Good morning. My name is Denise, and I will be your conference operator today. At this time, I would like to welcome everyone to the Befesa second quarter 2020 earnings presentation. After the speaker's presentation, there will be a question- and- answer session. To enter the queue, you can press zero one on your telephone keypad at any point during the call. Thank you. I would now like to turn the call over to Rafael Pérez, Director of Investor Relations and Strategy. Please begin.
Good morning, welcome to the second quarter 2020 results conference call of Befesa. I am Rafael Pérez, Head of Strategy and Investor Relations of Befesa. Today, as usual, we have with us Javier Molina, CEO of Befesa, and Wolf Lehmann, CFO of Befesa. Javier Molina will start with an executive summary of the second quarter, covering the main highlights of the period. Wolf will review the second quarter financials in total and by business unit, as well as cash flow, net debt, and capital structure. Javier will close this presentation providing a more detailed outlook for the rest of 2020. Finally, we will open the lines for the Q&A session. Before getting started, let me remind you that you can find this conference call and the webcast being live on our website. Now let me turn this call over to our CEO. Javier, please.
Good morning, and thank you for attending this conference call. As we expected, the second quarter has been a challenging one for Befesa as well as for the rest of the economy as a consequence of the COVID-19 pandemic. The main industries related to Befesa have seen, during the second quarter, significant reduction in their level of activity. As such, the production of steel has decreased 28% in Europe during this quarter compared to the previous year. Also, the sale of cars has decreased by 50%. In this challenging environment, we have been able to run our plants at a capacity utilization of around 80% across all our businesses. In the steel dust segment, we have increased steel dust throughput by 5% year-on-year, driven by the increased capacity in Turkey.
On the other hand, on the salt slag segment, volumes have decreased by 15% in the quarter, impacted mainly by the lower automotive activity. However, the main impact on the earnings of Befesa during the second quarter came through the metal prices, which have been affected as a consequence of the pandemic. As such, zinc LME average price decreased by 28% in the quarter. Zinc treatment charge increased unfavorably by , as we commented in the previous conference calls. Also, aluminum prices were down 8% versus the previous year. Finally, zinc hedge price this year are slightly lower than last year. As a result, blended zinc price has decreased 13% in the quarter compared to last year. All these different price components account for more than 90% of the negative impact on EBITDA, which were partially compensated by the increase on steel dust volume.
As a consequence, second quarter EBITDA has been EUR 22 million, which represents a decrease of 41% year-on-year and which is in line with our internal view as well as the market expectations. First half total EBITDA came at EUR 55 million as expected, down 31% year-on-year. Later, I will provide more details on the outlook for the rest of the year. However, I would like to highlight that despite the uncertainty regarding the evolution of the COVID crisis during the second half of the year, we maintain and confirm the guidance that we provide for the total year with an EBITDA range between EUR 100 million and EUR 135 million. At the end of the second quarter, we have a strong liquidity of around EUR 185 million, considering EUR 107 million in cash as well as EUR 75 million revolving credit facility fully undrawn.
The high liquidity as well as our efficient long-term capital structure with no covenant, no maturities until July 2026, gives us comfort to navigate the current environment. Additionally, we have reviewed our dividend payment to adjust to the current environment where liquidity and cash preservation is a priority. As such, we have paid EUR 15 million ordinary dividend in July, equivalent to EUR 0.44 per share. On China, we continue the construction works of our two steel dust recycling plants in Jiangsu and Henan. Although the COVID crisis has caused a minor delay in the construction, we expect to have the first plant ready by the beginning of 2021, and the second after summer of this year. Now, Wolf Lehmann will explain the financials in more details.
Please turn to page five, the second quarter 2020 highlights. As Javier mentioned and explained, the second quarter of 2020 has been as expected from an operational, financial, liquidity, and progress in China point of view. Please again note that 90% of the earnings decrease is driven by the continued unfavorable price environment in zinc, treatment charges, and aluminum due to COVID-19. I will elaborate more on this further on. Turning to page six, the consolidated key financials. In second quarter, consolidated revenue was down by 28%, or EUR 48 million year-over-year to EUR 122 million. On the positive side, one main factor. Electric arc furnace steel dust throughput increased 5%, mainly driven by Turkey in 2020, back in operation with the higher expanded capacity. On the other side, this positive effect was offset mainly by three items.
