Good day, and thank you for standing by. Welcome to the Outokumpu's Q3 2022 pre-silent call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Linda Häkkilä. Please go ahead.
Hello all, and welcome to Outokumpu's Q3 2022 pre-silent conference call. My name is Linda Häkkilä, and I'm the head of investor relations here at Outokumpu. With me today, we have our main speaker, our CFO, Pia Aaltonen-Forsell. As per usual, we will first start with a short update from our CFO, and after that, we are happy to take questions from the line. Now, without any further comments, I would like to hand over to our CFO.
Thank you, Linda, and welcome everybody. September is almost over. I guess we have only a few hours left, so it's a good time to host our pre-silent call. Obviously, a period of time when a lot of things are changing and uncertain, but hoping to be able to share some of the recent events and topics from an Outokumpu perspective as we usually do before the silent period starts. Without further ado, I think I would like to touch a bit on market, a bit on cost position, predominantly energy, timing and hedging, then a few words especially on ferrochrome because I think this energy and electricity is pretty linked to that.
Then end up with a few remarks on a more general level. At least I'm pretty excited about one of the press releases we had out today relating to potential biocoke and biomethane investment. Maybe I start first with the market and this is a continuation of what we have seen and what we have talked about since the Q2 report. Obviously the big frame here is a seasonally weaker demand, but also broadly a market situation that has shifted from this hyper hot that we had still earlier in the year into something more normal and maybe even further from that.
If I should describe what we see right now, obviously starting with Europe, a really big topic has been the higher import levels. Obviously, as we have discussed before, those have been on the back of probably, you know, orders put in for Asian imports already earlier in the year and maybe continuing early in the year. We have still seen peak levels of imports certainly in July. As far as we can understand now, this arbitrage and price differential has really been diminishing and is very small or not existing. Would expect certainly those flows to become smaller. You know, October is the first month in a quarter, so maybe that is still a month with some activity.
Certainly, that period of time now seems to be more history. It has resulted in higher inventory level, particularly at distributors, in Europe. I mean, this is the situation at hand right now, thinking about inventory and destocking, seems to be on the mind of a lot of distributors. However, we do see, you know, some signs of normalizing. This is not evenly distributed so that, you know, all would be the same. Rather, we see a bit of a mixed picture, but certainly, with some signs of returning to buying European.
I would broadly comment on the end user market that, despite, you know, the turbulence in the world around us, it is still, you know, the message has not changed from when we have talked before. We actually still see a normal or, you know a, in some cases, I would say a normal good level of demand really from end product perspective, or end user perspective, and particularly for advanced materials. Our order book is strong and we see a lot of these segments still in a very good shape. I move quickly over to Americas. I think the sentiment is the same when it comes to distributor.
More of a destocking sentiment clearly with high inventory levels at the moment. I think there is a sentiment or a need to flush out inventory, given that some of the inventory for sure has also been purchased at a higher cost compared with where the levels are right now. Maybe those are really the broad strokes of the market. Then I would move over to some of the cost elements, and maybe I'll really focus on energy and then electricity in particular. As this really has been the big topic and certainly impacting particularly Europe at this point. Looking then into our ferrochrome operations, we have taken some action here to optimize our production.
Just to be clear, what this optimization means is that we have found ways to steer the use of power in a way that we don't produce at those peak prices. I'm sure all of you are following the markets, and you know that there's a really extreme volatility also in the spot prices, so that we have these very high peaks. We have hours, you know, particularly nighttime, but also otherwise. You know, when there's a lot of wind, for example, where we can see considerably lower prices. You know, from what we have communicated before that we are still, you know, fairly well hedged when it comes to electricity and energy more broadly, until the end of this year.
Nonetheless, with the significant electricity consumption, particularly in ferrochrome, you know ferrochrome is using more than half of the electricity that we consume in Finland. We have found, I would say, good ways to stabilize the cost situation. Of course, this optimization at the same time then means that we are cutting some production. This is the balance that we need to strive for there. I think it's good to find ways. It's both good for us because it's a way for us to control the cost side. Probably it's also really good for Finland because in this case, we have really been cutting production at those peak hours of consumption and price. There's more good news from Finland.
