Thank you. Good afternoon and welcome to Outokumpu's Q3 2019 earnings webcast. My name is Tommi Järvenpää. I am the Head of Outokumpu's Investor Relations. With me here today are also our CEO, Roeland Baan, and our CFO, Pia Aaltonen-Forsell. We will be referring to the presentation that can be found on our website. With these remarks, I am pleased to hand over to Roeland. Please go ahead.
Thank you, Tommi. We will start with the vision: To be the best value creator in stainless steel by 2020. As you see, we are at this moment not repeating the financial targets next to it, because as we have said in the last call as well, if market circumstances like we have currently persist into 2020, obviously targets that have been set on mid-cycle circumstances will not be met. However, we are absolutely certain that we will make our vision of being the best value creator in stainless steel by 2020. Operationally, as far as we perform towards our customers and as far as we are moving on to becoming a high performing organization, we are on the right path. To the specifics of the third quarter.
We have had, as you saw from the release, a challenging quarter, in spite of the performance as a company internally, where we have made tremendous steps, in for instance, productivity, where productivity year-on-year has improved by 4% in a declining market, which is a remarkable result, and where we have been able to, and we come back to generating cash as well in spite of lower result. The external market is such that we have to report weak results for the third quarter. Deliveries were down to one of the lowest, if not the lowest quarter we have seen in the last five or six years. On top of that, with the increase in nickel price due to the sudden rise from about $12,500 -$1 7,000 in the space of two months, we have significant timing and hedging losses as well.
On a quarter-to-quarter basis, on ferrochrome, we went from $ 1.20 -$ 1.04, which of course is a significant negative. Then as positives, we had the improved cost efficiency that I was just talking about, as well as some gains from derivatives and emission allowances, bringing us to the EUR 45 million for the quarter. Go to the next slide. Talking about the unfavorable raw material price development. The base prices, both in Europe and in the U.S. more or less have stayed at the same level. But the average nickel price has significantly jumped up. Which of course created two things, the negative timing hedging result and a bit of a margin squeeze as well. The ferrochrome price I talked about, $0.16 down. We have always guided about $ 10 million for $0.10 , so that in itself is a $ 16 million difference just on price.
Having said that, in ferrochrome operationally, we have been operating extremely well, and when we get to the individual business area results, we will be commenting more on that. The unfavorable moves on the metal market have led to a margin squeeze, as I just said. First of all, of course, very directly on the ferrochrome, but as well on the margin in stainless steel, as normally you cannot recover fast enough in your alloy surcharge, what you see as an immediate increase in your input costs. If you look at the U.S., things are more stable. U.S. base prices have remained very stable. But if you look at the graph on the right hand, we are now seeing that the difference between the transaction price in Europe and U.S. and the Chinese transaction price is opening up to a very high level.
Which ultimately means that there is more room for arbitration of material flowing from Asia into Europe specifically. But it puts a cap on pricing because although there is a 25% protection through Section 232, it is still clear that at some stage the gap becomes so big that the importers can start paying the difference. We are not there yet. If you go to the next slide, you will see that in Europe, indeed, this has led to a surge of imports. Imports into Europe now account for 34% of consumption in cold rolled. That is the highest import penetration ever. Even during the years 2013, 2014, when China was dumping into the European market, their share did not go beyond 30%.
This is an unprecedented amount of import, that put a big lid on the market, especially as the market as a whole, of course, is far less active given the macroeconomic circumstances. Conversely, in the U.S., you see that the Section 232 continues to work its magic. The imports there are at only 15%. With that, I would like to hand over to Pia.
Thank you, Roeland. Good afternoon, everybody. Just having discussed both the import pressure in Europe as well as the macroeconomic situation, in some combination then with a more stable situation in Americas. However, we have also there been more selective when it comes to the volumes. This has then overall led to a low volume in the third quarter. You see it here, stainless steel deliveries of 533 kt. Obviously, seasonally, we would expect something lower in Q3 compared with Q2, but there was very clear pressure from the earlier mentioned topics. EBITDA then at EUR 45 million in the quarter. I think the focus that we have had on net debt reduction and the cash flow here, I will have a couple of more slides on the topic to really drill down a bit more into this, but we can see the headline figures here.
The operating cash flow was positive at only EUR 12 million in the quarter. Net debt then ended up at EUR 1.3 billion. Gearing healthy at 51.4%. With that said, I think we can start a bit more of a deep dive then first into the profitability or EBITDA development of the business areas. We start with Europe here. Obviously, for Europe, we ended Q3 at an EBITDA level of EUR 33 million. The main negative deviation came from the deliveries. I would still start by pointing out the underlying demand in Europe being low. We have discussed the import penetration, but the market also is on a weak level right now. Our market share has remained stable. We see weakness in the market. For example, the automotive segment is something I think we have discussed also in earlier quarters, distributor segment as well.
If we think of Europe from a geographical sense, also in Germany, we have seen lower demand, and I think given our business, this also had a clear negative impact. That's where we are. You see really the big red bar here, the deliveries compared with Q2. Obviously, a bit of seasonal impact there as well. We have other smaller items here. You see there was a bit of negative from the pricing and mix as well. Then I would like to focus for a short while a bit more on the net of timing and hedging here. The impact on this bridge looks slightly negative, but if we look at the absolute amount in the quarter, it's clear that in respective business areas, we will find quite negative impacts.
