Well, good morning, everybody. I'm John Tuttle. I'm the Chief Operating Officer here at the New York Stock Exchange. On behalf of our entire team, a very, very warm welcome to Vale Day. Welcome back to our friends from Vale Management. We're thrilled to have you here today. This is one of our favorite traditions that we look forward to each year. Today marks the 16th year in a row that Vale Day has been hosted here at the New York Stock Exchange. I think it is a deep symbol of the very, very strong ties between Vale and the global capital markets, which date back about 2 decades now. What better way to kick off this morning than by ringing the opening bell?
I'm sure some of you saw the team up there on the bell podium today, on an average day, it's the most highly viewed news event in the world. It's a great way to put the Vale name in front of an audience of global investors and also lead into today's dialogue. We look forward to hosting this program every year. We look forward to a great session today, and without any further ado, I'd like to turn it over to our host and our friend, Fabio. Thank you very much.
Thank you. Well, good morning, everybody. Thank you for coming, for joining us. Well, this was a good year, and we are very proud of it. We choose to start this presentation remembering one single chart that we presented last year here in New York Stock Exchange. We made this bold remark that Vale would be the company to generate more value to its shareholders. We are glad to tell you that that is really happening and is here for staying. We can reaffirm that next year, we hope the same to happen again. As a different approach, we decided that it would be better to start the presentation before the presentation itself, to make a quick remark regarding markets and what happened in the last few weeks. Some of you were with me 3 weeks ago when I mentioned that we were expecting prices to soften.
Typically in the end of the year, because the winter in China, prices normally, they ease a little bit by the end of the year. We were expecting this year to happen, and we were already planning to hold a little bit to our inventories in the end of the year in order to take advantage of the recovery in prices in the beginning of next year. Besides that, the pressure on prices, the negative pressure on prices were caused as well by this fact. The winter in China, the winter cuts in China were lower than expected. Certainly lower than last year. In general, companies plan for the same approach of the former year. Consequently, all of a sudden, there is a lot more supply available of steel in the market, at in this precise moment, that it was expected some time ago.
This combined with the pressures caused by the dispute between China and U.S., all of it combined, they cause steel prices to go down. Therefore, iron ore prices, they went down in the last weeks. They are starting to recover, as you can see. The most important thing here is, a number of times this year, I mentioned that iron ore prices will be contained inside a band between $60 and $80 per ton. This is clearly the case, and we are still very comfortably inside this band. So we are in what we consider a quite normal situation. It is our opinion that in beginning of the next year, prices will start to go up again. The reason for showing this is because I suppose, some of you has this question in mind.
Instead of waiting till the end of the presentation to discuss this, why not to give upfront our view on this particular. The presentation itself. We are going to cover today all these items. The three most important messages that we want to let you today are, first, iron ore. We are very happy and proud of the work that we are doing in iron ore. What you are going to see in this presentation, that we are doing more. We are actually increasing the share of high-quality ore in our portfolio. That will be the trend. Second, base metals. This is the challenge for this management of Vale. We have a compromise. We have a definition among ourselves, commitment that we are going to deliver this turnaround, and this will be the turnaround year, 2019. Third, disciplining capital allocation.
We remain totally committed to continue to distribute most of our free cash flow to shareholders. We are not going to invent anything different than distributing dividends and buying back shares, because you are going to see during the presentation, we have a very sound free cash flow during the next few years. With that in mind, we are going to start our presentation with sustainability. In sustainability itself, I want to call attention in the presentation that Osorio will make in the sequence, that we are focused in recovering some areas. Actually, 100,000 hectares of degraded areas outside our fences, in order to plant them with the purpose of creating sustainable income in the region that we operate. Again, once again, this is not something that we are recovering that we did. Actually, we are recovering what was done by third parties outside our premises.
With this, I will pass to Osorio to continue the presentation. Osorio.
Thank you, Fabio. Good morning, everyone. I'd like to start the presentation today by saying that last year here, we made a bold promise to become reference in sustainability. Today I would like to share with you the journey up to now and how we are delivering that. To start with, I'd like to highlight that sustainability is embedded in our culture and is addressed across the organization, throughout the operations, and in the way we operate. Such as truckless dry processing S11D project towards Mining 4.0. I'd like to say that this in detail will be addressed also by my colleague, Peter Poppinga. In the way we produce the high quality of our products having an impact in the environment with less CO2 emissions. Also in the way we engage with society.
We are committed to foster sustainable development economically and environmentally, development in the areas we operate. Our efforts are already paying off, actually. Vale is getting recognition from international bodies of the projects that we are delivering up to now. We are, as you can see, top 3 company recognized from the World Corporate Human Rights Benchmark 2018. In 7 years in a row, we are the only mining company listed in the UN Global Compact LEAD. Just recently, last week, we were listed as well in the 2019 Corporate Sustainability Index of the Brazilian Stock Exchange. Here I would like to share with you a little bit what we are doing through Renova Foundation, supporting the environmental recovery, resettlement, and compensation, up to now of the amount of $1.3 billion.
Today, what I would like to show you a short video of how Nova Bento city is going to look like in 2020. Please show the video. I'm sorry. As you can see, we are fully committed to building a better future to Mariana. Last but not least, I'd like to tell you that we are on the right track, right path towards becoming reference in sustainability. After a year that we selected key strategic projects totally aligned with our operations and strategic planning, we would like to share the goals that we selected to be met by 2030. Start with the energy, having 100% of self-generation clean energy in Brazil. As mentioned by Fabio, the recovery of 100,000 hectares of degraded land beyond our premises. The reduce of new water collection by 10%. In terms of CO2, the reduction of greenhouse gas emissions by 16%.
Of course, continue delivering the healthcare, education, and income generation projects in large scale that we are delivering in the operations where we are present. Ladies and gentlemen, that's the issues I'd like to share with you today. Now we will give back the presentation, give back the floor to Mr. Schvartsman. Thank you very much.
Thank you. Just an introduction in iron ore. The point here is to explain why we think the flight to quality is a given, and the premiums in iron ore of high quality is here to stay. The reason is simple. China cannot cope with pollution if they don't cope with emissions from the steel production. This is probably the most important source of pollution in all of China. This is being very well addressed, not only for this purpose but for the purpose of increasing productivity in the economy as well, through much higher blast furnaces. Much bigger, sorry, blast furnaces. Consequently, with allowing a lot more productivity and demanding a lot more ore of high quality. The ore of Vale is considered green ore. Green because of lower emissions and lower emissions of everything, particulates, CO2, and NOx and SOx.
All of them they have a meaningful reduction when used for the production of steel. At the same time, the demand is there because of this flight to quality in China. We are facing the depletion of mines of our competitors. In this precise moment, Vale is the only large mining company in the iron ore world that has more capacity coming on stream from this new mine, S11D. Meanwhile, the others are, if anything, facing depletion. I will ask Peter to continue in more detail the views about iron ore. Peter. Oops.
Thank you, Fabio. Good morning, ladies and gentlemen. As a consequence of this supply side reform in China, also the sustained steel prices, steel demand, what we can see is there is a need for productivity worldwide. You can see this on this chart, where you have a need for productivity, if you have to produce the same amount of steel with less capacity, the capacity utilization must go up. You see this on this chart. This is worldwide. From 70%-76%, it went up. If you just look to China, the 76% would be 85%. It goes along with higher steel prices through time. This is also worldwide. You see here a distinct trend. Of course, there is some seasonality happening through the years.
As we spoke already, now we are all well aware that the steel prices are off their peaks recently. This, we think, is not a demand issue. It is a short-term weakness and has to do with the high production of steel pre-winter cuts, which turned out to be less strict than forecasted. Now, the productivity story is a Fe unit story. To have more productivity, you need more Fe units. You can have Fe units in 2 types, 2 kinds. You either have a sinter plant with more high iron, means, for instance, Carajás from Vale. You go what this chart is showing, you go through the pellet route, right? You have the same effect. Essentially, what we are seeing worldwide is a dramatic increase in pellet consumption. You can see here more than 30% increase over the next years.
Especially in the Middle East and Africa, this will be the direct reduction route. We have in China, that is the new element here. China was never a pellet market. China is becoming a pellet market. Of course, blast furnace pellets. Even in Europe, pellet consumption is increasing. Something people forget all the time is the depletion. I am not talking about Australian depletion this time, I am talking about the domestic concentrate depletion around the world. The big question would be, where is all this feed going to come from to feed all those pellet plants in the world? Today, Vale estimates already that we have a shortage of almost 25 million tonnes in 2018 for pellet feed for those plants. I would not be surprised if this figure doubles in the next years.
