Welcome to Gränges conference call for the first quarter of 2018. Here in Stockholm, it's me, Johan Menckel, CEO of Gränges, and CFO Oskar Hellström. We will start this presentation with an update of Gränges performance during the first quarter, then go into the financial results. After that, we will conclude the presentation with a short summary, we will open up for a Q&A session. To start, I want to briefly go through Gränges' current operations. Gränges is a global aluminum rolling company with some 1,600 employees, with an annual net sales of more than SEK 11 billion. We have production facilities in Sweden, China, and in the United States. About half of our sales volume is to the global automotive industry, where we are the market leader globally.
The other half is split between the American HVAC market for buildings and houses, other niche segments in the U.S. When we're looking at the first quarter of 2018, we have continued to see a good development in all our markets. Sales volume was stable at 95,000 tons in the quarter. In automotive, we experienced a better sales development than the market in all our regions. In Asia, sales volume was up 1.4% compared to last year, developed better than the underlying markets. In Europe, sales volume increased some 2.2% over the last year. In the Americas, sales volumes was down 0.8% from last year. In the Americas, we continue to see a very good demand in all our product categories. Adjusted operating profit rose to SEK 282 million, up from SEK 237 million last year.
Improved operational performance in Europe, good metal management, price increases in the U.S. contributed to a higher profit. Profit for the period was SEK 167 million. That includes items affecting comparability of negative SEK 64 million and a positive SEK 22 million from joint ventures, both related to the wind down of our former sales and distribution company in the U.S. Earnings per share increased to SEK 2.21 in the quarter, from SEK 2.09 last year. Cash flow before financing activities was SEK 192 million. We ended the quarter with a net debt of SEK 2.4 billion, corresponding to 1.8 times EBITDA on a rolling 12-month basis. After the quarter ended, we have seen quite a turbulence on the global aluminum market. On April 6, the U.S. Department of the Treasury issued a sanction list with Russian individuals and companies, including the global aluminum company, Rusal.
This move by U.S. policy makers has caused a lot of turmoil in the industry. For Gränges, the direct impact of the sanction is mainly related to KUBAL in Sundsvall, which is a supplier of aluminum slabs to Gränges in Finspång. Oskar will come back on this. During the first quarter, the global light vehicle production decreased by 1% compared to the first quarter last year. In Asia, the market was down 1% in the quarter, as production of light vehicle was lower in both China and Japan compared to last year. In Europe, light vehicle production increased by almost 1% in the first quarter, while in the Americas, the market was down some 1% compared to last year. If we now look into the second quarter of 2018, the global vehicle production is expected to grow 5% compared to last year, according to IHS.
That comprises an increase of about 5% in both Asia and Europe. In the Americas, light vehicle production is expected to grow nearly 6% in the second quarter of 2018. If we look further into 2018, the outlook for production of light vehicle is unchanged. IHS estimate a global growth of some 2% for the full year 2018. If we then look into Gränges sales volume development during the first quarter, we can see that Asia was 1% higher, at 23,000 tons. This was a better growth rate than the market. The good development during first quarter of 2018 is partly due to good development in commercial vehicles. In Europe, sales volume was up 2% in the first quarter to 17,200 tons. Sales of heat exchange material was up some 4%, while sales of industrial products decreased in the quarter.
In the Americas, sales volume was 54,800 tons in the quarter. Sales volume for HVAC&R and other was somewhat lower at 46,200 tons due to a temporary production disturbances in one of our rolling mills in Huntingdon. Sales to the automotive heat exchanger was 8,700 tons in the quarter. In our local U.S. operation, we continue to see a strong demand in the quarter. The imposed import duties on certain aluminum rolling products from China is driving demand for all locally produced products. Our growth is, however, still limited due to the fact that we are operating close to maximum capacity. From the second half of 2019, we will be able to add new capacity in our Huntingdon facility.
