Well, good morning, everybody. Thank you so much for being here this morning. This is another Vale Day. We will start remembering a bold remark that we made last year in this same Vale Day. Remember that Vale was, in our opinion, prepared to generate more value than any other company in the sector. This was said one year ago. Fortunately, you can see through the figures that it's still true. Actually, I can tell you that we think that we are poised to do it all over again in 2019. Let's wait in 2019 and see if that's going to be true as well.
I decided to start this presentation, instead of the presentation itself, going straight to the concern that I suppose a number of you have regarding the situation in China, the situation in the steel prices, and the situation in the iron ore. Let's have it discussed before we start the presentation itself. Like three weeks ago, I was in New York.
I made a presentation there where I said that we were expecting prices to soften by the end of the year. Why? Because this happens every end of the year, because the winter in China, because lower demands, especially. What happened this year is besides the lower demand, besides the normal situation, you had two other factors that weighted on prices. First, this so-called trade war between China and U.S. with a very negative sentiment regarding everything, iron ore included.
Second, the winter cuts in China were lower than expected. People that made inventory expecting this happening, they found the market fully supplied. They are facing now more availability of steel than demand. Consequently, prices went down. Consequently, it brought iron ore prices down as well. What is really important, at least in our opinion, is that we made the remark as well that prices would stay between $60 and $80 per ton. This is precisely what has happened during these last 12 months, at least. This is comfortably the situation even now. The prices went down. Yes, they came down recently. They came down from a very comfortable level of prices. The prices are still in a proper way.
It is Vale's opinion, it is my opinion as well, that in the beginning of the year, when the building of inventories start all over again, prices will start to move up once more. There is a lot of noise regarding this trade war causing all kinds of movements in the market. If you take it aside for a moment, in the physical market, the real market, very little is happening right now. Well, having said that, with this introduction, we can start our presentation itself. We are going to cover in the presentation all these points. I want to emphasize the three main important messages that we want to leave with you. First, iron ore. Iron ore, we are going to continue to do what we are doing in a very successful way.
We are very proud in the evolution that we are showing in the iron ore. We see no reason for changing that. Much on the contrary. We are going to emphasize even more the flight to quality, the availability of high-quality products coming from Vale. Second, this is the most important point of this presentation, base metals. It is my goal, it is the goal of all of our management team to turn around this business this year. Why? We think that there is a real revolution coming, and we have this year to fix things, but we have only this year. It is not just myself or Eduardo Bartolomeo. It is Peter's job. It is Luciano's job. It is Alexandre's job. Actually, it's everybody's job to make it happen.
I hope to be here by this time next year showing you the evolution that we had on this. You are going to see during the presentation a number of measures that are taking place in the company. We changed management, as you know, starting with Eduardo Bartolomeo, but Eduardo Bartolomeo changed everybody also, as well. Consequently, we have a completely new team taking care of this operation, and I'm very confident that we are going to deliver what is expected. Finally, the last fact that I want to leave with you is capital allocation discipline. This is here to stay. Vale is not going to change that. You are going to see during the presentation that we are going to have a very large free cash flow during the following years.
Our purpose is basically to give it back to the shareholders, either through dividends or share buybacks, depending on the moment. In this presentation, we are going to start with sustainability. In sustainability, I want to emphasize one special thing. Osório will make a full presentation on sustainability. We are committed to recover 100,000 hectares of degraded land that is not Vale's, is outside Vale's premises, and with the purpose of not only recovering it, but creating a source for sustainable income in the region we operate. I think this is, among all the initiatives that we are going to see, the most important one. With that, I pass the floor to Osório that will continue to make the presentation on sustainability. Thank you.
Thank you, Fabio, for giving me the floor. Good morning, everyone. I would like to start my presentation recalling our bold promise made in this very room last year, which was a promise to become reference in sustainability. Today I would like to share our journey, how we are doing up to now, and let me start saying that sustainability is totally embedded in our culture, in the way we do business across the organization, throughout our daily operations, and in the way we operate. By being the most sustainable operation we have in the world, I may say. We have, in terms of efficiency, the truckless dry processing S11D project. Also, in everything we do towards a Mining 4.0, that's going to be given in detail by my colleague, Peter Poppinga, in his presentation.
In the way we produce, by having a high-quality products, helping the environment with less CO2 emissions, such as the high-grade iron ore and the nickel and cobalt for batteries. Last but not least, the way we engage with society. We are present in territories with critical and still social and environmental issues to be resolved outside our premises, as Fabio mentioned. We would like to leave a very positive legacy in this territory. We will continue to invest in social and environmental programs that we strategically selected this year in order to do so. Our efforts are paying off. We are being recognized by international bodies with some awards I'd like to share with you. The first of them, we are ranked top three out of 40 companies by the Corporate Human Rights Benchmark in 2018.
For seven years in a row, we are listed by the UN Global Compact LEAD as the only mining company in this rank. Just recently, ladies and gentlemen, last week, we were also listed by the Brazilian Stock Exchange Sustainability Index 2019 in Brazil. In other words, we are on the right track to deliver our promise made here. In terms of Mariana, I'd like to say that through Renova Foundation, it's already invested $1.3 billion in environmental and social programs, specifically in environmental recovery, resettlement, and compensation. Today, we would like to show you a video how Novo Bento is going to look like in 2020.
Please show the video. Last but not least, ladies and gentlemen, I'd like to share our vision and our goals that we set to 2030. We want to have 100% of self-generation of clean energy in Brazil.
As mentioned by Fabio, the recovery of 100,000 hectares of degraded land outside our premises. In terms of water, the reduction of new water collection by 10%. In terms of climate change, we have a new goal set, which is the reduction of 16% of CO2 emissions by 2030. Also, we will continue to invest in healthcare, education, and income generation in our social programs. We are shifting gears here, and that's the message I would like to leave with you, that we are on the right track to become reference and sustainability. Now we will give the floor back to Mr. Fábio Schvartsman. Fabio.
Thank you, Osório. Well, let's remember what is the situation in our iron ore division and why we are doing what we are doing. It is basically an issue of supply and demand. Demand because of the flight of quality, the supply-side reform in China. It's here for staying. They have to cope with pollution.
They have to improve productivity in their steel mills. Consequently, the necessity of the so-called Green Ore Valley, it's really very strong. This is the reason why the performance of our operation is as good as it is today. Why green ore? Because we are less polluted than the others. We have less emissions of everything, less particulates, less CO2, less NOx, less SOx. Meaning that it makes sense to use high-quality ore in order to achieve the results that they badly need. We are confident that this is not going to change.
At the same time, looking from the supply side. We are now, everybody understands the fact, we are watching at the same time, the depletion of the mines of our competitors, being the Chinese or Australians. At the same time that we have S11D ramping up and having more availability of this high-quality ore, the rest of the market, the rest of the suppliers, they are facing the opposite situation. This is the reality of Vale. Now I will pass through Peter that will describe a little bit what we've been doing recently with that.
Thank you, Fábio. Morning, ladies and gentlemen. It's a pleasure to be here with you again. As Fábio said, as a consequence of the supply side reform and the sustained steel demand, we have a need for productivity. If you have to produce the same amount of steel, say, with less capacity, of course, your capacity utilization goes up. That's what you can see on this chart here. We have world capacity utilization going up from 70%-76%. This is worldwide. If you take China only, this 76% would be 85% nowadays. Same rationale applies to steel prices. Steel prices have gone up worldwide constantly as well. Of course, there are some seasonality effects. We all well know, like Fábio said, the steel prices came off their recent peaks recently. We think it's not a structural demand issue.
It is a short-term weakness and has to do basically with the fact that China has produced much more steel ahead of the winter cuts. The winter cuts came out, turned out to be less strict than it was anticipated. Anyway, we don't think the steel prices will go back to their historical levels. Speaking about productivity, what is it about? It's about FE units. You can get more FE units into the system by either having more rich material in the sinter plant, like our Carajás fines, or you feed the blast furnace with more pellets, which has also a good effect on the emissions. What we see is increasing trend in pellet demand worldwide. We see an over 30% increase in the next years.
As a twist, however, we also see a huge depletion going on in the domestic concentrate in the whole world. It is easy to build a pellet plant, isn't it? It's very difficult to get the right feed for that. That's what's happening right now. We have today, in this year, we have a supply shortage of over 25 million tons pellet feed worldwide, and I wouldn't be surprised if this supply gap goes to 50 million tons within some years. Where are these big markets for these pellets? It's, of course, Middle East and Africa based on the direct reduction. Also some U.S. projects will probably grow. In China, that's the big news. China was never a big pellet producer, and there was never big pellet demand. Now it's coming.
In Europe, because of the CO2 issue, it's also probably going to increase the pellet consumptions a lot. We spoke now about the Fe units, but as you well know, blast furnaces and steel making is not only about the Fe, there is also the contaminants. You have to balance those elements very well. What we see now, mainly in the Asian region, is a big imbalance in contaminants like alumina, like phosphorus, the Australian mines being depleted, and what's replacing that has a much higher contaminants than the ore coming out, as you can see on the right side of the chart. What happens if this materializes, which is already the case, the penalties for all those elements shooting up. This is the next slide. I took the alumina example, but you have the same behavior for the phos.