This is very important, and we are going to speak about it later a little more. It is also not only about Fe units, it is also about the contaminants. When you make steel, you need to have a certain level of contaminants or not go beyond that. What we can see, especially in phosphorus and alumina, what we can see is that there is a big. This time it is in Australia, the big depletion happening, where the new ores coming on stream, they have much higher phosphorus and much higher alumina than the ores leaving, because of depletion. The consequence of all that is, of course, that the penalties of such elements go up, or the premiums when those elements are low, go up as well. I show you here an example. This is the alumina chart, the phosphorus chart would be the same.
What is happening around the world because of this phenomena, on the left side you see the. This is encompassing the 62 and 58 family of iron ore. You see it going up exponentially, the ABF penalty for alumina, right? On the right side of the chart, the right chart is only within the 62 family. What is happening there? You have our BRBF, which is the yellow line, getting a premium because of low alumina, and you have, for instance, brands like Mining RSC or Jimblebar, which gets huge discounts because of the alumina. FMG is not even here. This is in different league. This is the 62 family. What are miners doing actually about that? Miners are doing all sorts of things. They are very creative. They are separating high alumina, high phosphorus stuff, and trying to sell it separately or to different segments, different markets.
Miners are also not selling at fixed prices those ores anymore. When you sell it at fixed price, it goes into the index, and miners want to preserve sometimes their brands. By the way, Vale is today the company selling the most at the fixed price to sustain and to form the index. It is more than 60% that we are participating in this market. Eventually, miners will have to invest more CapEx. The OpEx goes up, not so Vale. Vale is, as Fabio said, we are not in a reaction mode. We are actually leading the quality game here. What have we done? How did we get here? Essentially, we have invested, and you will see it in a minute, some project. We have invested in our competitive advantages. What are those competitive advantage of Vale? There are two, essentially. Carajás is one of them.
The company who has Carajás is in a different league. The other one is the pellet feed for the pellet plants. The ability to generate pellet feed in the southeastern system is something which differentiates us. Investing our competitive advantages, at the same time then we have implemented successfully a differentiation strategy, with some commercial initiatives, and of course, supported by the flights to quality trend which we are experiencing. All this together is summarized here and gives you our main family of products we have. On the right side, it's more related to productivity, high Fe units. You have the Carajás, you have the pellets. On the left side, it's the Brazilian Blend and the sinter feed low alumina. Those are more related to the contaminant story I just told you.
Now I give back the floor to Fabio, who is going to give you some summary about what we did and what's in the pipeline. Thank you.
Thank you. As Peter was mentioning, we are not here by chance. How what have we done that made us the champions of high quality in this arena? We basically invested $20 billion to get there. Almost $15 billion of each, $14 billion, I'm sorry, in S11D alone. That is a nameplate capacity of 90 million tons per year that will be reached by next year. As well, we invested in the production of sinter feed and pellet feed, increasing capacity from 44 million tons to 65 million tons during this period of time, investing close to $5 billion for this purpose. Finally, we invest above $1 billion in the pellet production itself, through the increase in our capacity. Now it's 44 to 65. Sorry. In the last one, I was going to mention that we created 60 million tons of sinter feed and pellet feed capacity.
Vale has a much more complex operation than all of its competitors. The reason is there. We have too many mines. We have a lot of railroads. We have 13 pelletizing plants. We have 17 blending sites, and we have every day, more or less 350 big vessels transporting ore from Brazil to the rest of the world. This is clearly a lot more complex than the simplicity of the Australians, that they are clearly closer to the customers than we are. We decide to turn this into our advantage. Through the integrated control center that we created, we manage all these assets at the same time in order not only to optimize costs, but mainly, to be able to produce the best average price in everything that we sell. One very impressive thing that we've done recently was the partnership that was made in China.
16 different ports are now blending our products. This enable us to be the only company that has inventories sitting in China, therefore, we can take advantage of the market situation in order to maximize value to ourselves. The other companies are only selling according to orders immediately after production. We don't do that. We have big inventories there, if the market is good, we sell more. If the market is bad, we hold our sales for a while. Consequently, in the end of the day, our price realization ends up being better than the competition. With all of that, we increase our stake in the high-quality ore from 53% to 81% during these last years. Now comes the future. We are going to increase it to almost 100%, actually exactly to 95% of our sales.
We are going to do this through a set of investments. The first of which, that I will emphasize, is the expansion of the northern system. We are increasing the capacity of the system from 230 million tons to 240 million tons. Therefore, the 10 million tons of further capacity of high-quality ore coming from that system at very low cost. We are, as we explained before, recovering high-quality ore from Gelado. We will have this expansion of the southeast system, producing 20 million tons of further pellet feed. We are going to expand our operations of blending in Malaysia. We are going to increase our capacity of pellets in Oman. Finally, we are going to have shortly both- on acquisitions that will add to our capacity of dealing with this market.
Peter, please, if you don't mind, Peter is going to give more detail in each one of these investments.
Thank you, Fabio. Let's start with the first initiative, which is the expansion of the S11D project. This has clearly cost rationale, but also price realization rationale. The mining cost at S11D, as you know, are lower than elsewhere. We are around $8 per ton. What is it? $770 million we will have. The most of it will be spent in the mine and plant, the fifth crusher, some tertiary crushing adjustments, some secondary crushing reinforcements, and mainly a third silo close to the railway. A bigger stockyard close to the railway. That is very important so that the ore coming down from the hill, coming down from the conveyor belt from S11D, that there is no bottleneck downhill to hinder the flow of the production.
One thing I wanted to recover and upgrade existing tailing dam in Carajás by dredging, and it's a cost-driven project because to dredge and to pump is much less expensive than to mine or to grind. The CapEx here is $270 million net, 10 million tons of pellet feed. It's essentially a dredging, filtering, pumping, cycloning, and some magnetic separation. The other initiative is a very interesting one. The rationale here is price realization, pure price realization. This is big. This is 20 million tons. We are going to recover from our southeastern system, where we are going to upgrade this pellet feed into high grade pellet feed for the market. I just told you before, there is a big gap in the supply, and we are going to fill most of this gap.
We are going to dredge, recover and upgrade existing tailing dam in Carajás by dredging. It's a cost-driven project because to dredge and to pump is much less expensive than to mine or to grind. The CapEx here is $270 million net, 10 million tons of pellet feed. It's essentially a dredging, filtering, pumping, cycloning, and some magnetic separation. The other initiative is a very interesting one. The rationale here is price realization, pure price realization. This is big. This is 20 million tons. We are going to recover from our southeastern system, where we are going to upgrade this pellet feed into high grade pellet feed for the market. I just told you before, there is a big gap in the supply, and we are going to fill most of this gap.
There is 3 main pillars here. Process optimization. For instance, we have coarse tailings in Itabira and Conceição. While those coarse from the jigging process, we are going to grind those tailings and float it. The other one is the Fe content reduction in tailings. In our technological center, we have developed a very good system of high-frequency screening together with flotation, gives us very good results so we can recover more Fe during the process. The last one is the biggest one, the recovery and concentration of tailings. We have dams. We have dams in Itabira, in Brucutu, where we are going to recover the pellet feed. Since our bottleneck in all those regions is always the grinding, never the flotation, you can bypass the grinding and you can generate more pellet feed.
We have developed a technology, and we have patent for that, which is actually flotation of ultra fines which also is going to fit in this category here. Just on a sideline, we are also studying, developing and acquiring some expertise in dry ore processing. This is a big one. The next one is a small one, but also very important one in terms of price realization. In Oman, we have this pellet plant, with very small investments, $30 million, we are going to debottleneck it to produce 2 million tons more in terms of pellets. Last but not least, there is the expansion in Malaysia distribution center. This is also purely cost-driven, 10 million tons more. From 30 million tons, Malaysia will do now 40 million tons.
It is essentially about you can reach smaller ports in China in a much more effective way when you blend in Malaysia and then ship instead of making cabotage inside China. It's also a more effective way to have a better distribution of our Valemax fleet. The investment will be $130 million. We are going to reach new markets in Southeast Asia and India, which is we all know India will not be China so quickly in terms of iron ore imports, but it's coming, it's starting, and we are going to be prepared when it takes off. Wrapping it up, all those initiatives, it's like Fabio said. We have our ability to have a product mix of 95% of high grade products. You saw sometimes it's pure cost, sometimes price realization, sometimes it's both.
Right? What I wanted to really stress here, and that there is no misunderstanding between us, our value over volume approach is firm and we have some assumptions, of course, on the margin maximization. Those assumptions are still valid. Those incremental tons which I just showed you, which are going to come, we are giving here you the production guidance 2019 of 400 million tons. These incremental tons will not fundamentally change this production guidance going forward. Let's go to the other chapter, which is, we are, of course, checking on our competitiveness beyond quality. It's not only about quality. Let's start with the C1 cost, what we are seeing for the future here. We are forecasting a reduction in C1 cost between $1 and $2. This is mainly because of the S11D ramp-up, of course. Once it's completed, C1 goes down.