During the recent weeks, we have made good progress regarding our patented TRILLIUM technology. We have had several test projects with customers since last year, which have turned out very well, even better than expected, I would say. At the moment, we are in a dialogue with several of leading car brands in Europe regarding battery cooling plates, for example. Some smaller volume has been signed for new car platforms, and we have more discussion coming up in the coming months. The sales volume is, however, still small. Last year it was a few hundred tons, but expected to grow with double digits in the coming four to five years. What we see now is that TRILLIUM could make up more than 20% of our sales volume in Europe in only a few years. That is, of course, of great importance since this product with high prices than standard products.
Now I will hand over to Oskar for the financials.
Thank you, Johan. 2018 has started very well for Gränges, and the first quarter is yet another very strong quarter for the group. Although the sales volume remained relatively stable year-over-year, the rolling 12-month adjusted operating profit continued to increase to SEK 977 million. That's an improvement of SEK 208 million compared with the situation one year ago. If we look at the first quarter in isolation, we can see that the sales volume increased by 0.3% to 95,000 tons, whereas the net sales increased by 6.2% to SEK 3.1 billion. The automotive sales volume increased by 1.2% globally, whereas the HVAC and other volume in the U.S. decreased by 0.6%. This slight reduction is related to a temporary disruption in one of the rolling mills in Huntingdon, limiting production capacity in the quarter. These issues have now been solved.
The higher year-over-year increase in net sales and in sales volume is primarily driven by increasing metal prices. The net impact on net sales from changes in foreign exchange rates was negative SEK 176 million compared with the first quarter 2017. Moving to the earnings. The adjusted operating profit amounted to SEK 282 million in Q1, an increase of 19% on prior year. The increase in adjusted operating profit is primarily driven by improved metal management and productivity, in combination with a slightly higher average conversion price. Changes in foreign exchange rates had a net impact of SEK -19 million compared to Q1 2017. As of 2018, we are rebalancing the timing of vacation expenses in Americas to get a more even distribution over the year.
Although this is neutral from a full year perspective, it had a positive impact on about SEK 10 million in Q1 when comparing year-over-year. In accordance with this, we will also see a negative year-over-year impact of about SEK 5 million in Q2 and Q4 respectively. In the third quarter 2017, we updated the assumptions on the useful life for certain types of assets. The consequence of this is the reduction of depreciation and had a positive impact on the operating profit of SEK 16 million in the first quarter. We expect the same year-over-year effect also in the second quarter. The adjusted operating profit per ton reached SEK 3,000, which is SEK 500 or some 20% higher compared to Q1 2017. The profit per ton development was positive in both the automotive and the HVAC and other business.
items affecting comparability amounts to SEK -64 million in the first quarter and relates to the change in distribution model for imports to Americas as of January 2018. The new distribution model that is fully administered by Gränges will be more cost efficient than the previous joint venture setup. Still, the change as such means that we have acquired the old distribution company, and as we are for a period of time selling products out of acquired inventory, and therefore we're accounting for a lower margin. This is a one-time effect impacting only the first quarter, and it was also described in our Q4 2017 report. Including the items affecting comparability, operating profit amounted to SEK 217 million. The profit for the period reached SEK 167 million compared to SEK 157 million previous year, and corresponds to earnings per share of SEK 2.21.
The profit for the period includes a positive effect of SEK 2 million from the revaluation from book value to fair value of the acquired North American company, when we acquired the remaining 50% of this in January. Cash flow before financing amounted to SEK 192 million in the quarter, and by the end of March, the return on capital employed reached 17.3% on a rolling 12-month basis. During the first quarter, the net debt increased by SEK 61 million to SEK 2.4 billion. This corresponds to 1.8 times adjusted EBITDA on a rolling 12-month basis, which is within our long-term target range of one to two times. Looking at the cash flow before financing in the first quarter, we can see the positive contribution of the strong earnings. Working capital increased somewhat due to seasonal buildup of inventory and receivables.