Actually, Olkiluoto third reactor, I was reading today that now we are from a test usage perspective up to the maximum power of 1,600 MW. I think that is good and reassuring news in in the midst of a lot of other maybe more disturbing news, such as for example the sabotage on the Nord Stream gas lines. Maybe that's ferrochrome. There's still no benchmark price for Q4, or at least there wasn't 15 minutes ago when I was checking. It seems negotiations there are really taking their time, but not much more I can really say about that. Finally, over to net of timing and hedging.
You know, at our Q2 report, we already said that with current raw material prices back then, we did expect significant raw material rate-related inventory and metal derivative losses to be realized in the third quarter. We thought we could expect the same figure, but negative in the third quarter. I have to say, there's been some more negative moves in metal, such as we have in iron and in molybdenum, that are have been even sliding further compared with what we saw at the point when we talked after the Q2 report.
That could have even a little bit still more negative impact for that portion in our P&L. Okay, credit rating. We have news from Moody's mid-September. They did affirm the Ba3 corporate rating but changed the outlook to positive from stable. Again, a bit of good news on that side. I'll just wrap this up by saying that we have a press release out today about our plans for an investment in biocoke and biomethane in Finland, in Tornio. These are still, you know, plans. We do not have an investment decision yet. I mean, this needs to be further prepared, but we wanted to be sharing this news.
We have applied for some subsidies, so we are really seriously, you know, taking this process further. There are clear benefits. On one hand, for our CO2 journey, this is a really important part of reducing our Scope 1 emissions. At the same time, obviously, a good opportunity for us to become more self-sufficient on energy and particularly then on gas in this perspective. I think that was also some good news here still for the month of September. With that said, maybe I stop here and we start with the Q&A session.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Please stand by while we compile a Q&A roster. We will now take the first question. The first question comes from the line of Anssi Raussi from SEB. Please go ahead. Your line is open.
Thank you. It's Anssi Raussi from SEB. I have a couple of questions, and I go one by one. I start with the one regarding your customer activity. Have you seen any customers coming to you instead of your competitors, as they think that you could have a better delivery reliability at this point? Hi, Anssi. Thanks for the question. I mean, that would always be a joy to see such activity. What I can say broadly, I mean, we are definitely, you know, we are booking for Q4 at the moment still. In advanced materials, we are having a longer order book. You know, I would talk about from our perspective satisfactory activity at this point in time.
I cannot really comment, you know, I didn't ask them whether they are happy with our competition or not.
Okay. Understand. I'm not sure if you're able to comment on the next one either, but I will ask it anyway.
You can try.
Have you been able to use alloy surcharge-based pricing, or are your customers demanding so-called all-in pricing?
I think we have seen a movement towards all-in pricing. Maybe what has been historically the trend as well when the import levels have been higher and uncertainty has been high. Certainly there has been, let's say, pressure in that direction.
Okay. Yeah. Sorry if I missed this one, but, did you say that your energy costs are well hedged until the end of this year? If so, what will happen then if the energy-
Yeah.
electricity prices remain where they are currently?
Yeah. Anssi, it's a good question, and maybe it's good if I can illustrate that or be a little bit more detailed on that. I think the starting point first is that you know we have this funnels of energy hedging, and we always take a view 24-36 months ahead. With that, we typically have the situation that you know for periods closest to us, our hedging level is the highest, and then the further we go to the future, the lower the hedging levels will be. One of the particular themes of almost full year of 2022 has been you know less liquidity in the market and a lot of volatility in the pricing as well.
I would say we are more in this lower funnel of our typical hedging activity. With that said, I think that we are . We are absolutely never fully covered in terms of hedges. We always have a fair portion for also spot business. But maybe how to give the correct expectation of where our levels are, I can only say that, when it comes to 2023 and further, we are more in this lower funnel of what is possible for our hedging. That would mean, a notch lower than where we would normally hedge.
I cannot give you the percentage even though I would love to, but that I cannot share, so.
Okay. Can you comment, like, do you have to take some additional measures like you did already with one ferrochrome furnace?
Yeah. Well, I do think that for electricity, you know, ferrochrome is really important because we use most electricity in Finland, and out of that, we use a bigger share for ferrochrome than for stainless production. So therefore, and ferrochrome also from a cost structure perspective, is much more sensitive to electricity than what our stainless production is. So it is clear that, you know, we have taken very, you know, active control of the costs now by the optimization and the earlier announcement that we made also around the second furnace. So this about 30% of the capacity in ferrochrome that we are not restarting after the maintenance.