The alumina has an exponential behavior in terms of penalties. On the left side, this is taking the 62 family plus the 58 family together. If you look to the right side and look a little more detail, this is an X-ray of the 62 family only. You see that the alumina is affecting more and more the relative value of the ores. You see our yellow BRBF here is getting a premium because of the alumina. You see that some other brands like the Mining Area C or the Jimblebar from Australia are getting huge penalties. At the end of the day, the average of that is giving you the 62 index. Okay. Miners, of course, reacting to that different ways. Miners are taking out some high alumina phos stuff, selling it separately.
Others are avoiding participating on the fixed pricing system so that you preserve your brands. Actually, Vale today is we are having more or less 60% of all the volume in the price formation of the 62 index because of this effect. Eventually, miners will have to increase their CapEx.
There will be an increase in OpEx because of wet processing, but not so Vale. We are not in this reactive mode. We are ahead of the game, and we are actually leading the quality game. How did we get there? Essentially, there were two things we did. We invested in our competitive advantages, which are what? There are two. It's Carajás, and it is the ability to make high-quality pellet feed in the Southeastern system. Those two, again, it's easy to build a pellet plant, but to make the feed, that's the trick.
Those two are our competitive advantages, and we invested heavily in that in the last years. The second thing we did was we consolidated and implemented our differentiation strategy. You remember in the past, these ores didn't get a premium.
Through our commercial initiatives and, of course, supported by the flights to quality trend, we were able to differentiate ourself very well. The result is in front of you. These are the main families of our products. On the left side, it's more related to the productivity, the Fe units, the Carajás fines, the pellets. On the right side, it's more related to what I just said about the impurities, the low alumina, the low phos, the Brazilian Blend, and the Sinter Feed Low Alumina, which we recently sold one tender at $12 premium.
I would like to pass then back the floor to Fábio for him to show us a little more how these investments were done and what's next in the pipeline. Obrigado.
Well, we are not here by chance. We spent, in the last few years, almost $20 billion in iron ore to build this. This differentiated position that we have came out of that. We invested more than $14 billion in S11D alone, with a nominal capacity of 90 million tons of high-grade ore. We invested another close to $5 billion in pellet feed and Sinter feed, a total of 65 million tons of extra feed for both.
We invested more than $1 billion in pelletizers themselves, meaning that we have capacity now to produce and use all the pellet feed that we generate. The good news is this is the past. We don't have to invest that anymore. We do have some new things to share with you. None of them are huge investments, all of them are, in our opinion, very good news.
Sorry, before that, one further comment on our system. It's important to emphasize how we translated the complexity of our operation, 22 mines, 13 pellets plants, three railroads, four ports, 17 blending sites. We will never have the same competitiveness of the Australians. They are much closer to China, and their operation is obviously more simple than ours. What we have done through this integrated controls system center, we put everything in the same structure, and we are able to optimize the operation, take advantage of the evolution of the market in any given month. This is better emphasized by the 16 blending ports that we have in China. These were partnerships that were built during these last two years. Now we have 120 million tons of blending capacity in China, we have a big inventory sitting in China.
Vale is not selling according to orders anymore. We sell according to inventory. That means that we take advantage of the movements of the market. If the market is weak, as it seems to be the case in the end of this year, we are going basically to hold to the inventories, we are going to bring this product to the market when the market starts to operate better in the beginning of next year. We already did it last year, we are going to do it again this year. Consequently, we went from 53% of high-quality products to 81% during this period of time. It's a clear evolution in the right direction given the market situation. One moment about this new information that I want to share with you. First, the increase of capacity in the northern system.
We are increasing capacity in S11D from 90 to 100 million tons. The system to 240 in the north. We just announced today the acquisition of Ferrous Resources. This is one bolt-on acquisition that I have referred during the last calls with investors. This is exactly what we are looking for when we talk about bolt-on acquisitions. We are talking small acquisitions, very synergetic with ours. Why synergetic? Because we can take advantage of their infrastructure, and they can take advantage of our infrastructure. Therefore, we have a very competitive cost of operating. On top of that, we are talking about 4 million tons of further high-quality pellet feed coming from this in a moment where this is something that is lacking everywhere in the world. We have the Gelado recovery that was already explained.
We are increasing the production of pellet feed in our southeastern system by 20 million tons in the next few years. We have a Malaysia expansion of blending of 10 million tons. We have the expansion in pellets production in Oman. With all of that, you'll see that we'll be able to continue to grow the share of high quality in our portfolio. We are going to very good 95% of all of our sales of high-quality products in the next few years. Now it's time to give the floor back to Peter. He's going to explain each one of these investments to you in more detail.
Thanks, Fábio. Let's start with the S11D expansion, $707 million CapEx approved, 10 million tons. What is the rationale here? The rationale is cost reduction, of course. S11D has a lower C1 cost, around $8 than the rest, and the rationale is also price realization. What are we going to do? It's essentially investing the majority is in the mine and the plant.
We have a fifth crusher in the mine. We will have tertiary crusher and secondary screening enhancement in the plant. What's most important, we have a third silo for loading the trains and another stockyard coming down the mine so that the plant and the loading station will not become a bottleneck for the mine production in the truckers. One thing I wanted to emphasize here, this is not probably going into the seaborne market. This is what we are seeing today.
Well, first of all, we need feed for our pellet plant in São Luís, and we are detecting in the domestic market from Brazil, we are detecting a need for Carajás, and so probably most of it will go to the domestic market in some years to come. Second initiative is the Gelado project. This is typically only cost reduction. This is a recovery of the tailing dam, and also an upgrade of the pellet feed there. It's also a nice sustainability project. Why is it cost reduction? Because it's much easier to dredge and to pump than to mine and to grind. This is much more cost-effective. The investment here is $270 million, and it's about dredging, filtering, cycloning, and magnetic separation, which is the concentration. Very simple. Next one. This is a big one.
This is the big opportunity we have in the Southeastern system, where we have big reserves, but also big opportunities to produce a low alumina, high-grade pellet feed. Our plan is to increase the production by 20 million tons for pellet feed, high-grade pellet feed. There is mainly three ways to do it.
Process optimization. For instance, we have the Brucutu mine, we have the Itabira mine, where we have higher coarse tailings to the jigging process, just grind that and float it, and it gives you pellet feed. We have Fe content reduction in tailings. We have developed an own technology of high-frequency screening together with optimized flotation, gives you less Fe in the tailings. The biggest part is recovery and concentration of tailings. This is easy to understand. The trick here is that we have our bottlenecks in the grinding, not in the flotation.
You have a big tailing dam sitting in Itabira, you have big tailing dams from the past sitting in Brucutu, for instance. You're going to recover all that. This can bypass the grinding system because it's already fine. We have space and flotation, so we just float it. That is what's behind this big initiative.
We also have developed new technology. This is Vale patent. We have developed new technology to actually float the ultra-fines, 50% recovery. This is a very important process, and will start in the Vargem Grande mine in one or two years. Last but not least, I just wanted to make the remark that we are also studying and developing and acquiring expertise in dry processing or dry ore processing, which will be the next frontier here. We go to the acquisition of Ferrous, Fábio just mentioned about.
Ferrous today produce 3 million tons of sinter feed plus pellet feed, but not very high grade. The resources are 600 million, no, 1.5 billion tons, and the reserves are 600 million, around 600 million tons. They have this Vega project, where this production will be upgraded to 4 million tons per year, but now with a high grade content. The Vega project is almost done, almost executed. The rationale here is both, it's cost reduction and it's also price realization. Why cost reduction? We have our Fábrica mine sitting right next to this Ferrous mine, so we have lots of operational synergies here. We also will get the optionality instead of shipping and railing the ore through the MRS system, we are going to use our Vitória-Minas Railway.
Ferrous has a big tailing dam, a new one, and we have lots of plans with this tailing dam. Why price realization? Because this is easy. With a very few dollars, it's easy to I think it's something around $20 million, you can upgrade the whole Ferrous production into direct reduction pellet feed, which is our plan. The acquisition price was $ 550 million, as you know. Next one is a small one in Oman, an opportunity to go to 2 million tons more pellets by installing another grinding mill, but also by feeding more Carajás fines. See what's happening. Carajás fines are starting to be used in the domestic market in Brazil. We use Carajás fines already in the pellet plant in São Luís and in the pellet plant of Tubarão, and now also in Oman.
Not all the Carajás fines you hear about is going to the seaborne market, this is important because it boosts the productivity of the grinding mills, we can produce more pellets as well. It's typical price realization rationale here. Last but not least, the Vale Malaysia expansion, 10 million tons.
Malaysia, our distribution center, blending center there has a capacity of 30 million. We're going to 40. It's again, a pure cost rationale because it's much easier and cost-effective to reach the small ports in the region like in China, Southeast Asia, by blending it in Malaysia than by doing cabotage in the countries. It's much cost-effective, you have a better use of your Valemax fleet. The other rationale is to get to new markets easier in Southeast Asia and India. India is always this big question mark. Is India coming?
What are they going to do? For sure, they will import much more coking coal, we are seeing some iron ore, more and more, coming into India. Okay. That's summarizing it, what Fábio said. That's how we are going to reach the 95% of our improved product mix. I wanted just to remind you that we are committed to our value over volume approach, according to the assumptions of margin optimizations we have today. That means that our production guidance for 2019 is 400 million, it also means that all these incremental tonnage we are talking about, which you just saw in several projects, are not going to increase going forward from our 2019 production guidance, probably going to be very flat. Let's, just a minute, talk about pure competitiveness, pure costs. Leave the quality story behind a little bit.