If we look at working capital in relation to base of sales, this metric remained stable in the quarter. Other operating items refers to taxes paid of SEK 15 million. Investment in fixed assets amounted to SEK 123 million in the first quarter. About half of this refers to investments to maintain and improve efficiency in our current production facilities. CapEx related to the expansion of the plant in Huntingdon is included with SEK 65 million. Acquisitions and other capital transactions of SEK 22 million positive primarily relates to net impact of the purchase price and acquired cash in the North American distribution company. FX and other mainly refers to the acquisition of the remaining 50% of the North American distribution company and the financing of the acquired working capital. In early April, the U.S. Department of the Treasury introduced sanctions against certain individuals and legal entities.
Among these is the global aluminum company, Rusal, that is heavily integrated in the global aluminum supply chain. These sanctions, together with the recently imposed general tariffs and anti-dumping duties on certain imports to the U.S. of aluminum products from China, have increased the uncertainty on the aluminum market in general. As a consequence of this, we have seen rapidly increasing aluminum prices over the last couple of weeks. Although the aluminum price has come down somewhat following the update from the U.S. Department of the Treasury earlier this week that the deadline to wind down the transactions with Rusal will be extended until mid-October, the aluminum prices are still at a very high level. In relation to this, I think it's important to highlight a couple of things.
First, Gränges has a business model where we pass on the cost of the aluminum to our customers, which is also common practice within the rolled aluminum industry. During the time period we have the metal in inventory, it's fully hedged, and as a consequence, movements in the metal price has very limited impact on our operating profit. The increase in metal price does, however, have an impact on the value of our working capital. A higher metal price means higher working capital and that the cash flow is negatively impacted during the working capital buildup. This effect is, of course, reversed in a scenario with declining metal prices. Second, regarding the sanctions against Rusal, one of the results of subsidiaries, the KUBAL smelter in Sundsvall, Sweden, is a supplier of rolling slabs to Gränges operation in Finspång.
For the full year 2017, the supply from KUBAL corresponded to about 20% of our metal purchases in Finspång and to less than 5% on a group level. We have a multi-sourcing strategy for slabs, and since the sanctions were announced, we have worked intensively to reduce the risk by securing metal supply from non-Rusal sources. As the situation looks today, and with the deadline to wind down transactions with Rusal extended, we do not expect to experience any raw material shortage for our Finspång operation in the short term. We are, however, continuously monitoring any developments in this area very closely. I will now hand over back to Johan Menckel, that will summarize the first quarter and provide an outlook for the second quarter.
Thank you, Oskar. When looking into the second quarter of 2018, we anticipate a lower growth rate than the research firm IHS forecast for the market. That applies for all our major regions. We also note the increased uncertainty on the aluminum market in general, due to the recently announced U.S. sanction against aluminum giant Rusal, and import tariffs on aluminum products into the U.S. We are monitoring this development closely and are taking actions to reduce our risks and being proactive. Short term, we are still experiencing capacity constraints. The investment in new capacity in the U.S. will come into effect during second half of 2019. We're also reviewing capacity needs in Asia and Europe, and are evaluating different ways to move forward. In total, we foresee a sales volume for the second quarter of 2018 that is in line with the second quarter last year.
When looking further into 2018, we remain positive and see good market potential. We will continue to execute on our strategy to grow our business and maintain a solid and sustainable profit. To conclude 2018 first quarter report, Gränges had a good start of the year with better than market growth in the automotive in all our regions. Sales volume was stable at 95,000 tons, and adjusted operating profit increased by 18% to 282 million SEK, driven by improved operational performance in Europe, good metal management, and price increases in the U.S. Cash flow before financing activities was 192 million SEK. Return on capital employed was up 17.3%, and we ended the quarter with a net debt of 1.8 times EBITDA, which is within our target range. Our growth plans for North America are proceeding according to plan.
Expansion of our facility in Huntingdon has started and is set to be finalized in the second half of 2019. We are also evaluating other projects in the region, as well as in Europe and in Asia. Thank you, and now we're open for questions.
Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad and you will enter a queue. Thank you. The first question comes from Max Fridén from Danske Bank. Please go ahead
Yes. Hi, good morning. Max Fridén here. Can you hear me?
Yes.
Excellent. I have a few questions. Three, actually. The first one is, when you go through the earnings drivers, and congratulations on the good results, by the way, the metal management as a driver, is that possible to quantify, either in absolute terms or per ton on gross profit, et cetera?
Hi, Max. It's Oskar here. Yes, of course, it's possible to quantify the metal management impact. We have, however, been very careful with indicating these things historically. This is not something we will comment on externally.
Okay. I follow up with the price increases. If you compare the price increases to metal management, which one was the biggest contributor? Is that possible to say?
Yes, I can comment on that. If you look at the net price increase versus the net impact of metal management, in the first quarter, the metal management had a larger positive impact than the price impact.
Okay. On the price increases that you mentioned, you say you raised prices as of 1st of January. Should we expect that that's the price level we will see throughout the year? Or should you see increased prices on contracts coming in here during the year, so the year-over-year effect will actually increase?
Yeah, Johan here. We've seen specifically in Americas, where we have increased prices with some 5% for half of the volume. If you remember, basically 50% of our business in Americas is still contracted longer than 2018. The price increases, of course, confirmed for the open volumes will remain during 2018.
Okay. Finally, I'm just trying to understand the purchase of your remaining 50% of Norca. You acquired finished goods and finished products here in 2017 that the 9% are selling here in 2018. Doesn't this have any positive impact on your result in Q1?
I think it's a good question, Max. What you refer to here is the change in distribution for Americas that we highlight as items affecting comparability in the first quarter. Just to give you a little bit more flesh on the bone here, what this means is that in the past we had a joint venture, which was selling the Gränges products into North America. We have now changed this so that we are handling this distribution fully by ourselves, which we think is a more cost-efficient solution. When we did this change, what we did was that we acquired the remaining 50% of the joint venture distribution company. Basically, the inventory in that company is now in the Gränges books.
Of course, we purchased this company by that book value, which means that the product margin or the margin that we generate when we produce the products in Sundsvall and Shanghai, that margin was already accounted for in the inventory that we acquired when we acquired Norca. When we now sold that inventory in the first quarter, we could only get the small additional distribution margin, the margin on top, that is generated in the distribution company. This is a true one-time effect. It's isolated to the first quarter, going forward, you will not see this. It will be back to normal. If you want, you can say that actually, it's so that going forward, we also get the distribution margin on top of the product margin. That distribution margin was not accounted for in the Gränges group historically. This margin is, however, very slim.
In the bigger scheme of things, you won't notice that.
It seems like it's a sustainable level. Just maybe if I could get a general comment on your earnings growth here, because it is remarkably strong. You only had a few quarters where you can see this underlying strong growth, and even if I adjust for all these different positive effects from prolonged from the D&A and from the accrued accounting and the negative FX, it seems like a growing EBITA SEK 38 million. I'm just trying to understand, should we extrapolate that, putting in a price mix effect in the EBIT bridge in the same magnitude for the rest of the year, for the rest of the quarters? What am I missing?
No, I think it's a fair question there, Max. I think a lot of the drivers, of course, that we see here, the productivity, the metal management, the prices, those are things that we are working very intensely with and that we are continuously raising to new levels. Of course, we will try to keep those at that level. That's of course on the positive side. On the negative side, what Johan has indicated of course, is on a group level, flat volumes for the second quarter. What we do see there is that we will see a slightly mix effect where we see a slower development or actually decline in the Asian volumes, whereas Europe and Americas grows a little bit.
