Good afternoon, everybody, and welcome to ArcelorMittal's Q1 2017 Analyst and Investor Call. This is Daniel Fekla from ArcelorMittal's Investor Relations team, and I'm joined on this call today by Jean Reno Cristino, who is the Group Head of Finance. We announced back in February at the time of our 2016 results that Gennrino and I would cohost these calls for the first and third quarter results. As usual, Mr. Mittel and Aditya will host the calls for our interim and full year results, where is intended to be more on the strategic progress against our targets.
So the purpose of the call today is to provide further clarity and answer any questions that you have on the financial results for the Q1 announced this morning. Hopefully, you have also had the opportunity to review the other documents that we published. So we published the regular presentation with detailed speaker notes as well as our web Q and A document. So before we open up to questions, I'd like to remind you that this call is being recorded. But before we begin, I'd like to perhaps first address one of the key issues straight away, which is Mr.
Mittal's comment in the earnings release this morning that we expect market conditions to be broadly stable in the Q2. To be clear, this is a market comment. It is not guidance. The reality is that market conditions remain favorable. Demand in our core markets is positive.
Our order books remain healthy. And these conditions have really supported our best quarterly performance in almost 5 years since the Q2 of 2012. So the fact that we expect these conditions to continue in the second quarter is, from our perspective, a significant positive. As you know, it is our policy not to give specific quantitative profitability guidance, but what we can talk about is the drivers. So looking to the Q2, you should anticipate that the steel business will see higher shipments, reflecting the normal seasonal trends.
You'll also note that in Q1, our fixed costs benefited from its building inventory. So by that, I mean that we produced more than we shipped, leading to an increase in metal stock. And that driver will reverse in Q2, so our fixed costs will go back up. Then there is the impact of the lower iron ore price, which has evolved over the past 6 weeks or so. This will obviously impact the profitability of our mining segment.
But due to the effects of inventory, that will not show up fully in our cost of goods sold for the steel business until later quarters. So I hope that clarifies the statement made by Mr. Mittel. We have had a very strong performance in Q1, and the operating conditions have not changed. So with that, we will move to the Q and A.
And we'll take the first question, please, from Alain at Morgan Stanley.
Just two questions, if I may. Firstly, on the working capital guidance for the full year. So you started
the year with a nearly $1,000,000,000 cash outflow guidance. How should we expect that to evolve in light of your commentary? And secondly, on
the lead times for the orders you're seeing in the EU and the U. S, can you give us a bit more comment on the market commentary, how we're seeing your end markets, your customers? And what's the current lead times as compared to the target averages?
Thank you, Alain. This is Jan Ueno. So I will take your first question, and Daniel will comment on your second question. On the working capital, I mean, we continue to believe that the guidance that we provided last quarter remains, at this point, looking at current market conditions, a good working assumption. So we are reconfirming that.
That's slightly higher, but EUR 1,000,000,000 is still a good working assumption.
Thanks, Edwina. So Alain, on your second question regarding lead times, I think I've made the remark that our lead times do remain very healthy. If you look at demand across our core business in Europe and North America, It is good. It is strong. And the indicators of that demand are there for everybody to see.
So there's been no slowdown in those markets. And if you look at our order book, they're very similar to the extended levels that we had in the Q1.
Thank you.
We'll move to the next question from Mike at Credit Suisse, please.
Yes. Hi, Dan. Thanks a lot. Just three very quick questions, if I may. Firstly, just on the guidance, I know you don't want to give actual quantitative guidance, but Aditya did sort of mention on the last call that he would expect margins to be higher in Q2.
Given the dynamic that you've painted at the start of the call, does that still stand that you would actually expect margins to be up quarter on quarter is the first question? The second question just on Brazil, obviously shipments were down a lot in the quarter and you've given some explanation in that, but 22% does sound like quite a big number, including the 10% for market weakness in long. So can you give us some sense of how much of that you expect to come back in the coming quarters? Because 500,000 tons, dollars 80 a ton, that's around $40,000,000 of lost EBITDA in the quarter. How much of that would you expect to come back in the coming quarters?
And the final question just on iron ore. You've alluded to it just at the start of the call as well. There is a timing difference between what you ship and the price you get is almost instantaneous. Does that include, which I guess it does, internally ship tons? And on the back of that, what is the lag between that and the cost benefit that you receive from the lower iron ore price on third party purchases and also on the lower price purchases and also on the lower price from the internally shipped stuff?