What are we doing going forward in terms of our C1 costs? Let's start with that. We are having initiatives that the C1 costs can be $1-$2 lower. It's mainly about the S11D ramp-up. This gives already a lower C1 cost, it's also about productivity, technological initiatives, cost managements. Here, I would like to show you a small this is $1-$2 lower C1 costs. We have a small video showing the initiatives we are developing together with our colleague, Alexandre Pereira, about the technology. Can we have the film, please? Thank you. The other big pillar on the competitiveness is the freight, right? You know that all our first-generation Valemax are already operating. We are having now the second-generation Valemax coming on stream, 18 of 32 already operating, the 47 Guaibamax under construction.
I just wanted to remind you that the second-generation Valemax and the Guaibamax, they are $3-$4 more competitive than the first generation of Valemax. Right? We have also the IMO regulation coming, the SO2. By 2020, we must be compliant, we are well ahead of the game. What are we doing? The first-generation Valemax are being retrofitted with scrubbers. The second generation, plus the Guaibamax, they already come with scrubbers installed. That means that you can continue to use the HSFO, the high sulfur oil, with these vessels. On the red bar here, these are smaller vessels where we have decided then to go for low sulfur oil, marine diesel adjustments, we are assuming a spread of $200-$240. It depends on how the market will react.
We don't know how the refineries will react, but this seems to be a safe number. It means that if you add all this together, you see that still with our IMO compliance, we are going to have more or less half a dollar less freight some years down the road than we have today. Last but not least, I will show you the price realization in last year's. This is FE. This is all sorts of premiums, and pellets is included here. We are forecasting to next year to have a $2-$2.5 higher price realization than we had this year. Recapping here, the 65 index was launched in 2015, the 62 low alumina index was launched in 2018.
Some days ago, you saw that the SGX launched the derivative instruments for the 65 so that our customers, if they want, they would be able now to hedge. There is a forward curve being consolidated. Summarizing all the competitiveness initiatives, we have $1-$2 C1 competitiveness. This is S11D and productivity, $2.50-$3 higher price realization plus the half a dollar I mentioned on the freight, which gives us $3.50-$5 increased competitiveness down the road. The last chart here shows our journey. It's a normalized chart where we normalize by reference price, foreign exchange, and bunker. Those are the three elements affecting our competitiveness. You see steady as we go, getting more and more EBITDA per ton on a normalized basis. We are in the right direction. 44-47 in some years.
This is considering the $3.50-$5 on competitiveness we mentioned before, but also those small high return projects I just mentioned about. That was it from the iron ore. We speak a little about coal now. I just want to put it in context that as you know, we are going to produce this year the same amount of last year, roughly, 12 million tons. We wanted to stabilize the business first, the ramp-up. What do I mean by stabilizing the ramp-up? It's essentially about the mine. The mine, we had to develop new mine faces. For instance, we are entering the number 6 section. We also wanted to bring back the strip ratio to normal sustainable level that was not well-planned in the past. Now we have it almost back.
Also we wanted deliberately mine some regions where we would not mine normally because we wanted to empty the pit to prepare the pit for the future in order to avoid to build new tailing dams. All this together was not an optimal mining in this year and will become now better in 2019. Those are the main pillars we are building on. We have the capacity. Yes, we need some more infrastructure.
We need to build some conveyor belts from the mines to the plants. Mine equipments, we are getting two more shovels and 18 trucks to help, and the development of new mining sections I already mentioned. We also have on the mine productivity, it's mainly about knowledge transfer. We have roughly 50 people, 50 high-skilled operators, coming to Mozambique as we speak from Vale's operation to help mainly in the maintenance department.
In terms of yield, we had to build and we are building a buffer stock buy between the mines and the plants in order to increase availability, interconnection of the two plants and some more process control. A big drilling program is being carried out as well so that we can have more knowledge on the deposit. Here you see the ramp-up profile. Next year production guidance will be 14 million tons, and we are going to reach our capacity, 20 million, by 2021. Last slide shows you the forecasted cost reduction. We are around $ 120 today. We are going to $ 80 in the future. Of course, this includes the net Nacala tariff because of the project finance. We can make all sorts of calculation. Today the margin would be around $ 20.
In the future, the margin with this evolution and depending on the price you put for coal, the margin can be $ 40, $ 60 or so on. That concludes my presentation. Thank you very much. I would like to give the floor then back to Fábio, who is going to introduce base metals.
I got it, Peter. As you could see, we have all the reasons to be confident that we are in the right path regarding iron ore. I'm quite confident that with the steady and experienced hand of Peter, coal will be a source of good deals in the short period of time. What was lacking was base metals, and base metals is our main challenge and is going to be treated like this. Today, you are going to get a lot of information, which is the problem and how are we going to change that, how we're going to address that. The first is obviously we need to have this operation fixed and stable if we are to take advantage of the future EV revolution. Why do we think that the EV revolution is for real at this point?
Because if you take only the announcements of the automakers around the globe, the volume is so big that will be produced in the next few years that you have to have a lot more nickel than that is available in the market today. Vale is by far the largest company in this field. Besides being the largest company, we have the largest reserves untapped of nickel in the world, of higher quality in Indonesia. If anyone in the world will be participating in this EV revolution, supplying material, it should be Vale. Turning around. As I said, with these automakers' announcements, we are expecting production to get close to 14 million cars in less than seven years. You're going to need only for that 500,000 tons of further nickel. Today, the total market is $2 million.
Where this new nickel will come from, if not from companies like Vale that hold the reserves. Consequently, we decide not to close VNC. Actually, we think that if we really believe that this EV revolution is going to be real, why are we going to take out 50,000 tons of total capacity in New Caledonia when it's going to be badly needed in the market and surely rewarded by the market with correct prices. We are doing that not only because of prices, because now we change management there as well, and we are doing a completely different approach towards bringing it to normal operation. Again, this is the challenge of the company.
Among the challenges that we have in all of our base metals, this is the most difficult one, but the one that we are prepared to face as we should, given the proximity of the EV revolution. It's important as well to share with you this agreement that we just made with Glencore regarding Victor. Why this is an important achievement for Vale. Victor is a very good ore body that Vale has, as you're going to see in the presentation of Eduardo Bartolomeo in the sequence. It has more than yearly production expected of 40,000 tons of copper per year alone, and it was impossible to operate without cooperation between Vale and Glencore. Nevertheless, this cooperation was never possible, never achieved during the more than 10 years.
We are proud that we finally got it done, and this will be a win-win situation that will produce a fantastic return on investment for Vale. That's again, once more, like it was in the case of Voisey's Bay, the approach that we are having now, we do anything that makes sense in order to produce more value, and this was clearly one movement in this direction. Now, Eduardo, please tell them what is that you're going to do.
Thank you. Well, good morning. It's a pleasure to be here with you today, and a special day as well. It's my first Vale Day, it's a good chance to share with you my learnings, my views, my actions. By the way, our actions, as Fábio mentioned before, I think is a broader problem. It's not a base metal problem, it's a Vale's problem.
On the way we're going to tackle the problem, you're going to understand very easily that is being done in that way. Okay, before, one of my first learnings, I've been with Vale since 2004. A logistics person more to the iron ore world. Arrived in January and found out something that might be obvious to a lot of you, but not for us, by the way, that we have by far the best footprint in nickel.
I think there are polymetallic mines in Sudbury. They can even be cash cost negative, by the way. On Onça Puma, extremely well-run operation in Carajás. PTVI, as Fábio mentions, owns and has the biggest reserves and the largest and the best reserves in the world and where the new game's going to be played. In VNC, hard operation, but sitting in one of the best ore mines in the nickel quality in the world as well.
That's a very important point just to remember, but the house, as Fábio mentioned, has to be fixed to take chance of this opportunity. The way we look at this, and that I might pause a little bit here in this slide because as philosophically, what are we trying to do, and it's going to go through everything, through the turnaround and not that that has so much turnaround to be done.
I think it's important to define what turnaround means because a lot of people say turnaround. Turnaround what? What we expect one year from now or three or five years from now. We understand that turnaround fundamentally is to have a stable, predictable. We say to the market, we're going to produce 244. We come in the next year, we say we did 245, 244. We said that the cost is the first quartile or a second is going to be moved to the first. We need to have the most cost-efficient production and of course, extract the most value from our products because we have a very diverse product mix on the best value of it. I think fundamentally what we want to try is to make a stable efficiency and value operation.
It's clear-cut, that's we're actually going to do. I say I'm an engineer, I need an equation. Our strategy is not very complex. I think it has to be simple. It's around people and processes. We understand fundamentally, if I have the right people doing the right processes, we're going to have the right results. If you can get the equation and improve, like if I have good people, good process, we're going to get good results. I think fundamentally, it's very important because when I arrived at the base metals, the first thing we look at how we can get the best people together. What I mean best people, it's not like taking people out or taking people in, it's who does what.
I think I'm glad to say that a year after that we're very fortunate to have assembled a very good team. We brought people from the industry, we brought people from iron ore, we brought people from Brazil. I think it's a good moment. I think in this sense, we are ready to go. For the other side of the equation, it's going to be those three pillars here. We're not going to invent anything. I think Vale has world-class operations in the railway, I know very well, by the way, has world-class operations in iron ore. Why not bring process or accelerate the implementation of a process that Vale has since, I would say, decades.
