Morning, and welcome to the presentation of the SSAB Q3 report. I'm Per Hillström, Investor Relations at SSAB, and with us today here we have Martin Lindqvist, President and CEO, and also Leena Craelius, the CFO. If we look at the agenda, Martin will start to go through the third quarter, and then Leena will dig in more into the financial details. Then Martin comes back in the end with the few slides on the outlook. Finally, we will have a Q&A session, both from here in Stockholm in case of any questions, then, but then also from the phone lines. By that, please, Martin.
Thank you, Per. Good morning, everybody. I will actually spend a second or two on this picture because this bucket, as you see, is called Exmore. It's a very good example of the business model in SSAB Special Steels. This is a brand we have developed for buckets, among other things. We produce prototypes. We design them and produce prototypes in a daughter company in Australia called G&G. Then we license out the possibility to use these buckets or produce these type buckets to global bucket producers. They are, of course, produced only in our material. They are much lighter than an ordinary bucket. The life length is typically two times as long as an ordinary bucket. There are a lot of benefits, and this is one good example of how we develop and drive the Special Steels market.
Remember Exmore, and remember that this is one of many examples, how we develop and build the market. If we then move into the third quarter, it was, I would say, given the circumstances, a decent quarter with good profitability in SSAB Americas and in Special Steels that compensated for a weaker market and a weaker outcome in the European business, SSAB Europe, Tibnor, and Ruukki Construction. I will come back to that. We continue to develop our safety performance. This is one of the KPIs we measure Lost Time Injury Frequency, where we are now at 1.15, which is not, of course, in line with the target, which is zero, and the ambition to become the safest steel company in the world.
We are not there yet, but we are moving in the right direction and see good progress in this development. This is about building a culture in SSAB, and we are on our way. We continue to have a decent balance sheet, and I will come back to that a bit later. If we then dive into the divisions, I mean, Special Steels, it is about driving market growth, and that's why I use the example of the Exmore bucket. We do that by developing new applications that are typically stronger, lighter, and more sustainable, and that customers are willing to pay more per kilo of steel, but at the end pay less for a bucket because of reduced weight and an increased productivity.
We do that together with having a leading product offering and developing new grades and new products all the time. Of course, a global sales organization with local stocks. If we look at how we have sold so far this year up until Q3, we have had 40% or a bit more than 40% of the volumes going into Europe, 30% going into North America, and the remaining 30% roughly going into the rest of the world with Asia, Latin America, Middle East, and so on. If we look at the products, the majority is of course the QT products produced in Oxelösund and Mobile, but also 20% being advanced high strength hot-rolled steels then produced in Borlänge and Raahe. A fairly good spread of different markets.
I said the profit was good. We had an EBIT margin in Q3 2022 of almost 29% and had a record operating profit of SEK 2.4 billion. If you look at Americas, plate prices started to decrease somewhat during Q3, but from very high levels, and they are still at very good levels. The spread are at historically high levels. We saw and see good demand in several segments, and going forward, the infrastructure build and the energy demand could be positive for plate demand over the next few years. It looks quite okay. If we look at Q3, we had more than SEK 3 billion in operating profit and an EBIT margin of almost 37%. Europe was slightly different. We saw already end of or beginning of Q2, we saw demand weakening.
We have seen weaker demand in Q3, which is fairly typical because we have the seasonal slowdown in July in the Nordics, August in the rest of Europe, but clearly a slower demand in Q3. We, during Q3, adjusted production both in color coating lines, in galvanizing lines, and also in cut-to-length lines. We took down production already in Q3. Looking into Q4, we expect to continue to see a weak demand, and that's why we have taken the decision to put forward a repair of one of the blast furnaces in Raahe. That was originally planned to do end of 2023 or beginning of 2024.
Given the market situation, we took a tactical decision and said, "This is a good timing," and especially a Q4 is always a Q4, and the second half of December is always the second half of December, and very hard to predict what kind of volumes we will get out the last two weeks of December. We decided to do this from end of November and take it down six to eight weeks, and that will help us, of course, to do this in a good timing given the business cycle, but it will also help us not to build more working capital or to release working capital. I think that is a good decision. Looking into Tibnor, we saw lower shipments. We saw inventory losses or windfalls in inventories due to negative prices for steel.
The underlying profit was still positive, but overall, including the windfalls, we had -SEK 176 in operating profit. Ruukki Construction, SEK 160 million, clearly a slowdown in the construction segment already in Q3. We saw also the high inflation impacting demand, new builds, and that of course affected Ruukki Construction. All in all, I would say a quarter with fairly few surprises compared to what we planned for, and we saw what we expected to see in Q3. Moving then over to our transition into fossil-free steel, this is one picture from a seminar we held in Stockholm together with POSCO, where we invited all the major steel producers in the world into Stockholm.