Also about technological initiatives and cost management. Technological initiatives is in partnership with my colleague, Alexandre Pereira from the technology department, and Executive Director of support and services. I think we have a small video here to show. Okay, the other important cost element, of course, is our freight. Our freight rates are getting reduced. We have the second generation Valemax coming on stream now. Already 18 out of 32 vessels operating, and the 47 Guaibamax also coming on stream. Just to remind you that the second generation Valemax and the Guaibamax are around $3 to $4 more competitive than the first generation, which is already operating. As you all know, we have the IMO compliance to do in January 2020. It's about the SO2 reduction. We are well prepared. The plan is here. You can see the plan.
It is about retrofitting the first generation Valemax with scrubbers so they can continue to use HSFO. The second generation Valemax and the Guaibamax, they already come out of the wharf with scrubbers installed, so they will also be able to use HSFO. Only the small vessels, which is the red bar there. The small vessels there, we will have to use the maritime diesel oil, and this costs more. We don't know how the refiners will react. We are building in here a spread of $200 to $240. Taking all this into account, you can see that looking to 2018 until 2023, with all this compliance for the IMO, we are still going to be approximately half a dollar more competitive than we were before. Here, last slide on the competitiveness to remind you our journey in terms of price realization.
These bars are including Fe content, including pellet premiums, and also all those other premiums of the fines. You see that in 2019, we think we can increase still our price realization by $2-$2.50. Just some interesting milestones. You see in 2015, the 65 index was launched from Carajás. In 2018, the 62 lower alumina index was launched. By the way, day before yesterday, the SGX of Singapore launched a derivative instrument. If customers now want to hedge the 65, they can do that now. Right? Sum it up, the competitiveness initiatives, again, $1-$2 in C1 cost, $2.50-$3 in price realization, plus the freight I talked about, gives us $3.50-$5 a ton on total.
The last slide shows you our journey, our competitiveness journey, and this is a normalized slide with today's price, today's bunker, and today's FX exchange, going back and going forward. You see we are having a nice trend. We are in the right direction in our competitiveness. If then we look to 2023, take into account the $3.50-$5 we just saw and the return of the projects we showed before, which my colleague Luciano will then go into more detail, we can reach an EBITDA per ton of 44-47. Thank you very much. Now I give back the floor to the coal, yes. I thought it was a different sequence, but let's do the coal as well. The coal business, I would like to put first into context.
As you know, the 2018 production will be more or less the same like the 2017 production. That's for a reason. We have decided to stabilize the business first. There was a lot of things to do. By stabilizing, I'm meaning mainly the investments and the fixing of the mine site. I'm talking about opening new mine faces. I'm talking about sometimes forcing a mine region to exhaust a pit in order to avoid to build tailing dams and use the pit to dispose tailings. Also to bring back the whole mine was in not a good shape in terms of strip ratio, so we are equalizing that now. This is then hopefully leading now next year to a much better ramp-up. Those are the three pillars we are going to work on. The first one is capacity.
Yes, we need some more infrastructure, mainly conveyors from the mine face s to the plant. We are getting some new equipment, 18 trucks and two shovels. There is some new mining sections we are starting. The other pillar is the mine productivity. We are more or less having 50 Brazilian operators coming from already, as we speak, arriving in Mozambique to help to train, to help to contribute with their experience. This is mainly in the mine and also in the maintenance department, transferring their knowledge. The yield pillar, that's about we building a buffer stockpile because the mine was not linked to the mill with a buffer. You have to have a buffer in order to increase availability. That's going on now. The interconnection of the two plants and the equipment debottlenecking.
This leads us to the new ramp-up profile for Mozambique. You can see we are making a production guidance here for 14 million tons in 2019, and then reaching 20 million tons in 2021. Last slide would be how the cost would evolve through this ramp-up. Today, the cost is around $120. It will come down to close to $80, and always remembering there is the net Nacala tariff because of the project finance. There is the net Nacala tariff included in that, around $20 across the ramp-up. That was it from coal. Now I give then back the floor to Fabio to speak about base metals. Thank you.
Well, as you could see, summarizing what Peter just said, we are investing in innovation, investing in new assets. We are improving quality in iron ore. We are therefore getting more price realizations. We have a lot of initiatives towards cost reduction. All in all, iron ore will continue to deliver a continuous trend towards better results every single year. In coal, the approach that you just saw, I am quite confident that very shortly with the firm and proper management from Peter, very quickly we will have our coal operation in the same standards that we have in the iron ore. This bring us to the main subject of today, the challenge in base metals. This is our commitment. This is our purpose. This is not only mine or Eduardo Bartolomeo's, this is Peter's, it is Luciano, it is Alexandre, it is all of our officers.
We are now focused and committed into delivering the turnaround that is needed in base metals with the purpose of bringing base metals to the same standards of the rest of Vale. The challenge is simple. We do have a short window of time before the EV revolution happens. This is the time that we have to fix our operation and to make us competitive as we should, in order to be as we should, leading this EV revolution in the world. This is not a minor task, given the size of the operation, given how it is spread across the globe. You will see during the presentation, the number of initiatives that we have in place for this purpose. Even further, before coming here, we spent the weekend, Eduardo Bartolomeo and myself, visiting our operations in Canada.
I could witness myself the progress that we are making in each one of the sites. I am quite happy to say that we are moving in the right direction. Therefore, our expectation is that this year, you are going to see something very different coming from base metals that you have ever seen in Vale in the last 10 years. We believe, as we should, in this revolution to come. You take just the announcements of investments in EV that were made by the main automakers in the world, you see that production will be at least from today's close to 2 million cars, to close to 14 million cars in a little more than five years' time. This will represent at least 500,000 tons of demand of further high-quality nickel. That is exactly the nickel that Vale produces. If this is our belief, comes next.
The company reached a decision to continue with VNC operation for a very simple reason. We will need this operation in order to supply market because of the growth in the consumption for batteries. Because of that, we are going to make the Lucy Project. It is an investment of approximately $500 million that will be made with the sole purpose of allowing operations to continue. The combination of the EV revolution and our expectation to turning around this business in VNC, make us very confident that this will become another good part of our portfolio of operations in the world. Another announcement for today. I don't know how much you noticed, Vale finally reached an agreement with Glencore regarding a joint effort towards the exploration of Victor of Vale and nickel-rich ore, that belongs to Glencore.
This is for Vale, an important moment because it's something that shows that Vale is clearly aiming to create value. Vale is not committed to be the only owner of anything. If there is a way of making it better, making it in a more positive and more value-oriented, this will be the way that Vale will look into it. After that, now my friend Eduardo, that is, I want to say, doing a very hard job to turn around this. He will present to you every initiative that he has in place for the purpose of improving the situation of our operation. Eduardo. Good luck.
Thank you, Fab, for the floor and for the support. I think base metals have been with Vale since 2004. I think it's time to change. First of all, I would like to greet you and say it's a pleasure to me. Pleasure and it's a special day as well. It's my first Vale Day, exactly one year after I came back. It's a good opportunity to share both my learnings and my strategy, or maybe even better, our strategy to tackle this challenge. I'm really committed. I feel the company committed, as I believe is a one-time opportunity in this industry, what is ahead of us. Fundamentally, I think we are in the right time, those famous right time to be there.
Before going to the competitiveness, I think it's very important to remember ourselves what is one part of the learning. Looks maybe obvious to a lot of people in this room, but for me, I learned that we have by far the best assets in the industry. We have the best polymetallic mines in Canada. We have a huge reserve and extremely well-run operation in Brazil, in the Carajás region. We have 50 years of experience in PTVI, where the nickel game is being played. Everybody that follows the industry knows that. As Fabio just mentioned, we are supporting VNC because of the quality and the importance that will play in the future in this revolution that is coming. Fundamentally, I think the turnaround. It's another point that's very important to set expectations here. What's the turnaround for us?
Turnaround for us is to have a stable, predictable, and safe operation. By the way, deliver on our promises. If we say we're going to produce 50, we produce 50. We have to have the best cost in the world. We have to move our assets towards the first quartile, as we have on the nickel in Canada, for instance. Finally, of course, have the right products on the right value, on the right price. You're going to learn a lot on my presentation that we are bringing iron ore or the logic that we've proved successful in the iron ore business to our place. The value use. In sum, we want to be predictable, we want to be efficient, and we want to create value on the high-quality products that we have.
For that, I think, as I'm an engineer, by the way, we need like an equation. Our strategy is pretty simple. It has to be easy to grasp. We just want the right people doing the right processes to get the right results. For that sense, I think, first of all, I would like to mention that this year. It's funny because it's very easy to attract people to the business. People from base metals industries seize the opportunity at Vale. We were able to bring very good people, keep very good people, bring people from Brazil, and we were able to create a good team. I believe my team is formed. It's a great team. It will help to do the other part of the equation, is to tackle processes.