The first one is, I think very, very dear to Peter, by the way, is the IBPs, the supply chain integration, integrated business plan is what it is all about is to move our processes from a push model that it used to be to a pull model.
I think we did a pull model, by the way, very wisely when Fabio arrived, when we decided to cut production. We slashed 80,000 tons of production. If the market doesn't need, why should we be producing at $99,000 something that costs 11 at least if you put sustain, it can go up to 15. I think that mindset is around the IBP, it is a more granular thing. We need to streamline. We need to look this from market to mine and do exactly what we have to do in operations.
Moreover, this process is going to bring something that is really important, if you notice our footprint in a global footprint, is to streamline operations extremely, how can I say, extract the most of each one. It gives transparency, checks and balances. It is a very fundamental part of our system. Second one, as well, we have this framework in Vale since 2008, is a framework that designs and implements processes of operations and maintenance that creates stability. Good processes, as I said in the beginning, without good people, it doesn't work.
There is another arm in this framework that deals with the leadership, how we manage KPIs, et cetera, how we engage people. I think everybody has, if you had the opportunity to get through a turnaround. Turnaround in the end, there is only one word that is important is how do we engage everybody.
From Fabio, by the way, I think Fabio mentioned, how can we engage our executive team and how we engage everybody. We are talking about 25,000 people at Base Metals that has to be aligned what we want to do.
This framework is simple, extremely hard to execute because it depends on a lot of discipline, it is behind what we call operational excellence here. When we achieve that, I can be sure that we are going to say 244, and it is 244. The last one, I think, and again, Alessandro here is our tech guy, I think it is a way to accelerate both. Both the supply chain integration and the execution of processes inside our mines, for instance. I think there is a lot of technology on the shelf that we can bring to our system to accelerate these three things and make them together work much more efficiently.
With that said, today 50% of our cost and 100% of our future is in Canada. Canada is an operation that has been through a turnaround since 2006 or 2005. We streamlined or we closed Manitoba Refinery, we created single furnace, is the first line there. How can I say? It is time to collect the cost reduction. I am going to show some numbers later, fundamentally, we have a new operation. We have a very modern plant in Long Harbour, extremely well-run mine on the north or on the Arctic. We have a mine mill operation in Manitoba, and we have a problem in Sudbury. Fundamentally, we are going to do this year. Conclude the flow sheet. We did that now.
We're going to cost reduction, we have to, and that's I think the point that has to be really understood when we are looking at the nickel business fundamentally in Sudbury. We need to go in the underground. I think this year, let's talk about commitment. We said we're going to save $75 million, I mean 2018. We save it. We delivered. As Coleman and people that follow us know that Coleman had problems until April, and hiccups until now. It's burned more than $100 million. All my savings are being burned literally on the underground. Our focus there is to do exactly that equation there. We are bringing the good people. Just an example. We are bringing people from the process world inside Sudbury to the underground.
Our focus on Canada is to really get this leap change in the underground mines there where, of course, the feed comes from. Just to conclude Canada, we need to conclude the Long Harbour ramp-up that has key on when the evolution comes or the revolution comes, and we'll be ready to do that. As we say, put your money where your mouth is.
This is in our budget. We are capturing $140 million in our budget through revisions of contracts. There is a huge opportunity. It's not only going to the contract and say, "Pay me" or "I'll pay less." There's a lot of revision around that. The matrix cost management, maintenance, a lot of benefits from the centralization, from the closing of Manitoba. This all around brings us around $140 million.
Again, if we're not able to operate well the underground mines, we can burn it. That's the focus about the turnaround. The second piece of the fixing is PTVI. PTVI is, although well-run, although in a cost base that is okay, we believe we say, and Fábio is focused on that as well. We call our jewel. Our jewel, but a jewel that needs to be polished. It's a 50-year-old jewel. It's long time, so it's an aged plant. It's an aged fleet. Fundamentally, we're going to age, we're going to modernize our fleet because we need better feed to the system. We're going to debottleneck our furnaces there with some small improvements. There's a huge opportunity in converting our kilns and dryers to coal from oil.
Just to give you a number, this is around $ 1,000/ton in the medium term that we can extract from a $ 7,000/ton operation. It's relevant for the nickel business to be able to operate in the range of $6,000 cash cost. Lastly, our most preferred problem. We have a task force there since June. We are really focused on turning around.
We're using again, we think it's powerful to have the right people and the right processes. It's exactly what we are doing in Sudbury. Moreover, we are bringing new equipments and revising the mine plans to guarantee that we don't hear in a such complex plant what we heard this year. We don't have feed. That doesn't make any sense. This is an isolated action. We were very humble because Goro is a very complex plant. It's been 10 years.
We hired an engineering company to assess if there are any fatal flaws in the project. There weren't, by the way. We were stocking 40,000 tons. We have run at 40,000 tons rates in the fourth quarter last year, first quarter this year. There are very minor investments needed to debottleneck on the partial neutralization plant. I won't bother you for the technicalities, but we know that the plant is able to do 50. We know by that. Again, it's a matter of having the right process with the right people. We are pretty confident that we can bring VNC in 50 tons in three years. That is going to be more or less when the line we will cross in our front for the demand. That's where I come now for my second part of the presentation.
I would have to say that in the beginning, there's an interesting thing here. There is an alignment of circumstances, right? I'm extremely motivated because this is an opportunity of a lifetime in an industry that is shaking, shifting, in a company that needs that to happen. When we look at these numbers, and a lot of people, there's a lot of talk we're going to be able to discuss on the Q&A. The numbers are like, this is short-term. We're talking like 23, 100,000 tons a year. We did that 73 through NPI production. If you look in the next cycle, we are talking about a Sudbury, a Voisey's Bay, and a PTVI every year has to be brought to the market. There's a huge challenge here.
For that, we say we have the best, I would say can, I don't know how the word is for that. Oh, it's not moving. What happened here? Okay, I have to give it by heart. Let's see if I'm well prepared. Anyhow, fundamentally, we're bringing from 244 to 313. 313 is our number that we did. There's no investments whatsoever of growth to bring from 244 to 313.
Just like VNC is at 10,000 tons, Onça Puma is the second furnace, PTVI is the improvements in the furnace, and North Atlantic is the improvement in the mines. This is marginal. With this we can bring when it's needed. We will bring. You see in our releases, there is no number set for 2020, 2021. We don't care. We're going to bring it when it's needed. When market comes, we can tap Indonesia.
We can tap Indonesia through Pomalaa and Bahodopi, bring back to 400,000 tons, keeping our production as leaders in the industry. For nickel, I think we're very well prepared. We need to have our house fixed. We need to have the foundations done, and of course, bring the production as it has to be brought at the time that it has to be brought. We're pretty confident that we will bring that.
To conclude, it's not all about nickel. We have copper. Copper is another story. It's our good kid. We are bringing from 417 to 500,000 tons. There's a long-term potential for 800. I'll explain a little bit later how we get there. The idea here in copper is very simple, is let's accelerate the projects. Let's try to bring them as cost-effective as we can and as fast as we can.
Using again, that's the. If you're getting the message here, everything that Vale has the best is its knowledge. We have a huge knowledge of years of exploration in Carajás. That's where we're going to drink in the water to try to improve. We had a very great idea. Our friends, it wasn't even from my group. It was outside my group. Why not use the mini mine concepts that we use at iron ore to explore various satellite deposits that are not feasible for us? Even it's too small for too big of a guy, so it's better to bring small guys. We're talking to the small guys to try to help us develop them. When you look at the numbers, we're talking 550,000 tons of copper. It's a lot of copper.
We have a huge infrastructure built in our plants, in our railways to do that. This is a concept. It doesn't have a target date now, but it's short-term, really short-term. We are already talking to some partners to do that. As I go, we have one year, more or less like a year project to be delivered.
First one is Salobo-III, was announced. It's a replenish growth project. We call it smart project. We are using the gold stream for silver, we turn precious. It has a net CapEx of $450 million and starting up at 2022, we already start the construction. We got the environmental licenses. This project is undergoing. Cristalino is a replacement project. It's an 80,000 tons, very low CapEx. It's to replace Sossego's mine and keep the plant operating. It's for 2023. Next one is Alemão. We are revising this phase II.
This is a growth project. Has a huge benefit of the gold, starting up in 2024. Eventually, we're looking for that. It wasn't like that. You just have to understand those projects were left out, we tried to bring them to the stream. Victor, we're really proud. I think Fábio mentioned in the beginning. I'm a newcomer, but everybody that's in the basin, they know what Glencore and Vale in the basin means. It's a huge opportunity to develop together. I think this change in mindset that we are approaching for Voisey's Bay and why not do it together. Glencore is a very wise business-focused people. We were able to get in a very decent agreement. We're talking by far one of the best bodies in the basin. It's an 8% copper, 7.7% grade of the copper.