First, lower aluminum salt slag and spent potlining volumes recycled mainly due to the COVID-19 related restrictions, which have decreased demand from end-use sectors such as automotive, as well as scheduled regular maintenance downtimes at our German salt slag recycling plant. Second, lower metal market prices in the wake of COVID-19 on all fronts. Zinc LME average prices were down 28% year-over-year. Zinc treatment charges up unfavorable by $55 per ton to reference finally settled at $300 per ton. Zinc LME and treatment charges combined represents a 37% year-over-year price decrease in second quarter. Metal Bulletin prices were down 8% year-over-year and are all trailing at the lowest price levels over the last 10 years. Third, on the price side, our hedging approach works and is clearly beneficial.
Still, zinc hedging prices in second quarter were approximately EUR 90 per ton lower compared to last year, resulting in a 13% decrease in zinc blended prices. On the revenue side, our operational progress and growth was offset by the COVID-19 related metal price pressures. Referring to EBITDA, the lower part of page six. In Q2, we reached EUR 21.7 million of EBITDA, very much as expected, down EUR 15.3 million EBITDA year-over-year and all in net price driven. The main price year-over-year headwinds in second quarter were, first, EUR 9 million due to lower metal prices, eight of the nine based on zinc LME and one of the nine based on aluminum free Metal Bulletin. Second, EUR 2.5 million due to the unfavorable zinc treatment charges. Third, EUR 2 million due to slightly lower zinc hedging prices, totaling EUR 14 million pressure from metal prices.
Main operational year-over-year impacts came from a positive EUR 2 million from steel dust volume increase, which was offset by a negative EUR 2- EUR 3 million due to lower aluminum salt slag volumes. In summary, again, EBITDA down year-over-year EUR 15 million, primarily or EUR 14 million, driven by depressed metal prices due to COVID-19. Finally, on second quarter consolidated net profit, this was one-time impacted by two extraordinary items which about offset each other. First, EUR 11.8 million from the impairment review, which required a write-down of the U.K. salt slag plant operations, which was mostly offset by EUR 11.2 million from the successful debt repricing earlier in the year and related accounting for financial instruments per IFRS 9. Combined and net, a minor impact on net profit of EUR 0.7 million on consolidated net profit.
Please note we explain more details about these extraordinary items in notes 16 and 17 of the consolidated financial statements, including adjusting EBIT for the U.K. plant impairment. Going now to page seven, the results of our steel dust recycling services segment. Q2 2020 revenue decreased by EUR 18 million or 19% to EUR 74 million, primarily driven by the price pressure in zinc LME treatment charges and the minor hedge price reduction as explained, partially offset by higher electric arc furnace steel dust throughput, +5% year-over-year, driven by Turkey capacity expansion. Q2 EBITDA year-over-year decreased by EUR 9 million to EUR 19 million. The main drivers of the EUR 9 million EBITDA year-over-year decreases are EUR 12 million combined price decreases from LME treatment charge and minor hedging price reduction, partially offset by a + 2, driven by higher electric arc furnace dust throughput as explained.
As the price pressure falls straight through to EBITDA, the EBITDA as a percent of revenue decreased to 25% in Q2. On the right-hand side of slide seven, we show details on plant utilizations and prices. On capacity utilization, we continue to run at resilient utilization levels even during this challenging COVID-19 times. We are pleased with the operational progress at the expanded plant in Turkey and continue to see high utilization levels in Europe and Korea. Overall, at our steel dust recycling plants have been running at average load factors of 83% in the first half and 76% in Q2 of the expanded latest installed annual recycling capacity of 825,000 tons. The zinc prices decreases we already discussed earlier. Clearly, on average, prices are down in Q2 year-over-year by 28%, and including treatment charges, even 37%.
Nevertheless, at least we see a recovery away from the lows experienced in March of below EUR 1,900 per ton to around EUR 2,100 to EUR 2,200 per ton in the last weeks of June and July. We are monitoring this price recovery closely. Overall, for our steel dust recycling services segment, very much as expected. Again, the operational progress in Turkey is delivering, but continues to be offset by the price headwinds in the wake of COVID-19 pandemic.