By the way, which process we brought here to share with you? First of all, supply chain integration. Everybody that follows Vale since 2008, we're talking about sales and operations, COI. We're exactly doing that. The idea behind this fundamentally is to move. By the way, we did a movement in this sense, not structure as we want to go forward with the cut of production that we did. We want to move from a push model, produce whatever you have, to a pull model. Let's produce what market needs at the right price. Moreover, I think this process of integrated business planning, as I mentioned already, very successful in iron ore. It proves to give transparency to the operations. As we remember, the footprint in those operations are very spread. It's easy the problems to be hidden or not solved.
Streamlining the operation is very important to bring the efficiency that we've mentioned in the beginning. IBP is one part of it. The operational excellence one is a very detailed, I cannot go over here because of the time limits that we have. Fundamentally is the stable part. We want to stabilize our operation. How? Design and execute processes in maintenance and operation in a very disciplined way that will create stability. As I mentioned in my equation in the beginning, but we need the people on the other side. This framework that we have in Vale since 2008, and is already being implemented here, by the way, even before I arrived, is a betterment that sums the processes with the management part, with how we manage our KPIs, how we engage our people.
Engagement in a turnaround, I think everybody that had the chance to go through one of those, is a key element here. You might have the best process in the world. If you don't have your people engaged, forget it. I think those elements together bring the difference, and we really think putting world-class process that we do have inside our company, inside base metals, all around with the right engagement, brings operational excellence. Lastly, I think, and again, I think like Peter mentioned in his video and mentioned Alexandre here, we earned and growing and acceleration as well. We don't need to wait. We have proven technologies around the world that we bring. We just approved this year around $120 million of investments in base metals in Ontario. Some examples just to shorten the blast site. There are ways to accelerate as well.
Our commitment here in sum is to have stable, very cost effective, and value in the operations. To give some more granularity, everybody that follows base metals knows that we didn't start this now. We have been reducing our costs and mainly I'm going to talk fundamentally in Canada, PTVI, and VNC. First for about Canada. We had done the reduction of the Thompson, Manitoba to a mill and mine. We closed the refinery. We transformed the operations in Sudbury in a single furnace operation. It's time to collect that. What's that? I'll show some numbers later. Fundamentally is the flow sheet optimization, is the cost reduction program. I want to highlight one thing here. It's fundamental that we focus on Sudbury because everything that we gained, we've been losing on the underground mines. This year, for instance, we delivered on our promises.
We had a $70 million number to be captured. We captured, but with our stoppage at Coleman, and again, who follows us knows what happened. We just had to go after purchase feed, and we burned this gain. We need to really focus there. Again, the game is playing by bringing the right people, bringing the right process, doing it with extremely disciplined way. That's our focus this year. Of course, as Fabio has already mentioned, when in the short time of the window is short, we have to have Long Harbor, our processing plant in Newfoundland and Labrador, ready to go. Basically an opportunity is this. Sorry. We put your money where your mouth is. This is in our budget already. As I mentioned, this has been coming from years.
It's our commitment to do, so around revision of contracts, benefits of centralization, the matrix cost that we implemented when Fabio arrived, whatever. Well, those are numbers that are already in our process, but again, as I just mentioned, they have to be captured if we're able to fill the plants. PTVI, we like to say is our jewel, but a jewel a little bit that need to be polished. It's a 50-year-old operation. It's extremely competitive, by the way. It's going where it should be in the quartile curve, but I think it can deliver much more. We are undergoing and renewing its mine fleet. We are going to debottleneck. We have four furnaces there. We're going to debottleneck two other furnaces to increase capacity and gain gains of economies of scale.
There's a huge opportunity to transform their operation in coal, transform there we have five kilns so we can transform three of them. There's a marginal investment there. More importantly, when you look in medium term, after we go under this process, and again, the people plus process, we believe that we can extract around $1,000 of around $7,000 operation, bring it to $6,000 in operation. VNC, I think may be our biggest challenge in a way that although very modern, very up-to-dated, those same process that has to be implemented at the underground mines, for instance, just for you to understand, has to be executed there. We are doing there. We have a task force going there. We have leadership there that is taking care of that. With that, we need to unbottleneck the mine.
I think who follow us knows that this year we were coming very well until the second quarter, and we ran out of ore in a process plant that they cannot happen. We are debottlenecking in the sense of the mine as well. We're revising the plant and debottlenecking the mine with acquisition of equipments. We undergone a very detailed study to know exactly why we cannot achieve our nameplate capacity that we say is around 54,000 tons. That proved there are only minor investments that should be made, so there's no this can be done. VNC is doneable, if the English is permitted. Our main goal in the short term, two to three years, is to go to 50,000 tons. It's in our plans. It's in our commitment. With that said, maybe a good analogy here, as EVs is our, how can I say?
Is our future in the sense of business of a nickel. Where's the growth? We need to get the EV ready, but the race will be tough, I think, because as leaders in the industry, we see when we look at the numbers that is needed to supply this market, Fabio mentioned 500. If you look for 30, it's around more than 1 million. Just for you to get a grasp, I think, again, it's a Sudbury, a Voisey's Bay, and a PTVI every year. It's amazing. A lot of talks of what race is going to happen. Again, we have our cannon because we cut 80,000 tons, and we will only bring that, as Peter mentioned, is his capacity, when time is arrived. When time has arrived, we are able to bring 80,000 tons. They are there. Our all industrial plants are ready to go.
Again, marginal investments Indonesia, marginal in Onça Puma, not relevant for the size of our investments. Moreover, we have Indonesia, as I mentioned before. We have the best reserves in the world, and we are there. We know Indonesia very well, and we are able, when time comes, to take the decision to go after Pomalaa and Bahodopi, bringing us to 400,000 tons of nickel. It has a good story of growth, again, fundamentally after we fix our house. Base metal is not only nickel. We have our another hidden jewel, is our copper operation that we can ramp up in the medium to short to 500,000 tons. I'll show the list of projects that we are planning to do. Our strategy here is very simple, is accelerate these projects. We have a very deep knowledge of Carajás.
I won't bother you reading the number of projects that we have. Besides those, that's a very good idea that came from our team, by the way, that is working very well together. Again, another example that things that we did in iron ore, we're going to try to bring the concepts of mini mines to Carajás on the copper. Small satellite source that we have that can be operated by small operators that will bring. It's not small in a sense of size, 50 to 100,000. Of course, we don't have a date to that, but it's thing that we think we can do it, and we're looking for partners in that sense. Going for a project, our idea, of course, and it's more or less coincidental, it's one every year we are able to come. Salobo 3 was just announced.
We just received all the authorizations. We start the construction. It's we call a smart investment. Net investment around $400 million-$500 million. We are getting the gold stream from Wheaton Precious, as I mentioned, it's going to start in 2022. Cristalino is moving from field 2 to field 3. It's an 80,000 tons. It's going to be the capacity being replenished for Sossego. We'll keep Sossego plant operating, we'll start in 2023. After that first time span that I mentioned, the next project on the pipeline is Alemão. Alemão is a very high content of gold. Very high, of course, production, we'll be able to start, if everything goes fine, we are FEL 1 to FEL 2 in 2024. This is our new baby. We're very proud what we achieved in, I think it's transformational in the Sudbury Basin.
We finally, after years, some people say 10 years, some people say even 2003, we are able to get an agreement with Glencore. This is by far the best mine that we have there. It's a 7% copper mine. Has two satellites around it of nickel. We'll be able to produce around. We kick off in 2024, but actually the production ramps up in 2025, of 30,000 tons of copper, peaking 40 to 11,000 tons of nickel. Last, it's a transformational project. We've just been through FEL 1. It's a Hu'u project Indonesia. It's again, huge volume, 300,000 tons of copper, a huge amount of gold. Again, we say potential because there's a long way from FEL 1 to FEL 3 to do it.
With that, I would like just to summarize my presentation saying that, again, we, it's not only base metals, we as Vale are committed to make this business work. We will use all the resources and the knowledge that we acquired that made our iron ore business world-class, we will have humbleness to know that the challenge is huge, we're up to it. Again, I would like to call my friend Luciano to summarize the rewards of this strategy, the strategy of iron ore, the strategy of Vale. Thank you, Fabio.
Eduardo, this is your first Vale Day and you're bringing us a lot of luck, because I've been here a few times and I don't remember a Vale Day in which we have brought to life so many concrete initiatives. We've announced here agreements with Glencore, Carajás expansion, Oman expansion, Malaysia expansion, a full roadmap for growth in copper. The beauty is that these are all very small investments, very accretive, very high return, and they add up. Individually, they may be small, but small is beautiful. They add up, and they add up big. Not only Vale is a cash machine, and I'll show you that all these initiatives, they don't change the investment profile of Vale. Not only we are a cash machine, but we have a huge upside. This is one of the key ideas also for today.