When we talk about business area Europe, the absolute value was of EUR -70 million. I think I will still get back a bit more to the hedging impact. I just want to bring the total picture because the outset for the group is that we have negatives in the BAs and we have some positive in segment other. I think it's important to see this from a total picture perspective. On the costs, you can see that we have a bit of positive movement here, but it's also typical seasonality. We have a little bit lower personal costs due to already accrued, so to say, holiday payments that have then been used during the quarter. Okay. Next, let's look at the business area Americas.
Here, we also already sort of visually can see that the underlying performance, we have more green bars compared with Q2, actually a bit improved deliveries, better raw material mix, pricing and mix being positive. Also, some positive, maybe mainly bridge effect in the others. Also here, you see that the timing and hedging is clearly negative. This, again, if we look at the absolute amount of this one, is at EUR - 15 million in the quarter. When we look at the demand side here, it has remained relatively stable. Still, the distributor segment is on a weak level in the sense that we have seen continued destocking during the quarter. We have also been much more selective in volume. If we look at the previous year, we had, for example, export volumes during this period. This has not repeated in this quarter.
Overall, still, we can now see some benefit really in the underlying business, but the negative from the hedges, net of timing and hedging, have then resulted in an overall negative result for the quarter of EUR -11 million. Long products next. Clearly here, the demand is the big negative factor. You see the deliveries being on a negative trend here as well. Here we have seen both inventory destocking, but also a decrease in end user demand. On top of that, Q3 is seasonally slow. We have all these negative impacts in the same quarter. We also have a negative hedging loss here. The net of timing and hedging in absolute terms was EUR -6 million in the quarter.
You see here a small positive impact on cost, but obviously, given this very challenging situation, this has led to some further actions also in terms of balancing the cost base. But I think, Roeland, you will come back to this later. Overall then, the quarterly results at a EUR -9 million EBITDA. Finally, on ferrochrome, I think I just really want to reinforce the message that the operational performance has been good. We have already talked about the price here. The lower benchmark price clearly had an impact. But you see that on costs, we have lower personal costs, seasonally lower coke price. But I do want to bring up that we have had the maintenance break. It started in September, carried over into October. It has been carried out in a good way, according to plan.
Despite this maintenance break starting already in September, we did have a good ferrochrome production of 131 kt in the quarter. So, a really good performance operationally, and then ending up with a EUR 90 million EBITDA as a result. Okay. We have added a slide here, to explain the hedging dynamics or more or less the principles around metals hedging and nickel hedging in particular. Before I go into the principles, I would just repeat sort of the group level headline numbers here. So we had a EUR -17 million in Europe, EUR -15 million in Americas, EUR -6 million in long products, and that is of course a total of EUR - 38 million. Then in the other segment, we had a positive impact of approximately EUR 10 million. So this was then balancing the impacts from the BAs to some extent.
I think it is obvious that with this very rapid increase in the price of nickel during just one quarter, it is really the sort of volume and timing mismatches that are the main issue here. We also have seen changes in the pricing mechanisms of sales in particular, to some extent also purchases. This refers to, let us say, the earlier principle of applying an alloy surcharge, almost throughout the business. Now this is a more selective process where a part of the business is running with alloy surcharge and a part then with effective pricing. Which then leads, of course, to the necessity of constantly adjusting the pricing and being very diligent about that implementation. So the typical procedure that we have is, of course, clearly monitoring our underlying positions.
If we have fixed price sales or fixed price purchases, we have an underlying exposure vis-à-vis nickel, and we would typically hedge that. When it comes to stock, you could maybe separate two different types of inventories, realizing that the pipeline actually from raw material to end product is something where we have both a lead time and quite an amount of inventory. This we call the base stock. Here we are trying to find the right balance, balancing between managing the earnings and on the other hand, the cash flow volatility of whether we hedge or not. During the third quarter, we have hedged the base stock to some extent. Something that from a CFO's perspective sounds a bit aggressive that we have excess stock, but I just want to say this is the stock on top of the base stock.
On top of what is absolutely needed to run the production process. We have something ready for sale for our customers. Typically we would also hedge that position fully. Those are the principles of how we apply the hedging. We have a very diligent approach. According to our policy, we can make some choices when it comes to base stock, and we have used that option, hedging the base stock to some extent during Q3. The financials, we already spoke about the end result of that. Okay. Net working capital next. I think, the headline says it all here. This has been a challenging year to work diligently on net working capital.
Particularly in the third quarter, we had the rapid increase of the nickel price, and it's quite clear that given the amount of working capital we have, these are significant impacts purely just from the price being higher. I would say anything between, let's call it EUR 70 million -EUR 100 million just on top of the value of the inventories and sort of for working capital comes from the higher nickel prices. Despite this, we have also in the third quarter managed to bring in some positive cash flow from the working capital. This then brought us already now after nine months, to the position where we can say, yes, we've reached our target. We've had internally tough targets, wanting to achieve at least EUR 150 million cash inflow from working capital this year, and now we have reached that.
