thanks, Seth. We'll take the next question, please, from Alessandro at Bloomberg.
Good afternoon, gentlemen. Just have two questions. The first one is related to what's happening at the moment with the massive reduction of exports from China, which is clearly impacting more probably long steel, considering the decline of capacity in the induction furnaces. I was just taking a look at the output in terms of production of your long steel in Europe, which has not really dramatically changed since Q1 2012. How do you see in terms of knock-on effect of continuation of lower export from China, in terms of potential uplift on margin on the long steel in Europe, even though there is not really a visible improvement in the level of demand for construction at the moment?
The second one is clearly related to a kind of phenomenon that is materializing, especially in Russia in the last few months, when we're seeing steel prices up significantly from the Black Sea, despite a relatively weak ruble relative to both dollars and the U.S. If we assume that China remains relatively stable, I'm not really pricing any kind of improvement, maybe decline slightly from the current level. Utilization rates should continue to sustain margin in China considering the shutdown. If the situation remains at the moment the way it is, considering utilization rates in long steel in Europe, do you see a potential uplift on margin because of lack of competition? Thank you.
Alessandro, thank you for your question. In terms of the long business in Europe, I think two comments. First, let's look at our business in Europe. If you refer to Q1 production levels to today, there has been a massive shift in our operating footprint. The numbers that you see don't necessarily reflect that. Since 2012, we have shut a number of assets. We have sold facilities. For example, last year, we sold Zaragoza. Last year itself, we shut our Zumarraga facility. We have also shut facilities in Madrid, as well as in Luxembourg and other parts of Europe. The production level is reflecting higher output from the remaining assets. We've also moved our production into more higher added value segments.
Rail I spoke about, but we're also doing a lot more in terms of quality wire rod, sheet pile, and sections, which traditionally have higher margins, and even today have higher margins than the commodity side. That's just on our European long business and what has happened over the last four years very quickly. In terms of margin for long steel Europe and the correlation with Chinese exports, I don't see it so clearly, because in Europe we still have significant overcapacity in the long business, especially in the construction sector and those segments. That's why consciously over the last four years, we have changed our order book and we have changed our asset mix. To the extent that construction recovers, today we can see that things are looking better for the Eurozone. That will be a strong positive for our European business.
Clearly the last thing is that the margin for long in Europe is also very dependent on scrap movement. You'd have to model that in as well as the growth in construction to really determine margin. I didn't really understand your question on Black Sea pricing.
Sure.
I think you understood it, so maybe you can go ahead. Sorry?
I think already answered the question, Aditya.
Oh, okay.
Maybe Alessandro can correct me, but I think.
Just a very little follow-up because we're seeing the steel prices, of course, picked up significantly in the last couple of months, despite the weakness of the ruble, which is quite atypical. Russia is not really at full utilization yet. There is an uptick in domestic demand, which is visible. I was very much surprised by the fact that steel prices picked up so much despite the weakness of the ruble, that clearly is an incentive for Russian producer to explore more leverage on the fact that translation-wise, it's beneficial for them. I was wondering whether you have any kind of macro picture that justifies this uptick. Thank you.
No, nothing specific apart from the fact that demand in Russia is better. We have also revised upwards our apparent steel forecast for the CIS market, that clearly has a role to play.
Thank you very much.
Sure.
Thanks, Alessandro. We'll take the next question, please, from Cedar at Bank of America.
Thanks very much. Two questions. Can you please talk about the South African business? I see that it's struggling a little bit because of weak demand, particularly in the long space. I note in the release today, on the SA side, there was an impairment taken there and the management team talking about potentially looking at structural initiatives or structural changes. What can we expect to see from the SA business? If you look at the U.S. market, we've obviously had a few price hikes announced over the last few months, which appear to be sticking.
Can you talk about how you see the outlook for prices in terms of further price hikes potentially coming through, considering that ultimately global pricing is healthy, but you do flag that the autos market, while it's still at a healthy level, is maybe rolling over a little bit and you still have very high imports into the U.S. market at the moment? That would be helpful. Thank you.