And could you try and quantify the net impact? Because to me, obviously, Q2 is going to be negatively impacted, but you should get some of that coming back in Q3 from the cost benefit. Is there any quantification of that? Thanks a lot.
So, Mike, so let me try to address the Brazilian question and then the I don't know question. Then I will touch on the first one. So in terms of the Brazilian shipments, yes, you're right. I mean, the reduction is significant, but we will be recovering at least 200 Kt going forward. The way we look at it, I mean, if you look at the shipments, 1st half for flat products in Brazil, 1st half of twenty seventeen versus the first half of twenty 16, we should be relatively flat.
And then, of course, in Longs, we continue to see weakness in Construction. So that will even though we see conditions stabilizing, that is we're not going to be recovering that the losses that we had in Q1. Regarding the I don't know the lag, I mean, you're right that you will see the impact in our Mining division straight away. And because of the accounting lag, it will take more time for us to see the full benefits in our Steel division. The term that we use and that works very well for Europe is the delta that you see in price is 40% will hit your results in the Q1, then 35% in the second, 15% in the third and then 10% in the 4th.
So it means that it takes almost 4 months for you to really refresh fully your cost base. In terms of measuring the impact in the next quarter, I'm not going to give you a number, but I think with this rule of thumb, you can I'm sure you can take into account, as you know, our production through EIF's integration of our mines, in particular in CIF and that, I'm sure you can come up with a good estimate.
Thanks, Yanira. So just to address your question, Mike, on steel margins. And I think what you're alluding to is the comments that we made last quarter on the price cost expansion that we were anticipating in the Q2. I think if you look at our results for this quarter, clearly, we have seen a price cost benefit. We've noted that in NAFTA results.
We've noted it in the Brazil segment results. And I think if you look at the performance that we've enjoyed in Europe as well, it was primarily volumes, but there was also the benefit of price cost there as well. So looking into the Q2 and just reflecting on the answer that Genarino has just given in terms of the lags, both in terms of iron ore and coking coal. On an accounting basis, our cost of goods sold will increase in Q2 because of higher accounting raw material costs. But that will be fully offset by the revenues lags as well.
So I can confirm that there's no price cost compression in the Q2 versus the Q1. Okay. So just to confirm, I guess, is right.
There's no reason to believe that internally shipped tons are priced any differently to externally purchased tons of iron ore?
Yes. That's right, Mike. So the ton shipped at market price, the dynamics will be exactly the same.
Okay. Many thanks, Victor. Thanks a lot.
Thanks, Mike. So we'll move on to the next question from Ioannis at RBC.
Yes. Thanks very much. Two questions on my side. First, in terms of your demand forecast, you're guiding to demand growth this year across most of your regions. But as was already mentioned, Q1 shipments were down 2% year over year.
Part of it is a change in scope. Part of it is the issues you mentioned in Brazil. How should we think about full year improvement in volumes in light of the change in scope and the issues you mentioned in Brazil? That would be the first question. And secondly, in the U.
S, just looking at the automotive market, we've seen weak sales from automakers so far this year. What's your view on ArcelorMittal auto volumes in 2017 in terms of year on year growth? And do you see potential for market share gains? Thank you.
Yanis, maybe I'll take your second question first and then Jean Reno can highlight the scope effect on shipments this year. In terms of U. S. Auto, I think you need to reflect on the fact that our business in
is not just U.
S, it is a NAFTA auto business. So whilst there is the forecast of lower sales and production for the U. S, for NAFTA as a whole, actually the market forecasts are for stability and maybe even a slight growth this year. So I think hopefully that should answer that question that overall, we wouldn't necessarily expect our NAFTA auto shipments to decline in 2017 versus 2016. In terms of market share, that's obviously something that we don't comment on.
I think we have a lot of confidence though that given our reputation in the market, given the strength of our product portfolio that our market leadership position is quite clear. And in terms of the evolution, the way that the market is heading in terms of light weighting, we have the required products within the portfolio to lead that evolution.
Yes. In terms of your question, in terms of shipments, so yes, so we had Brazil. But we should also take into account that in CIS, we had also maintenance in one of our largest waste furnaces in Ukraine. So that will come back up again in Q2. And also in our loan business in Europe, we also had some maintenance.