It's along the same lines of that optimization and finding that sweet spot of, you know, where we have hedges at good price levels and where we can then find these hours to run with spot prices at, you know, very reasonable levels or even cheap levels, you know, at points because the spot prices really vary a lot. I think from our perspective, we have a clear path in mind what we can do to control costs and in that sense, stabilize the results, I would say, understanding that the electricity is such a significant cost factor in ferrochrome.
Maybe if I still try to illustrate that a little bit, if I think of, you know, when I was speaking about Q3, I said, "Well, you know, electricity costs really seem to increase, and it could be even EUR 30 million more quarter-over-quarter for ferrochrome." You know that after I said that, there's even been further pressure on electricity prices, even in Q3. I mean, we saw this August, you know, huge pressure on electricity price also in Finland.
If I look at the situation right now, with our optimization, we have been able, starting from August, so in August and September, to balance the situation so that I would assume at this point in time, I don't have the final figure yet, but assume that maybe we didn't increase electricity by EUR 30 million, maybe we increased with half of that. On the other hand, we also lost some production. We did this really , you know, stabilize the result in a difficult situation, and I don't mean stabilize on a high level, but I mean stabilize so that it makes sense to run what we run. With that said, you know, we have lost production, maybe compared with our normal quarterly plan, what we would have had.
Well, in percentages, it's a double-digit figure, but it's a low double-digit figure. I honestly don't have really the final figure yet. With this long explanation, I'm trying to say that, you know, we have ways of managing, but it is not easy with high electricity prices, and we will find those ways to operate that makes sense. When it doesn't make sense, then we have to take stops, like we have now said for the second furnace, that we don't restart after the maintenance.
Okay. Thank you. That was all from me for now.
Thank you, Antti.
Thank you. We will now take the next question. One moment, please. It comes from the line of Ioannis Masvoulas from Morgan Stanley. Please go ahead. Your line is open.
Hi, Pia. Good afternoon. Thanks very much for the call today. I have a few questions from my side. I'll start with the one on Europe. One of your peers this week has been talking about a severe destocking in Europe during Q3. Is that what you've seen so far in the quarter? Do you think your, as a result, your shipment guidance for Q3 is still appropriate? Are there any signs of improvement consequently into Q4?
Ioannis, thanks for the question. I mean, broadly, we still see that the distributor inventories are at a high level, and destocking is the theme of the quarter clearly, because I think this, you know, high inventory levels were very much driven by these high import figures as well. We definitely see a connection between those two. On the other hand, I mean, when we gave our guidance, we said volumes are down 10%-20%, that included this view of the destocking mentality and the low distributor activity. We are definitely, you know, that is our guidance, the same as we gave before.
Great. What about Q4? Do you expect this destocking activity to continue, at least from what you're seeing today?
Well, maybe a few facts I can say around that. One of them is that inventory levels are still high at distributors. You know, normally they would like to drive them down to something more historical levels, I assume. That would be a factor that could drive a further destocking. But what I wanted to share was that we start to see you know, not one united picture of all distributors being exactly the same. There seems to be a bit of differential, you know, between distributors. Some of them have maybe already destocked, other are still, you know, having a lot of really high inventories. We see a little bit more variation, but certainly there are.
We are also aware of distributors who definitely have very high stock levels. You know, that could mean that they just have to digest that, and that probably continues well into Q4, maybe even until the end of the year. That's the best I, that we can see right now.
Great. Thank you. That's very useful indeed. The second question is around ferrochrome, where you're running at 70% of capacity utilization.
Mm-hmm.
Are you effectively producing only what you need for internal needs for your stainless business?
Mm-hmm.
How does that work in practice? Because I know that over the past few years, you've been working really hard to build your contract business with external partners.
Yes. Yes. Yes, indeed. It is a balancing act, absolutely. One of the things obviously has been that also internally, you know, aligned with our guidance of 10%-20% down, we have had lower volumes in the third quarter. I mean, this is all a balancing act. Our basic attitude is always that we honor contracts and then we do our best to balance the situation. As you can understand, several contracts for the year 2023 are also under negotiation. We will keep a very close eye on this. And certainly both logistically and for CO2 reasons, we want to give priority to internal deliveries, so.
Yeah. No, that's clear. The other question I had was on working capital because.
Mm-hmm.