In there it has two bodies of nickel that would never be reached by us if we were to use this infrastructure. It's a 30,000 tons copper project. It is a copper project, but brings 11,000 tons of nickel as well. It's starting up at 2024 and ramping up in 2025. Uhu, this is the long-term one. This is potential. We just finalized phase I for the ones that understand the methodology. It's just a very conceptual to understanding the dynamics. We have now to prove the dynamics, it's very long-term. It takes years to go through phase II because of exploration, et cetera. It's a huge deposit. It's around 250,000-300,000 tons. A lot of gold, has a potential to bring it on stream to 2026. I think with that, I conclude my presentation. I hope it's clear.
Fundamentally, what I'm trying to transmit to you is that we know the challenge of base metals. We are humble. We are not here to come and say it's piece of cake. We know it's years that we've been trying to fix the business. The approach that we are trying to bring new is let's do it simple, let's do it with the right people, and let's do it with Vale knows we are at Vale, so let's use what Vale knows, and that it has been done with a lot of success for the last years. I think we built, as I said, a tremendous operation in Brazil for iron ore. We should be able to do that at base metals. I'm very confident to do that.
As I didn't wrap up my numbers, I would like to invite Luciano to put your money where your mouth is with the rewards of our strategy. Thank you.
Eduardo, congratulations for your very first Vale Day. It's very exciting for me because he's bringing us luck. I've been here for a few times, and I don't recall a Vale Day in which we have brought to life so many concrete initiatives to uplift Vale. You see, we have 240 million tons of Carajás. We have Oman expansion. We have Malaysia expansion. We have the acquisition of Ferrous. He has just shown you a roadmap for increased production of copper. We have an agreement with Victor. Lots of small initiatives, and small in the sense that they cost very little, very marginal CapEx for the company. They don't change at all the profile of cash flow generation. This you know already, that Vale is a cash machine, and we started to deliver this year.
Now what I'm going to show you, when you add up all those initiatives together, and they add up big, there's a tremendous upside potential. This is one of the key messages for today. Not only Vale is a cash machine, but perhaps we have the best upside potential in the industry. I'll show you the numbers.
I'm going to start with iron ore. Before I start, the assumptions you're going to see here are that there are no additional tons of iron ore offered in the seaborne market. That may not be true to our advantage. Peter, for example, noticed that there is additional demand for Carajás ore in the domestic market. Eventually they may be incremental, but the numbers you're going to see assume only increased price realization, lower costs, or both. In my left, we start with Carajás, 240 million tons.
We have obviously higher price realizations, and we have obviously lower costs. Gelado, the additional EBITDA comes from lower costs and also from the higher quality pellets that will be produced at São Luís for an additional premium of $5 per ton. The 20 million tons additional pellet feed from the Southeastern system also add price realization. Oman adds price realization through the sale of additional pellets. Malaysia has lower costs of distribution. The Ferrous acquisition, these tons are already being sold in the seaborne market, these will be, from a Vale perspective, additional tons. This is the EBITDA that we expect once the Vega project is up and running, and we also upgrade the pellet feed towards direct reduction pellets. You see, they incrementally add up.
When it comes to the competitiveness, we have another $2 billion just based on things which are already here, such as S11D remaining ramp-up, such as the freight cost reductions that we will see, the matrix cost management program, the digital initiatives, and the like. In iron ore alone, we have close to $3 billion of incremental EBITDA in the next five years. We move to base metals. Again, on my left, we start with what we call the nickel turnaround. The first column is just the potential when we bring back the 80,000 tons back to 313,000 tons of production at the existing margins, $500 million of EBITDA. The cost reductions that Eduardo touched over and over have a potential of lowering the cost base of the entire nickel production by over $2,500.
Again, if you just add the turnaround potential with the existing assets, you get to over $1.3 billion of additional EBITDA for nickel. The third column is the EV revolution opportunity that we call. We cannot grant that, this is the opportunity in which we believe. 2019 is the year in which electric vehicles are going mass market. The likes of Ford, Volkswagen are introducing their offerings to the middle classes.
We believe a $7,000 price uplift is required to incentivize the supply which is needed for that revolution to happen. We believe you should believe. Finally, the roadmap for copper growth production. Until 2023, there are additional 80,000 tons of copper coming in. At current margins, another $300 million. That does not include the projects that start up after 2023, such as Alemão in 2024, Victor in 2025, and eventually Uhu.
Another up to $4 billion of opportunity in base metals. Finally, a number of different, again, small and accretive opportunities, starting with coal. The key word for coal is operating leverage. The cost reductions with the volume increase and cost dilutions are huge, you will see as it ramps up an acceleration of results from coal, mainly because of the cost reductions on the second column, obviously also with additional volume at current margins.
If you continue going to the right, remember a year ago, I was complaining about the pre-operating expenses of so many operations which had been stopped or were ramping up in Vale. We spent this year $180 million in pre-operating expenses. In 2019, pre-operating expenses at Vale will be 0. Continuing moving to the right, you have 2 columns that talk about opportunities of reduction of financial expenses.
You might say, "Well, you already reached $10 billion of net indebtedness, how are you going to reduce your expenses going forward?" First, we'll still carry too much cash on our balance sheet and too much gross debt. There's a carrying cost. Once we get to optimal levels, we save 2.6%, over $2 billion of gross debt. We believe the next column, liability management, we have way too high legacy indebtedness in our balance sheet, high in terms of interest rates. We refinance those liabilities towards 2023, overall cost of liabilities will decrease. Some of you may remember on the before last column, the MBR shares, preferred shares in an iron ore company within the core of our operations that we had to sold in 2015 to finance ourselves. We paid $117 million in dividends in 2018.
We will buy back those preferred shares, this will not be a cash outflow anymore. Finally, talking about cash outflows, do not forget Samarco. We've been supporting the company, paying the wages of its employees to this date, this is not going to be the case in 2023. Samarco will be producing, will pay its own bills, eventually even returning some money back to shareholders. The $360 million spent in 2018 will no longer be there.
When you add all of this together, again, almost $2 billion of EBITDA and cash flow opportunities going forward in the next five years. Putting this all together, from analyst average consensus EBITDA in 2018 towards 2023, there's an almost 50% uplift in Vale cash flow generation. That's the opportunity that we will hungrily go after. Not only we are a cash machine, we have huge upside.
You might be wondering, how about investments? How are they going to eat up on the cash flows? They're not going to be different than what we presented to you last year. Our budget for 2019 is $4.4 billion of investments, it will stay at this level for the years going forward. There's a lot of capital allocation optimization ongoing, we will easily absorb those small incremental initiatives in our CapEx profile.
As a result of all of that, I showed you last year, I updated to you the cash flow generation estimates from management for the next three years. You pick your iron ore price, you pick your nickel price, you see how many billions of dollars you will have available for distributions, for dividends, for buybacks, for financial flexibility over the next three years. Bad years, perhaps $8 billion.
Good years, perhaps $12 billion. On average, close to $10 billion every year. I invite Fabio now to come back on stage to tell you a little bit how we intend to use these cash flows, and for his closing remarks.
Well, guys, unnecessary to say that I'm very proud of this presentation because this is the Vale I worked for. This is the company that I dreamed it was possible to build. A company that, as a mining company, left no rocks unturned. Everything that exists in the company are being taken care of at the same time. Consequently, now the last thing that we have is, well, this will be the level of our cash generation every year in November. I would say in a very conservative basis, this will be clearly returned to our investors, as we don't plan to do anything at all with it other than giving it back to shareholders. Just as a final reminder, the three key messages of our presentation. Iron ore, we are going to continue what has proven successful.
We are increasing our stake in high quality ore, taking advantage of the flight to quality that is happening in the world right now. Our biggest challenge is to transform base metals. I don't think that Vale can be considered a successful company if we are not able to operate base metal at the same level that we operate iron ore. This is my personal goal. It is our team goal. Finally, capital discipline is here for staying. We are not going to change it because different for our competitors, we don't need it. As you saw during the presentation, we have plenty of things to do at home that will enable the company to continue to grow, to continue to improve EBITDA generation and cash generation during the next few years.
We are in a position that we can take care of the situation without putting more money to work, and that will be our goal. This was our presentation. Now we are going to be answering your questions. Thank you.
Thank you very much.
Yeah. Very good.
I've got two questions, if I could. It's Paul Gait from Bernstein, the first of which is on the nickel business. You're presenting sort of clearly a very bullish sort of scenario here. Over the course of the last year, we've seen a number of announcements, thinking about here sort of Tsingshan, but also things from like Direct Nickel, things like Clean TeQ, a number of guys that are coming forward with potentially quite different cost structures, in terms of the processing routes that they're sort of making claims for at least. Just wondering if you have any thoughts about some of the viability of some of those routes and what that might mean for the deficits essentially that would support the acceleration in the price that you're looking at there.
The second question I have is, if you could just remind me, of the tonnage that you're shipping out from Brazil, how much of that is covered by your own shipping, and do you have any sort of external requirement beyond your own sort of Valemax fleet? Thanks very much indeed.
Okay. Let's start with the nickel question. Our position on this is that there was an announcement that was exactly at the same time as LME here in London. This announcement made by Tsingshan made it sound possible that they will be investing only $700 million to build a H4 facility, and more than that it will be up and running by the end of next year. I claim that it is totally impossible. Taking aside the ingenuity of the Chinese, they will get there eventually. They are going to show important cost reductions in this investment, important CapEx reduction, and they will do it in a very fast way. I'm pretty sure that's not happening in 2019. I'm pretty sure it's not happening either in 2020.