I think it's a fair question to ask that how about Q3 and what about Q4? Are you continuing to work on this topic? Of course, we are. Given the high attention on this topic, it's clear also that we will do our utmost to continue the positive trend. But what you have seen is we've had very big positives in Q1, in Q2, and we had EUR 25 million in Q3. Now we have to work really hard given the higher nickel prices to be able to continue on a positive note in this area. If you look at the overall cash flow, the operating cash flow was at EUR 12 million. We did end up with certain payments relating to pensions as well as provisions. Let's say a little bit on top of the normal outflow that we would have in the quarter.
These are things that needs to be taken care of course. Then you see that from a CapEx perspective, we had a EUR 37 million outflow in the quarter. If I then jump to the right-hand side of the slide, you can see that CapEx is one of the areas where we have also focused now to really review how we can protect the cash flow and what is the right balance of that for this year. You see the yellow part here, the CapEx reduction, it is on EUR 25 million compared with our previous estimate. Currently, now we are somewhere at around EUR 230 million estimate for the CapEx outflow for this year. Cumulatively, by the end of September, we had been at EUR 156 million.
Then there is one large item that we have described earlier, talking about the real estate sale in Germany, the so-called Benrath real estate area. This is an important point for our cash flow as well. Now, the money has finally hit our account during October. That is of course now an important addition then to the cash flow of the fourth quarter. All in all, we talk about an amount of approximately EUR 90 million, and the final payment of about EUR 80 has then reached us in October. I think that is a great segue to the next slide, which talks about our focus on net debt reduction, which really remains unwavering. You see here our net debt at EUR 1.34 billion at the end of Q3, and then the leverage of 4.8 x.
Obviously now then, looking into Q4, the real estate sale cash flow addition is important, and we are continuing the focus on working capital as well. However, as you can see from the planned CapEx, we still have some rather important CapEx in front of us also during the fourth quarter. I think this is the continuing balancing that we need to do with the focus on net debt, on the other hand, evaluating both the more operational CapEx as well as the strategic CapEx. Without sort of jumping the slides too much, I would still say that we have made the separation also in our presentation between the more operational part, the deep mine part, and the other development, just to also give a clear picture, in order of priority as well.
If facing a more severe situation, of course, then we would have also an understanding of whether there are any areas that are, let us say, more developmental of nature that we might choose to postpone. So far, we have not seen the need for that. One more important topic then from the funding side. Now if you look at the debt structure as well as the debt maturity profile here, you should be aware that we have been drawing upon our new EUR 400 million term loan also in October. In this picture, you still see this as an unutilized facility, I mean the new EUR 400 million term loan.
However, what will then happen and how this picture will change quite dramatically when you see it next time is that the significant maturities amongst other in commercial papers that we have really even in 2019 will then of course be repaid, and a longer maturity until 2023 achieved by this term loan. We are step by step improving our maturity profile, which has been an important target as well for this year. I think with that said, Roeland, I will hand back to you.
Thank you, Pia. That brings us to the outlook. For Q4, we are expecting the stainless steel market to continue to be subdued. As a result, with the seasonality as well that you typically have, especially in the U.S., we expect deliveries to be lower than the deliveries in the third quarter. On top of that, as you know, every fourth quarter, we have significant maintenance going on in the Nordics and specifically in Tornio, which on a quarter-to-quarter effect will have about a EUR -15 million . The last point in the equation is that at current raw material prices, we do not expect that the losses from raw material related inventories and metal derivatives will be repeated. That altogether brings us then to an EBITDA expectation at a similar level as what we have in the third quarter.
With that, we talk a little bit about what we are doing in this environment. Because of course, this is of great importance. We do not take an environment that is challenging lying down. We fight back. We have already achieved over 10% reduction in variable cost. As I said, we are close to a 4% productivity improvement year-on-year. This, by the way, when I talk productivity improvement, this is real productivity. This is not because, for instance, prices in electrodes went down. We exclude those effects from productivity. That is what the market helps us with. We only look at what we do ourselves. We are doing a lot more. As we have low volumes, we are limiting our melting, and with that, optimize our maintenance connected to the lower volumes. We can clearly see further cash flow reduction issues.
We are looking at CapEx reduction in 2019 of EUR 25 million, and we see another EUR 40 million of non-core divestments in 2020. Then I think we touched on it, but we couldn't be more specific because negotiations were going on. In Germany, we are in negotiations with unions and workers' councils to restructure part of our business there, which has an effect of approximately 350 jobs that we will be losing. In long products, in August already, we shed 25 jobs in Sheffield because we went from 18 shifts to 16 .5 . We're now going down to 15 shifts, so reducing another 30 people, 55 in total, which, by the way, is over 20% of the population. We are working diligently in making sure that the adverse effects are being mitigated by our own actions. Then as the last point, Tommi.
Yes. Operator, we are now ready for the questions.
Thank you very much. As a reminder, to ask a question over the phone today, please press star then one on your telephone keypad. You can cancel the request by pressing the hash key. Once again, star then one to ask a question over the phone today. The first question we have today comes from the line of Michael Boam from Sona.