Turning to page eight, the results of our aluminum salt slags recycling services segment. Q2 revenues were down EUR 31 million or 39% year-over-year to EUR 49 million, mainly driven by two items. Firstly, the lower volumes in both sub-segments. Salt slags and spent potlining volume is down 15% year-over-year. Secondary aluminum alloy volume is down 32% year-over-year, mainly affected by COVID-19 related restrictions, which reduce production levels and demand from end-use sectors, especially from automotive.
Secondly, the 8% lower prices for aluminum alloy, currently still depressed at around EUR 1,200 -EUR 1,250 per ton, and at the lowest level over the last 10 years. Q2 EBITDA was down EUR 6 million year-over-year to EUR 4 million. Secondary aluminum sub-segment, the gray bars, was down EUR 3.5 million year-over-year to roughly EUR 1 million in Q2. Main drivers are: EUR 1 million negative from lower secondary aluminum alloy volumes affected by COVID-19 as explained.
EUR 1 million from lower aluminum alloy average prices, and EUR 1 million from reduced metal margins. The salt slag sub-segment, the orange bars, down EUR 2.7 million year-over-year to EUR 3 million in Q2, mainly explained by EUR 1 million negative from lower aluminum alloy average prices, and EUR 2 million from lower salt slag volumes affected by COVID-19 as explained. On the right-hand side of page eight, we show plant utilization and prices.
Salt slags and spent potlining volume and utilization levels continued at a resilient 80% on average in second quarter. In secondary aluminum, volumes were especially hit by COVID-19 related restrictions, which lowered demand from end-use sectors, especially automotive as explained. Market prices, on the other hand, decreased. Alloy free Metal Bulletin prices in second quarter averaged €1,282 per ton of aluminum alloy, down 8% year-over-year. Currently at the lowest price levels over the last 10 years. A challenging second quarter for the aluminum salt slags recycling services segment with COVID-19 further pressuring aluminum prices to 10-year low levels and lowering demand, especially in the automotive sector. Turning to page nine. On the left-hand side, net debt, cash, capital structure. We closed second quarter with a continued strong level of liquidity of approximately €185 million.
Readily available, EUR 107 million of cash on hand and EUR 75 million entirely undrawn revolving credit facility. Our capital structure is strong, as explained at our last call. It is the strongest one Befesa ever had. It is a simple term loan B fixed until July 2026, thus another six years to go. No maturities and no covenants applying. We repriced in February and reduced the interest rate to an attractive 2%. On the right-hand side of page nine, the total cash flow after funding working capital, taxes, interests, and CapEx investments was a negative EUR 19 million in first half. Working capital was temporarily impacted by EUR 24 million, mainly due to receivables more back-end loaded in second quarter versus year- end 2019, as well as EUR 10 million less factoring and confirming. Furthermore, a lower payable balance with COVID-19 related decreased operations.
Taxes and interests are as expected for midway through the year. On CapEx, as explained at our last call, we plan to spend EUR 70 million total CapEx for the full year, of which EUR 20 million are for maintenance and EUR 50 million on growth, primarily China. Halfway through the year, we are on track having spent EUR 31 million. EUR 11 million on maintenance and EUR 20 million on growth, mainly China. All in, resulting in solid cash in the bank of EUR 107 million. The operating cash flow during Q1 was a positive EUR 8 million. In Q2, a positive EUR 3 million, amounting to EUR 11 million positive operating cash flow in first half, also in a very challenging COVID-19 environment. The last 12 months period stands at EUR 65 million operating cash flow.
Summarizing, the high liquidity, strong and long-term capital structure, as well as our hedging book, forms the backbone of Befesa's financials and serves us very well to weather the COVID-19 pandemic period. To page 10. Our hedging approach and book are the same as during our last update. We are hedged up to and including October 2021. Zinc spot prices have been gradually recovering from levels below EUR 1,900 per ton seen in March and April, pressured by COVID-19, to around EUR 2,100-EUR 2,200 per ton over the last weeks in June and July. In the blue box, we quantified approximately how much our hedges, the 104,000 tons of zinc we sold forward up to October 2021 at fixed prices, are in the money against the Q2 average spot price of EUR 1,780 per ton or about EUR 1,960 per ton.