Although the net of the volume is expected to be on the same level as last year, that will lead to a slight negative geographical mix effect for Gränges. That's something you can keep in mind looking into second quarter. I also want to highlight, of course, that I mentioned the timing of the vacation expenses that we are now trying to make more even over the year. Of course, that is a SEK 10 million positive impact in first quarter, but it will have SEK 5 million negative impact in second quarter and fourth quarter respectively, but neutral over the year.
I got that one. I adjusted for that one in my very blurry commentary. In Asia, is that primarily related to the inventory destocking you've seen from your customers? That should maybe bounce back when we move into Q3?
Yes, Johan here. It is somehow related to the destock in Asia. Of course, we don't share the very positive view on the Asian market that IHS has. We have another view on the quarter two outlook for Asia. Still, we are confident for our Asian business for the full year.
Okay. Thank you. I've been taking up too much of your time. Thank you so much.
Yeah. Thank you.
The next question comes from Johannes Grunselius from Handelsbanken. Please go ahead.
Yes, hello, everyone. It's Johannes Grunselius, Handelsbanken here. Can you hear me?
Yes.
Great. I have some similar question as Max elaborated on, a little bit of follow-up. Could you touch upon the FX effect? I think it was SEK -18, that was pretty anticipated, I suppose, for Q1. How should we view Q2, Q3, et cetera, going forward? I suppose you have more tailwind now again from FX.
Yeah. Johannes, it's Oskar here. It's true that the FX effect impact on our operating profit was negative SEK 19 million in the first quarter. I think when we talk about FX, we never provide any forecasts for FX impact as such. What we can remember here when we talk about this, and I think it's worth to highlight, is that we are exposed both to the SEK to U.S. dollar, the SEK to euro, and the SEK to the Chinese yuan, and the Chinese yuan to the U.S. dollar. We have quite some exposures in Gränges. The transactional exposures we do hedge, and we hedge it in such a way that we delay the impact. The full impact will take some 12 months before you see the full impact of an FX change flowing through to the bottom line.
After six months, you have basically half of the impact of an FX change. Even though that you have seen some recent movements here in FX rates that is on the beneficial side for Gränges, they won't fully come through directly, but it will come with a bit of a delay. I don't know. Hope that helps.
Yeah. Am I right that you will still have negative P&L effect from FX in Q1 and possibly also in the third quarter, and in the fourth quarter, we should see more of a neutral effect or a positive effect?
We only provide the numbers of the quarter we report. We don't provide any guidance on FX.
Sure.
In addition to that, we describe the way we are exposed and the way we hedge.
Yes. Okay. On the U.S. pricing, I think you said here, Johan, that you still have 50% of the volumes open for negotiation, I suppose, in the next few quarters. For the ones that you have negotiated, are you fully done with price hikes in the U.S. now for Q2, Q3, or should we see more of a sequential positive effect from pricing in the U.S.?
No. Basically, for the price increases we have concluded for 2018 is done. There are remaining volume to be renegotiated for 2019 and onwards.
Okay. Got you. When you have a very solid demand in the U.S., and as you mentioned, there is a good appetite now from buying from the local players in the U.S., could you take the advantage here and improve the mix, would you say, in this market? Do you foresee more of a unchanged mix? How should we see that?
Yes, definitely, it's a very strong demand in the U.S. and of course, in addition to the expansion product we are currently running in Tennessee, we are increasing capacity. Can you hear me? Okay. Sorry, it was some other one on the line. The mix in America, as you were referring to, we are working, of course, with also increasing the automotive part in the U.S. for our customers.
Okay. Thank you very much. Thank you.
Thank you.
The next question comes from Mats Liss from Kepler Cheuvreux. Please go ahead.
Hi. Thank you. Congrats on the good results. Well, a couple of questions. Regarding the price increases you mentioned, you have implemented them on 50% of the offering in the U.S. Is that Fast step change in the first quarter, or did it sort of affect you gradually? We will continue to see the impact during the second quarter, maybe to a larger extent.
It's a step change in the first quarter. The effect is now.