Hi. A few questions, if I can. First of all, on working capital, clearly, as the business has contracted, you generated cash in the first half. You said you generated small cash in the second half. But the reality is, it seems that industry conditions are set to remain where they are today, at least through early 2020. I just wonder what your available pro forma liquidity is post the use of some of the term loan to pay down other debt.
Yeah. If you look, hi, it's Pia here. Hi. Looking at the funding pages that we have here and the liquidity profile that we have, of course, currently now in October, we have drawn upon this EUR 400 million term loan. Obviously, that changes the picture a bit to the more positive. We have a revolving credit facility of approximately EUR 600 million that remains largely undrawn at this moment, as well as some special funding that we have for the deep mine investment, where we also have a significant amount still undrawn. It's approximately EUR 100 million. So here we have already from the funding perspective, quite important sources. At the same time, when you look at our maturity profile, one of the key maturities next year is in the convertible bond, EUR 250 million in February.
Apart from that, there are no important maturities during the next, let's call it 12 - 24 months.
Okay. Can you talk to any covenants on any of those facilities, please? Obviously, your leverage is ticking up, and I dare say it will go up in the fourth quarter.
Yes.
Should we have any concerns around covenants at this point?
No. If you would see me there, you would see me smiling. I'm sorry that we don't do a video, but no. Obviously, we are safe and very much in line and safe with the covenants at the moment.
Can you share the covenants? Have you done that before or not? Are they net debt to EBITDA? Are they debt to this net worth? Or what?
They are on gearing.
Okay.
We are nowhere near in no scenario whatsoever to even touch them.
Okay. You talked about splitting out CapEx going forward. What is the provisional CapEx budget for 2020, and how can that be tweaked if that proves necessary?
Yeah. I think when we look at one of the pages here in the presentation, it is typical for us to have this underlying level of maintenance CapEx of, let us call it up to EUR 100 million. Then we have the ongoing deep mine investment. Both of those remain very important for us from an operational and strategic level, even though on the margin, there are always items that you can consider. Then we also have the bucket of what I would call more sort of development investments, involving some as well into more like IT and systems, which would be, let us say, in order of importance, the first area that we would be really evaluating carefully if need be. But so far, I think we have been carefully evaluating each and every project.
I think spending, I do not even want to say how much hours, but a fairly large amount of hours evaluating each individual project. Most likely ending up with a CapEx budget or sort of planning figure that is somewhat lower than this year, but still ensuring that we can continue our operations and our most important strategic projects in a good way.
Okay. Can I ask, have you had any dialogue with the rating agencies, or with Moody's, since they put you on review for downgrade?
I mean, it is typical that we have reviews with rating agencies. That is kind of a normal routine. However they see us, we would always talk to them.
Okay. Do you have any plans to come back? Given your EUR 250 million maturity next year, how are you expecting to refinance that in the bond market?
Yeah. A really important step for that was the EUR 400 million term loan that we signed in June and that we have now drawn upon in October. So that has just given us more, let's say, flexibility around the maturities, more options. Of course, we are continuously evaluating also other, let's call them attractive funding options per se. But I think we have enough flexibility in terms of our position here and now.
Yeah. As you heard Pia say, we have ample liquidity, which is more than enough to pay down the EUR 250 million, a bit less for the convertible.
Yes.
Then still have significant liquidity left.
Yeah. Finally, on the dividend. You reduced the dividend payment this year. Given the operating environment, are you committing to maintain the dividend? Is it a ratio of net earnings, or?
We have a dividend statement where we are aiming to have a stable dividend through the cycles.
Right.
We will have to see, ultimately, a board of directors decision. We'll cross that bridge when we get there.
Okay. Thank you very much for your time.
Yep.
Thank you very much. The next question today comes from the line of Seth Rosenfeld from Exane. Please go ahead.
Good afternoon. A couple of questions starting out on outlook for stainless scrap and then moving to your U.S. business, please. With stainless, I am trying to better understand how the scrap price is hitting your P&L right now. As nickel's obviously rallied strong in recent months, we have seen stainless scrap discount to raw materials widened to close to 40%. Historical average is 10%-20%. That should ostensibly be a big benefit for you, but we are not seeing it in your P&L. First, why are we not seeing that aid your cost base more than it is right now? Do you think the scale of discount versus nickel and chrome is sustainable for stainless scrap? If you started to normalize into 2020, what would that do for your profitability? Is that a risk you see on the horizon?
Separate from that look for stainless scrap, please, on the U.S. business, please. It has been several years you have been speaking about a turnaround of Calvert, both operationally and commercially, still in the red despite multiyear high base prices. With regards to the 2020 targets, I understand that we are not focusing on the EUR 750 million any longer at the group level, but U.S. base prices are close to $ 100 above where they were in 2015 when that EUR 100 million EBITDA target for the U.S. was set. Is that still a reasonable target just locally in the U.S. business, or is that also off the table? What can we do to really drive the U.S. business to a higher level of profitability moving forward? Thank you.