This represents EUR 46 million of value or buffer and profit in cash over the next quarters to come. Overall, our hedging book continues to reduce our earnings variability and allows us to plan our cash flows better to ensure we can fund our growth initiatives. Turning to page 11, our midterm growth roadmap. Upfront, it is important to understand that also during this COVID-19 pandemic, we stayed the course on our strategic and growth roadmap. As we continue to execute our initiatives, we target to get out of this COVID-19 crisis with a stronger portfolio versus when we entered. In the graph, level 1 hedging, I already explained on the prior page. Level 2, organic growth, completed last year on time and on budget and delivering in 2020, including Turkey, Korea washing, and out-of-furnace upgrades.
Level 3, China, as mentioned by Javier, as well as shown on pages 12 to 15, where we show the latest progress in construction and pictures, we are on track. Now back to Javier, who will cover outlook and closing remarks.
Thanks, Wolf. I would like to finish the call providing more details on the outlook for the rest of the year. As I said earlier, we maintain the guidance of EUR 100 -EUR 135 million of EBITDA for the total year. Second quarter came, as we expected, at EUR 22 million, which we expect to be the weakest quarter of the year, driven by low volume as well as weak metal prices. On the volume side, we have brought forward most of the annual maintenance shutdowns that were scheduled for summer and autumn. This decision, together with the stock of raw material that we have in each of the plants, will capacity utilization up in the second half of the year. The level of deliveries of the steel dust that we are receiving from our steel maker customers have significantly decreased during the second quarter.
However, already in July, we're starting to see indication of a slight recovery in the production levels. On the metal price side, the combination of high zinc treatment charge with low LME zinc price is putting pressure on the less efficient zinc miners. Over the last few weeks, we are seeing the announcement of zinc miners operation being shut down. This has made LME zinc prices to slightly recover since the lowest level achieved during the month of March in the midst of the COVID crisis. This also reaffirms our thoughts about the zinc price floor. On the aluminum business, the weak situation of the automotive industry in Europe is affecting the demand for secondary aluminum as well as the production of salt slag.
We are starting to see a slight recovery in this quarter, in the third quarter, there is still a lot of uncertainty about the development of the auto industry during the second half of the year. This combination of volume and price indicates to us that the third quarter should be better than the second one. There is still a lot of uncertainty about how the fourth quarter will evolve, which will depend on the evolution of the pandemic. I would like to highlight that in Befesa, we serve the part of the steel industry that is more stable and resilient, which is the electric arc furnace steel producers. In many crisis in the past, this way to produce steel has demonstrated to be more stable and resilient than blast furnace producers.
A clear example, during the first half of this year, the total steel production in Germany has decreased 16%. However, this decrease has been different between electric arc and blast furnace. While blast furnace's steel production has decreased 19%, electric arc has decreased only 8% in the period. This again proves the resiliency of our business model. Even though we currently enjoy a comfortable and healthy liquidity, as Wolf has explained, we keep on ensuring that any decision we make takes liquidity into consideration. We have reduced maintenance investment by 20%, and we are keeping our growth plan in China, which will deliver attractive return for our shareholders.
We have recently closed the financing of 50% of the investment of the first plant in China with the local debt, which also will contribute to preserve our liquidity. Finally, I would like to highlight that during the second quarter, we published our new sustainability report, which explains in more detail why Befesa is a great example of circular economy. One of the main levers that will drive the recovery of the global economy from the current sanitary crisis is sustainable development, and one of the pillars on which sustainable development must be based on is the circular economy. Befesa is part of the circular economy and contributes with its business to environment protection by recycling more than 1.5 million tons of hazardous residues annually, producing more than 1.2 million tons of new materials, reducing the consumption of natural resources.
This has been the backbone of the business since the company started more than three decades ago. The circular economy not only reduces the generation of waste, but also avoids the extraction of newer sources from the earth, avoiding the great environmental and financial costs that this produces. A transition to a circular economy represents a great opportunity to exit this crisis. Thank you very much. Thank you, Javier. We will now open the lines for your questions.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please dial zero one on your telephone keypad. Thank you. The first question comes from Ingo Sachtleben from Commerzbank. Please go ahead.