Yeah, good stuff. Secondly, regarding the production disturbance that you mentioned, could you say something about the volume and the earnings impact during the first quarter?
Yes. Hi, Mats, Oskar here. Basically what we have said and what we forecast here for the first quarter, as well as we are now saying for the second quarter, we expected a low single-digit growth in volume in our domestically produced business in the U.S. because even though we are operating at full capacity, we are continuously working on releasing bottlenecks and therefore adding additional capacity. What you can say there is that we would probably have expected some growth in the quarter, a couple of percentage points of growth. Instead, it was a close to 1% decline. That's sort of the delta I think you're after.
Yeah. Great. In the U.S. also, during the capital markets day here, you mentioned some idle capacity that you got when you acquired Noranda. When do you expect that to be up and running? Is it on hold, or could you say something there?
Yeah, of course. No. When we acquired Noranda, we acquired three plants, one in Tennessee, one in North Carolina, and an idle one in Arkansas. We are now actually looking into restarting this plant in Newport, Arkansas, and that will only require minor investment to get that plant up and running, and that plant will then be dedicated for the thinnest foil product. This is something that we are working with right now, there is no decision as of today.
The volume is-
It's a very attractive opportunity for us. The volume there, we were initially talking about some 20,000 tons.
Sounds good. Then about the Mitsubishi JV here. Do you have some comment to make regarding the negotiations?
Yeah. The status, we are still in a phase where we are basically negotiating terms and conditions. It's basically the same status as we presented during our capital market day. We have no new updates here. It's of course an interesting project that we are pursuing, but we haven't concluded on that yet.
You still expect to be finished during the year, or is it more Yeah?
Yes, we definitely expect to conclude on whether to do this or not this year, for sure.
Great. I guess the U.S. tariffs have some impact on the Chinese market. Could you give some comment there, how it affects your segment?
Yes, definitely. There are basically two different kind of duties on Chinese rolled product. The first one was implemented last year, and that was on thin rolled products, foil, with some 100% basically tariffs. For that volume, we have actually transferred that volume to our Finspång operation. Of course, that has also increased the demand in U.S. substantially. Now it's also a similar review from the U.S. Department on the more thicker products, the remaining of the rolled product, and there's been preliminary duties imposed from January this year. It's likely that this will also be concluded for all thicker products this year. We have started also to transfer the volume we had in this category from China to U.S. into our Finspång operation, and it's about 2,000 ton we are talking about here that we are part of that thicker product category.
That will, of course, also increase the demand for thicker products in the U.S.
In China, do you see any that your Chinese competitors are sort of trying to balance the negative impact of the U.S. tariffs in China?
Yeah. Of course, this volume needs to go somewhere else, and it's of course an activity for these suppliers, the Chinese suppliers, to compensate for the loss in the U.S. We should not exaggerate this because we've had a lot of capacity anyhow in China for many years, and a lot of the business we have is already contracted. It's good to know there was not so many suppliers in our business segment supplying the North American markets.
Okay. Thank you. Finally, just about the tax charge or tax rate for the full year, could you give some indication there?
For the group tax rate, we assume that for 2018 to be between 22%-25% here. We are basing that on the assumption that we have a 25% tax rate in China. We still think that it's quite likely that we will enjoy this 15% High and New Technology Enterprise tax also for 2018. To be conservative, we are applying the 25% in our accounting. That means 22%-25% guidance for the full year.
Okay. Thanks a lot.
Thank you.
The next question comes from Kenneth Toll from Carnegie. Please go ahead.
Thank you. Returning to the U.S. situation, I think that the metal price premiums in the U.S. have gone up quite a lot. I remember a few years back, you had some issues with compensating yourself fully from high metal price premiums. The first question is, do you have still fixed metal price premiums in some U.S. contracts that could hit your profitability? The second question is: have you seen any One thing you can do when you have import duties is to not import the material, but make some products that contain a lot of material and import the final product to the U.S. instead, in order to avoid those import duties. Such as if you would do a heat exchanger in Europe instead and import it to the U.S.