At the last call, you talked about potentially building stocks of finished material in Germany in case or to avoid any gas-related challenges.
Yes.
Has this transpired? What would the impact be on the working capital?
Yes. I think we are still considering some pre-production, as we would call it, potentially during Q4. I would say, you know, if we do that, we do it really to support our customers. At the moment, I don't see it being, you know, so significant that I could, like, give an amount here. I usually don't talk here, you know, about EUR tens of millions. You may recall that I talked about that we have had a step up in working capital because of the Ukraine war and because of changed supply chains and some extra inventory. That step up, I mentioned that it's about EUR 100 million, and that did not include, you know, this possible pre-production for Germany.
I think with that, I wanna say we are definitely still considering it. I don't see that, you know, the risk has completely vanished, even though there have been maybe some bit more positive signals. It's still potentially in our plans for Q4, but not so significant that, you know, I would have a figure to give to you that.
Yeah. That was very clear. I guess with that in mind, Q3, you can still deliver some working capital release.
Yes. Seasonally, yes. I mean, we have always done that, and I don't see any reason why this would be different.
Okay, great. That's very clear. Just a last question from me, if I may, on this biocoke project. Just to clarify, the EUR 25 million. You're applying for a grant?
Indeed.
What is the total CapEx associated with this project that you have in mind?
Yeah. I mean, so far, we haven't given the CapEx simply because we are still planning. There is maybe one thing that I do want to share. I mean, as part of our sustainability journey, it was in December. Linda is laughing when I'm saying this. Well, we did, in our sustainability journey share that we will invest around EUR 160 million for reduction of Scope 1 emissions. Clearly, this CapEx is one very important part of that Scope 1 emissions.
That's very helpful. Great, Pia. Thank you very much for all the answers.
Thank you.
Thank you. We will now take the next question. Please stand by. The next question comes from the line of Krishan Agarwal from Citi. Please go ahead. Your line is open.
Hi. Can you hear me?
Yes.
Hi, Pia. Thanks for taking my questions. Following up on Johannes' question, I mean, couple of your competitors in the region, they are saying that, you know, demand has been weakening and de-stocking going on, the trend which you have also confirmed.
Mm-hmm.
In the context of your guidance, like 10%-20% decline in the deliveries, would it be fair to assume that we are more towards that upper end of the guidance? Just like in ferrochrome, you are reducing the capacity utilization. Did you also take some measures in European production base in stainless?
Yeah. Thank you, Krishan, for the question. What should I say? What I should first say is that a normal seasonal decline in Q3 for us has been more like minus 10% over a longer period of time. There have been so many abnormal years that it depends on what time period you take, but that has been more like minus 10. It's clear that the minus 10% to minus 20% also speaks to this lower demand that we can see during the quarter. Then in terms of, you know, where in that spectrum do we land, I mean, usually, ideally, from my perspective, we would be in the middle. I think that's as far as I can go today.
You're confirming that, okay, you did not have any production stoppages in Europe as your competitors had?
No, not.
for stainless.
For stainless, no. I mean, obviously, we have had maintenance, you know, in actually all of our major sites, during the quarter, and that was planned, and that was also part of the guidance, and we have restarted after the maintenance breaks. We have had in Tornio maintenance, we had some maintenance in Avesta. I mean, we've had basically summer maintenance stops throughout Europe because we had a very long period of this very high demand, where we tried to avoid any unnecessary maintenance. We have definitely taken the opportunity during this quarter, to get some maintenance done. We have restarted after maintenance.
Understood. I mean, we are at the end of the quarter, so if I were to, you know, ask for your views in terms of the base prices have come down, electricity prices are staying very high, nickel not necessarily coming down that much.
Mm-hmm.
Would you confirm that your operation, stainless operation in Europe are profitable even today, at current a price-cost dynamics?
Yeah. I'm thinking here how to best. I understand why you ask and I think it's a fair question. On the other hand, I mean, if I look at the underlying operation, I mean, just looking in Europe and if you follow the price trend of, for example, you know, just look at where our result was in the second quarter, and then understanding that the timing impact, you know, lower nickel price could have some negative impacts. Other lower metal prices could have some negative impacts, not being fully offset by hedging in any way. Clearly there is a downward pressure, potentially still from there.