Yes, thank you. My first question would be on the situation of your French competitor and partner, Recylex. I was just wondering that they seem to have filed for insolvency of their German subsidiaries and protective shield proceedings. I guess I would be interested in three aspects. First of all, what does this proceeding mean for the competitive landscape in Germany? It's something like Harz-Metall which go out of business. Would customers just send their dust instead to your Freiberg plant or to Duisburg, and you could benefit from that? Would you see other dynamics? I would also be interested in the aspects on M&A opportunities for you. I think a few years ago, or a decade ago, you quite opportunistically bought the aluminum recycling business out of insolvency. I think of something like Weser-Metall or something in another metal, like lead recycling is now insolvent.
Would you ever consider the option to maybe also recycle other metals that are aluminum and steel dust? Maybe just as a quick confirmation where you could tell us there's no impact on your partnership with them in your French Recytech plant.
Okay. Thanks, Ingo. Well, as you have explained, the situation of Recylex is well known. Let me explain the different aspects or effects in Befesa. Regarding the competition situation in Europe and especially in Germany, what we think right now is somebody will take care of Harz-Metall. In our opinion, the plant will continue operating. We don't see any relevant change in the competitive situation in Europe in the steel dust recycling. Regarding the possible M&A opportunity, well, as you can imagine, we have analyzed deeply the Harz-Metall opportunity. Frankly speaking, we are still on the process. Frankly speaking, we don't see that we are a real candidate because from a market point of view, we have a very strong position in Europe, and I think that will be enough for the competition authority.
Regarding the possibility to enter in other metals, it's something that our strategy is very clear and well-defined. While we have the opportunity to grow in new geographies in our current business, that this is steel dust recycling and salt slag recycling, we will be totally focused on that. We are not considering, at least in the short term, the possibility to enter in the recycling of other metals. I don't know. You have asked something more? No, I think.
Yeah. About France, whether there's any impact on your cooperation with them in France.
No, we don't think so. At the end of the day, as you know, Recylex is participated by Glencore group. We feel that we have, at the end, a very stable partner in our operations in France.
Okay, thanks. Maybe just on your steel dust throughput volumes, I think they were pretty strong even if you strip out the effect from the tonnage that you had in Turkey. It looks like your European and Korean volumes were only down quite moderately. I was just wondering on the third quarter, I guess everyone is expecting steel production to recover by maybe 10% or so. In such a scenario, would you also expect your European and Korean volume to recover by a similar magnitude? Are there other factors to keep in mind, for example, that you've worked off lots of inventories and that even if electric arc furnace steel production recovers by, say, 10% in the first quarter, you would rather see stable volumes in Europe and in Korea?
I can explain what has happened in the past more than what is going to happen in the future, because we never know. I can provide you some figures about the second quarter. For example, the steel production in Europe dropped by 28%, while our deliveries dropped only by 21%. We have said many times that we are more resilient than the industry. This is because we serve, as I have tried to explain during the presentation, we serve the electric arc furnace producers that are doing much better than the total industry. In that sense, we feel that if, as you said, there is an improvement in the production of the steel in the third quarter, we will enjoy this recovery at least in the same proportion.
Okay. Thanks very much.
Okay.
Thank you. The next question comes from Michael Hoffman from Stifel. Please go ahead.
Thank you for taking the questions this morning. I'm going to sort of do them one at a time. Could we talk about what your thoughts are about Turkey ramping up and therefore the utilization moving from mid-70%s back in towards the 80%s in steel dust going into the second half, if in fact steel production continues a slow gradual improvement?
In Turkey we are running basically as expected. The production of the steel in the country is suffering like in the rest of the world. In the second quarter, the production in Turkey has dropped 17%. Our feeling is that we will see similar levels in the second part of the year. Taking account the tariffs from U.S., et cetera, we don't see a strong recovery in Turkey in the second part of the year. Based, all in all, we are running the plan as expected, and I think we will finish in utilization levels around 70% in the whole year.
This is in Turkey. The blended average would be about 75%-80% then for the remainder of the year.
You mean in the whole company?
Yes, for steel dust.
For steel dust. Yes, even slightly better than that. We have finished this first month around near 80%, and we expect to get better levels in the second part of the year. What's happened, Michael, is that we have some visibility for the third quarter, and clearly the third quarter will be better, at least slightly better than the second one. We have a big uncertainty about the last quarter. We don't know if the last quarter is going to be, again, depending on the pandemic and if we enter in a new lockdown period. A very weak quarter as the second one or at contrary, we can see a strong recovery and get be again a strong quarter like in the previous year. We don't know that. Our customers don't know that.
