Good afternoon, everybody, welcome to ArcelorMittal's Q1 2017 Analyst and Investor call. This is Daniel Fairclough from ArcelorMittal's Investor Relations team, and I'm joined on this call today by Genuino Christino, who is the Group Head of Finance. We announced back in February at the time of our 2016 results that Genuino and I would co-host these calls for the first and third quarter results. As usual, Mr. Mittal and Aditya will host the calls for our interim and full year results, where the focus is intended to be more on the strategic progress against our targets. The purpose of the call today is to provide further clarity and answer any questions that you have on the financial results for the first quarter announced this morning. Hopefully, you have also had the opportunity to review the other documents that we published.
We published the regular presentation with detailed speaker notes, as well as our web Q&A document. Before we open up to questions, I'd like to remind you that this call is being recorded. If you'd like to ask a question, do press star one on your keypad and we'll form a queue. 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 second quarter. 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 five years, since the second quarter of 2012.
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. Looking to the second quarter, 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 a building inventory. 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. There is the impact of the lower iron ore price, which has evolved over the past six 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. I hope that clarifies the statement made by Mr. Mittal. We have had a very strong performance in Q1, and the operating conditions have not changed. With that, we will move to the Q&A, and we'll take the first question, please, from Alain at Morgan Stanley.
Yes. Good afternoon, ladies and gentlemen. Just two questions, if I may. Firstly, on the working capital guidance for the full year. You started the year with a nearly a $1 billion cash outflow guidance. How should we expect that to evolve in light of your commentary? 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 comments on the market commentary, how we're seeing your end markets, your customers, and what's the current lead times as compared to the historical averages? Thank you.
Thank you, Alain. This is Genuino. I will take your first question, and then I will comment on your second question. On the working capital, we continue to believe that the guidance that we provided last quarter remains at this point in looking at the current market conditions, a good working assumption. We are reconfirming that. Perhaps slightly higher, but $1 billion is still a good working assumption.
Thanks, Genuino. Alain, on your second question regarding lead times, I think I've just 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. The indicators of that demand are there for everybody to see. There's been no slowdown in those markets, and if you look at our order books, they're very similar to the extended levels that we had in the first quarter.
Thank you.
We'll move to the next question from Mike at Credit Suisse, please.
Yeah. 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. Can you give us some sense of how much of that you expect to come back in the coming quarters?
500,000 tons, $80 a ton, that's around $40 million of lost EBITDA in the quarter. How much of that would you expect to come back in the coming quarters? 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 shipped tons? 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 from the internally shipped stuff. Could you try and quantify the net impact?
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.
Mike, let me try to address the Brazilian question the iron ore question, I will touch on the first one. In terms of the Brazilian shipments, yeah, you're right. The reduction is significant, but we will be recovering at least 200,000 tons going forward. The way we look at it, if you look at the shipments first half for flat products in Brazil, first half of 2017 versus the first half of 2016, we should be relatively flat. In longs, we continue to see the weakness in construction. Even though we see conditions stabilizing, we're not going to be recovering the losses that we had in Q1. Regarding the iron ore delay, you're right that you will see the impact in our mining division straight away.
Because of the accounting lag, it will take more time for us to see the full benefits in our steel division. The rule of thumb that we use, that works very well for Europe, is the delta that you see in prices. 40% will hit your results in the first quarter, 35% in the second, 15% in the third, 10% in the fourth. It means that it takes almost four 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, I'm sure you can take into account, as you know, our production through EAF integration of our mines, in particular in CIS and NAFTA, I'm sure you can come up with a good estimate.
Thanks, Genuino. Just to address your question, Mike, on steel margins, what you're alluding to is the comments that we made last quarter on the price cost expansion that we were anticipating in the second quarter. 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. 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.
Looking into the second quarter and just reflecting on the answer that Genuino's 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. That will be fully offset by the revenues lags as well. I can confirm that there's no price cost compression in the second quarter versus the first quarter.
Okay. Just to confirm, I guess it's right. There's no reason to believe that internally shipped tons are priced any differently to externally purchased tons of iron ore?
Yeah, that's right, Mike. The tons shipped at market price, the dynamics will be exactly the same.