I'm going to quantify this upside. I'm going to start with iron ore. The numbers you're going to see have the assumption that there are no additional tons offered on the seaborne market. The improvements in EBITDA, they either come from increased price realization, or they come from lower costs, or both. If there are opportunities to increase sales without disturbing the seaborne, we'll do that. For example, Peter mentioned sales in the domestic market. That's not what's here. This chalkboard from your left to your right starts with Carajás 240. Here we have additional margins from the high-grade Carajás ore and lower costs amounting to approximately 240 million tons of EBITDA. We have the Gelado pellet feed, lower costs, but also a better quality pellet that will be sold for an additional premium of $5 per ton.
We have the 20 million tons of pellet feed in the Southeastern system. Again, better price realization at the expense of a little cost increase. Oman, this is the one that I like the best. 80% internal rate of return. Almost two million tons of pellets for very, very little investment. Malaysia, reduction in distribution costs. Finally, our competitiveness initiatives that encompass the further ramp-up of S11D, the decrease in freight costs, the digital transformation initiatives, the matrix cost reduction initiatives that Peter talked about. They all add up to around $2.7 billion improvement in five years in the iron ore results. Moving on to base metals. The nickel turnaround also is in my left.
It's the opportunity there is by bringing back those 80,000 tons of capacity back to 320,000 tons of capacity with the existing margin, some with the incremental cost reductions that we can get from the initiatives Eduardo described. Over $1 billion just with the existing assets can be extracted from the nickel business. The third column from left to right is the EV revolution opportunity. 2019 is the year in which EVs are going to start going mass market. The likes of Ford and Volkswagen have announced their offerings for the middle classes. We believe in this. We believe you should believe.
The $7,000 is how much we believe nickel prices should increase to incentivize the production which is needed for the challenge that Eduardo exposed. Finally, all this roadmap for copper increase, you have an additional EBITDA of over $300 million on the further right column, and that does not include the projects which will only start up after 2023, such as Victor, such as Alemão, such as Hu'u, and the like. Another $3.9 billion of opportunity in base metals. A number of other sources of additional EBITDA in cash. Starting from left to right, we have the coal opportunity, and don't underestimate that. The key word for coal is operating leverage. The cost reductions that will come when the volumes come are huge.
Again, if you do the math with the incremental volume and incremental cost reductions, you get to almost $1 billion of EBITDA at today's prices. Remember last year I talked about pre-operating expenses that were dragging cash flow from Vale. They dragged $180 million from Vale cash flows in 2018. They will be zero in 2019. We talked a lot about also the reduction in debtness of Vale. There are also opportunities to decrease interest expenses. First, we reached our target of $10 billion of net debtness, but we still have too much cash on our balance sheet and too much gross debt. The carrying cost is about 2.6% a year. If we further reduce gross debt, we can save more money.
The next column shows you how we believe our average cost of debt will come down over the years as we refinance the expensive debt that we still carry in our balance sheet, additional savings. Some of you may remember, we'll still have to pay dividends on MBR, preferred shares that we sold during the crisis in order to fund ourselves. We intend to retire those preferred shares. It's an accretive investment of our capital. Then another almost $200 million of cash outflows that we'll seize. Finally, by 2023, Samarco will be up and running, generating cash, paying its own obligations instead of dragging Vale cash flows. Over $300 million were spent in 2018. All in all, another almost $2 billion of cash opportunity for Vale.
Adding up all those small little things we get from analyst average consensus EBITDA for 2018, almost a 50% uplift in five years. I reinforce the message, at almost no expense in terms of additional investments. I'm showing you here, investments for 2019, $4.4 billion. Pretty much what we told you last year we would spend. For the next few years, stable at $4.5 billion. The room that S11D is making in our investment profile will absorb those small initiatives with very little incremental investments. When you put this all together, all this cash flow generation, all this incremental EBITDA opportunity, all this stability in investments, I update to you here the cash flow profile that we estimate for Vale over the next three years. You pick a number for iron ore prices, you pick a number for the nickel prices, and we have these estimates.
The numbers are obviously very big. On average, over and around $10 billion every year. Bad years, maybe $8 billion, good years, maybe $12 billion. That's a lot of money. Perhaps now I could call again Fabio to tell you how we intend to allocate and to spend this money going forward, and for his closing remarks. [Foreign language].
No rocks that are now going to be unturned. No small initiative, no big initiative, nothing will be out of our reach in order to generate the value that we think the company has. We think that Vale has a very particular situation. As you could notice, Vale has in itself everything that's necessary to generate value in the years to come. I guess this is quite different from other mining companies that have to find other things to do, because their existing business are basically stalled. That certainly is not our case. That's why, in a very simple way, we are committing ourselves to continue to distribute a lot of dividends and a lot of share buybacks to our investors because this is the logic thing to do given the situation the company is.
The combination of paying back to the shareholders and producing even higher returns every single year, we are certainly combining a very attractive proposition for the investors. Finally, only once more, the key messages of today. I don't know. We are going to continue to invest in high-quality ore, reducing costs. In summary, leading this market in these years to come. Second, our purpose, our goal, and please don't forget that because I want you to be looking at us and see if this is going to happen during this year. We are going to deliver the turnaround in base metals. This is not my commitment, but the commitment of management of Vale. Finally, we are and continue to be totally committed to capital discipline without investments that are not accretive for the company.
Yes, looking for investment that can have a very high return, but mostly distributing the excess cash flow to shareholders. Thank you. Now we can take your questions if you have any. Thank you. I will call some of my colleagues to join me for answering. Peter, Eduardo. Yes. Who? Okay.
Sure. Thank you.
I didn't know you had lunch.
Yes. Actually, Fabio has paid for some boxed lunches for you. We're going to take a quick break. We're going to set up the Q&A so all management can come up. There's boxed lunches on both sides of the room, so please help yourselves, and we'll be back shortly. All right, thank you. Okay, folks, welcome back. We're going to start the Q&A session right now. If you'll see, we have a few hostesses with microphones throughout, so please just raise your hand and we'll get started. Okay, thank you.
Good morning. Thank you very much for such a detailed presentation. First question, if I may. When would you be ready to maybe announce a special dividend based on the very strong cash flow generation and strong turnaround plans that you have? Would it come only in the shareholders' meeting or in preparation to the shareholders general meeting early in 2019? Or it could be earlier? Second, if you could provide some details around the arrangement or the agreement with Glencore, that would be very useful. Thank you.
Thank you for your question. Look, the issue of dividends and buybacks, to be disciplined and predictable means at least the way I see it, to do it not in a surprising way, but to do it in a systematic way. Vale will be analyzing the results of the second quarter as soon as the second quarter is closed. As soon we have it closed, we are going to define to our board, which will be the distribution of dividends and which will be the share buybacks, if any. This could be done around January, February of next year. Second, regarding the agreement of Glencore. The beauty of it is the fact that we can explore both ore bodies, ours and Glencore, with a lot of synergies, therefore, lower costs and a much lower CapEx than if it were to be done by each one separated.
I leave to Eduardo to give some color to that.
An agreement to study. It's a feasibility study during this year until December next year. In the head of the agreement, we have as well the commercial and the operational details, procedures, how we're going to operate the mine. Basically, what Fabio just mentioned is ore body that we are exploring. Because of the Canadian law, you have the boundary agreement. We're exploring them. From each side would be impossible. That was a zero-sum game. That, I think, was transformational. We came up to the obvious thing. There is a sum, we built a win-win solution that will share the deposit, that will allow us to get access to the infrastructure. Our infrastructure, because we have infrastructure as well there for ventilation, and their infrastructure is for the shaft.
That as well, for Vale, as an additional benefit for Vale, we will reach the nickel contact in M24. There are two other ore bodies that belong to Vale. Basically, it's a commercial and an operational agreement and a binding agreement around the studies of the feasibility, the engineering studies.
The main benefit is that no shaft will have to be built by Vale to explore the ore body. This obviously improves in an important way the return on investment of that mine, because shafts in underground mines are the single highest investment that you have there.
Hi. Thiago Lofiego from Bradesco BBI. Two questions. Fabio or Peter, could you please explore a little bit more the bolt-on acquisitions on iron ore? What could be the strategy here, and if we could be talking eventually about commercial agreements rather than specific acquisitions given the potential antitrust issues in Brazil. The second question to Eduardo, how concerned are you with the potential competition on the nickel Class 1 market? I would imagine a $7,000 per ton price delta in this new world driven by the EVs would also bring new investments from competitors. How concerned are you with that? Thank you.