Yeah. Thanks for that. Starting with stainless scrap. First of all, you have to see how the raw material works its way through the melt. One of the reasons why you see volatility in earnings is exactly that point where we are hedging the nickel and take an advising mark of the hit in one go. But then over time, it will come back in your P&L because you start melting the scrap at different levels. So, normally you have to say, let us say it is about a three-month cycle from the purchase of your scrap until it hits the cost base of your melt. So you will see it come in, but it takes some time. The advantage is that if nickel reverses, you still have then an advantage that got through. Then your second, I cannot even read my own handwriting here. Oh, is it sustainable?
We see a shift in thinking in the scrap market, whereby, as we have argued before, the link between scrap and the LME makes no sense. Just to make the argument again, you can use nickel scrap, or nickel-containing scrap for only one purpose, and it is for stainless steel. You cannot use it to make batteries. You cannot use it in any other nickel-using application. So there is absolutely no reason, other than convenience, to have nickel scrap connected to the LME. If you take that then to the next level, where you say it is basically the same as carbon scrap, but there is nickel in it, and you look then at the carbon scrap pricing in the market, which is about $300 - $330. The collecting, the processing, the distributing of carbon scrap or nickel scrap has the same cost base.
Theoretically, there is no reason why there will be a link between nickel-containing scrap and the LME, because from a cost base, it is not there. So we see a decoupling coming, and I think it is not a risk. It is actually a fantastic opportunity that is coming to us. Americas. Again, first of all, want to correct, we are not at multiple year highs in pricing. We are pricing at $1,300-something. Actually, we have seen far higher pricing in the past. But it is not bad, I have to grant you that. Our performance has not been where we want it. We have acknowledged that. We have changed out the management, in order to have now a group of people in place to make the next step.
I am not saying that the previous group has not done well, but they have done a fantastic job on stabilizing operations. Commercially, we have not done a good job. When you look at some of the supply chain operations, we have not done a good job. What I think is extremely positive and gives us great confidence is that even at a low level of shipments of 150,000 tonnes, we are basically underlying in positive territory. We can see that continue into Q4, and then beyond. Are we still confident that we make the target that we set? Yes, we are.
Thank you. Just to follow up on the U.S. business. In the past, you have walked through a number of steps, changing your freight strategy, with new warehouses, turning around Mexinox, et cetera. You have already commented earlier, exited the export market of semis. What is left in terms of the self-help measure into 2020? There is obviously a big gap between where we are today and EUR 100 million run rate EBITDA. I would assume we should be seeing that to perhaps a lower level given where prices were back in 2015. Thank you.
One thing is that the measures we took on the logistics do not immediately take effect. Yes, we have our warehouse outside of Chicago. We have now just contracted the warehouse close to Pittsburgh, and a third one on the West Coast. But those product streams are just starting up now. Because it is not just getting the warehouse, it is moving from truck onto rail and barge. You cannot just go to railway and say, oh, by the way, I now have 20,000 tonnes of steel that I would like to transport as from tomorrow. There is a lot of scheduling that comes in. That will bleed into the results over time. That is not going straight. The second thing is we have been relatively poor on using scrap as our main ingredient for the melts.
Our scrap rate in the U.S. was typically 55%, 60%. We are now driving that to get to 90% +. That will be another big driver. Commercially, we have been very much concentrating on distribution and the large ones, and then single product. That is another thing where we are now starting to be much more diverse, have a much broader portfolio. We are introducing some new grades like Duplex that we have not produced yet in the past, but we are now producing. We are giving other gauges that we did not do in the past. Then of course, the big one is the ferritic investment that we did a bit later than we wanted because of the cash flow in the Americas. But actually, their cash flow has been fantastic. They have produced and released over EUR 100 million of cash flow out of working capital.
That funds the investment in the ferritic that is coming on stream in the fourth quarter of 2020. That in itself will be a very big step towards the EUR 100 million.
Great. Thank you very much.
Welcome.
Thank you very much. The next question today comes from the line of Anssi Kiviniemi from SEB. Please go ahead.
Yeah. Hi, Anssi from SEB. Just continuing on scrap discounts, because when I look at the nickel impact on variability some time in, it was March 15 in Q3, then in Q4, maintenance break in Europe that is EUR -5 million. Those basically net them each other out. Just trying to find out the drivers for earnings to be flat. Scrap discounts will support increasingly, volumes will come down. Are there any other elements or large factors that I should kind of calculate into estimates?
Well, let me start and then Pia can have a go. Just first on the misconception on the discount. If the discount goes up, but the LME price has moved from $12,500 - $17,000, the net result is zero, if you are lucky. Secondly, the alloy surcharge that actually takes care of that increase in nickel pricing, that should help Bleeds in over time. There is a formula. It does not go in the U.S., for instance, a different formula. It works immediately. In Europe, it takes about two and a half months to see that come in. Thirdly, what you have seen in Europe due to the imports is that a larger portion than the past of sales is now on basically effective price, so not any more another surcharge. So that has a margin effect or in other words, it pushes your base price down.
Those are a few of the elements. You say, you have a non-repeat of the hedge mostly, which is correct, but indeed then you have the EUR 15 million extra of maintenance, and then you have ferrochrome being lower even again in Q4 over Q3. I think that probably hits most of the buckets unless, Pia, you have anything else there.