We also had some less availability of crude steel there, so that would come back up. And so we remain I mean, we believe that we're going to be able to catch our growth of the ferroto steel in our key markets. Having said that, we are not really providing a guidance in shipments other than we remain focused on making sure that we protect our market share.
Thank you for that. Maybe just a quick follow-up on the latest coking coal price surge. Given the related time lags and the exposure you have to spot pricing, should we expect the main impact in Q2 or Q3? How would that play out? Thank you.
Well, I guess the rule of thumb that we just described for iron ore would also be applicable for the coking coal that we are buying in the market. So 40%, 35%, 15% and 10%, I think that is a good rule of thumb for you to apply.
Thanks. Thanks, Janis. So we'll move on to the next question from Jason at Bank of America.
Yes. Thanks, Dan. Look, two questions from me. One is just technical, just to make sure that I understand the accounting and the others a bit more big picture. Just on the comment you made on the fixed cost absorption and you said that you produced inventory and that's basically brought down the fixed cost per ton, if I understood correctly.
To the extent that you're talking about that going up in the second half or sorry, the second quarter, Dan, Is that because you're producing less or you're saying it's going to go up overall just because you're shipping out of inventory? So that's the first question. Second question, just more on the competitive backdrop. I'm wondering how you guys are thinking about the U. S.
Steel results debacle and in particular, the fact that they're having to sort of back away a little bit and start reinvesting in all their facilities. What does that mean for ArcelorMittal?
Thanks, Jason. So I think January now is well placed to answer the technical issue that you raised on the competitive landscape in the U. S. I think obviously, we've had a
we've got
a lot of confidence, I think, that we've been able to maintain our assets very well and our assets throughout the very challenging years that we've had over the past 4 or 5 years have been very well invested. So if you look at the results that we've been able to generate in terms of production, asset downtime, etcetera, it is very encouraging. And I think that, that reflects the fact that we've been there's no question that we haven't been maintaining and investing in our assets effectively. And so if there are examples where our competitors are now having to take production downtime in order to revitalize their assets. Obviously, that's going to tighten up the supply in the market a little bit further, and that can only be a positive for our overall business.
But Jan, just on the fixed cost effect.
Yes, yes. Jason, so if you look at our the cyclicality in our working capital seasonality, you will see that typically in Q1, we build working capital. And this is in anticipation of generally what is our stronger
quarter, which is second quarter. And then normally,
you can see a reversal of that. So in Q1, we tend to produce more. And then in Q2, as we see higher shipment, the production is slightly lower. And therefore, you see the reverse. That's what Teo was trying to explain.
So less fixed costs in Q1 and that will reverse in Q2.
Q2. Can I just follow-up, guys? So if we look at I think the disappointment today in the market is that we should be seeing the costs we thought we were going to be seeing the costs going down in the second quarter. And is it the case then that maybe we, the market, understand misunderstand this dynamic in the fixed cost absorption? As you sort of produce, you have lower unit fixed cost, but you're producing that to inventory.
And then we unwind that into the Q2, but then you've actually got higher fixed cost absorption into the tons you're producing. Is that something that you think is well understood by the market?
Well, this is not something that is new. I mean, it has been in our case. It's as I said, it's part of the normal seasonality of our business. And so I guess we should not forget that we have seen also iron ore prices continue to go up until at least Q1. So in Q1, as you know, iron ore prices were quite high.
And because of the lag, that will continue to impact our costs going forward. And because of the rise also of the coking coal that we saw, particularly in the Q4, that continues also to impact our costs. Remember, so we spoke about 4 quarters for us really start to see completely refresh of our costs.
Okay. All right. Thanks for
that. Thanks, Jason. So we'll take the next question please from Luke at Exane.
Are you there, Luc?
You hear me?
Yes, we can now. Thanks.
Okay. Sorry. So thanks for taking my questions. I would have a couple of questions, one related to working capital requirement and what you could say as to what are your requirements for the full year. Previously, you guided on €5,000,000,000 to €1,000,000,000 potential need.
Is this still valid? Or do you see the need closer to the €1,000,000,000 given the Q1, which I understand is seasonal buildup? That would be my first question. Secondly, looking at market conditions, which seems to have changed not for the best over the past 3 weeks, they are currently widespread looking at U. S.
Or Europe versus China. Do you see downward pressure? I understand that your order intakes are good, but can you comment maybe on how you see things developing as we get into the similar level? That would be my second question. Thank you.