Okay. Many thanks. Very clear. Thanks a lot.
Thanks, Mike. 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 forecasts, you're guiding to demand growth this year across most of your regions. 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. 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.
Ioannis, maybe I'll take your second question first, then Genuino can just 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 is not just U.S., it is a NAFTA auto business. 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. 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. In terms of the evolution, the way that the market's heading in terms of lightweighting, we have the required products within the portfolio to lead that evolution.
Yeah, Yannis, in terms of your question about shipments. We had Brazil, we should also take into account that in CIS, we had also maintenance in one of our largest blast furnaces in Ukraine. That will come back up again in second quarter. Also, in our long business in Europe, we also had some maintenance. We also had some less availability of cold-rolled steel there, that will come back up. We believe that we're going to be able to catch our growth of the paired 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. 40%, 35%, 15%, and 10%, I think that is a good rule of thumb for you to apply.
Thanks.
Thanks, Yannis. We'll move on to the next question from Jason at Bank of America.
Hi. Yep, thanks, Dan. Look, two questions from me. One's just technical, just to make sure that I understand the accounting, and the other's a bit more big picture. Just on the comment you made on the fixed cost absorption, and you said that you produced an inventory, and that's basically brought down the fixed cost per ton, if I understood you correctly. To the extent that you're talking about that going up in 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? That's the first question. Second question, just more on the competitive backdrop. I'm wondering how you guys are thinking about the US 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. I think Genuino is well-placed to answer the technical point on fixed cost absorption. I think to address the issue that you raised on the competitive landscape in the U.S., I think, obviously, 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 four or five years have been very well invested. If you look at the results that we've been able to generate in terms of production, asset downtime, et cetera, it is very encouraging. I think that reflects the fact that there's no question that we haven't been maintaining and investing in our assets effectively.
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. That can only be a positive for our overall business. Jan Mario, just on the fixed cost effect.
Yeah, Jason. If you look at the cyclicality in our working capital seasonality, you will see that typically in Q1, we build working capital. This is in anticipation of generally what is our stronger quarter, which is second quarter. Then normally you see a reversal of that. In Q1 we tend to produce more, and then in Q2 as we see higher shipments, the production is slightly lower, and therefore you see the reverse. That's what Daniel was trying to explain. Less fixed costs in Q1, and that will reverse in Q2.
Could I just follow up, guys? I think the disappointment today in the market is that we thought we were going to be seeing the cost going down in the second quarter. Is it the case then that maybe we, the market, 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, we unwind that into the second quarter. 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. It happens in our case. As I said, it's part of the normal seasonality of our business. I guess we should not forget that we have seen also iron ore prices continue to go up until at least Q1. 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. Because of the rise also of the coking coal that we saw, particularly in the fourth quarter, that continues also to impact our costs. Remember, we spoke about four quarters for us to really start to see completely refresh of our costs.
Okay. All right. Thanks for that.
Thanks, Jason. We'll take the next question, please, from Luke at Exane.
You there, Luke?
Can you hear me?
Yes, we can now. Thanks.
Okay. Sorry. Thanks for taking my questions. I would have a couple of questions. One related to working capital requirements and what you could say as to what are your requirements for the full year. Previously, you guided on $0.5 billion to $1 billion potential need. Is this still valid, or do you see the need closer to the $1 billion 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 three weeks. There are currently widespread, looking at U.S. or Europe versus China. Do you see downward pressure? I understand that your order intakes are good, can you comment maybe on how you see things developing as we get into the summer lull? That would be my second question. Thank you.
Okay, luc, let me address the first question. We touched on it already at the beginning of the call. We are reconfirming that based on current market conditions and what we see today, the $1 billion or slightly higher assumption for working capital for full year remains a good working assumption. Second question, Daniel will address.
Thanks, Genuino. Obviously it's not our policy to talk in public forums about our expectations for steel pricing. I think earlier in the call and as you highlight in your question, we did talk about the strength of demand in our core markets, the strength of our order book in our core markets. Given that inventory is very balanced and in the U.S. is actually on an absolute in 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. 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. China does need to address that capacity imbalance.