No, I think it's just from a brief perspective, that's exactly important to remember that when we have some topics that are highly negative in the third quarter, if we expect them not to repeat, then of course it's a positive. There is one going the other way. You have noted that in segment other we had quite a positive, and I already referred to the derivatives there. But there were a few other positive items as well, for example, some sales of emission allowances and then those positives will not repeat. Again, you have a negative bridge impact. I think, we have talked about the most important topics here.
Okay, good. Then continuing with emission allowances that you sold. You accurately allocated more of those than you are using. My question is, how much do you have excess inventory in your balance sheet? And should we expect this kind of, let's say, still one of efforts to come in the future also?
Yeah. I think that's a really fair question after this quarter, but you know that there are several variables in that. If you just think about this year and you look at the lower volumes as well, I mean, generally, that has a direct impact then as well on the emissions. It's clear that this is something that we can use also pending the production volume, we have a different balance. Then this is a balancing act to that. You would always have that variability, pending the business situation, of course, the variability as well in the value of the allowances, even though they have been stable at this EUR 25 per tonne now for a while. You have all these different elements.
I would just generally say that, over the period of years, it gets tighter and tighter, but we are quite good at productivity improvements and various other improvements. I mean, we are having efficiency targets that are helping us to this direction. We don't have huge excess inventories. You should see it more as a balancing element in case our production is lower.
Okay, thanks. That's pretty clear. Then continuing on ferrochrome. You've previously highlighted that the maintenance costs are like EUR 5 million-EUR 10 million Q3, Q4. How much were they in Q3 and how much they're going to be in Q4?
Sorry, I don't understand the EUR 5 million-EUR 10 million. Maybe you can repeat the question, Anssi.
Yeah, I think you have indicated that the ferrochrome maintenance break will impact the profitability by EUR 5 million-EUR 10 million in Q3 and Q4. So what was the extra cost in Q3 and what will it be in Q4?
Okay, now I got you. It's EUR 5 million and EUR 5 million.
EUR 5 million and EUR 5 million. Okay, clear. Then perhaps one more question left. The European Commission announced the antidumping case against the stainless hot rolled coil from Indonesia and China. If the preliminary and permanent duties come in in the next, let's say, one-year timeframe, what kind of effect you expect coming from a cold rolled market from this decision and kind of a disturbance in the markets?
Yeah. Let's be clear on the timing. We launched the complaint back in June, July. The commission acknowledged in August. There is, let's say, a 9 - 12 months which stands for going through it. We expect them by summer to come out with a preliminary. It's not that long. Secondly, what we'll do as an industry, and this has been supported by the commission, by the way, is to ask for registration as from January. What that means is that as from January, we will register all the imports that are coming in, the volumes, et cetera, from the countries. As a result, these are then subject to retroactive tariffs the moment the antidumping tariffs are put in place. That in itself will stem the flow.
The second thing to remember is that hot rolled coil is not just a hot-rolled black coil, it is white hot coil as well. There is both part of that hot rolled coil works as a semi product that is being re-rolled into cold, and part of it is direct into certain market segments in direct competition with our own products. The potential effect is quite big on pricing. First of all, if you look at the semi that is coming in, it's probably close to 300,000 tonnes, 400,000 tonnes of semi black hot coal that comes in that has been rolled into cold roll, and that has a tremendous effect on the pricing cap put on cold rolled product in the market. Secondly, the price pressure on the white hot band has been tremendous as well.
We expect that it will be a significant game changer when that is being cold.
Okay. That is clear. That is all from me. Thank you.
Thank you very much. The next question today comes from the line of Alan Spence from Jefferies. Please go ahead.
Hi. Thanks, guys. A couple questions. The first one is just on following up from the last point. You mentioned the white hot band competing directly with some of your products. Can you give us a sense what end markets it has been the most impactful on?
A lot of it goes into pipes and tubes. That is probably one of the largest markets. Some of it would go into the oil and gas sector, but not that much. But pipe and tube is a very large market where it goes straight into.
Okay. Thank you. The EUR 40 million planned and on core sales in 2020, is there any contribution to earnings those are currently doing?
Yeah, I think I don't have an estimate. Hi, it's Pia here. I don't have an estimate to give you a figure here right now, but I think if you look at that case, it's clear that when we are talking about, for example, real estate, the book values would typically be quite low.
Okay.
But I don't have a figure to give you.
That's fine. The last one, coming back to Americas. What amount of this EUR 100 million improvement relative to 2018 needs to be achieved so that Americas can achieve its cost of capital?
That's extremely difficult to answer because the book value of the Americas is a number that was put in there out of an acquisition of almost EUR 3.5 billion back in 2012. Not necessarily does it reflect the real capital cost. I don't have a real answer there.
Okay. If I can try to maybe ask this a bit of a different way. Group level return on capital employed has been below 3% the last few quarters. You mentioned in your opening remarks that you want to be the industry leader in value creation, whether you get to that EUR 750 million number or not. As it currently stands and with Americas in your portfolio, is that a realistic target?
Look, the EUR 750 million, again, was in a different market. If we would have the pricing and the volumes from that market, then you would see that number. If you look at the CMD numbers of the last CMD, it shows clearly that we were on that path. Relatively speaking, yes, I'm sure that we will get there. But of course, in this market, you will see that returns on capital employed across the industry will be down.