Look, let me address the first question. I mean, we touched on it already at the beginning of the call. Yes, so we are reconfirming that based on current market conditions and what we see today, the one with ilmeno is slightly higher assumption for working capital for full year remains a good working assumption. Second question, Daniel will address.
Yes. Thanks, Emilio. So obviously, it's not our policy to talk in public forums about the our expectations for steel pricing. I think earlier in the call and as you highlighted in your actually on actually on an absolute and months of shipments basis, you can see that U. S.
Inventories are quite low at the moment. All the fundamentals are really in place within our core markets to support healthy steel spreads. And so yes, the risks are there. China does have a lot of excess capacity within its steel business. That does present a risk to the global steel industry.
And so China does need to address that capacity imbalance. It is making progress, but more effort needs to be done to address and make that industry more sustainable on a going forward basis. So all that we can do with that recognizing that risk, all that we can do is focus on the things that we have influence on. So we will continue to deliver the Action 2020 program and the improvements associated with that. We'll continue to strengthen our balance sheet and deleverage.
And we will continue to work with the governments and petition and lobby for protection and to put policies in place where appropriate to protect our high quality, cost competitive, well invested domestic assets from any evidence of unfair trade.
Could you maybe elaborate a bit more as to what do you think is happening currently in the Chinese market? What do you think is driving the weakness in prices? Is this only related to some form of destocking? Or do you see something bigger at stake? Thank you.
Yes. So as you noted, it's been just in recent weeks that you've seen the correction in pricing and spreads in China. So it's probably too early to draw any strong conclusions. Obviously, what we can observe is that pricing has dropped. That is coincident with the drop that we've seen in the iron ore price.
And so there's probably an incentive there within the domestic market for customers to adopt a wait and see attitude and to destock, which is obviously unhelpful to spreads while that occurs. But it is too early to draw any strong conclusions. What we need to do is keep a good eye on it, remain vigilant and make sure that any destabilization in the Chinese market due to that excess capacity does not pollute our markets.
Okay. Thank you.
All right. So we'll move on to the next question please from Alessandro at Berenberg.
Hi, guys. Most of my questions have been already answered. Just I have 2 left. Relative to the European market, which seems to be quite strong and solid also for a healthy backlog of orders that you have, how do you compare now the resilience of steel prices relative to growing import on a year on year basis? Because I mean, if you have to go backwards in the history of the industry, I mean, with such a huge level of input, clearly also reflects a very good supply and demand balance in Europe.
Do you see any major risk of a downside of the price from current level? And also to the preliminary anti dumping investigation against the against the import of HRC from a number of countries. I mean, the final decision will be taken by October 6. Also, the European Commission has recognized that there is injury from this import. How do you reconcile that with the chances that there can be a further implementation of a final antidumping duties that is favoring the HFC market?
And the second one is related to an update on Action 2020 program. What are you at the moment? What kind of view you have in the coming years? Thank you very much.
Thanks, Alessandro. So I'll let Ghenrino just cover the Action 2020 topic in a moment. But first of all, just to address your Obviously, we can't comment on pricing. Just in Obviously, we can't comment on pricing. Just in my previous response to Luke's question, I did obviously acknowledge the risks that are out there.
And that's something that I think everybody is aware of, the risk of the global excess capacity in steel, that, that needs to continue to be addressed. And we will continue to make the necessary efforts to protect our domestic concerns where there is evidence that, that excess capacity is driving any unfair trade. And I think as you highlight in the investigation that's ongoing on the HRC imports into Europe, there was very strong evidence. So that case is very, very strong. There is evidence of injury.
Obviously, we didn't have the provisional duties we didn't have any provisional duties put in place in time for the initial deadline. But I think that was just not due to a lack of conviction that the injury was there, just that there was a requirement for a further level of detail, which will now be considered during the remaining period of the of that investigation. So it's a strong case. There is clear evidence of unfair trade, which is supporting increased imports into our European market. So the all the factors are there to justify import tariffs and but we will obviously wait for the final decision as you highlight, in Q3.
So on Action 2020, that's Anders. So we continue to make good progress across the organization. Our teams remain focused on achieving the results. We see good progress, for instance, in our footprint in USA, the ramp up of Calvert progressing very well, also in Europe, our 2019. Thank you very much.
20.
Thank you very much.