Regarding bolt-on acquisitions, the idea is simple. There are mines that are very close to our existing mines, actually, fence by fence with us, where we can have the benefit of using their infrastructure and the existing mine using our infrastructure, consequently, with big synergies, therefore with returns more than proportional. Yes, CADE will be always a concern, but we are talking about very small things, and that will be 100% focused on exports, therefore, no impact in Brazil whatsoever.
Fabio, if I may, could you quantify, maybe we're talking about 5 million tons or 10 or one, just to understand the magnitude, if possible.
Thiago, very shortly, as I mentioned in the presentation, we will give more color to that. I ask you please to wait a little bit, and you have all the information available in no time.
Fair enough. Thank you.
Okay. If I understood your question correctly, we see new supply as welcome, by the way. The worst thing that can happen to the industry was what happened in 2006 when the nickel hiked to $50, and then we found a solution that was what created the problem in our mining industry afterwards. Basically, I'm not concerned. I think it's not a fact. What would be a concern in a sense is, it's been said, and I think it's creating some noise, is that people are downplaying the reality of putting this new capacity. That, I think, is more important than bringing new capacity. People are underplaying the price of ore that will be played for each 500,000 tons that we mentioned. For each 100, we need 10 million tons of ore. If you add up, it's 50 million tons.
If you get the production of Indonesia today, 63. People think that ore will appear for sure, but will be a price for that for sure. We believe this $18,000, $17,000, even if you go to intermediate, will need some refinement. It's always going back to the range that is priced. That, I think, is conservative in a sense, but it's reasonable for the industry. We want a reasonable. As we want to be stable, we want to as well to have stable pricing. We don't want to have prices going to $50 and then destroying the industry. Would rather have the price, the level that is capable for everybody to produce, to supply the EV, to not see the movement that cobalt saw this year, being moved away from the batteries because it's unsustainable.
I think that for me, supply is welcome, but supply has to come in the price that will come. We know very well Indonesia, we know very well Class 1 operations in Canada, as I mentioned before. I hope I have answered your question, but basically, it's our thoughts are around that.
Very clear. Thank you.
Hi, Jonathan Brandt from HSBC. Fabio, you've mentioned in the past that iron ore prices should be between $60 and $80 per tonne. As you ramp up the premium products to 95%, how do you think about the range of the premium, whether it's the pellet premium or the Brazil fine premium? Should we see a similar type of range on that $3-$7, $5-$10? How do you think about that? The second question was on nickel. How dependent are the nickel projects that you've announced, how dependent are they on this EV revolution? If it's delayed or doesn't come, would you look at pushing those projects back, or have you started investing in that immediately? Then just, Luciano, if you could clarify the incremental EBITDA that you're forecasting for nickel.
I'm assuming that excludes the $7,000 per tonne price enhancement that you would expect in the coming years, if you could verify that. Thank you.
Well, starting with iron ore prices. We don't see the issue of premiums per se. The way we look at price towards quality. That means for us it doesn't matter if price comes through premiums or price comes through an increase in overall quality in the system, and therefore an increase on the average price in the market. This can be either one or the other, and the final consequence will be that there will be more EBITDA coming from our existing operation. That's the way we look at it. It doesn't matter for us if we are going to get that premium or we are getting only an absolute value that will be higher. It's all the same. The second thing about nickel, your question was, sorry? See what is he asking.
Just on the, if the EV revolution is delayed.
Look, we are only doing what depends upon us. Basically, we are challenging ourselves towards restructuring the operation and generating the value that is there. The money that we are putting out has only to do with that. We are only going to put more money to work if we see this revolution coming. If not, of course, that's not going to be the case. We have a very simple way of noticing that it's coming. Let's look at the price, and if the price is moving in the right direction, it seems that reality is showing that this is the time to start investing. It's important to emphasize that in Indonesia, Pomalaa and Bahodopi are the two best and largest reserves, untapped, of nickel in the world, and they both belong to Vale.
That means if someone in the market will participate in this growth in supply in the future, it will be Vale. This obviously has a direct relation too with the EV revolution. Finally, you ask about-
We uploaded a presentation on our website. When you go there and see, there are three different columns. One for the resumption of the volume that was taken out towards 320. The other one for the cost reduction. There is a third column for the price uptick, and it is included in the 50% opportunity, around $2 billion of the price uptick in nickel.
It's not included the part that we called turnaround of the business.
Yes.
It is in the other part.
Separate.
Thank you. Could you tell us about the Indonesian copper gold ore body? Did you find it? Do you have to pay a royalty? What island is it on? What are the ore grades? In addition to describing the property, why do you expect the Indonesian government to treat Vale fairly or more generously than Newmont or Rio Tinto or Freeport that haven't had as much fun in Indonesia?
I'll start by asking the second one because honestly, I didn't understand the first one. We'll come to that. Indonesia, we are and we think of ourselves as a company that is very close to the Indonesian government. We've been there for 50 years. Vale has been making money there for a long period of time. We think that we have a completely different relation than the other company that was in the news recently. We have an Indonesian national that is running our operation that is quite savvy regarding how to operate there. We don't see major difficulty. Much on the contrary. I can tell you that if anything, we are looking for further partnerships with the Indonesian government for the purpose of exploring these reserves.
It is pretty clear for us that Indonesia is the place where the EV revolution is going to happen.
Regarding materials. There is no way out of that. There is no way around it. This is our part of our job, to make it happen in a proper way. We are fully committed to do so. I'm personally committed with negotiations with the government, with this purpose. Now your other questions. Going to where?
What are the grades? Which island is it on? Do you own 100%? Do you owe a royalty? How did you find it?
I can try to answer to you as well. It's our body that I said, I mentioned in the beginning, it's going to be developed. We're just moving through the phase 1. The phase 1 we call, we have a process of assessing the ore body. Today, we own less than 29, right, of the process. We want to share. We're going to have to do a deal with Antam, is a partner there. We own the asset in a sense. It's a 300,000 tons life year. I think it's 3% of the grade is now Around 3%. It's really high grades. A lot of gold. We have a good partnership with PT Antam on that. We are developing studies. That's now we're starting because the process comes from the conceptual. Now we're moving to this more detailed engineering to go to phase 3.
It's a process that takes a long time, but we're very confident. We see this as a potential product to be one of the largest mines in the world.
Should we assume that it's 50% Vale, 50% PT Antam or?
Today is around that. No, the number exactly is-
It's 80% Vale and 20% PT Antam.
80/20. 80/20.
It is a different story from the others. Why? Because when this process started in Indonesia, Vale was the first company to reach an agreement with the Indonesian government, allowing them to have a stake in the company that we had there. Consequently, they gave us a different deal that they end up offering for the others. We do have 80% of the ore body there and 80% of the benefits as of today. We have an obligation by next year to sell another 20% for them. We end up having 60% and they 40%.
Hi. Marcos Assumpção from Itaú BBA. Congratulations on the presentation and also on delivering on your last year's promise. First question on the premiums. You mentioned that premiums should be definite and sustainable over the longer term, and you also provided the guidance for iron ore prices between $60-$80. Can you provide us a range for the premiums for Carajás and also for BRBF as well in the future? What do you think is a sustainable range of premiums?
Peter.
I try to answer your question. As you know, premiums for Carajás, they depend mainly on steel price margins, on the coke price. Also they depend on what sells there in terms of iron ore with low grades, so that there is something to be blended with, right? I am not sure if you have seen the recent, day before yesterday, forward curve coming out from SGX. It is actually very interesting. The iron ore continues in backwardation. Very slight backwardation, but the premiums are in contango. That means that if you take today let us say December the premiums are around $17 from Carajás. But if you go back to 2017, it was also more or less that level. This year it is $21. I am assuming that now we are reaching a bottom in terms of the premiums.
Since the spread is in contango, you would probably look something between the average of 2017 and 2018 for 2019. That is a very broad It depends on lots of other things. For the BRBF, we have a constant, we have had $4 to $5 and I think this is a good number to keep. This is a structural premium of alumina, $4 is a good number. Yeah.
Okay, thank you. Fabio, could you elaborate a little bit on your strategy on bolt-on acquisitions? What type of assets are you looking at? What type of synergies are you looking to extract?
Just complement Peter's information before. What we informed in the last call and still the same happening in the market. What is going on this day is the quality of the average product that is offered in the market is higher than it was before. Why? Because a lot of the low-quality ore is not being offered in the market anymore. This change for better, the average price in the market. One of the reasons why the price of ore of the 62 was above $70 in the last few weeks was because of the fact that the average quality of this ore was better than it was a couple of months before. That was the main
Single reason for the increase in prices. This phenomenon that I described, that we are not focused in premiums but in quality itself and how this translates in total prices, it is happening. Bolt-on acquisitions. Again, Marcos, I'll give you the same answer that I gave to Thiago Lofiego. It will become very clear very soon. I ask you to be a little bit patient here. We're going to get all the information very shortly on what is that we are looking for bolt-on acquisition. If I go further than we are today, I'm entering a dangerous path that I cannot follow because of regulations.