Thank you for the question, Cedar . I'm going to get Genuino to discuss the impairment that we took in South Africa. Very quickly, I'll answer the macro question. Our South African business has been hit by two macro headwinds, which actually normally should work in the opposite direction, but have not in South Africa. The first is that we have a weak economy, which means we have weak demand, and at the same time, the currency has strengthened. That has really made the business less cost competitive than it needs to be, and it has the inability to maximize output because there is lack of demand. That is causing stress on the business and causing negative EBITDA. What we have done as a result is we have a slate of cost reduction programs.
We've also made management changes on the operating side and on the commercial side. We're further strengthening the business, and we hope that the changes that we have outlined will support the business in the medium term. In terms of the North American market, the North American market is still doing well. We're not overly concerned by the weakness in auto. The demand level is still very healthy. We continue to sell more of our advanced products into the U.S. automotive market. Overall, the auto franchise in NAFTA is intact, if not improving. Overall demand levels, price levels, I think are healthy, and I don't see significant concern in our NAFTA business.
Cedar , in terms of the impairment in South Africa, it's really a function of the weak results in longs compared to our expectations at the beginning of the year. You are required to reform your impairment test in certain circumstances, which was the case for the long business.
As we adjust our expectations also in terms of future cash flows, we will require to record this impairment charge.
Okay. Can I just ask one follow-up? Just on SA, we have had some plants downsized and closed last year. When would you take a decision to resize the footprint there further to the extent that the economic landscape didn't really improve anytime soon?
It's a good question, Cedar . At this point in time, we are focused on the existing footprint and maybe optimizing the existing footprint, and reducing the cost base within the existing footprint.
Perfect. Thank you.
Thanks, Cedar . We'll move to the next question, please, from Novid at Cowen.
Thanks for taking my questions, guys. First, pretty big adjustment to the apparent steel consumption forecast for China. I just wanted to see if you can give us a little bit more of the moving parts there, maybe the potential, what city tiers that you're seeing, the strength in this real estate. Just anything that you can give us to kind of highlight that shift from what's changed, essentially.
In terms of China, we see a much stronger construction environment than what we had anticipated. It is still not growing on a real basis, but it is not as negative as it used to be. The markets which continue to grow is automotive, which is, we are forecasting roughly 5% growth. Machinery segment, which is about 7% growth, and the construction market to remain flat. As a result, as in China last year, there was limited growth. We are forecasting that real steel consumption will mirror apparent steel consumption in 2017. Manufacturing PMIs also remain above 50 in China, pointing to growth. Is there anything else that you're looking for?
Just with respect to real estate, anything that you can mention there?
Daniel, do you have any specifics you want to go through here?
Not too many specifics, I think what we recognize is that the strength is in the tier 3, tier 4 cities, where you've seen a significant reduction in the overhang of unsold inventory. That's been significantly reduced during 2017, much more than we'd anticipated. As a result, there's more longevity to the construction outlook than we'd previously anticipated.
When you think about tier 3 and tier 4 cities, is there more leverage that you guys see there relative to the number of units, given the lower price of housing? The potential lever that you have for a similar dollar amount could be multiple times out of, say, a tier 1 city?
To be honest, I don't know the answer to that question, Navid. What I can do is follow up internally and come back to you with a more considered response.
Sure, that'd be great. My last one, just switching gears to the U.S. market. You touched on U.S. pricing. We have seen prices moving higher. How much of that do you guys attribute to raw material costs versus potential tightness from Section 232? We've been hearing that imports have come down a lot, and so maybe later this year, we'll be actually seeing that number in the DOC data. If you guys could just comment on that.