Thanks, Alessandro. Sorry, my mic was switched off. So we'll take the next question please from Seth at Jefferies.
Good afternoon. I have two questions. First on the mining side, can you give us an update please on your cost savings program there? And also with regards to I think it was last week you renegotiated Canadian Union agreement for some of your operations in the region. In those negotiations, you seem to drop a move to a 2 tiered pension.
Does something of that sort ultimately weigh on your own cost savings target for the full year? And then separately, last quarter, Aditya was able to give us a bit of color on the outlook 2 quarters forward going into Q2 at the time. Can you please give us any thoughts on the outlook for Q3, please?
Thanks, Seth. So just in terms of mining costs, obviously, we're making some great progress within the mining operations this year. And you can see that in the Q1 shipments on a year on year basis. And so we are obviously looking to increase the shipment volumes this year by 10%. That's reflecting the normalization of the situation in Ukraine.
It's reflecting the restart of our Mexican mine. But it's also crucially reflecting increased production in Liberia. So there we are now transitioning to the new deposit at Gangra, which is a higher quality DSO material. And it has a it's easier to access that material. So we have to remove less burden.
So the strip ratio is lower. So the operating costs at Libera will benefit from that and the product quality will mean that the realized price in the market is higher as well. So we're making progress in mining. And in terms of the overall cost, we didn't start the year with an objective of further reducing our cost position. We've worked hard over the past 2 or 3 years to reposition ourselves on the global cost curve.
We now do have that good position of being free cash flow breakeven at a $40 CIF China iron ore price. And as we move forward, the focus is protecting that cost base, protecting that cost position and at the same time, improving our product quality and the price that we're able to realize in the market. And then just in terms of the outlook beyond the Q2, I think what I would be just anticipating is at this stage the normal seasonal trends within the business because there's nothing else that we're seeing at the moment to that you should factor in.
Seth, in terms of your question on the CLA signing in Canada, I mean, I don't have the specifics in front of me, but I can confirm that given the circumstances, I guess, other parties were
Thanks, Yanomita. So we'll move to the next question please from Rojas at Kepler.
Yes. Hi, Dan. Just a few questions from my side. One is on your production rhythm. I'm not really sure whether I got the point you made.
You're saying, okay, you'll produce more in Q1 and then you start releasing in the from the Q2 onwards. At least when I look back to the previous couple of years, Q2 in production was always stable or even up. So has there something changed in the way you're running your assets? Or is there anything else why the RIZZ might be different this year? That's the first question.
The second one is again on your comment on the guidance for Q2. So if you're saying now if you're now seeing less spread improvement in the Q2, is this purely a function of the costs which are dragging for longer? Or is there anything else which is creating a headwind on the 2nd quarter still spread? And the third question is on the loss of volumes you occurred the Q1 from Tuggerao, Ukraine and so on. Can you give us a sense of the volume effect in Q1 and the EBITDA impact you're having there?
And the last question is on, I think you touched the point on the long side, which hasn't been that great in some parts. I guess it's not only the European side across the board. I guess the longs have been down by 11% year over year. I guess this is definitely more than the deconsolidation. Can you give us a sense about the big picture of what's happening there?
Maybe let me try to explain a bit better the fixed cost issue. So it's true, I mean, when you look at our production and is normal. You always see production higher, and that's the yield loss that we will see every quarter. But then in Q and so if you apply that normal yield loss, you will see that in Q1, we are producing more. So we are restocking.
And then the way to think about it, maybe another way to think about it is, if I'm producing more, the fixed cost per ton of my production will be lower because my fixed cost doesn't change, I'm producing more, so then I have less fixed cost per ton, right? And then as we move into the Q2, my production will not be at the same rate as my shipments. And therefore, my cost in that particular quarter will be higher because I'm producing less and my per ton will go up. So that's another way of looking at it. But that's again, I mean, this is really the normal aspect of our business.
There is nothing new here. It doesn't mean that we are running our facilities in a different way. It's exactly the same thing.
Thanks, Yanira. So I'm going to come back to your question on guidance before I think Jean Reno will cover the volumes at Tuberao in Ukraine and what's going on
with the long product business.
So just in terms of the guidance, I really think it really boils down to the iron ore price impact. So if you look at how the iron ore price has evolved since we last talked through the market, clearly, it's moved down. You have, in the export market, seen steel pricing adjust to that lower iron ore price. But it's not really affecting our steel business. It's really affecting the mining business.