Okay. Correct me if I'm wrong, but in your opening remarks, I thought you said you think you can be the industry leader in value creation next year, even if we don't get to that EUR 750 million target because-
Correct.
Yeah. Is Americas, if we do not have that pricing environment, is that something, how much of a drag is that?
Again, we have been talking about the expectations of Americas, what they will deliver, and we are still committed to it, and we are convinced that they will deliver those numbers.
All right. Fair enough. Thanks.
Thank you very much. The next question today comes from the line of Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yes, good afternoon. I have got a couple of questions. Firstly, on your European business, I have got a question on some of the pricing details. How have your customers responded to the higher nickel price environment in the transaction price business, and how far have you been able to push through any price increases in that part of the business? Also, have the customers which are still on the traditional price methodology accepted the price increases for the alloy surcharge, or are they putting a lot of pressure on you to discount via the base price or even switch to the transaction price method as well? I have got a few more questions, but I will stop there.
Yeah. Customers are never happy when you give them higher prices. It is very funny, but it is always the same. Not necessarily are people very happy. What you have seen this time, actually, which is different from other cycles, where when you see nickel price go up, you see especially the distribution segment to increase their buy in order to gain some inventory gains. I think the market is skeptical that the high nickel price will hold because the high nickel price was predicated by two movements. One was one specific company, Tsingshan buying a lot of nickel in July in the space of four or five weeks, which drove the market up by roughly $2,500-$3,000 a tonne. Then, of course, totally unexpected and not connected, Indonesia came out with the announcement that there is a ban on export of the nickel ore.
As you know, something like 50% of all nickel ore consumed by China comes from Indonesia. So that underpinned the next set. However, we do know that there is an enormous amount of shipment now happening from Indonesia into China. Philippines is capable of ramping up, as they have done as well in 2014. So there is cap in the market that nickel will stay at these levels. So that has not helped the volume. As to have we been able to move prices up, yes, we have. The nickel surcharge has the effective pricing in Europe has moved up. Not as much as you would have expected given the nickel move, but it did, and it has been accepted.
Just to follow up on that, have several of your traditional customers, which are on the old method, trying to switch on the transaction price business as well following the move in nickel?
It depends. If you talk about customers, for instance, that are end users and want security of supply and are looking at an annual contract, then absolutely not. They stick to the model because that model works for them and works for their security of supply and their security of pricing. One or two customers who traditionally have been on the L surcharge might have been pushing back here and there. That is, again, no issue. As I said, it is communicating vessels in the end. If we can decouple the scrap price from the LME, then it becomes much easier to actually start selling at effective pricing.
Okay, understood. Then just following up on international markets, if we look at the various sources which are reporting on the Chinese market, I think some show an uptrend in prices on the back of nickel prices, and some, like CRU obviously, say prices are even flat to down. What are the price trends which you are seeing in the Chinese market, and when do you expect the cost pressure from the Chinese NPI route producers to come through and force them into price increases?
The Chinese market has been flattish. As I said earlier, you could see that on the graph I showed that the gap between China and European pricing has opened up further. The main reason for that is that in, I would say, the sort of middle part of the year, March to August, melting rates in China have been tremendous. There is, if you look at the inventories in the two main areas in China, the inventories of cold-rolled finished stainless steel have increased exponentially. So there is a large overhang of material in that market. That overhang cannot find easily an outlet because both the U.S. and Europe are close to Chinese material, so that will keep a lid on Chinese prices. However, that is not necessarily something that can overflow into the European market.
Okay. Thank you then. Just moving on to your U.S. business. If we back out the hedging loss, your performance was obviously significantly up versus the last quarter. Now, in Q4, volumes obviously get weaker. That is seasonal, but you also get the hedge reversal and then probably the benefits from higher nickel prices and better scrap discounts. As you already said, the lower surcharge works a bit more promptly in the U.S. Is the volume decrease you are seeing in Q4 more than the usual seasonality, or is there any other reason why Americas would not be able to show a positive result in the fourth quarter?
Yeah. It is normal seasonality, and we would say that you can see the improved performance coming through as well in Q4.
Okay. Just a very last one on the restructuring measures, which you have been announcing. Are there any extraordinary charges which we should expect for the 350 people, and will they come through either this year or next year?
Bastian, hi. Pia here. That depends really on the negotiations and how they are proceeding, because simply said, there needs to be enough agreement alignment, and people need to be aware of the situation for us to book a provision. There is, I would say, a likelihood that we could book a provision already this year, but it really depends on the outcome of the negotiations.
Understood. You would probably report that as extraordinary, I suppose.
Yes.
Understood.
Likely, yes.
Okay, thanks.
Yes.
Got it. Okay. Thanks for taking my questions.
Thanks.
Thank you very much. The next question today comes from the line of Luke Nelson from JP Morgan. Please go ahead.
Afternoon, everyone. You have guided to lower shipments in Q4. Is it possible to quantify that by division? Also looking into 2020, any indication of how you are thinking about shipment levels given the current outlook? That is my first question. Second question is just on the underlying improvements, EUR 270 million improvements by 2020. Obviously, I know it is set on a base of historical pricing, et cetera, but can you maybe give an indication of how you are tracking towards that goal by the end of this year on a sort of equalized, normalized level?