It is making progress, more effort needs to be done to address and make that industry more sustainable on a going forwards basis. 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. We will continue to deliver the Action 2020 program, the improvements associated with that will continue to strengthen our balance sheet and deleverage. 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.
As you noted, it's been just in recent weeks that you've seen the correction in pricing and spreads in China. 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. 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. 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.
Thank you.
All right, we'll move on to the next question, please, from Alessandro at Berenberg.
Hi, guys. Most of my question been already answered. Just have two 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 imports on a year-on-year basis? If you have to go backwards in the history of the industry, with such a huge level of import, clearly also reflects a very good supply and demand balance in Europe. Do you see any major risk of a downside of steel prices from current level? To the preliminary antidumping investigation against the import of HRC from a number of countries. The final decision will be taken by October 6th. 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 HRC market? The second one is related to an update on Action 2020 program. Where are you at the moment? What kind of view you have in the coming years? Thank you very much.
Thanks, Alessandro. I'll let Genuino just cover the Action 2020 topic in a moment. First of all, just to address your questions on pricing and maybe the influence of the ongoing investigation.
Obviously, we can't comment on pricing. Just in my previous response to Luc'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. 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. I think, as you highlight, in the investigation that's ongoing on the HRC imports into Europe, there was very strong evidence. That case is very strong. There is evidence of injury. Obviously, we didn't have any provisional duties put in place in time for the initial deadline.
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 that investigation. It's a strong case. There is clear evidence of unfair trade, which is supporting increased imports into our European market. All the factors are there to justify import tariffs, but we will obviously wait for the final decision, as you highlight, in Q3.
On Action 2020, Alessandro. 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 U.S., the ramp-up of Calvert progressing very well. Also in Europe, our transformation program. The initiatives are underway, and the measurement, how much we are actually achieving, as we have in our Q&A, we will be updating you at the end of the year, once we announce our.
Thank you very much.
We'll take the next Thanks, Alessandro. Sorry, my mic was switched off. 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? Also with regards to, I think it was last week, you renegotiated a Canadian union agreement for some of your operations in the region. In those negotiations, you seemed 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? Separately, last quarter, Aditya was able to give us a bit of color on the outlook two quarters forward, going into Q2 at the time. Can you please give us any thoughts on the outlook for Q3, please?
Thanks, Seth. Just in terms of mining costs, obviously we're making some great progress within the mining operations this year. You can see that in the Q1 shipments on a year-on-year basis. 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. It's also crucially reflecting increased production in Liberia. There we are now transitioning to the new deposit at Gangra, which is a higher quality DSO material, and it's easier to access that material. We have to remove less burden. The strip ratio is lower. The operating costs at Liberia will benefit from that, and the product quality will mean that the realized price in the market is higher as well. We're making progress in mining.
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 two, three 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. 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. Just in terms of the outlook beyond the second quarter, 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 that you should factor in.
Seth, in terms of your question on the CLA signing in Canada, I don't have the specifics here in front of me, but I can confirm that given the circumstances, I guess other parties were.
Thanks, Genuino. We'll move to the next question, please, from Rochus at Kepler.
Yes. Hi there. Yeah, just a few questions from my side. One is on your production rhythm. I'm not really sure that I got the point you made. You're saying, okay, you produce more in Q1, and then you start releasing from the second quarter onwards. At least when I look back to the previous couple of years, second quarter in production was always stable or even up. Has there something changed in the way you're running your assets, or is there anything else why the reason might be different this year? That's the first question. The second one is again on your comment on the guidance for Q2. If you're now seeing less spread improvement in the second quarter, is this purely a function of the cost which are dragging it for longer?
Is there anything else which is creating a headwind on the second quarter steel spread? The third question is on the loss of volumes you occurred in the first quarter from Tubarão, Ukraine and so on, can you give us a sense of the volume effect in Q1 and the EBITDA impact you're having there? 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. It's true, when you look at our production and shipments, you will see that there is always a yield loss between our crude steel production and shipments. That is normal. You always see production higher, and that's the yield loss that we will see every quarter. If you apply that normal yield loss, you will see that in Q1, we are producing more, so we are restocking. 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, then I have less fixed cost per ton, right?