Hello. It is on your right. Thiago Ojea from Goldman Sachs. I have two questions. One first for Bartolomeo on nickel. We have been reading on the media about new projects using high-pressure acid leach with very low cost and coming online soon. How do you see this threat to the nickel Class 1? For Peter, thinking more long-term strategy, like five to 10 years on iron ore. With new steel mills being built on EAFs in China and the usage of scrap increasing, how do you see the different type of iron ore being played by the steel mills, and how this would affect the regular 62% grade? Thank you.
I'm sorry, I'm going to answer your question about nickel because I find it very interesting to understand the whole picture and I want to share with you my view on that. There is no question about the ingenuity of the Chinese. They will evolve. They will have access to this technology. This technology will become more competitive in their hands, and I certainly hope that it happens because it is going to improve the possibility of having more availability of nickel for batteries in the market. What has to be noticed is the timing of the announcements that were made. They were made given the impression that it's possible to have something even this year. This is totally impossible. This is not going to happen this year. Eventually, it's not going to happen next year. Eventually, it's not going to happen even year after next.
Nevertheless, if you are a buyer of nickel, if you want to see prices moving down, what is that you have to say to the market? Wait, that I prove myself in the pig iron time that I'm able to deliver different products with different costs. I'm going to do the same here. I'm going to do it right now. They announced a very big investment, $700 million. $700 million to build an acid leach, but this is not going to happen, ever, and certainly not in 2019. This was the purpose of this and it very well succeeded, I have to tell. There is a crazy situation in the market because the inventories are going down everywhere. Since that announcement that was made by Tsingshan some months ago, prices of nickel went down.
This is more an issue of communication than an issue or there is anything real behind it. I only ask you to wait and see what's going to happen during time that will prove that situation I am describing.
I will just give some hard facts to support your point. The environmental process, if HPAL is allowed to be disposed ultramarine, is at least 18 months. We understand the legislation in Indonesia very deeply. People say we got the environment license. They got the provincial license, not the federal license. The environmental rules in Indonesia are extremely strict. There's a second element here that HPAL, and we are studying because we have HPAL plans, we are a specialist on that. It's a mineral processing or it's industrial processing. There are a lot of doubts. As Fabio said, we have no doubt about the ingenuity of them, but there's a lot of talk. Again, if supply comes, supply will come. Even if you look at the HPAL, because we know that very well, in this range of 17 up.
We see as an opportunity as well, not a threat. Again, there's a lot of talk. Today's talk, still talk.
We certainly hope that this will be developed in time to be used, this technology, for our own reserves of Bahodopi and Pomalaa, allowing eventually to have a more efficient process that we have today in the future.
Regarding the scrap question and how it would affect Vale in China. Yes, you are right. Everybody knows the scrap consumption in China is low, and it will increase either through the building new electric arc furnaces or through increasing the scrap ratio in the BOFs. It's not so easy because the existing structure in China is that there's, first of all, no real collection system. This takes time, the distribution and collection of scrap. Second, the energy prices are high for scrap. Maybe the most important factor would be if you look some years down the road, these are small electric arc furnace compared to the big ones, for instance, in the U.S. It means that they are not very competitive, and they compete.
I think the pig iron they produce or the steel they produce is one third or almost half more expensive than the integrated steel mills. This means that if they replace some blast furnaces, some iron ore and stuff, it will replace the small blast furnaces, the non-competitive blast furnaces down the road. Again, we are talking 10 years. If they do replace the small blast furnaces, that means that they don't use so much Vale iron ore because they are much more flexible. They can use low-quality iron ore. The big blast furnaces won't be affected by this. Of course, there's always a communicating effect, but Vale will not be so much affected than others by this trend which again, it's 10 years down the road.
Caio Ribeiro, Bank of America. I have a question to Peter. What do you expect to be the steel production level in China in 2019 and 2020? If you expect the steel makers margins will increase as this is an important driver for the quality premiums. The second one, when do you expect China will reach the peak production, and what are the main drivers going forward for steel production?
Today China is producing around, is reaching 900 million tons in terms of production. I expect next year it will be a little more, maybe 910, 920. It will peak below 1 billion for sure. The steel production, though, will go on a little bit more. The peak in terms of pig iron is probably or was probably reached two years ago or will be reached in two years, talking about 750 million tons. This was the second question. The first question I did not get so well what you said in terms of premiums.
What's the level of production in 2019 and 2020?
Yeah.
Do you expect the steel maker margins will coming up after the recent decline as this has been.
Yeah
A driver for the.
The margins will come up. The housing market is good. The new starts are good. The infrastructure markets are good. We think the steel production will go up as will also the demand. It's not only about China. If you look to the whole world, the world demand is intact, and we are working with 1% or 1.5% increase of demand.
Yes. Hello, gentlemen. Leonardo Correa from BTG Pactual. Thank you very much for the presentation. Starting out for Peter and maybe for Fabio, also, the second question. First question on pellets, Peter. We've been seeing a lot of movement in spot pellet pricing. Last year you settled pellet premiums at about $60-$65, which was well above previous years. I just wanted to get your sense on how you see pellet price negotiations for 2019. The second question on my side is, we've been living a volatile world. Fabio, you started out talking about how markets in the short term have been more challenging, especially given the drop in steel pricing and demand conditions in China.
I wanted to ask you, more and more we've been receiving the question on how Vale will behave with this volatility and how Vale would adjust its potential supply in a situation where prices would break the $60 level. My question is, it was very clear in the presentation that Vale continues the value over volume strategy and Vale will continue preserving margins. I just wanted to check with you, if prices go to $50, would Vale remove some capacity from the market? Thank you very much.
I start with the pellet negotiation this year. The negotiations are almost concluded, it's because of the supply and demand stressful situation for first tier, not talking second tier. First tier pellets. There is, of course, an important price increase underway. I'm not talking premium increase. I'm talking price increase because on the other hand, we are also changing the formula, the way we are going to price the pellets. We are going away from the 62 reference to the 65 reference. This makes sense because if you make a pellet, this is 65 plus the pellet feed you use for that, right? On the other hand, if both of those indexes, 65 and pellets, are linked to productivity in the steel plant. By switching to 65 index, there would be a natural hedge for the blast furnace guys to tackle any productivity needs.
That's on the way, there will be important price increase, and we will have to price the pellets in terms of the 65 index. Fabio, do you want to talk about the other question?
Look, for starters, we don't see prices coming down to $50 per ton at all. If in any case it happens, we are going to react accordingly. We are, for sure, sustaining the idea that prices will stay between $60 and $80, that will be part of our job, not to burn our product at the wrong price.
Thank you. I have a question on nickel and then on the pellet premium. On the nickel, Fabio, I agree with you on Morowali announcement. It's just too cheap, and it's too fast. That said, Chinese companies have blown my mind, and probably yours, in what they've done with NPI and stainless steel at Morowali. Now what they're doing at Ramu with HPAL, and those numbers are higher, but they've successfully created a very low-cost operation producing nickel and cobalt. What do you think of that, and potentially, what is your appetite to partner with one of these Chinese companies in Indonesia in that area?
Look, we already have too many partners.
Okay.
What that translates into, we don't have any restrictions to becoming partners with anybody. Everything has to be manageable. The question of having too many partners is that it can come to a point that you just cannot manage it if you tie yourself into this kind of situation. Having said that, we are going to move forward in Indonesia if it is the case, if the market shows the opportunity, and we are going to do this through partnerships. We are not going to do it alone at all. This is guaranteed.
Okay. Thank you. Peter, on the pellet premium, you mentioned it is going to be there for a long time. Samarco is going to come into operation at some point in the next 2 or 3 years, hopefully. You are going to put a lot of money into pellets, and the Chinese are going to put money into pellets. At what point, though, does that premium come down because of all the extra production?
I do not see the price coming down so soon. Of course, when Samarco comes back or when other will react to this. Samarco is a first-tier pellet, but there is lots of pellets coming in which are not first-tier, second-tier, and that is a huge difference in terms of quality. I am not so concerned about the pelletizing capacity. I am concerned, and I see an opportunity here for Vale about the pellet feed because it is easy to buy a pellet plant and to build one. It is difficult to get the right feed to get a good quality pellet out of it, and that is where we are going after. That is why it is not so important what the pellet premium is. It is more important whether you have or not the right feeds to feed the pellet plant.
Thank you. If I can sneak in a last one. The base metal IPO idea of a few years back, is that completely off the table now?
Completely off the table, because we are integrating the operation in order to be able to extract the benefit. We do not think that we can do both things at the same time, integrate and separate, that would be needed for IPO. Our focus is to turn around the business. How it is going to look like financially wise, it is another issue that we are going to look down the road once we have this operation in the shape that it should be.