Have you seen any such moves of all the production moving away from the U.S. due to high aluminum prices?
Okay, Kenneth, hi. It's Oskar here. I can answer your first question there on the premiums. I think it's very well noted. We did have some issues a couple of years back, when there was some speculation against the aluminum premiums. I think what we can say, we can divide the answer in two parts. Basically, for the old Gränges business, we have basically, when we are writing new contracts, we have replaced the vast majority of all our contracts over the last couple of years, of course. Our contracts now are structured in such a way that we always pass on the metal price premium, in addition to the basic LME price to our customers. As a consequence, we do no longer have an exposure to premium fluctuations in the way we had in earlier years.
That I think that problem is no longer there. Also the second part, of course, is our U.S. business. I think that's of course the business that is most exposed to these U.S. premiums. I'm then referring to, of course, the ex-Noranda business here. In the U.S., you typically quote the aluminum price on a Midwest price, that includes both the LME and the premium. There it's automatically transferred to the customer. It's a very fair comment, especially taking the history into account here. We are not so worried about these things at this point.
Kenneth, if you want, I can comment on your second question. There are proposed duties on 10% for aluminum products into U.S., which is now prolonged. It's negotiation ongoing. We haven't seen the value of doing semi-product in Europe to ship, because the Midwest premium has increased by 10%. The net impact for the American customers is actually zero. That is not really a big issue with this 10% of tariffs from Europe that are not implemented yet, still under discussion as you most likely know.
Okay. Very good. Yeah. Thank you. Thank you very much.
Thank you.
The next question comes from Emmy Östlund from ABG. Please go ahead.
Hi, this is Emmy Östlund. I'm sorry if you've already answered this, you're adding 40,000 tons of capacity in the U.S. over two years. You sort of touched upon that we're going to see some of this capacity going to production in the second quarter of the year. Could you just give us some more colors on the details here and what we should expect in sort of production ramp up and in the U.S. and things like that? Thank you.
Yes. We are adding 40,000 annual tons capacity in the Huntingdon plant in Tennessee that will come into start of production basically in half year 2019. Right now we are of course discussing with customers also for this additional capacity, and there is a very good dialogue, I would say right now. Because what has happened in U.S. is of course with the 2 types of countervailing and anti-dumping duties on Chinese import, there is a very strong demand for the coming years in U.S. These duties are decided for a five-year period. There is very strong need for the customer base in U.S. to solve their long term supply locally. You should, 40,000 tons, it's a very small number in relation to the overall demand.
Basically as soon as you have this production capacity, you're thinking that this will sort of be filled up immediately or is that how you should think about this?
Yes. We are very, I would say, comfortable with that this additional 40,000 tons will be contracted and sold.
Okay, this will come into effect in the second half of 2019. Is that correct?
Yes, correct.
Yes. Okay. Thank you. That was all for me.
Thank you.
The next question comes from Sven Turyhan from Catella. Please go ahead.
Hi, guys. The question on Chinese capacity that is not exported to the U.S., are you seeing this capacity popping up somewhere else in the world, or do you think it will be closed?
Johan, we have not seen that capacity ending up somewhere else. Of course, the Chinese supply that cannot export to U.S. are definitely working on finding new markets for this. There is also a lot of discussion in general in the European Aluminium Association, what will be the impact of tariffs on Chinese raw products to Europe, et cetera. There is a concern in the overall market, but we have not seen a clear pattern as of today.
Secondly, it would be interesting to hear your view on supply coming to the market in general for 2018 and 2019, if you have any view on that.
Sorry, Sven. Once again, repeat the question.
I would be interested in your thoughts on the supply coming to the market in general in this year and next.
Okay. No, there is no really announcement on new capacity coming into the market. Not in Europe and not in the U.S. either as of today. There is no dramatic change from that perspective. I think it's likely to believe, of course, over time in the U.S. that there will be some announcements from other companies as well.