And so the expectation is, as we look into the Q2, that, that lower iron ore price will have a negative impact on mining segment profitability. And as we've talked about several times in previous questions, you don't see that benefit coming into your steel cost of goods sold because of the inventory and the lag effect. So that low iron ore price that we've seen over the past couple of months is only going to start to come through more into the second half of the year in terms of steel cost of goods sold.
In terms of the shipments, so most of the shipments, the reduction Brazil were fine, actually up year on year. I think that's also encouraging because it shows that the flat business, we start to see a positive momentum there in flat. So that will as I described, so we will see a catch up in shipments in Q2, but we should also take into account that it's going to be also in the export market. So we'll continue hopefully, we'll continue to see a positive development in domestic markets, but the catch up in shipments will also mean that our exports will also go up in the Q2. And then I'm not going to give you here a number for the shipments.
Think you can based on the profitability of this of our divisions, I'm sure you can come up with a good estimate. In terms of loans, again, it's just the loans Europe. I think we have good demand in loans in Europe. We saw the apparent soup consumption up. The issue there really was just some maintenance work, which will not reoccur in the Q2.
Great. Thanks, Rucker. So we'll move on to the next question from Naved at Cowen. Please.
Dan. Thanks for taking my question. You guys had discussed how the destocking pretty much has ended in the U. S. I was wondering if you can give us a little bit of color on inventory the infra situation in Europe right now.
Yes, sure. I think what we do observe in Europe is that there's less volatility in the inventory in the system. So we're not seeing that same more significant movement that you see in the service centers in the U. S. So inventories within Europe relatively stable.
And when we look at demand, there's a much closer relationship between real demand and apparent demand. And so looking at the picture today, although there's no really useful indicators in the sort of like the MSCI data that you can rely on in the U. S. We don't have that level of detail in Europe. But what I can tell you from our business is that the inventory situation is quite normal.
Okay. And then just as far as underlying demand goes, what would need to happen? Or what are the drivers that would get Europe up to kind of the growth rates that you guys are estimating in the U. S, whether it be next year or the coming years? Just wondering what the moving parts are there?
Thanks. Yes. So actually, it's a little bit of a function of what we've just talked about, where in the U. S. Market, you do have this disconnect between apparent demand and real underlying demand.
So taking you back to last year, real demand in U. S. Did grow, but due to the destocking in that market, apparent demand was negative. So then looking into 2017, although we're seeing a slight improvement in real underlying demand in the U. S.
Market, by far the bigger driver is the no repeat of the destock effect that we have in the 2016 base. So then switching to the European market. You are seeing a much closer relationship between apparent and real demand in our markets. Obviously, so far this year, the indicators of demand have been positive. We are seeing that reflected in the Q1 and into the Q2.
But I think in terms of the opportunity for further growth in Europe, it's still clear. We're still continuing to improve some of the key end market demand areas relative to where we were prior to the crisis. And if you look at some of the appendix slides in our presentation, it just show that the main end use markets in Europe do have a lot of relatively positive, albeit fairly steady growth in front of
them. Thanks, Daniel.
Great. Thanks, Naved. So we'll move to the next question please from Christian at SocGen.
Thanks, Daniel. I've got 3 small questions. The first one is, I think South Africa has been increasing their tariffs on imports. And could you just see if you believe this may have a favorable impact on your South African operations as early as this quarter or next quarter? And the second thing is your coke supplier in Indiana Harbor, I understand is facing some questions with regards to the renewal of its air permit.
Could that be an issue for you in the U. S. In terms of your production there? And the third question is in Brazil, obviously, we see your issue about volume. But all the indicators in Brazil for industrial production and confidence have been steadily improving in past months.
Do you see any indication that perhaps underlying demand for your products is improving somewhat? Thank you.
[SPEAKER JEAN
FRANCOIS XAVIER
BOUVIGNIES:] Okay.
So let me try to address first South African question. I think what we have seen recently is the announcement by the South African government of the intention to impose safeguards, and that should be in place, I believe, if I recall correctly, the date from 2nd from June, July onwards. So we of course that is very important for our industry in South Africa. We have seen also levels of imports high, very high in South Africa really hurting the business. So we hope that that will help.