Thank you.
Good morning, Gustavo Lipovetzky from Banco Santander. I have two questions here. First one regarding capital allocation. I'd like to know if with this strong cash flow generation, the company could pursue a lower net debt below $10 billion, or the company is still targeting this level? The second question is regarding divestments. Last year in the presentation, the company showed some non-core assets that could still be sold, but the company haven't sold them yet. I'd like to know if the company could still do some movements on the divestments, or they are pretty much concluded.
We pretty much reached the $10 billion target, and we don't have the intention to go down this level. It's very comfortable.
However, as I pointed out, there are opportunities to manage the balance sheet beyond straight debt. First and foremost, we will do something with the MBR preferred shares in due time. As regards divestitures, you should not expect significant divestitures going forward, mainly because most of our non-core assets now, they are partnerships, and they have shareholders' agreements, which makes it a little more complicated to sell those stakeholdings. We continue to pursue those sales, but they have a different dynamics than simply deciding to sell an asset that you own and going to the market.
Thank you. This is more of a, I guess, a strategy, a little bit out-of-the-box question, but with the turnaround in base metals now, looking at the EV revolution going forward, more midterm, should we look at Vale as a producer of nickel for this industry? Or should we be thinking of lithium cobalt and other components also?
Vale today produces cobalt. We have a lot of cobalt associated with our production of nickel. I guess today we sell more or less 6% of all the cobalt in the world. We are meaningful in that. It will continue to be the case. Every time we produce more nickel, we have more cobalt associated, and therefore we increase. We are not going to make any particular movement regarding cobalt or lithium in this case. We have a challenge big enough in front of us in the nickel arena, and that's our focus. We think that the only chance of delivering what is needed is to have the company really focused on delivering it. Otherwise, if you try to open it too much, the consequence will be that probably we are not going to be able to deliver what is necessary.
I have a question on VNC. I think sometime back you guys were thinking of selling a stake in it, and saving the $500 million, and now you've turned around to say that you want to invest $500 million, and you think you can actually ramp it up and change things around. Can you give a bit more detail as to how you are specifically turning things around? What are you doing differently there that for years no one has managed to do so?
Well, this is no different from the situation in the whole of base metals. Actually, if we thought the past is the only explanation for what we are going to make in the future, actually, we are not going to do a good job. Unfortunately, that was our recent story of not performing well in base metals. VNC is exactly the same story. It's an issue of management, and what we are doing, and Eduardo is doing, we are changing the management. We are putting a lot of effort. Guys, it's just an operation and not the most difficult operation in the world. I'm 100% sure that with good people, with commitment, money that is not lacking exactly in Vale, we are going to turn it around. Why we are doing that? Let's put the situation on reverse.
Let's imagine that we decide, say, to shut it down. 12 months down the road, the price of nickel went up by $7,000, $8,000, $10,000. How can we live with a decision like that in the moment that we are now? As we believe that this revolution will come, we are just going to do the effort that is needed to turn it around. Turn it around is nothing else than do the right thing. Do the right thing, it's just do it.
Just to add as well, Fabio. I think your question's very Because I was arriving as well, I said, "What happened?" We did analysis, a diagnostic, as mentioned that in the presentation, with an engineering company to assess exactly if there's any insurmountable bottleneck in the plant. There is none. There's small bottlenecks on the partial neutralization site, in the middle of the plant. It's really not relevant in the sense of investment. It's really doing the basics, putting leadership and putting management there. As well, of course, having the time to mature that, as Fabio mentioned. We didn't get like, "Oh, I was going to just put this medicine here, it's going to work." We ask people to ask and assess to us to say that we were in the right path, and I think we are.
Thank you.
Thank you. Several years ago, Vale was discussing a blending JV with Fortescue. Now that you're going to 95% high value, you don't need to blend with the low-quality ores. The discounts for the low-quality ores are very big, and those companies need Vale. I know you don't need them. You understand concentrators and pelletizing and improving the ore.
Is it an opportunity to JV with one of these companies that is not as well managed to turn them around?
I'm sorry, I have to disagree with your last comment. I don't see this company as poorly managed. Much on the contrary, some of them, Fortescue for instance, they are excellent cost-wise. Their operations is tremendously efficient and this actually is a problem, not a good news. If we had any hint that the company was poorly managed, then eventually we could think on ways of improving it, and therefore making money if we move in this direction. Honestly, we don't think that they are poorly managed. They are a reference in a number of things in this operation. Vale mindset is proved and will be proved a number of times by our behavior. Why did we make the streaming on Voisey's Bay? Do we need the cash? Of course not. It was not an issue regarding cash.
It was an issue of improving the value of the operation there by the streaming. Undoubtedly, we did that. Why did we finally reach an agreement regarding Victor? It creates more value to do so than to continue to stubbornly do the same thing all over again. It means that the approach to Vale to this question and to any other question will be, how can we do things, sometimes outside the box, that will create more value to the company. It just doesn't mean that we are going to buy anybody, it means that we are going to look to opportunities in a creative way that will end up being a win-win situation for companies in general. That includes your comment or any other comment in this particular, we are not doing this at this moment, it is the way we look to everything.
Sorry, I cannot answer better than that.
Thank you. Andreas from UBS, just one question from me on freight. After you take delivery of the second generation of Valemax and Guaibamax, the VLOCs and so on. As we proceed forward, the 400 million tons of iron ore, how much of that will be transported not by the Valemax and the Guaibamax, but by other third-party vessels like Capesizes? That's the first question. Second question is what do you envision there in terms of the third-party charters you will bring in? Will you be chartering in vessels that already have the IMO compliant equipment, or will you be buying higher cost fuels with lower sulfur, or will you be investing in scrubbers for the third party vessel operators? How will that work going forward? Thank you.
If you add the first generation, second generation and the Guaibamax, this makes more or less two-thirds of our CFR sales. You remain with one-third, which is not these big vessels. It depends on case and case. There may be some of them, they will have scrubbers, but others, we will just have to pay for the marine gas diesel, low sulfur. Which is what I showed in the chart, which is still not a problem because of the other savings on the other side, so that our freight rate going forward the next years will still have a freight reduction of at least $0.50. We are good.
Hi. Can I ask a little bit about your deleveraging plans, what you've achieved this year in terms of reducing debt, and what you're focused on now in the next year, including liability management and new bond issuance?
Well, Luciano already explained it a little bit. What is really important here, that's the point, is to understand which is the logic behind what we are doing. There is no magic number. Not even close to that. What we truly think is we live in a volatile world, and we are a mining company that typically we face big investments from time to time. To have a strong balance sheet is very important to allow us to cope with any given situation. That will be maintained. It doesn't mean that the number will be strictly 10. It can be eight, it can be 12. It's basically the same thing. It has to be low enough that in any situation, it's not gonna have any negative consequence on the company. The liability management, if you want.
We just concluded, for example, a tender to retire some bonds. We will continue to gauge the markets to seek for opportunities because, as I mentioned in the presentation, the current cost of debt for Vale is above what it should be if you were to-
In debt the company today from scratch, from zero. We have a legacy that we need to deal with, and this legacy is expensive, and it's also not well-balanced in terms of the profile of the debt. We will continue to address that.
Just in terms of your expansion plans, you've done a fair number of royalties over the last five years, some in the copper, and more recently with Voisey's Bay. Just as you look at those expansion projects that you had on the board, how open are you to doing further royalty streams to finance them?
Each one of these movements depends on how the markets will be in each occasion. It's very hard to say we are going to do this way or that way, but we are going to try to find the best combination to fund the investment properly, to reduce the CapEx commitment of Vale, and therefore, to increase the return on investment. That will be our mindset in any project. That means that we will be always looking which are the alternatives to generate that.
Thank you.
Fabio, I think your 2-year contract is up in the next several months. Has there been any attempt to renegotiate the contract to extend it for another couple of years? Are you committed to staying past this contract? Thank you.
I cannot tell on the part of the company because it is the issue of the company. For my part, I'm fully prepared to stay in the company for longer. We are starting discussions in this direction because, as you mentioned, very shortly the contract will come to an end, and much prior to that, we are going to come to an agreement. For a very simple reason, I couldn't have more fun than what I have running this company. I can't imagine anything else that would give me more pleasure than what I'm doing. Guys, thank you so much. I guess it's time to finish. Again, we try to answer your question. We show you the path. I want to repeat once again, the focus in iron ore is to continue to deliver high-quality ore, to increase our stake, to have lower costs.
Our biggest challenge is the turnaround in base metals. Base metals next year has to be a completely different story from the past. Finally, capital discipline will be there. Money will be delivered. I guess the shareholders are not going to complain of what we are going to do during the next year. Thank you so much.