We had more than 125 participants , at Fotografiska Museet in Stockholm on this Hydrogen Iron & Steel Making Forum. We had more than 1,000 participants over the web for two days. Huge interest to inspire each other, learn from each other, and develop ideas and look how we can do this as an industry together going forward. Very, I would say, inspiring and positive event. If we look at how we work with customers, we continue to see a strong demand for fossil-free steel, and we during Q3 announced our first North American strategic partnership with Oshkosh, a big producer of commercial vehicles. They are now a partner and will get fossil-free steel and start to produce their applications in fossil-free steel.
We also, during Q3, saw Volvo trucks beginning to do small scale introduction on fossil-free steel in their heavy electric trucks. It is moving on, and if anything, the interest and the demand is increasing day by day, week by week, month by month, which is very positive. If we look at our own possibilities then, we got an approved application for the 230-kilowatt cable power lines to Oxelösund from Energimarknadsinspektionen. That will be most probably appealed, but now the process have started, so we know that we will get electricity. We don't know exactly when. We continue with the feasibility studies for our planned MiniMills in Luleå and Raahe, and they are moving on according to plan.
What is of course important is that this transition, not only for SSAB, but I would say for a large part of the industry, will require sufficient availability of fossil-free electricity, both in Sweden and in Finland and elsewhere. We need to have that at the right place at the right time, and that is something that we are working very hard with. Another topic that is really hot is what we call level playing field, and we work a lot with politicians, and we need to intensify that work with the new Swedish government, but also with the Finnish government and with the European Union to make sure that there will be a level playing field across Europe regarding state aid for the transition.
During October, in conjunction with this conference I talked about, fossil-free iron and steel making, the Hybrit Development also filed a number of patent applications to the European Patent Office. What we have done in Hybrit together with Vattenfall and LKAB, we have developed a method to produce fossil-free sponge iron that has much better qualities and much better handling properties than if you produce DRI using natural gas as an example.
That we have filed for those patents, and then we need to decide within Hybrit in the future how we share that and license those findings out. These are important patents that saves not only a lot of costs, but also gives a lot of positive benefits to the quality. With that, Leena Craelius, I hand over to you to go through the financials and come back in a couple of minutes, go through the outlook for Q3 and sum it up.
Thank you, Martin. Good morning, all. Let's go through the familiar slides. Again, let's start with the shipments. Performance Q3, it was 11% lower compared to the previous quarter, or 14% lower compared to previous quarter and 10% lower than last year. In the outlook, we were indicating somewhat higher volumes than what the outcome was. If we look at the sales profile or graph, we can see that there was a reduction versus Q2, but it was actually less than the reduction in the volumes. Prices were still holding on average level pretty well. If we compare to the previous year outcome, the sales is still 25% higher. Pretty different view this year with the prices.
If I summarize the year to date volumes altogether, year to date, we are 10% lower than last year. If we look at then this so-called division mix, we can see that the Special Steel division volumes have reduced less than the others. We could indicate that the mix this year with the product mix is better compared to previous year. That's of course, somewhat also visible in the sales graph development. EBIT reduction from previous quarter, but still, the segment total EBIT higher level than last year and also visible in this graph. We are SEK 1 billion higher than last year, Q3. If we then dig into more details, this is now comparing Q3 result compared to last year.
Biggest positive impact with price and product mix, and all the divisions contributing positively with their price development. Special Steel prices are 50% higher, Europe division over 20, and SSAB still over 30% higher. So big impact with the prices. Volume, as said, was 10% lower than last year. Here we have the least reduction in Special Steel volumes, and the biggest reduction compared to last year is now in the Americas volumes, and that's mainly related to the maintenance break that we had this year. Last year, we didn't have the maintenance break in the U.S. Also here as Martin already indicated that the reduction in demand is hitting the volumes of Europe division.
Variable cost, we were telling that there will be an increase in the variable cost for Q3, and that's the reality and the outcome visible here. Iron ore actually is on a bit lower level than last year, but then the coal prices are twice as high, PCI three times higher. One question you might have in mind is related to the energy. Energy from the total variable cost is less than 10%. Electricity in that 10% is only 3%-4%, and gas 3%-4%. But yes, we do see an increase compared to year-on-year. Electricity cost is around 50% higher, and gas even 70% higher. Small portion of this is related to energy cost, that we know.