Sorry. I did not understand that second question, to be honest. You lost me. Maybe you can do that again.
The EUR 270 million of total gains by 2020, which is within the EUR 750 million, just assuming the base for the EUR 750 million, how would you be tracking towards that EUR 270 million as things stand? How much do you think you have achieved with the commercial growth and the efficiency gains as things stand?
Yep.
The final question is just a modeling question on the inventory and hedging, where you say losses are not expected to repeat. By that, do I take it that there will be a full reversal or that the impact will be zero in Q4?
I think, it is Pia here. I think that the third question is maybe the easiest just to answer straight away, so that they will not repeat. It just means that given the current metal prices as we see it, they will not repeat. As I went through earlier, the group level impact of the metal timing and hedging was about EUR -30 million, and we would not expect those derivative losses there to repeat. But of course, pending metal prices.
Yeah. If I get your first question right, you were interested to understand the volumes in Q4 by business area, which I cannot give you. I can tell you that the overall volumes will be down to Q3. And that is something that is a misery being shared by all BAs.
So-
Go ahead.
Sorry, just to push a bit harder on that. In Europe, I think you have guided to real demand down 2% and America's flat. Is it possible to give an indication of where you expect your market share and maybe inventory moves in Q4?
No. Very difficult. Clearly, we don't want to give up market share, and that is what we will not do. We have maintained our market share this year and actually versus the end of last year, actually gained both in Europe and in the U.S. Not thinking of giving that up. On the EUR 270 million gain, look, it was commercial growth on the one hand and efficiency gains, the other. The efficiency gains, I think we can comfortably say that, yes, we are delivering them. As I said, our productivity is close to 4%, whereas we said we are targeting 3%. We are making our procurement savings, and we have been on this path of raw material optimization, where in the U.S., we are now getting in the last bit, where we are optimizing the scrap mix.
The restructuring in Mexinox is now fully done, and the run rate is coming in. The logistics cost reduction is going slower than expected because of the operational issues that I mentioned earlier. That scheduling it onto railways and barges is harder than we thought. But it is coming in, and it will reach what we need to reach in 2020 at some stage. Generally speaking, on track. Delivery reliability very well in Europe. In the U.S., still a bit more spotty. Is dependent on our partners in Calvert. For instance, last month, they had a breakdown in their hot mill. It went down for 11 days, and that then means that we will have less product than we expected, and that will influence our delivery performance. But it's nothing dramatic. We are on track. The commercial growth in a market, it's easy to see, right?
The U.S., in spite of all the great news, has now for two quarters in a row announced lower decrease in manufacturing activity. Europe has decreasing manufacturing activity. Automotive is down 10%. China, they reported the lowest GDP growth number in 30 years. Automotive is down for 15 months, every single month. Clearly, commercial growth is something that in this environment is near impossible.
Thanks a l ot.
Thank you very much. Once again, as a reminder, if you would like to ask a question, please press star then one on your telephone keypad. The next question we have comes from the line of Olivia Du from Bank of America. Please go ahead.
Hi, good afternoon. Thanks for taking my question. I have two questions, please. The first one, can you give us a bit color on how the import trend has been since October 1st this year? Related to that, how is the anti-dumping investigation going? As I understand, it is mainly targeted against China and Taiwan imports. But as it stands, Indonesia is actually the global price setter as of now. I guess, longer term, where do you see should be the normalized level of import as a percentage of total European market? That is my first question, please.
If you look at imports, and we track imports against quota, and you see that there are some countries that are proportionately on quota. There are some countries that are ahead of quota, but nothing extraordinary there. On the anti-dumping, the anti-dumping investigation is against three countries, Taiwan, China and Indonesia. So they are all three included.
Where do you see should be a normalized market share of imports over the longer term?
Well, if you look at how the safeguards were designed, again, based on an average of the 2015, 2016, and 2017 figures, which is again, sort of mid-cycle, it should come to about 22%, 23%, 24%, depending on where the market goes and how much relaxation there is. So that is where it should land back in when the market returns to normal.
Okay. Second question, very short one. Can you just clarify that, do you still have any nickel price hedging in the fourth quarter?
Yes. Hi, it's Pia here. Yes, we do. Based on the principles that I explained through the slides, we would typically hedge if we have entered fixed price sales contracts, which we do. If we have fixed priced purchasing agreements, which we also do, and then, on top of that, if we have finished goods inventory, which is readily available for sale, we would hedge that. So the answer is yes. We also have base stock hedges during Q3 and those were on a certain level and they are continuing at least in the early part of Q4.
Are you able to share how big is your position?
No. Not at this point. But I think when you are evaluating the impacts, it is important to take into account that this price movement was extremely abrupt during the third quarter.
Okay. Thank you.
Thank you very much. There are no further questions. Please continue.
All right. Thank you. As a reminder, Outokumpu will be hosting a Capital Markets Day in London on March 18, 2020. Please save the date already now. The formal invitations will follow. At this point, I would like to thank you for attending our earnings call. Goodbye.