As we move into the second quarter, 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. That's another way of looking at it. That's, again, 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, Genuino. I'm gonna come back to your question on guidance before I think Genuino will cover the volumes at Tubarão in Ukraine and what's going on with the long product business. Just in terms of the guidance, I really think it really boils down to the iron ore price impact. If you look at how the iron ore price has evolved since we last talked with the market, clearly it's moved down. You have, in the export market, seen steel pricing adjust to that lower iron ore price. It's not really affecting our steel business. It's really affecting the mining business. The expectation is, as we look into the second quarter, that lower iron ore price will have a negative impact on mining segment profitability.
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. That low iron ore price that we've seen over the past couple of months is only gonna 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, most of the shipments, the reduction that we saw in Brazil, I think it's important to say that it's in the export market. Domestic shipments in Brazil, they 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. That will, as I described, we will see a catch-up in shipments in Q2. We should also take into account that it's going to be also in the export market. Hopefully, we'll continue to see a positive development in domestic market, but the catch-up in shipments will also mean that our exports will also go up in the second quarter. I'm not gonna give you here a number for the shipments.
I think based on the profitability of our divisions, I'm sure you can come up with a good estimate. In terms of longs, again, it's just the longs Europe. I think we have good demand in longs Europe. We saw the apparent steel consumption up. The issue there really was just some maintenance work, which will not reoccur in the second quarter.
Great. Thanks, Rochus. We'll move on to the next question from Novid at Cowen, please.
Hi, Daniel. 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 could give us a little bit of color on the inventory situation in Europe right now.
Yeah, sure. I think what we do observe in Europe is that there's less volatility in the inventory in the system. We're not seeing that same more significant movement that you see in the service centers in the U.S. Inventories within Europe are relatively stable. When we look at demand, there's a much closer relationship between real demand and apparent demand. Looking at the picture today, although there's no really useful indicators in the MSCI data that you can rely on in the U.S., we don't have that level of detail in Europe. What I can tell you from our business is that the inventory situation is quite normal.
Okay. Just as far as underlying demand goes, what would need to happen or what are the drivers that would get Europe up to 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.
Yeah. 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. Taking it back to last year, real demand in the U.S. did grow, but due to the destocking in that market, apparent demand was negative. 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 had in the 2016 base. 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 strong shipment performance that we've seen in the first quarter and into the second quarter. 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. 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, Novid. We'll move to the next question, please, from Christian at SocGen.
Daniel, I've got three small questions. The first one is, I think South Africa has been increasing their tariffs on imports. Could you tell us if you believe this may have a favorable impact on your South African operations as early as this quarter or next quarter? 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? The third question is, in Brazil, obviously we see your issues about volume. 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.
Okay. Let me try to address first the South African question. I think what we have seen recently, 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 June, July onwards. Of course, that is very important for our industry in South Africa. We have seen also levels of imports very high in South Africa, really hurting the business. We hope that will help. This is not really for now for Q2, but then hopefully it will help us in the second half. In terms of Brazil, so yeah, you're right. 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.
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. Our long business is still down. Construction remains relatively weak, but we see signs improvement in industry overall. Construction is still weak, but industry is starting to show some recovery. Given the weight, the importance of the construction market for our long business, so in terms of shipments, you still don't see a positive evolution there.
Thanks for that. Just coming back to your question, Christian, on coke supply at Indiana Harbor. That's not something I have in front of me, actually. I'll follow up with you after the call, if that's okay.
Okay, that's cool. Thank you very much.
Thanks. 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's provided what you think to be reasonable levels of spending on the assets during the downturn.
Does the 2017 cost profile for the business reflect any pickup in maintenance spending as profits have recovered? I guess that's one. 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, 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 here. We feel very comfortable with our maintenance policy. We have no intention or plans to change that. We don't see any need to change that. The CapEx that you see going through in our NAFTA operations, they are for the footprint, which is progressing and will continue. We have worked very hard, as you know, in our footprint there. We don't anticipate any change there.
Yeah. Just in terms of the overall maintenance spend for the group, maintenance CapEx spend, you should just assume that sort of $2.1 billion-$2.2 billion, which we've been consistently spending, that that will remain the case going forward.
I was thinking more to any more on an operating level.