If I may, two additional questions. One, in terms of the Russian sanctions and the impact on your relation with KUBAL and Sundsvall, you said that you don't expect any raw material shortage, but would you expect higher costs in order to find new suppliers and solve the issue?
Hi, Sven. It's Oskar here. It is a fair question. I think that for the time being and until October this year, we still expect to continue to get deliveries from KUBAL. Of course, in a scenario where you at some point would not be able to get those deliveries, we have other sourcing options. We are using a multi-sourcing strategy as I indicated earlier. That strategy, of course, also involves that we try to optimize the capabilities of our suppliers using different suppliers for different types of raw material where we think they are the best, and of course, if we are to switch some of the supply that we have today buying from KUBAL to some of the other slab suppliers, that could mean a cost increase. You could foresee a logistics cost increase, for instance, because they don't have the same location.
You would have to buy from Norway instead of from Sundsvall, for instance. You would also expect, at least for some period of time before we can tune in their raw material, you would expect probably some higher production cost at our end when we adjust to the new raw material. Yes, in a scenario where we could not use KUBAL volumes, I would foresee some higher cost.
Okay, thanks. The final one, if I may. You say in the report that you're evaluating other projects such as involving expansion in Finspång due to the fact that you're running at full capacity. Could that mean greenfield projects in Europe as well, or is that out of the question?
What we are evaluating right now is to increase capacity and improve capabilities in our Finspång operation. That is the best strategy for us in Europe. Of course, we see a fairly strong market in Europe going forward. That's an interesting project for us. Of course, over time also, we are optimistic about Asia, and of course, we are actively looking how to address the future capacity in Asia.
Okay. Thank you.
Ladies and gentlemen, just a reminder, in order to ask a question, please press 01 on your telephone keypad. Thank you. The next question comes from Max Fridén from Danske Bank. Please go ahead.
Yes, hi. Just a follow-up question on currency transaction flows, how has that changed now from U.S. dollar and from renminbi to U.S. dollar?
Sorry, Max, I'm not sure I understood your question. Can you please rephrase that again, please?
Yes. Sorry, that went a little bit too fast even for me. The transaction flow, when I look into your annual report on currency, you have the renminbi to U.S. dollar on a 10% movement, it is SEK 77 million effect.
That was based on 2017. Now you have shifted a lot of production. You do not ship as much from China into the U.S., etc. I'm not sure how your cost and revenue streams are in those two currencies anymore. Could you give us an updated view on that transaction flow, how it should look like with the new parameters in 2018?
Absolutely. Now I understand your question fully, Max. Yes, as you say, in our annual report, we have quite well described our exposures and how we hedge. To pinpoint here for anyone looking at that section of the report, the table that Max is referring to here is the impact on EBIT of our FX exposures. Also you need to remember that it's the transaction exposures and it's the unhedged transaction exposures that we are illustrating there. To your question on the change, we have moved some of the volume that we have previously produced for the U.S. in Asia. We have moved that to production in Sweden. Of course, as a consequence, that volume being sold in U.S. dollar, that means that the U.S. dollar exposure in our Asian operation, the USD to Chinese renminbi exposure has come down slightly between 2018 and 2017.
At the same time, the biggest U.S. dollar to renminbi exposure is not for the volume shift from China to the U.S., it's from the volume shift from China to rest of Asia. If you look at that totality, the change is actually not that big in that exposure. You can still use that table as a good proxy for the exposures also going into 2018.
Very clear. Thank you so much.
Ladies and gentlemen, there are no further questions at this time. I now give back the word to the speakers. Thank you.
Okay. Johan Menckel here. No more questions. I would like to conclude this session. Thank you everyone for participating today. Thanks for a lot of good questions, and good and interesting questions. Looking forward to our next call on July 19, and we will present our Quarter 2 report then. Thank you.
Ladies and gentlemen, the conference call is now over. You may now disconnect your lines. Thank you.