So this is not really for now for Q2, but then hopefully it will help us in the second half. In terms of Brazil, so yes, you're right. I mean, we see a lot of positive indicators there, not only the sentiment, but we see inflation coming down very significantly. We see then the interest rates are also falling, which for sure will support investments going forward. But for the time being in terms of shipments, so as I said, we see an improvement in our flat business year on year in particular.
And our loan business is still down. So construction remains relatively weak, but we see signs improvement in the industry overall. So construction is still weak, but in industry starting to show some recovery. But given the weight importance of the construction market for our long business, in terms of shipments, you still don't see a positive evolution.
Thanks, Susan. And just coming back to your question, Christian, on coke supply at Indiana, Albert. That's not something I have in front of me actually. So I'll follow-up with you after the call, if that's okay.
Okay, thank you very much.
Thanks. And so we'll take the next question please from Phil at KeyBanc.
Thanks very much. My question was on operating maintenance spend. I know you said, Daniel, already that within U. S. And Europe that the company has provided what you think to be reasonable levels of spending on the assets during the downturn.
But does the 2017 cost profile for the business reflect any pickup in maintenance spending as profits have recovered? I guess that's one. And then the sub question to that, is there a way to think about normalized maintenance spending within U. S. Or Europe on a per ton or percentage of sales basis?
In terms of the I think in our case, if you look back if you go back to 2014 and given exactly the fact that we have maintained well our assets, we were able actually to extend the useful life of our assets. So we feel very comfortable with our maintenance policy. So there is no we have no intention or or plans to change that. We don't see any need to change that. So the CapEx that you see going to in our NAFTA operations, they are for the footprint, which is progressing and will continue.
So and we have worked very hard, as you know, in our footprint there. So I don't see any we don't see any and we don't anticipate any change there.
Yes. And then just in terms of the overall maintenance spend for the group, maintenance CapEx spend, you should just assume that sort of $2,100,000,000 $2,200,000,000 which we've been consistently spending that, that will remain the case going forward.
I was thinking about doing more on an operating level.
Yes. So beyond that sort of aggregate global level, I don't think that's a level of detail that we're prepared to go into, if that's okay.
Okay. And then last one here. Any update you can provide us on the Calvert production ramp?
Yes. So just to complement in terms of I think your question is more on the OpEx side. So we are not really anticipating or forecast an increase in our OpEx. In terms of coverage, so we continue to make good progress. So in Q1, we were running at a capacity of close to slightly above actually 90%.
Great. Is that good for you, Falk?
Yes. Thanks very much.
Great. So we'll take the next question from Carsten at UBS.
Thank you very much. Just a follow-up on the net working capital. We have seen a significant uptick here, I think more than 25% quarter on quarter. I'm just curious where this net working capital actually regionally understanding why you actually did this? Was there any, in fact in Brazil, any outage involved?
That's the first one. And on the second question, what we have seen in Russia CIS right now is a quite significant drop in steel prices. We're talking about somewhere in the range of $80 per tonne already. Have you seen any of these drops in your CIS operations already? And what do you think about the performance of
the working capital, I think it's quite straightforward. If you look at our production and shipments by division and if you apply the usual yield between crude steel and shipments, then you can see that we have built working capital, metal restocking all of our divisions, which again is the normal seasonality of the business. The only exception to that, of course, was CIS because of the maintenance work there. So we had actually more shipments coming from so we had less production there. So we destocked in CIS, but in all the other divisions we restocked.
In Brazil, I mean, a good way to see it is that we have some maintenance work in Q4 in our hot strip mill. So then in Q1, of course, we are replenishing our HFC inventories. And then other than that, some shipments just got delayed, right? So some were in transit and because of the incontinence, we did not count them in this quarter. And that will come off worse than in the second quarter.
So that's it was just timing issues there.
Karsten, just on your question on the Russia CIS market. Obviously, that's a market which is quite proximate to the China market where you have seen pricing adjust to the lower raw material environment. So within that area of the business, obviously, the order lead times are fairly short. And we only have a sort of a 2 or 3 week order book. So pricing there does reflect the market reality quite quickly.
Okay. But you haven't seen any spillover effects into the European market here at all at the moment?
No. I've been trying to stress that on all of the comments that we've made around this topic today that the risks are clearly there. But what we're seeing within our business today is that there's no compression of spreads.
Okay. Perfect. Thank you very much.
Thanks. So we'll move on to Bastian, please, at Deutsche Bank.