We also have a high starting point in the second quarter. T aking then a step down in the third quarter as per our guidance. If we still see lower metal prices, well, obviously it depends on how low, but I think it's a little bit too early to try to foresee the Q4 result when it comes to timing and hedging. There are some uncertainties, obviously, related to that as always. When it comes to energy, I think we have found the way to operate. In the fourth quarter, our hedging level is still following our normal pattern.
As I said, for the first quarter, our hedging level is then somewhat lower at this point in time. I see that as more pressure on the result. On the other hand, I mean, if you have a look at the forward prices, you will see that there is still a relatively lower price in the Nordic region compared with the rest of Europe. Maybe that is all that I can say. I don't really wanna give a guidance yet, and I, you know, probably will come back with a little bit more detail then in our Q3 release.
I understand that. Basically, if I understand, you know, correctly, is that okay? Yes, you are profitable because you are protected from hedging. Probably the situation would have been different if you are on spot electricity prices.
With spot also, I mean, we have found some ways, particularly in ferrochrome, to optimize, but the optimization always comes at the cost of lower production. That's the trade-off we have to make.
Got it. A slight clarification for ferrochrome energy cost. You said EUR 30 million quarter-on-quarter increase in Q3 and something around EUR 15 million net of production cut increase in Q4. These cost increase we are talking when you have hedging in place for ferrochrome energy cost as well, right?
Yes. First of all, I was trying to explain Q3, so thanks for the question. I was really trying to say that, you know, when we gave the guidance for Q3, we were foreseeing about EUR 30 million cost increase. We even suffered a huge spike in electricity prices in Finland, but we started this optimization. I wanted to be specific around energy costs. As far as I understand them today, I think we would rather see an increase quarter-on-quarter of about EUR 15 million, so that's less than we were foreseeing, but it comes at the price of lower production, and that's all for Q3. I wanted to explain the dynamics of the decisions that we have taken.
Okay. The question is this, these are cost increases after hedging.
Yes, yes.
electricity costs.
Correct. Yes.
Okay. Okay, that's all from my side.
Thank you.
Thank you. We will now take the next question. Please stand by. The next question comes in line of Harri Taittonen from Nordea. Please go ahead. Your line is open.
Thank you, and good afternoon all. Well, one thing, I mean, with these prices, the market prices going, I mean, they've been coming down for stainless on the one hand, but also for scrap.
Mm-hmm.
quite steeply. Just.
Mm-hmm.
I mean, I don't know if you can give any color on how it works in your universe. I mean, and how the timing of the raw material cost versus your end product price. I know that you can't go all the way with explaining that, but still.
Yeah.
How do you see that?
Harri, thank you. I think what you described is really testament to the market dynamics. I mean, obviously, if there is a lower demand in stainless, it has an impact on the scrap market as well. Usually that is somewhat then, you know working in the direction to offset the negative impacts of the lower prices or lower demand. I mean, it's market dynamics, just usual, you know, supply and demand, what we learn in the macroeconomic course or whenever that was, you know, a long time ago at university.
Very long time.
Yes, and that is sad to think about, but yes, you are right. With that in mind, I think, you know, that dynamic is there. Then, what can potentially make it a bit more difficult to analyze is exactly that we always have the inventory cycle to think about. In order for us to produce and to sell, I mean, you can look at our figures. I mean, our inventory turn is more like three months. That's just keeping that in mind is maybe the trick here to try to understand the dynamics.
Okay. On the, I mean, the thing that you said about ferrochrome, and it seems that, I mean, you are guiding or like, in a way, steering the energy consumption versus the hedging and timing optimization. Mainly through the ferrochrome.
Yeah.
operation as it looks. I mean, any indication how long this maintenance might be extended? Technically, how flexible is this production line? I mean, you see, by the sound of it, you can control production at fairly frequent-
Yes.
...a short cycle, as it were.
Harri, I think it's correct. The reason why we have more done this for ferrochrome is, first of all, that the cost impact of electricity is so significant in ferrochrome versus the stainless. Of course, it's important in stainless, but you know, in stainless, you still have important raw material costs, et cetera. You know, it's not the same relative size at all, but in ferrochrome, it's extremely significant. It's clear that for that reason, it's the natural place where to go. Obviously also with the way how the operation itself works, I think our ferrochrome team has been able to. They've done a really good job. Our energy team has done a splendid job in coordinating the efforts here.