That's why we are only confirming the wide range we provided as a guidance at the beginning of the year.
Okay, fair enough. Given that auto production has come back online, and while I get the second quarter had a meaningful impact on new car sales, the rate of production going into the second half would suggest pretty good demand for both steel and aluminum. What's your view of that being a?
Well, Michael, it's really a difficult question. I would like to be able to answer properly. What we have seen in the first part of the year has been a very weak situation in the automotive industry. 50% production, car registration decreased. In our view is in June, the automotive plants in Europe were running at 50% of capacity. We are seeing some recovery in July, and this month we feel that the levels of activity they have are more in the range of 70%. For sure, July and August will be more or less in this range, but we don't know what is going to happen later on. We hope to see a strong recovery because all the government stimulus that the automotive industry is receiving will support this recovery, but we need to confirm. Let's see what happen.
Okay. Thank you very much for taking my questions.
Thank you, Michael.
Thank you. The next question comes from Sylvia Barker from JP Morgan. Please go ahead.
Hi, thanks. Good morning. If I can just double-check, you mentioned one kind of number around steel volumes in Europe. Could you maybe just spell out again the volume trends in Q2 in steel by region, as I couldn't quite catch that. Secondly, just on the guidance. I guess the lower end of the range was implying some very sharp reduction, very dramatic price action as well. Do you think that that end of the range is still plausible? It doesn't seem like it is. I'm just wondering whether you were considering moving the range up at all. Finally on cash flow, could you maybe talk about any of the government deferral schemes? Obviously, a lot of companies have been using the VAT or Social Security deferrals.
I'm just wondering whether there was any impact on your working capital in the first half. Thank you.
Thank you, Sylvia. Well, regarding the production for plants, this information that is very sensitive. We don't like to enter into these details because we manage the company as a whole. Sometimes our logistics send the raw material to different plants depending on the market situation, et cetera. I think it's better for us don't enter in this kind of details at the end of the day could confuse you or the analysts and all the investors. I think that the message is that we have finished the first part of the year at a strong 80% of load factor, and for Q3 will be better. Let's see what happens in the last quarter. Is it the same answer for the guidance? First half, we finish at EUR 55 million. Second quarter, we finish at EUR 22 million.
I said that third quarter will be slightly better than the second quarter, but it's not going to be a strong quarter. Let's say that we finish around EUR 26 million, EUR 27 million. We will have finished probably the first nine months above EUR 80 million, EUR 80 something million. The question mark is what is going to happen in the last quarter. If we have, again, a weak quarter like the second, for example, we will be in the low part of the range. If the recovery comes and we have a strong quarter, we will be around the middle part of the range. Clearly, to be in the upper part of the range, taking account the situation we are living today will be very difficult, will be quite impossible because we should need to be a very strong recovery starting immediately. Probably this is not the case.
Wolf, don't you mind to answer the question about cash flow?
Sure, absolutely. Thank you, Sylvia. You had mentioned VAT, obviously, yes, that by law, we apply that, but it's only very minor impact. Social Security deferrals, we're not aware of. Rather what works for us is we're allowed and we're applicable if we are in temporary low volume situations. We use the government programs in Germany, Kurzarbeit short work, or in Spain, similar programs called ERTE. We use that, but overall, I would describe the impact on the financials very minor. Sylvia, in terms of volume by region, if you are looking for crude steel production volumes by region, we do provide those. Those are on page 15. You see them for EU, Turkey, Korea, and China.
Okay, great. I was just wondering about your own. That's clear. Thanks very much.
Thank you.
Thank you. The next question comes from Jaime Escribano from Banco Santander. Please go ahead.
Hello. Good morning. One question from my side regarding the Chinese projects. Could you give us an update on the negotiations with the steel makers? Where are you, whether you have already closed some kind of terms and conditions or when this will happen? When do you plan to start operations of the first plant, if there is any change? Do you all plan to start production earlier or if there is any further delay? Thank you.