This announcement that came in a moment where the market price was increasing, not because of the EV revolution, but because of the reduction in inventories in nickel worldwide. What happened once this announcement was made is that the price of nickel started to come down. That was a very convenient situation for companies that were short on nickel, they have to buy nickel in the market.
My position, Vale's position, is this is something temporary that will revert itself for a very simple reason. There won't be any electric car revolution and batteries if there is no availability of nickel. Actually, we go even further. We hope that this new technology they are talking becomes a success so that we can use it as well. We are waiting to see if that's something that will happen. If it happens, the reserves belongs to Vale.
Valedo, Pipoma are basically Vale's reserve. Who else has nickel reserves in the world? This for us is a good situation. It will reverse ourselves and that's the reason why we are very strong on our forecast for EV and taking decisions according to that. Now, if you want, Peter, about the freights.
Yeah. If you take a 400 million tons, let's say our base case number, 400 million. You take our domestic market, which is 30 or something, and the balance is 360,000, 370,000. 70% of that is CNF and the rest is FOB. One-third of the CNF is not covered by the Valemax or Guaibamax. One-third is either short-term or spot or one-year COAs and stuff. Yeah.
Thank you. Christian George at Société Générale. Just going back to that nickel question that Paul put across to you. Sorry, here. Hello?
Hello.
Just to come back to the question on nickel. I think there's been also some developments with regards to the content of the batteries. I think BASF was reported recently being able to reduce quite substantially the amount of nickel and cobalt, and increase instead manganese.
The question is: Is there a downside risk on the amount you're showing us on the slides with regards to your expectation of the future demand? Equally, by the way, you're a relevant manganese producer. Would you be considering increasing your manganese production accordingly? The second question on iron ore. You mentioned India in your presentation. I think 2018, iron ore supply from India has come down dramatically, both on the open market and domestically. Do we have a really upside risk on iron ore demand from India over the next 24 months? Thank you.
Go first. Go first.
About the manganese.
Your question about the BASF examples of trying to reduce the nickel content on the batteries. By the way, we partner with BASF in several studies as well. Fundamentally, what we see is a shift for more nickel. All the effort for the industry as we speak is to move from nine, like even Tesla say nine and a half, saying that they're going to strike cobalt out. That's not possible, by the way, but this increases in our direction. What could change the amount of nickel relevantly inside the batteries is solid state batteries. This is the next state, but it's good as well because it improves the performance of the batteries, make it cheaper. I think what Fabio is trying to say about the Chinese in Indonesia, we are there as well. We want a stable market.
We want a supplied, stable market in a good way. If we have solid states, I'm talking 10 years from now, we're going to have a better cost performance. We don't see a threat in the short term trying to take nickel out and trying to put manganese. We're seeing increase in nickel because it gives energy density and together with some cobalt for stability. Again, our play game is to make the revolution possible. We cannot see what we saw in the stainless steel in 2007. We need to be very careful as an industry to supply this market in a cost-effective basis. Fundamental is this.
Just to complement. You can see that we put in just $7,000 of price increase. That means basically a normal behavior of the market. It's obvious. If prices, instead of going up $7,000, if prices go to $50,000, something will happen. Of course, people will take out nickel from batteries. We'll find other ways of dealing with the situation. It is our responsibility as we are play in, I don't know, to operate according to this fact. We don't want prices to go too high. It's not helpful, it's not sustainable. It's going to change in a negative way, the demand for it. Vale, being the largest producer in this segment, has this responsibility, and we are going to work with this view. As we did recently when we reduce our sales to the market.
We made something that It was funny when I was in my first meeting in Canada, and I told the guys, "Well, look, we should reduce production." Have you ever heard of a mining company reducing production? Well, we did it. We did it. Why? Because it doesn't make sense to sell a nickel at a very low price when the market will eventually react on the sequence.
We are going to behave in a way that will support a normal market, that will guarantee, if possible, the presence of nickel in batteries in the long run to the extent of that we can manage it. Regarding your question about manganese. Manganese, Vale is a very tiny producer. The problem with manganese is the availability of high-quality manganese in the world that is not there. The place where the manganese is Gabon.
That's not exactly the easiest place in the world. I think that hardly we can think that manganese will be a solution, as cobalt is a difficult solution as well, given where the source of cobalt is. We have the same problem of cobalt and manganese. If you look at everything, it point out that nickel is the most natural solution for batteries. Okay.
Hello. Jim Lennon, Macquarie. Peter, you gave a brilliant exposition of the flight to higher value in iron ore. Could you elaborate a little bit more on coal at Moatize? What is the mix between the lower value thermal coals and higher value coking coals? Is there anything you can do in your mining plan to maximize value going forward?
Hi, Jim. Thank you for the question. Yes. The coal, the mix of thermal and metallurgical coal in Moatize is around 60 metallurgical and 40 thermal. What we are doing is actually trying to increase the yield in the process plant because you know the yield is defined inside the plant, and I showed you the initiatives. The other one is to sell some thermal coal domestically. We are advanced in some discussions with some local stakeholders to build some thermal plants for local electricity. You would get more space in the railway to increase your mix, exporting more metallurgical. I wouldn't say that this would change dramatically, but maybe we could go to two-thirds metallurgical and one-third thermal down the road.
Sylvain Brunet with Exane BNP Paribas. My first question, perhaps on the suite of projects you've shown us. Could you give us a bit more color on how price sensitive these projects are or some association with the returns you expect? You've given us the blended figure. Any indication of the contingency plans you've built into those numbers. My second question is on nickel. As you've taken over the business, what is your analysis of what went wrong previously? I understand people, but beyond that, what are the other conclusions from your audit? Thank you.
If I understand well your first question, it was about in the iron ore business, there's several initiatives, how price sensitive they are. Some of them are cost initiatives, so there's no other price component here, right? The Gelado project or the Malaysia is a pure cost initiatives. All the others has to do with price realization. That means that's on top of the benchmark of the 62 benchmark, okay? We are increasing our price realization. Maybe the best, the most powerful project here, which is not yet fully captured in our numbers, is the ability for us to produce more pellet feed in the southeastern system. As I told you, we have a huge supply gap in the world for pellet feed. Huh?
Demand.
The supply for pellet feed, because there is this demand for pellets, right? This is not only to be delivered by our southeastern system, but also by Carajás. There are new segments in the world where people think, "Where is the Carajás going to go? How will this affect prices?" As you see, we are on a runway. We are at 200 million tons today. We are going to go to 240. The 40 million additional, 10 million domestic market, and maybe another 10 to increase our Brazilian Blend. The other 20 will be exactly destined for these markets where you need pellet feed, because you can transform easily Carajás fines into pellet feed as well. It is very powerful, these initiatives, because of this huge demand for feed for pelletizing.
Which can be pellet feed from the southeastern system, or it can be Carajás fines ground like we are doing it already in our own plants. If we can do it in our own plants, why not in the whole world? This is different segments. This is not in the equation of the seaborne people have in mind. Yeah. It's not very price sensitive. It comes on top of the 62 reference. It's price realization.
Well, I'll try to be short, okay? It's an interesting question because it's the same question I did when I arrived. As I said, I'm with Team Vale since 2004. I fundamentally saw three things: lack of business vision, low vertical integration, and low horizontal integration. I think when we talked to people, we didn't stop production. Why we're doing that, fundamentally. Like examples for Long Harbour or even Goro, et cetera. But more important, I think that's the fundamental problem that we have is the low vertical integration. We were integrated with Brazil. We were running a standalone business, and loosely, because of the lack of business vision, integrated horizontally. People in New Caledonia was let alone in New Caledonia. When I said send a task force and I said, "We are there in New Caledonia.
We are present there. We need to add value to New Caledonia." Not only changing it. It doesn't matter, just go send another hero there at New Caledonia and forget about them. It's our office helping New Caledonia through the process that we have in Brazil. This is what I call the vertical part that is bringing value inside. The horizontal is bringing us around Indonesia, and it's a very hard business, by the way, in Canada and in Brazil for us. Fundamentally bringing focus on results on everybody because as I said in my presentation, we are being beaten by the underground mines because there's a huge lack of focus and results there. We have a very well process. We run very well the process in Sudbury. We are really good on the process side in Sudbury.
This lack of result, lack of use of the knowledge in Brazil, and lack of trying to disseminate this knowledge is what, in my expectations, are going to be the actions that will solve. They are hard. That's why I'm saying the way I finalize my speech, I'm not coming here to say, "Oh, it's hard." We do it very focused and very disciplined. As Fábio mentioned at the beginning, I'm counting on everybody. Again, I would be the hero that go there. I don't want to be a hero. I want to just make base metals great.
A story as well. As soon as I joined Vale, one of the first executive meetings that I run there, I saw that we discuss a lot about iron ore, a lot about Brazil, and almost nothing about base metal, but base metals was not even present in the discussions. I was asking my colleagues what was going on.
They have very limited idea because there was a clear separation between what was done in Brazil, what was done today, everything is the same. We are really doing together everything that is needed in every single place. Brazil, iron ore, base metal, coal. There is no difference. Everything is part of Vale. This is not a minor thing. It is a total different mindset that will enable us to become responsible for what's going to happen there. Till then, who's responsible? Nobody.
Someone that was running the business alone there.