It is also possible with that production, to actually turn the power up and then turn the power down, if the electricity price is spiking. I think it's more difficult to reach the same in the stainless production, but it's definitely possible to do some optimization in stainless production. Those are topics that we are considering. It is not straightforward in the same way as in the furnaces in ferrochrome, where you can literally turn the power up and then you can turn the power down, and when you turn the power down, it takes longer, and then you lose production.
That is the key that we have been able to do this, but this is the first time that we have done it, and we have started in August. Now we have two months experience. I think the experience has been positive, but it still doesn't rule out that if electricity prices are high, like they are in Q4, like they are in forwards for Q1, then there might also still be reason to continue having some capacity completely shut down. Because of course it takes effort. Of course, it takes more manpower than in a normal situation to have this focus on turning power in different electricity price situations to different level.
Okay. At least it would help you for in not having to sell ferrochrome to the spot market as-
Yes.
I think there were a couple of quarters in 2020.
Yes.
Yeah.
At least the energy cost was really low. Now we have the opposite in that sense.
Exactly. Okay. Thank you.
Mm-hmm. Thank you, Harri.
Thank you. We will now take the next question. Please stand by. The next question comes from the line of Tristan Gresser from BNP Paribas Exane. Please go ahead. Your line is open.
Yes. Hi, thank you for taking my questions. The first one, if I may push a little bit on the guidance, I mean, two of your peers have provided clear quantitative guidance for Q3. One of them has also commented about being comfortable with 2022 full-year consensus.
Mm-hmm.
Given the extreme volatility in energy costs, et cetera.
Yeah.
I mean, when I look at Q3 consensus at EUR 240 and four-year consensus at EUR 1.3.
Mm-hmm.
Billion, is that a level that you're fairly comfortable with?
Well, again, I understand the question, and I have not been in the habit to make that statement. My IR is looking at me and shaking her head like, "Pia, don't do it." But what could I say now to at least partially answer your question? I think we have kept firmly with our guidance, and we have tried to provide additional color where there has been some change, such as the ferrochrome electricity position, for example, and this optimization that we have been able to do. I think for us, at least for now, that's the way how to do it.
Obviously, you know, if I would be extremely concerned for somethi pinpoint facts, where it seems that our message has not been flowing through. We are not ignorant to external facts, and we are, in fact, following really closely. I usually, rather than saying that, "Hey, you are right or you are wrong," I try to comment on things and facts and parts that we usually are guiding on. I hope you hear from me that we really haven't changed our guidance, despite the very turbulent situation that we are in.
All right. Fair enough. My second question is more on the U.S. market.
Mm-hmm.
We're starting to see a bit of weakness there, from the data providers I'm looking at. I see base prices are falling as well. I'm seeing also, Electrolux cutting production guidance, et cetera. When you comment about, you know, still healthy underlying demand,
Mm-hmm.
Regarding the U.S. market, what is driving the weakness? Are you seeing it's not just about imports, inventories being high, but
Yes.
Also maybe some underlying weakness as well? Thank you.
Yeah. I think we see in the distributor behavior really a need to reduce inventory, this destocking and obviously, you know, uncertainty could be a background driver to that. High inventories could be another background driver to that. I do think that this destocking sentiment talks to, you know, some uncertainty in the market. I don't think this has been going to a more positive direction, rather I think that the uncertainty has increased. This is where we are. Then, you know, in the US also, we typically see a Q4 that is the weakest of the year.
I mean, the seasonal slowing down that we see in Europe more for Q3, in the U.S. market that goes more for Q4 with Thanksgiving and Christmas and so on. Last year was maybe a bit abnormal that, you know, with the really hot market, even Q4 was a fairly strong from a volume perspective. But I think this is clearly now talking to a more normal seasonal development this year.
Okay. Thank you.
Thank you.
Thank you. We will now take the next question. One moment please. It comes from the line of Bastian Synagowitz from Deutsche Bank. Please go ahead. Your line is open.
Yeah. Thanks so much, and good afternoon all. Just had a few questions maybe following up briefly on the demand side, maybe first. I guess you talked about obviously the underlying demand still being fairly okay.
Mm-hmm.