Thank you, Jaime. The effect of the pandemic in China from a construction point of view is, we can say, is quite small. What we have really is a delay of one month, let's say, at maximum six weeks. From a construction point of view, we maintain our goal to start production in the first quarter at the beginning of next year. What's happening is that we will start cold commissioning of the plant after the European holidays, Christmas holidays, then we will have the Chinese New Year holiday. That, as you know, produce a big shutdown of the country. The idea is to start hot commissioning of the plant in March 2021, which is a delay more or less of one month or month and a half. Nothing dramatic.
From the contract and from the supply point of view, we are suffering slightly more from the pandemic. What has happened is that until one month ago, even the pandemic was going better in China, has been impossible to travel, to make trips. We have some delay in the contacts with the steel makers. We are really starting the contact right now, when our year was to have started the contact three, four months ago. Today is too soon. As you know, because we have explained in our different meetings, we know very well all the steel makers in the region. We are starting to have the contact right now. Probably after summer, we will start to have some more visibility about when we will start to sign contracts later.
As we have explained sometimes as well, we don't expect to sign the contracts before to finish the construction of the plant. I think the process will be slightly different. We will finish the plant with a lot of contact with customers, but the process will be first to do trials to convince them that our technology runs and everything goes as expected, and then we will start to sign contracts, probably more next year. Okay?
Okay, very good. Thank you.
Thank you, Jaime.
Thank you. The next question comes from Clarissa Quig from M&G Investments. Please go ahead.
Hi. Morning, Javier, Wolf and Rafael. Thank you for the presentation. Just two questions from me. The first is on hedging policy and if you've got any plans to extend the hedges. The second, can you just remind me what your exposure to the automotive sector is, please? Thank you.
Thank you, Clarissa. Regarding the hedging, our hedging policy remain totally the same. We want to hedge in euros. We want to hedge from one to three years in front of us. What's happening is that we have a solid view. We don't know, as we said many times, we don't know what is going to happen with the zinc price, but we have a solid view about the zinc price floor. Based on this view, we are not in a hurry to extend our hedging if the zinc price that we can achieve are below to EUR 2,100 or EUR 2,200 per ton. Again, the policy is the same, and we are monitoring what's happening with the zinc price and to take the opportunity to increase the hedging when the situation start to change. Second part, you mean our exposure to automotive industry.
Well, in our secondary aluminum business is depending, let's say, 80% of the automotive industry levels. Our salt slag business is more resilient. It's something like what's happening with the steel dust business. The best example is what has happened in the first half of the year, when the automotive production has dropped, or at least the car registration has dropped around 50%, our salt slag production has reduced only by 15%. This is because we can manage our raw material stock, maintenance, shutdown, et cetera, to be more resilient than automotive industry. At the end, we have a, let's say, high dependency on the automotive industry.
All right. That's very helpful. Thank you.
Thank you.
Thank you. Ladies and gentlemen, let me remind you again, if you have any comments or questions, please press zero one on your telephone keypad to enter a queue. Thank you. The next question comes from Oliver Calvert from Kepler Cheuvreux. Please go ahead.
Yeah. Hi, good morning all. To start off, just a follow-up, just to be very clear on the zinc hedges. You said you hedge until October 2021, and obviously, from next year onwards, your zinc content will further increase with your two plants in China going online. What is your level of comfort in terms of getting closer to October 2021 without further hedging? Would you be looking to maintain a stable share of zinc content hedged in proportion of your production volume? Or would you stay closer to the more usual running rate of a full year hedging content of 92,000 tons?
Thanks, Oliver. We feel very confident with the level of hedging of around 70% of our production levels. We would like to be below that figure, we don't want to go over that figure. Around between 65%-70% is a very good figure for us. Regarding the price levels, again, we do a permanent analysis about the zinc price floor based on the cost to extract zinc from mine. Based on that, we establish our strategy. Today we feel that this cost will be around EUR 2,000 per ton, but it's difficult to precise, plus some premium. That's why we are not in a hurry to extend our hedging below a price level of EUR 2,100, EUR 2,200 per ton.
Okay. Thanks very clear. Just on China, a follow-up on what you just said. Just to confirm, you probably are not going to see EAF dust. I saw in the picture, page 13, I think, that the slag storage, it looks ready at least on the picture. You're not seeing any EAF dust coming for you to store in this year or even at the beginning of next year until March or so?