In terms of imports have not really come down, right? Because imports up to May are 5% higher year-over-year. What is pointing to a relatively healthier U.S. economy is that we still have strong GDP growth. There's some recovery in the oil and gas sector. Manufacturing is also picking up. Auto, yes, we spoke about auto not growing, but not rolling over. Nevertheless, the other segments continue to do well in the U.S., and so that's offsetting that growth, and therefore ASC is still growing. Also, the construction is doing well. Long is growing faster than flat. We expect construction growth to be about 3%.
This is, I think all of these factors are helping, including higher lead times from our business and what we see from the rest of the industry, as well as the fact that inventories remain at a low level.
You see it, if I understand your answer correctly, you see it more as market-driven versus, say, potential trade action driven?
I think that's a fair conclusion. It's very hard to distill these things and be so categorical. The market is allowing for a higher price level, that's what we are seeing. That is how we think about it, at least.
Sure. Great. Thanks so much, guys.
Thanks, Navid. We'll move to the next question, please, from Francisco at Bank Sabadell.
Hi, good afternoon. I have a couple of questions, please. The first one would be related to your feelings on steel prices in the flat business in Europe. Could we see a price increase in the short term, do you think? Also regarding Europe, I would like to ask if there's any specific sector or country which is surprising you in the sense that demand is picking up above your expectations? The last question would be if you're working with any specific timeframe regarding your investment-grade recovery. Thank you.
Okay. In terms of Europe, again, the macro environment remains very constructive. We see strong growth in various sectors, machinery, construction, as well as auto, with real steel consumption growth actually slightly higher than apparent, about 2%-2.5%, and apparent ranging from 0%-1.5%. I would not say it is specific to any region. I think it is quite broad-based across Europe. In terms of investment-grade rating, I think if you look at our ratios today, we are in investment-grade territory. We continue to have discussions and dialogue with the rating agencies. As the macro environment, I think remains strong or stable as we continue to perform, they will take appropriate action. They should decide and then take appropriate action.
Okay. Sorry, regarding the price situation in Europe, I don't know, do you feel prices could go up in the short term or?
Yeah. I don't want to comment on specific price, I think.
Oh.
Yeah. Thank you.
Okay. No, thank you.
Thanks very much. We'll move to the next question, please, from Phil at KeyBank.
Thanks very much. I had a question on the Calvert ramp this year. Has that been impeded at all by the imports that arrived in the U.S. in the first half and/or the existing auto overhang in the market?
No, not at all. Calvert is doing better than it was on a like-to-like basis as well. We talked about in our release that Calvert is now above 90% capacity utilization. Clearly the transformation work there has been progressing well. Yeah, no impact of imports or the auto weakness.
Shipments picked up at Calvert in the second quarter versus the first quarter, and were a little bit weaker at some of your more legacy operations on the flat side?
That's fair. Our production and shipments in Calvert were up first half 2016 versus first half 2017. The weakness in NAFTA, some of it was in Mexico, where we ship less slabs, and some of it was in Dofasco as well.
Okay. One more from me, Aditya. If you could talk a little bit about your energy-related order book within the U.S. I know you don't do tubular products, but anything you could comment in terms of your substrate demand for line pipe and/or OCTG could be helpful. Thanks very much.
Yeah. We're seeing pipe and tube demand rise, actually. Strong growth in 2017 versus 2016. To the extent we supply into those sectors from Calvert, clearly we're seeing more demand. Our focus in Calvert remains automotive. Really that's where most of the work is underway, is ongoing.
Thank you.
Thanks, Phil. We'll move to the next question, please, from Carsten at UBS.
All of my questions have been answered. Thank you.
Okay, thanks, Carsten. We'll move to Bastian at Deutsche Bank, please.
Yes, good afternoon, gents. I have just two quick questions left. Just firstly, again, on the cash requirements. Out of the $300 million reduction in cash requirements from taxes and pensions, could you please give us the split between the two and also let us know whether the reduction which comes from the pension part could be a bit more sticky into next year? Because I guess the tax part is already a bit more volatile depending on your earnings. Secondly, just getting back on your non-core assets as well, and Erdemir in particular, could you please let us know what your plans are with regards to the residual stake post the conversion of the mandatory convertible which is coming up soon? Thank you.