Thank you. Tyler Broda at RBC. I just have two questions, I guess probably for Peter, just on the pellet market. Do you think that having more pellet supply will change the dynamics around the pellet premiums going forward? i.e., is there an element of the lack of pellet supply driving this higher price? Then secondly, in terms of the structure of the pellet market, the annual contract negotiation, how do you see that evolving? There's some talk about whether or not it may become more like other markets where there's more of a spot component, I guess. Just wonder your thoughts. Thank you.
The first question, it is no secret that today, on top of the demand, which is very, very high, there is a supply shortage mainly because of Samarco. Once Samarco comes back, and we hope it will come back very soon, in beginning of 2020 or something like that, of course that will be an effect. Samarco will come back in a very responsible way, and probably a ramp-up will be a long three years.
It will not have a big impact at once. The structural price negotiations, how they are happening today. You must, and what people are not doing it, is differentiate between first-tier and second-tier pellets. It's very different. When you see people publishing, which is of course very useful to know, publishing index or indices in the Asian markets, for instance, in China, that's sometimes mixing first-tier and second-tier, mostly second-tier pellets.
That's very volatile. That's coming from countries which are different. They have different policies. It's not constant. In our case, we are proud we are first-tier. We even give sometimes the market the option. Do you want to go for spot? Do you want to go for short-term settlements? It's the market deciding, "No, we want to stay with either, let's say, half-year contracts, one-year contracts." We say yes because we think this is good for the stability of the market. That's what we are. We don't see any big change there.
Thank you.
Hello. Hi, it's Olivia from Merrill Lynch. Just a point of clarification on the nickel business. My question is for your base case assumption, have you already considered an offsetting effect potentially from a lower demand from stainless going forward? Second question, what is your view on Chinese steel price going into next year and the year after, given that your business relationship with China? Would be very interested to hear your insights. Lastly, how are we doing on Samarco? Thank you.
Peter to start commenting on the steel demand and prices for next year.
Was it not Nicole? Stainless.
She made a connection. She's saying that the demand will go down, or stainless. Did we take this into consideration?
No. Yes. I think for the first question was about nickel. We don't believe that, by the way. Actually, in our projections, we saw a very modest increase in stainless. For short term, there's not this case, although Tsingshan is flooding the market with stainless. We see some softening now, our projection is not this growth still on the stainless steel demand. Of course, not as huge as the electric vehicle. Your second question was about steel as a whole or stainless? I think it's for Peter. Can you repeat the question?
My second question was on crude steel in China, i.e., HRC price. Yeah.
The crude steel production in China.
Your view on steel price going into.
Yeah. That is what Fabio said in the beginning. We think the current weakness in the market is a short-term one, because China produced too much steel ahead of the winter cuts, which turned out to be not so strict as forecasted. It's seasonal, and I think very soon, stock and traders are small.
In the first quarter next year, you will see a restocking there naturally happening. Steel in general, steel production in China, we think will go up, next year. This year, we've got probably 900 and something. It's going to be 920, 925. The one billion mark, I think, will be very hard and not be reachable. What's most important for our business is not the steel, it's the pig iron. The pig iron is today around $740, $750, and the peak there could be $ 770.
It's still to come, it will come shortly because right after that, as you know, there will be a little more scrap used in China, this will go down.
Regarding Samarco, the worst is clearly behind us. We are getting closer to restart. I think that we have almost everything in place to restart it by the beginning of next year. The climate in Brazil towards licensing is starting to improve. What it probably will help the restart. Nevertheless, it's important to emphasize that what BHP and ourselves we are doing regarding Samarco is more a social thing. That's something that will translate into any kind of return for the companies. As Peter mentioned, the ramp-up will be very slow. The company will not generate enough cash in the first years. This is because of the necessity of having a sustainable and safe operation. That will be the goal. People will come back to work, that's the most important part. The region will benefit from it.
Money-wise, there is nothing coming out of Samarco except what Luciano mentioned. Eventually, in some years ahead, we end up putting more money to work there every single year.
Good afternoon. It's Grant Sporre from Macquarie. I've got some number-related questions. The first one really is on the pellet market. In your 12 to 12.5 premium that you're guiding to for next year, how much of that is akin to the pellets component? Secondly, in your copper plan, when do you forecast that Sossego, the current pit, comes to an end? Just on the MBR, what sort of cost reduction in terms of dollar per ton are you looking at when you buy back those bonds? Thank you.
First question on the pellets. You mean the 2.5 price realization for next year? Yeah, there is a good amount of pellet in there. We are not only increasing production because, first of all, there is a production increase for next year because of the ramp-up of the São Luis pellet plant, there will be additional 5 million-6 million tons there. Of course, there is an important price increase being negotiated as we speak, not yet concluded, but it's going to be an important one. Yeah.
Yes. Cristalino is the project that we mentioned that we will replenish the depletion of the Sossego mine. If I'm not mistaken, 2023. It's in the presentation. It's just a pure replacement of the capacity. That's why it's so low CapEx. It's so just exploration, and we're using the plant for Sossego. Remember that mini mine that I mentioned is another idea to fuel our Sossego plant as well. The whole idea is to feed the plants. Keep it operating, and Cristalino is the best ore for that.
The repurchase of MBR shares will not have an impact on costs. It's below the line. It's accounted for as dividends to non-controlling shareholders. We will actually increase consolidated net income available to Vale shareholders. That's going to be the effect.
Afternoon. Liam Fitzpatrick from Deutsche Bank. Two questions on iron ore. If we do see a sharper than expected slowdown next year and iron ore drops below 60, should we infer from your presentation that you will react relatively quickly from a supply point of view? Secondly, on high-grade premiums, if I remember rightly, last year you talked about a $13-$14 a ton long-term sustainable premium. Does that figure still hold or has it increased? Thank you.
It's important to emphasize that we don't believe that prices will go below $60. Having said that, if it goes beyond $60, we are going to react accordingly. Your second question was what, sorry?
Premium.
Premium. Yes, the premium.
Just to complement on Fábio's remark, we think like last year, like the year before, we will hover around a $70 price reference. On the premiums, if you take the premiums, well, the premiums depend on steel margins, as you know, on coke prices. Also what people sometimes forget is how much low quality ore is there to be blended, to be corrected, right? This has decreased because of the Indian exports. It can increase again now, so that affects the premiums as well. I would say if you take the average of the year 2018, which will be around $20 to $21 on Carajás. If you go back to 2017, which was around $16, I would say next year would be between $16-$20, something like that. Of course, this includes the 3%-4% FE. Don't mix it up.
There is the premium including the FE. There's the premium over the FE correction, right? If you take it like that, between $16 and $20, $21, I would guess would be the right premium for the average premium. It makes no sense to say one month or two, it's the whole year. That's my guess.
Complement and to emphasize Peter's point. What we are witnessing is a market that is more quality-driven. If there is an availability of low-quality products, the premium will be bigger. If there is no availability of a low quality or low grade because people decide to put it elsewhere. The consequence will be lower premium, but a higher average price of all ores. For us, it really doesn't matter if we collect a bigger premium or a bigger price. In the end of the day, the net result is what we are looking for.
Jenny Guarin from Hermes. First I want to commend you for setting up sustainability targets in terms of clean energy, recovery of degraded land, water, and carbon. I wanted to ask if you could give a bit of background on how the carbon target was set. Is it ambitious enough in the sense of is it aligned with the Paris Climate Agreement? Also, what are the challenges that you anticipate in order to achieve this target? The second question is about social license to operate. I wanted to have a sense of, across your global operations, what are your main concerns in terms of securing social license to operate, considering community relations and also labor relation issues. What are the hotspots that needs more attention from you in terms of social license to operate?
Respond to the first one, then I'll respond to the second one.
Okay. Well, in terms of the Paris Agreement, it's totally aligned. I would say that we spent the year going through international methodology to verify our carbon footprint. We just concluded that. Of course, we analyze throughout our operations new goals. As you know, before time, we just met our 2020 goal to reduce 5%. Now we are going to 16%, so we are stretching the goal. This is because all these technologies, all these 4.0 mining that we are moving towards. I would say that it's totally aligned, it's national methodology, strategy, and that's our ambitious goal set for 2030.
To emphasize as well, these goals were set according to our investment plans in all of our operations. Therefore, it's planned for. It is poised to happen, and we take that our reading of it is a conservative one. It can and we will try to have even more than the figure that is there. Regarding social license, one thing that became clear for me, I guess, and for us, that Vale is a mining company, and a mining company that generates a lot of money from operations in several places in the world. It is our duty, our responsibility to give something back for the communities that are affected by Vale's presence. We are poised to do so.
When I emphasize in the presentation the recovery of the degraded areas and the production of income out of it for the population, is because we are going to build thermal electricity plants there, and that we will use the biomass that will be produced in this land in a sustainable way. We are going to guarantee the demand, and consequently, the offer will be sustained, and people will be rewarded by that. Vale is totally committed in every region Vale operates to see what is the necessity in each. They are different in each region. The one that I was describing is particularly in the Pará state, that needs badly an improvement in income of the population. That's the way we are looking there.
In every single place that we are, we have a specific look what is necessary there, what is that we can do in order to be in a well-positioned relationship with the community for the social license to operate.