To bear in mind that we are hedging electricity, and we are also producing electricity, and we are in some cases selling electricity externally. Those two should be netted. Fixed cost, yes, somewhat higher level, and this is now spread to the personnel-related cost and also materials and services. We have some 3% higher FTEs this year compared to last year. FX, and this is now revaluation of receivables, payables, and hedging, netted all together. Relatively small impact to the operating profit. Capacity utilization, this is positive, and this is now related to the maintenance we had last year in Mobile. That was in the middle of Q3, and this year it is actually starting at the end of Q3 and also continuing for Q4.
If we then compare to the previous quarter, as said, price is still on average level holding well, and this is actually now related to this divisional mix, as said already in Martin's presentation. Special Steel division still improving, doing well. Americas holding well. Then the Europe division, they're taking already the reduction in demand and prices. Volume, yes, lower than previous quarter. All the divisions had the maintenance outages starting in Q3. Variable cost in this comparison, the negative impact is less than compared to the previous year. Here we do get hit also in the iron ore cost. Europe division was consuming more expensive Indian and U.S. pellets, which were compensating the Russian pellets.
Coal prices also depending on the mix, 10%-40% higher, and the PCI is still twice as expensive compared to previous quarter. This all summarized together, and also here some increase in the energy cost, but less now quarter-on-quarter. Actually, the gas price has already sort of leveled out, so the increase is only 10%, and in the energy cost we are talking about electricity cost increase of 40%. Fixed cost, and this is now related to the seasonality. We have this release of vacation pay accruals, having a positive impact quarter-on-quarter. Then the capacity utilization, that's related to the maintenance breaks with all the divisions.
Maintenance starting in Special Steels at the end of Q3 and taking place in Americas throughout the quarter in Europe division. If we look at the cash flow, EBITDA quarterly comparison for last year, still on a higher level than last year. Of course, compared to year-to-date figures, we are almost doubling. The change in working capital has a big negative impact. Yes, we are aware that we have high raw materials. We have also increased other inventories. We could say that half of this increase is related to the raw materials, and half of that is volume and harvest value, as already discussed in the previous slides, that the cost of raw material is high.
We were buying excess safety stocks due to the sanctioned raw materials that we were previously buying and then compensating with other suppliers. We have excess. Also at the time when we were buying, the production plants were on a higher level than what they are now. The strong focus in the organization is to release the working capital during Q4. Maintenance CapEx rather well in line with the plan, somewhat higher than last year level. Still high taxes. High level of taxes will be paid also during Q4. That we know already. Just below zero, the net cash flow, it was still improving throughout the quarter, improving in September, and of course the goal is now to improve during Q4. Strong financial position.
End of Q2, we were on the level of, I think it was 7.2. We are here seeing now impact of this revaluation of financial assets and liabilities, and those are related to U.S. dollar. It is now boosting this figure definitely during the quarter. Raw materials, iron ore prices have stabilized a bit already compared to last year level, already lower level, and this we foresee to continue as such. The thing that will impact our result is the coking coal. Here we can see that the increase year-on-year remarkable over 300%. We do have high level of inventory, so this will still come through during Q4. We have not sort of consumed all the inventory, expensive inventory, during Q3.
We foresee it will remain high. We are not having PCI coal here, which is similar to this graph, and that will also continue on a high level during Q4. Scrap prices, we can see that it has reduced and, of course, this is then supporting the margin in Americas during quarter four. The maintenance, this is something Martin already covered. Yes, we have updated some plans and also the figures here related to SSAB Europe. We have added the maintenance cost and absorption variance cost related to the blast furnace repair during Q4, which considered, of course, to be a good decision at this point. Martin will continue with the outlook.
Thank you, Leena. If we look at the segments for Q4, I would say fairly neutral in heavy transport and automotive. Of course, some risks with the production stops for heavy trucks in EU and further production stops within automotive. Overall, I would judge it as fairly neutral. Construction machinery, we see a slowdown in Europe. China continues to be weak, but stable underlying demand and stable demand in U.S. Material handling, good demand from mining and recycling for the coming quarter. Energy, we see improved activity in oil and gas, which is important for us in U.S., and also good demand in renewables.
Then construction, of course, slow in Europe, slow in the Nordics, and service centers on the sideline with low inventory levels in U.S. and more normal or slightly high inventories in Europe. Overall, I would say especially in Europe, or in Europe, a more, call it, wait and see for Q4. Always, when you enter into Q4, the million-dollar question is what will be the deliveries the second half of December and especially between Christmas and New Year? Will the companies take the opportunity to take outages due to high energy costs and so on? Well, remains to be seen, but we have the order book for Q4 pretty much in hand. We know how it would look in a normal situation at least.