Yeah. 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. Last one here. Any update you can provide us on the Calvert production ramp? Thanks.
Yeah. Just to complement in terms of, I think your question is more on the OpEx side. We are not really anticipating or forecasting increase in our OpEx. In terms of Calvert, we continue to make good progress. In Q1, we were running at a capacity of close to slightly above actually 90%.
Great. Is that good for you, Phil?
Yes. Thanks very much.
Great. Thanks. 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 happened. Was there any volume involved, which you built, to get a better understanding why you actually did this? Was there any, in fact, in Brazil, any outage involved? That's the first one. 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 ton already. Have you seen any of these drops in your CIS operations already? What do you think about the performance of ACIS going into the second quarter? Thank you.
Let me, Carsten, so 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 stock in 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. We had less production there, so we destocked in CIS, but in all the other divisions, we restocked. In Brazil, a good way to see it is that we had some maintenance work in Q4 in our hot strip mill. In Q1, of course, we are replenishing our HRC inventories. Then other than that, some shipments just got delayed.
Some were in transit, and because of the Incoterms, we could not count them in this quarter. That will come, of course, then in the second quarter. That was just timing issues there.
Carsten, 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. Within that area of the business, obviously, the order lead times are fairly short. We only have a sort of a two or three-week order book. Pricing there does reflect the market reality quite quickly.
Okay. 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. What we're seeing within our business today, is that there's no compression of spreads.
Okay, perfect. Thank you very much.
Thanks. 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. I'm still not quite sure I caught it correctly. When you say prices will compensate the rising accounting cost, does this also consider the fact that fixed costs will be up, or is there a risk that the gross margins will be up? If you include the fixed costs, which will be higher, it will drive your overall EBITDA per ton margin down. Just secondly, could you please quantify the impact of the reline and the maintenance you did this February in the first quarter? 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.
Seems like we shouldn't be 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.
Bastian, just on the first question in terms of trying to get even more sort of guidance out of us for the second quarter, I think we've laid out the factors to consider. We 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 second quarter. Genuino's talked to the issue of fixed costs and how that is going to impact the second quarter relative to the first quarter. 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. Hopefully that's all the elements that you need to be considering when you're formulating your forecast for the second quarter.
Answering 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 $2.1 billion, $2.2 billion 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. I think the reassuring message that you should have is that there's been no lack of investment within our operations in recent years.
Okay. Just following up on that one. You say the $2.1, $2.2 actually does include even some product upgrades of your plants, which you, for example, need for some of the higher strength material, I guess?
No. That's really the ongoing maintenance CapEx within-
Okay
both steel and mining.
Okay. Clear. Just on Kryvyi Rih, was there any larger financial impact in EBITDA in the first quarter?
I mean, clearly production was down, so the impact was not very significant. Of course, going forward, we have to restock. We draw on our inventories, and that's why, as I described to you don't see an increase in inventories in CIS. Going forward, we have to replenish that.
Got it. There was obviously the working capital and more cash flow on balance sheet side. I was referring to the P&L side. Were there any costs you were carrying through the P&L related to the maintenance other than lack of fixed cost dilution?
I mean, there might be some cost, of course, but there is also some part of it gets capitalized to the extent that it increased the useful life of the furnace, so it does not impact. There might be some small costs that get expensed, but most of it would be capitalized as this type of maintenance will generally extend the useful life of the furnace.
Okay. Great. Thank you.
Great. Thanks, Bastian. 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 inclinations 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?
Brett, let me perhaps start with the last one, the investment grade. Yeah, you're right. 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 rating with Fitch. We continue the dialogue with them, very active dialogue. I cannot really share much with you, as you know, these are confidential discussions. In terms of Italy, unfortunately, I'm not going to be able also to provide much color here. As you know, we are also bound by confidentiality. We remain focused on being successful there. We will know the outcome when the government announce. Expectation is that
I would say, are you generally acquisitive from this point forward or more focused on delevering or even asset sales?
Our focus at this point is deleveraging. That's our priority, as we have previously communicated. We'll continue the deleveraging process.
Thanks very much, guys. Good quarter.
Thanks, Brett. That was the last question. Thank you very much for everybody's attention. Mr. Mittal 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.