Hello, Ben McKeown from Sarasin & Partners. I'd like to follow on from the last question regarding the emissions of Vale. Absolutely commend Vale on its emissions reduction target. When you look at your clients' emissions, they're obviously a lot more emissions-intensive in the production technologies, as is the current Chinese crude steel production. How do you think about the long-term dynamics of crude steel production in China from an emissions intensity perspective, and what does that mean for Vale's production? Thank you.
Jardes, do you want to give it a try?
Yes, Jardes.
Well, first of all, the answer that Osório gave to the other guy about reduction of our emissions is basically scope one and scope two. Only in our internal operations, okay? If you go to the maritime transportation to our clients, it's another thing. Just for direct, for example. In Brazil-About 60% of our emissions is basically in our pelletizing plants, the rest at the mines. Most of this reduction is based at the mines and railways. The pelletizing plants, we are looking for new technologies to reduce, but we don't have it yet, but we will get. We cannot reduce anything because we make a lot of money, and also because through our pelletizing plant production of pellets, we produce reduction of emissions in our clients. We are also at the Valemax.
In average, this fleet of Valemax, we reduce compared to the fleet used before about 40% of CO2 emissions. It's not considering in that 16%. The transportation of our ore produce much more CO2 than our operations in Brazil and elsewhere. The third part is about how we can help our customers to reduce emissions. This problem here in Europe is absolutely important because now they have from 2020 to 2030, they have new targets to be reached. To be very frank with you, we are talking to them, and we understand that they don't know how to comply with the new targets. We have a view that production of metallics like HBI and pig iron based on natural gas and biomass is the future in this industry.
If we can, and I can tell you that we are working very hard on this task. If we can produce in a competitive way, metallics in Brazil and supply Europe and also China and our other clients in a competitive way, we are quite sure that we can do that. Probably, this demand doesn't exist today. For example, just as an example, if you feed the best furnace with pig iron or HBI, the reduction of emissions, you can go up to 40% of the feed of the best furnace with. The reduction of emissions is about 30%-35% in the steel mill. You see? Now we are in touch with a lot of customers interested on this kind of development. I'm quite sure that next year in Vale Day, we will bring something in real terms.
What I can tell you now is that we are working very hard, and we are quite confident that we will bring the solution for this kind of thing. If we can do that, our customers will very easily comply with the new targets of our CO2 emissions in Europe and even in China.
Thank you, Jorge. Just to complement, this is the new step for Vale. This will be the next natural step for our development that will generate more value from our existing production.
Hi, it's Hemal Swadha from Barclays. A couple of questions just on numbers I wanted to ask. For Siani, with respect to IFRS 16, what effect is that likely to have on your net debt going into 2019, and does that limit potentially your surplus capital for distribution next year? Secondly, just a couple of CapEx questions. What's the potential CapEx liability you're looking at for Cristalino, for Alemão? Moatize sounds like it may need some additional capital. Also to quantify in terms of the nickel ramp up from 245 next year to 313, how much capital will that require as well? Thank you.
In terms of IFRS, we're still working on the details. There will be some impact. It will not impact the ability to distribute excess capital. In due time, when we close the books for 2018, we will make public the precise numbers. There obviously will be some impact, it's not going to be meaningful enough to impair the ability to distribute capital.
On the copper project that you asked, I won't disclose the numbers, but the range is around Cristalino, as I mentioned to you, is a very low intense CapEx, is a $ 500-ish. Alemão is a $1 billion. It's more or less like Salobo, but they're still in phase II, that's exactly the process that we're going through to exactly nail down the cost. Very importantly, your other question, there is no growth CapEx for the 313. It's there already. There's sustaining CapEx, of course, because we need to have the feed to operate the plants, but that's sustaining. There's no growth for any, just also put a second furnace, but it's still sustaining, very small. We are able to get that to 313 with no growth CapEx.
Thank you. It's Doug Upton with Capital Research. Thank you very much for the presentation today. I had a question on iron ore. If you're planning to add 10, 20, 25 million tons of new capacity or high-grade capacity, but to keep the total at the old 400 million ton number, it means you have to close some capacity somewhere else, so southeastern system. The experience of the industry is that it's always very difficult to close a mine, even when it's losing money. You want to close the mines that may be making small amounts of money. Can you just touch on the challenges of doing that and the cost of doing that? Thank you.
Thank you for the question. It's not always about closing. First of all, it's not exactly like that. We are going to increase the capacity of high-grade products, some of this additional tonnage will not go into the seaborne market. That must be clear. The traditional seaborne market, some of it will go to the domestic market, some of it will go even to pelletizing abroad, which is using domestic concentrates. Yes, in the Southern system, probably we are going to reduce, but not close. We have mines where we can easily switch off some plants, from three or four production plants, maybe close down two, reduce like that, but not closing mines. We are not going to close mines. We are going to reduce production in some of these regions, mainly in the Southern system, but not closing mines.
Thanks. It's Tal Lomnitz at First State Investments. Thank you for the excellent presentation. I just wonder if we could dig a little deeper into capital allocation priorities. I'm particularly interested in considering a somewhat more negative scenario for global growth. In fact, perhaps a global recession which hurts steel prices and perhaps quality premiums and base metal prices all at the same time. In such a scenario, can you tell us how much you could cut CapEx below the $4.4 billion number that you've outlined? If it came to it, what would take priority, investment projects or the dividend?
Well, tough question, let me put it this way. We prepared the company for the bad times. What is really important is that we have today a very low debt indebtedness that will allow us to cope in the best possible way with any scenario. That means that it will be only an issue for allocating between this and that, it will depend on where are the effects concentrated. We are committed to only invest in things that will have a decent return on investment. If this return is not there, the investment is not going to be there also. We have some room always to cope with that. This business plan that was presented take into consideration normal course of business. If it's not normal, not normal will be our behavior.
The cash generation of this company, in no matter what scenario, will be huge. You understand that our delivery in China, the cost is around $28 per ton. If the price goes to, say, $50, will cause a number of unforeseen situations. We are still generating a big amount of cash out of our operations in even this scenario. On the other hand, the issue of nickel is much more connected to what's going to happen with this electric car revolution. The question has not to be driven to ourselves, but to the automakers that are planning to invest hundreds of billions of dollars. They announced more than $100 billion of investment right now. If they are going to keep the investments, they will need batteries. If they will need batteries, they will need nickel.
If they will need nickel, price of nickel has to be enough to reward it. Otherwise, there won't be nickel for them. I think that two different situations. One is we are in a very good shape regarding cost. The other, I think that we are in very good shape because of the market expectation for nickel.
If you let me add. In 2015, our EBITDA bottomed at $7.2 billion, and that with the fertilizer division. If you adjust for that, it would be $6.7 billion. If you take all of the relevant variables of 2015 and rerun the cash flow projections of Vale with those, and that includes also oil prices, which tend to come down, and the real exchange rates, which tend to adjust as well, you get to almost twice this number today.
If you get an EBITDA between $12 billion and $13 billion, spending $4.5 billion, and the wreckage that probably will happen in the industry, this will be much more a scenario of opportunities rather than a scenario to retreat and cut investments by $500 million or whatever. It's a completely different game. You should not think of a scenario like this one for Vale as what happened in 2015.
We're way more prepared now.
Ladies and gentlemen, this is the final question.
Thanks. Doug Upton again. I was just thinking about the nickel business, and Fabio, earlier you said the jewel is in Indonesia. This one you own 60% of, and you have to reduce that ownership in the future. Can you firstly just remind what's the sell-down requirement and how does that look? Secondly, why it doesn't make it more interesting to look at growing the nickel somewhere where you own 100%, perhaps in New Caledonia, perhaps in Canada, somewhere. Two thoughts from me.
Well, I would love to give you a different alternative. Let's start to tell you that the only place on Earth where you have nickel in volumes that will enable the production to grow is in Indonesia. It's not an issue of choice. Either you do it in Indonesia or there won't be nickel for this industry at all. Second, we are different from other companies.
We think that we have a very good relationship with Indonesia. We are there for 50 years. We never lost money there. We have a good and respectful relationship with them, and we are prepared to go even further in order to build something that is sustainable. It is so obvious that the only place that you can find nickel in the world is there, other than the nickel that exists today, that there we will have a solution.
I can anticipate that we are in advanced conversations with them in a very positive grounds. Unfortunately, we don't have a choice of doing in a place where we hold 100% of the company.
Fabio, just to add, I think that you're right. That's the optimist scenario. New Caledonia and Canada, like Manitoba, we have optional. Again, remember when I said this slide, we have all the optionalities. Our focus has to be Indonesia, as Fabio just explained. If you look New Caledonia, it's hard to say, but it's a huge opportunity there. If the market comes, the number for 30 is 1.4 million. As an industry person, I'm really concerned about the supply side, not to have another imbalance. We have this cannon in New Caledonia and even in Canada as well. It's too early to talk that. Our focus has to be Indonesia because it's the next round. We're there. It's the one that has to come right after. You're right, I think there are optionalities there as well.
Ladies and gentlemen, thank you very much for joining us today. I hope that you enjoyed the presentation. I don't want to bore you, but I want to repeat once more that we have three goals. Iron ore, we are continuing to improve our own flight towards quality. The challenge of this organization is to be able to speak of base metals as we speak of iron ore, that we are looking to make it happen in the short term. Finally, capital discipline. You can count the capital discipline will continue with large dividend distributions and shareholders right back to the investors. Thank you.