Yes. Good afternoon, gentlemen. I just have three quick ones left. Firstly, following up on Jason's questions and on your question and your comments around fixed cost and margins, so I'm still not quite sure I called it correctly. When you say prices will compensate the rising accounting does this also consider the fact that fixed cost will be up?
Or is there risk that the gross margins will be up? But if you include the fixed cost, which will be higher, it will drive your overall EBITDA per ton margin down? And then just secondly, could you please quantify the impact of the realign and the maintenance you did at Gregory in the Q1? And the last one, just again on the cash requirements. Maybe you could give us a bit of an early color on your CapEx for the next few years.
It seems like we shouldn't expecting any larger maintenance cycle. But given the recovery in pretty much all of your end markets, are there any larger projects for growth or product upgrades which you're planning to revise? Thank you.
Bastien, just on the first question in terms of trying to get even more sort of guidance out of this for the Q2. I think we've laid out the factors to consider. And so we've talked about seasonally stronger volumes. We've talked about pricing having adjusted to the higher accounting raw material costs as they come through in the Q2. And generally, I know you talked to the issue of fixed costs and how that is going to impact the Q2 relative to the Q1.
And we've highlighted the obvious factor, which is the iron ore price hitting our Mining segment performance in the second quarter before that you start to see any relief really in the cost of goods sold. So hopefully, that's all the elements that you need to be considering when you're formulating your forecast for the Q2. Answering your question on the your third question on CapEx. I think if you look at the level of maintenance CapEx that we have, which has been quite consistent around the €2,100,000,000 2,200,000,000 level, that is giving us a nice amount to invest this year in developing the business, investing in our high quality products and our high quality solutions and really allowing us to take advantage of the opportunities within the business to create value for the future. I think it's inappropriate at this stage to start talking about guidance for CapEx beyond this year.
But I think the reassuring message that you have should have is that there's been no lack of investment within our operations in recent years.
Okay. Just following up on that one. So you say the 2.1, 2.2 actually does include some even some product upgrades of your plants, which for example need for some of the higher strength material, I guess?
No. That's really the ongoing maintenance CapEx within both steel and mining.
Okay. Okay. And then just on Queverie, was there any larger financial impact in EBITDA in the
quarter? I mean, clearly, I mean, production was down. So the impact was not very significant. But then, of course, going forward, we have to restock. So we draw on our inventories, and that's why, as I described to you, you don't see an increase in inventories in CIS, then going forward, we have to replenish that.
Got it. But that was clearly there was obviously the working capital and more cash flow on balance sheet side. I was referring to the P and L side. Were there any costs you were carrying through the P and L related to the maintenance other than lack of fixed cost dilution?
So I mean there might be some cost, of course, but there is also some some part of it gets capitalized to the extent that it increases the useful life of the finance. So it does not impact. And then there might be some small, courses that get expensed, but most of it would be capitalized as part of the as this type of maintenance will generally extend useful life of the company.
Okay. Okay. Great. Thank you.
Great. Thanks, Bastian. So we'll move on to our last question, please, which is from Brett at Loop Capital.
Hey, guys. Just to give a rough sense as to sort of what's going on in Italy, kind of your inclination in terms of buying additional assets, potentially selling assets? And then also sort of I know you guys have got a commitment to getting investment grade style numbers. You had an investment grade style quarter. Any updates from the rating agencies?
Let
me Brett, let me perhaps start with the last one, the investment grade. So yes, you're right. So we were pleased with the evolution that we made. I mean, we had the upgrade with Moody's. We had also the stabilization of the rates with Fitch.
And we continue to dialogue with them, very active dialogue. I cannot really share much with you. As you know, these are confidential discussions. In terms of Italy, I mean, unfortunately, I'm not going to be able also to provide much color here. As you know, we are also bound by confidentiality, but we remain focused in being successful there.
And we will know the outcome when development announced. Expectation is that
I would say, are you generally acquisitive from this point forward or more focused on delevering or even asset sales?
Well, our focus at this point is deleveraging. That's our priority as we have previously communicated. So we'll continue the deleveraging process.
Thanks very much guys. Good quarter.
Thanks, Brett. So that was the last question. So thank you very much for everybody's attention. And Mr. Mittel and Aditya look forward to updating you on the strategic progress of the group at the first half results, which we'll be publishing at the end of July.
Thanks very much.