Obviously we're chewing through this inventory, which obviously may still take some time. I guess given the current situation and I think perceived risks in the market, it seems like the inventory destocking could obviously well last also a little bit into Q4. From the volume comments with regards to your guidance, even though you obviously haven't been, like, overly specific, but it seems we're maybe not really towards the upper end, the softer end of your volume guidance, which would be -20%. Is that maybe more closer to the midpoint of that guidance? I guess most people probably would've seen you, if that's fair to say, probably closer to the lower end. That seems like you're actually doing a little bit better.
We obviously, if we think about Q4, we've got obviously the softness in the U.S., which is seasonal, and that's normal. Given that maybe we are ending up on a slightly higher Q3 base, is it fair to assume that there is a pretty fair chance that volumes for your whole group will potentially slip further in the fourth quarter? Is that like a fair assumption without obviously going too much into detail at this point?
Yeah, that is a tough question because the normal European pattern would be maybe a little bit up from Q3, Q4. You know, given the whole market and war and everything, obviously that is not given yet. I hope that this will be clarified in the next week when we really can also finalize the bookings, et cetera, to really see where we end up for the quarter. With the US and with the Americas market, I think it's clear that we will see the seasonal pattern down. Then it's probably not. I cannot give one clear answer to that yet.
I'll have to get back when we give really the Q3 report and the Q4 guidance, because I think the market is still in a state of uncertainty in Europe because of the war.
Okay, fair enough. Pia, just on maintenance breaks. In Q3, obviously your maintenance charges are rising by EUR 10 million versus the second quarter. With regard to Q4, is there still any larger maintenance break coming, or will we see an easing in the maintenance budget, or is it gonna be stable? Is it gonna be up further?
I think we will have some maintenance in the U.S., around the breaks, you know, in November, December. I still think broadly it will probably be a little bit easier. We don't have that significant maintenance plans for the fourth quarter.
Okay. Okay, great. Lastly, coming back on costs, just in terms of the way, first of all, maybe you procure electricity. In ferrochrome in particular, 100% of the electricity you buy is renewables, I guess, as you probably refer to nuclear power here. Is this an entirely spot-based contract? Is there, I guess, any fixed cost, fixed electricity cost, contract portion in your energy supply for either ferrochrome or stainless?
I understand where the question is coming from, and it's actually so detailed that, you know, I cannot rule out that there would be in one of our sites somewhere, you know, some fixed cost portion. We are such a big electricity user that I would really say that from any material respect, it is really a variable cost that we have. Our hedged portion comes from a number of really long-term procurement agreements, and those are actually wind power. Those are all more like, you know, 5-10-year deals that we have actually announced many of them early this year. We have other, you know, contracts running over a midterm period.
We can talk about one year or something similar to that, where nuclear, for example, could be a typical part of the mix there. We always leave something for the spot and with the spot, this is where we also now can utilize these optimization opportunities because spot prices are varying really a lot between different hours of the day and between different days.
Mm-hmm. Okay, okay. That obviously means that you do have a certain portion of your business where, in fact, you hedged for this year, and you're also gonna be hedged for the next year and pretty much the next 5-10 years after whatever happens.
Absolutely. That's like the base, but it's a fairly so thin layer press releases, I think late last year, early this year, for example.
Yeah. Okay. Okay. Got you. If you, I mean, if you look at ferrochrome and stainless, and I guess it's, again, coming back a little bit to the questions we've had earlier, and actually, unfortunately I dropped out of the call, so maybe some of that has been covered in the question Khristian has been asking. If you look at the hedges and some of them will obviously roll out over the next couple of months, do you still see stainless and ferrochrome separately still being a profitable business for you whenever these hedges are rolling over at your mark to market to spot?
Yeah. I think if I would only consider the electricity perspective here, I think in stainless, just to try to put it into perspective, you know, even with the levels of higher prices that we have seen now, that really are higher. You know, on a relative basis, Nordic prices have still been more you know. Well, you can look at the spot prices and forward prices and you get a view. With that said, I mean, we have been happy to continue our operations for sure in stainless because other cost elements are also so significant.
This goes f or the total picture of energy, so including gas and including electricity, you know, with that combination of the hedges that are continuing and then long-term contracts and then spot. We have certainly been able to find a balance, at least under the current circumstances with even quite high peaking prices in, for example, August. With ferrochrome, I think this optimization method we have really created to ensure that we can run, you know, a profitable operation because we are really what we wanna make sure is that independently, you know, we have a ferrochrome operations that, so to say, makes sense.