No. We have enough problems in constructing the plant. We would like to start to storage steel dust at the same time that we are constructing the plant. This won't be a problem. We are in the middle. In Jiangsu, we are in the middle of very strong area in terms of steel dust production. We are in close contact with all the steel producers. Now is the time to start the negotiations about terms, conditions, et cetera, on the future contracts. Step by step. First, we need to finish totally the construction of the plant. Once the plant is constructed, we could start to store steel dust.
Finally, just on the question on the secondary new aluminum business. I think in a previous call, you were talking about the Hannover capacity expansion plan being on hold. I'm just wondering, considering what's happening in the auto industry and the outlook for the next few years, in Europe, would you say it's still on hold, or what is the status of that project at this stage?
Let me say that, you are right taking into account the current environment. What we can say is that we are not in a hurry to start the construction of the capacity increase very soon. We are still in the process to obtain of all the permits, et cetera, from the local authorities, which is not easy because our Hannover plant is located pretty close to the center of the city. We need to first finish all the permits, administrative, environmental, et cetera. Then once we have all this on our hand, we will review again the situation to take the final decision.
Okay. Thanks very much.
Thank you, Oliver.
Thank you. The next question comes from Sylvia Barker from JP Morgan. Please go ahead.
Hi. Sorry, just a quick follow-up. Just on the Chinese financing that you said you've secured for the first plant. Could you maybe talk about kind of the size terms, who it is with as well? Thank you.
Wolf, please.
Sure, Sylvia. As we mentioned, we're looking for the first two plants roughly at a 50/50 loans equity structure. Equity we already provided. Now, on the first plant, the 50% of the loan is secured, and we're also actively working already for the second one on the same. With the investment, if you remember, the first two plants cost each EUR 42 million total. Half of that approximately is loan and half of that is equity.
Is that with a local bank or?
Yep. It's with Bank of China, which is an excellent local bank, but quite frankly, by now, also one of the top in terms of size and assets under management, et cetera. One of the top banks in the world. We're very pleased with the conditions we achieved. It is just like our term loan B, Sylvia, as you know, runs until 2026. This is also long-term financing, also running all the way until 2026.
Okay, great. Thank you.
Sorry, Sylvia, as you know, in our capital structure, we had already included the local loan basket, general use basket. The entire China growth initiative, those local loans fit perfectly into those baskets and fit to our capital structure. All of that was already organized middle of last year when we done the refinancing of the capital structure.
Thank you very much. The next question comes from Andrew Benson from Ambienta. Please go ahead.
Yeah, good morning. Thanks for taking my questions. On treatment charges, these are hurting you this year. Well, they hurt you for quite some time, actually. The spot rate in China is about half the annual rate. What is your strategy with your approach to treatment charges prospectively, and will you continue to seek an annual price negotiation? Secondly, just as the Chinese plants start up, I've known with steel, with various commodities, that the Chinese much prefer to deal on a spot basis than an annual negotiations. Do you think that your approach
To treatment charges with the Chinese expansions will be different, and how do you see that in the future, and how do you think that would impact your profitability? Thanks.
Thank you, Andrew. Regarding our strategy of treatment charge negotiations, let me start out of China. Our idea is to keep the same policy that we have done in the last, I would say, 20 years. I think we shouldn't enter in a spot price negotiation. We are happy to know at the beginning of the year which will be the treatment charge for the full year. This is the idea we have. We want to maintain our annual negotiation for treatment charge, because that give us a big stability and a strong relationship with our customers as well. Okay, China is different, as you say. We are learning about it right now. We are dedicating a lot of time. Our commercial people is analyzing what's happening.
My first idea would be, we would prefer probably to, if possible, to keep the same policy that we have in the rest of the world. Let's see if we must do some changes in the Chinese operations in the future. This is something that we have not defined today. I think we are in a very bad moment regarding treatment charge for mining or for companies like Befesa, but we are totally sure that the situation will change sooner than later. Okay.
Thanks very much.
Thank you, Andrew.
Thank you. There are no further questions. Dear speakers, back to you for the conclusion.
Thank you all for your questions. You can also contact the investor relations team of Befesa for any further clarification. We will now conclude the conference call and the Q&A session. Let me remind you that you can find the webcast and the dial-in details to access the recording of this conference call on our website at befesa.com. Thank you very much.