Okay. Thank you for the question. I think, at this point in time, we have a forecast. It is very hard to give an exact split. Our forecast between those items of tax and pension is $300 million lower. I would say the larger amount is on pensions, and the smaller amount is on taxes. I think the better information or better answer to this is what happens going forward. Going forward, we had talked about in 2017 the cash requirements of $4.6 billion, excluding CapEx. I would expect that as we continue to de-lever, our interest expenses would fall. I think, as you mentioned, cash taxes are volatile, I would model in higher cash taxes. Assuming that all things remain equal, I know there are a lot of moving parts in pensions, I would expect that number to not change.
Therefore, approximately $4.6 billion-$4.8 billion would be a good number for 2018, assuming CapEx of $2.9 billion. In terms of non-core assets, look, I do not want to make any comments. I think we do have certain investments. They are important to us from the [Pearl China Oriental] and Erdemir, are two that have been pointed out.
Okay. Thanks a lot.
Thanks, Bastian. We'll move on to the next question from Luc at Exane.
Hi, gentlemen. A couple of follow-up. Would it be possible for you to quantify the Calvert impact on NAFTA EBITDA when it comes to Q2? Secondly, when I look at the current market trends, the low level of inventories, the high price increase that have been announced, I think it can be argued that the price traction is positive, of course, but may remain shy of the announcement. Do you feel that there is some, let's say, hesitancy, wait-and-see stance developing in the U.S. because of the confusion around Section 232? Therefore, do you think that clarity could help price move accordingly?
Okay. In terms of Calvert, we don't break out EBITDA by facility or by units. We can't really do that. I think I would just add that Calvert EBITDA is broadly stable Q1, Q2. I think clearly the business has done well Q2, but we also had higher slab prices coming in. That offset some of the revenue gains in Calvert. In terms of NAFTA, I think we've provided a lot of commentary already. There was a little bit of a wait-and-see attitude that we saw in the second quarter, which has impacted. That can only last for so long. I think there have been statements made that the 232 action is not occurring in the soonest, rather it'll take some more time, therefore, I would expect the market to normalize.
Thank you. Can I have another question on Brazil? Could you maybe elaborate a bit more on the decline in profitability Q2 versus Q1? Is this mostly long related, given the weakness you are taking and the driver for the weaker demand you're seeing there?
Genuino, go ahead.
Yeah, I think in Brazil, we had, of course, a mix impact because of the higher shipments to the export market. That's one impact. Clearly also we had higher costs still coming from Q1 levels, it's still impacting our cost position there. That is really true for both segments. It's flat and long, the decline is on both sides.
Thank you.
Thanks, Luc. We'll move to the last question, which is from Philip at ABN AMRO.
Hi, good afternoon. Thanks for taking my questions. I've just one left on the interest charges. I was wondering, you're close to investment-grade. If you do get an upgrade to investment-grade, do these outstanding bonds that you have also have a covenant that the interest or the coupons on the bonds will be lower? To what extent will they be lower, if so?
Yeah, we do have these step-ups and step-downs. Not on all the bonds. On some of the bonds. Our estimate is about $50 million lower interest expense if we're upgraded.
50, five zero?
That's right.
Okay. Thank you.
Thank you all for your attention and interest. As I mentioned in my opening remarks and from the discussion on this call, it's clear that we are heading on the right course. The industry backdrop has improved. The market trends are positive. ArcelorMittal is making progress. Progress in our financial performance, progress in our Action 2020 plan, progress towards investment-grade balance sheet, and progress in terms of our asset portfolio, including Ilva. These are exciting times for the company and our shareholders, and I look forward to updating you as we move forward. With that, I will end the call by wishing you all a safe and enjoyable summer. Thank you very much.