On the other hand, we run always when we can because we have demand internally, and we also have demand, of course, to some contract customers. We really, you know, we work very hard to find that optimal balance. It's obvious that there is a high cost pressure from electricity, even with the optimization. The whole target of the exercise is to find that balance where we can produce, but, you know, not make losses.
Mm-hmm. You're on that point in particular, and I guess it's really about ferrochrome, as you mentioned, because in ferrochrome, you're really probably in a more global, you're basically sitting on a more global cost curve rather than, first of all, European cost curve and then whatever imports are doing. It's a more globalized market.
All right.
If your hedges run out, is this basically a business where you would basically see it indeed challenged to keep it running?
Well, not all hedges are running out. I mean, just to be clear.
Yeah.
We are on a lower hedging level for 2023. I think it puts more pressure. I mean, we will optimize. For sure we will continue with the strategies that we have now developed and the price we pay for that is then potentially lower volume. At the same time, obviously ensuring that we have a, you know, an operation that we can run, you know, with some level of reasonable profit. I mean, this will not be. It really then depends on other factors. Yeah, as we speak, we don't have the benchmark price for Q4, so there are factors we simply don't know yet.
Mm-hmm. Okay. Very lastly, and sorry to really keep you on this topic, but if we go towards like the, I guess the approach which the European countries may be taking, i.e., introducing a mechanism where infra-marginal producers of electricity will basically receive a different pricing instead of like charging the spot prices, which is basically charging the price of the marginal electricity generators. If I look into your portfolio, you've got nuclear power, you've got lots of renewable energy, so that actually puts you into a very good situation should the government basically force the utilities into a pricing mechanism which is basically rationalizing the market in a better way. What is the discussion locally in Finland?
Could you maybe just bring us briefly up to speed, maybe in two sentences on what's going on here, whether you see that we are also potentially migrating to such a pricing mechanism, and what may be the timeframe even for that?
Yeah. I mean, there is very little electricity in Finland produced based on, for example, gas. I mean, it's literally non-existent. I think the discussion in Finland really has been on one, you know, first of all, Russia cut off all electricity exports to Finland already in May of this year, and we kept very calm, and we carried on. We have been helped by an investment decision into nuclear that was taken a very long time ago. Olkiluoto 3 is now producing 1,600 megawatts. I mean, that is more or less replacing so that Finland is at least on a, you know, more balanced level, especially on days when there's wind.
The wind power capacity has also really been built up. I think there is more this, you know, the public debate is more one of you know, keeping calm, carrying on, you know, not wanting to use old language, but just really, hey, you know, we somehow got to get through this. People I think are ready to save electricity. Many consumers are highly alarmed and, you know, it's very cold in Finland during winter, and you really need to heat your house. There really is no alternative. There are indeed consumers that are worried. The state is providing some support, but I think it's more like a subsidy of maybe EUR 2,000-3,000 for four persons.
That's not helping very much if you have a super high electricity bill. I think some of the more negative debate has been more around why are we paying for, you know, problems in some other countries. Unfortunately, I don't think that refers to the war and Russia. I think that also points to the dependency on gas from Russia and to somehow curb that sentiment. I think it's good if there are some pan-European decisions in this area. I think, you know, Finns are generally very grateful for the Olkiluoto 3 power that is being generated now.
Mm-hmm. Again, if they are lucky, it's also here the idea of making sure that the electricity price levels are somewhat kept toward where it maybe should be instead of really charging for gas.
Yeah.
or something close to gas instead of electricity, where infra-marginal costs or generation costs would be.
Yeah. I think, you know, the way how people understand this is that, you know, electricity prices are set on a European level playing field. We all understand the complexity of what that means with transmission cables and that it's not exactly the same and so on. Nonetheless, people understand the dependency and they are looking for some political solution to curb the price increase for sure. I think, you know, people just want there to be some reasonable approach for private individuals, and that has not yet been, you know, reached, so people still wait for that.
Okay. Perfect. Thanks, Pia.
Mm-hmm.
Thank you. There are no more questions at this time. I would like to hand back over to Linda Häkkilä for final remarks.
Thank you all for following our pre-silent call today. Before we close the call, I would like to remind you that we will start our silent period next week on Tuesday, October fourth, and then publish our Q3 results on Thursday, November third. Thank you once again, and have a great weekend.
That does conclude our conference for today. Thank you for participating. You may all disconnect.