We have a good order book for Q4. If we then look at prices and shipments, we have talked about the weak European market, the stable heavy plate market in North America, and also decent underlying demand in Special Steels. We expect somewhat lower shipments in specialty steels, stable shipments in Europe, and higher shipments in Americas due to the outage. Somewhat lower prices for specialty steels in Americas, and significantly lower prices in Europe. To sum it up, strong earnings for specialty steels in Americas, continued good trend in our journey to build the safest steel company in the world.
As Leena said, we took decisions this spring to build working capital for raw material, and we also during Q3 seasonally build working capital, and you should expect us to release working capital in Q4. Uncertain market outlook, but what we have done the last couple of years is clearly improved our ability to manage downturns. We have flexible manning. We have we are reducing our temporary employees. We have a better product mix. We have done a lot of things. I would claim that we are a different company compared to five, seven years ago, and we will continue to develop those abilities. The plan for fossil-free steel production is on track. We are shipping pilot shipments to partner customers, and they are ongoing. The interest is huge.
We could ship much more if we had the ability to produce it. The transition requires sufficient availability to fossil-free electricity, and that is a challenge in Sweden. It looks different in Finland, but I think the new government in Sweden need to take this seriously and speed up the process. We will continue to push for a level playing field when it comes to state aid within Europe with the new Swedish government, with the Finnish government, and with the European Commission and European Union. With that, Per, I guess there are some questions that needs an answer.
Yes, then we can start the Q&A session. Yeah, for you in the room here, you can present yourself and your company also if you would like to ask a question. We can start there. Is there any questions here from the floor? Okay. We can turn to the phone lines. As a general guideline there, you're most welcome to ask several questions, but please state them one at a time to facilitate the process in answering. With that, I will ask the operator then to please present the instructions.
Excuse me, this is the conference call operator. We will now begin the question and answer session. Anyone wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. The first question is from Alain Gabriel with Morgan Stanley. Please go ahead.
Yes, good morning, everyone. I have two questions. My first one is on your green steel transformation. Your peers in Europe are receiving significant financial support for their programs in spite of your Hybrit being probably far more advanced and more viable than most of what is being built on the continent. Is there a reason why grants and other forms of support are lagging your peers? Is there anything that the company should be doing to speed up the process? That's the first question.
No, you're absolutely right, and we are pushing hard for that. As said, not only now we have a new government in Sweden, we will continue to push hard for the new government. We will continue to push hard in Finland, and we'll also continue to push hard for the European level. I think we still think that this could have been done by the industry itself, but it is so important that we have a level playing field in Europe. If others are getting supports, we need to do that as well. As you said, we are developing a new technology, a new way of producing steel. I think we should be treated at least as anyone else.
It's an ongoing work where we will.
Okay. Thank you.
Continue to have a strong focus.
Very good. Thank you. My second question is on capital allocation. Your cash balance continues to build, and you probably have a higher quality and more cash in your business than you have ever had in the past.
Mm-hmm.
Given this backdrop, do you think that your capital allocation framework has become obsolete and needs a major revamp? Thank you.
Let's come back to that.
All right. Thank you. That's all from my side.
The next question is from Tom Zhang with Barclays. Please go ahead.
Yes, good morning. Thanks very much for taking our questions. I've got two as well, please. The first one, just on volume and pricing dynamics for Q3. Clearly relative to previous guidance, you had sizable beats on realized pricing, but misses on volume, which sort of implies a value over volume approach. A, is that what you've actively been doing? Two, how sustainable do you think that strategy would be into what looks like a weaker market in Q4? You know, what are the risks of losing out on market share?
No, on the margin, we have done that in Americas and in specialty steels, so kept up the prices and we have a strong market position, and I think that was, of course, the right decision to do, and we will continue to monitor that closely. Of course, in Europe, we were losing volumes given the market. I would say in relative terms, we were standing still in some color coating lines and some galvanizing line and in some cut to length lines. Overall, I think we managed Q3 in a decent way given the circumstances, and we haven't seen the reports from other steel companies, but my guess would be that we have managed Q3 quite okay.
Okay, thank you. The second question, Leena, you mentioned you're generating your own energy, in some cases selling it third party. With the Raahe outage, are you going to be slowing down sort of coking and similar as well? Or will you mostly keep it running to benefit from off gas generation? Maybe if you could just give an idea of how much contribution to earnings that sort of energy side makes up.
The problem with coke oven battery is that I mean, you start them and then you run them until you stop them, and then you never start them again. We will continue to run the coke oven battery. We will take down the blast furnace for six to eight weeks, and then we will produce coke, and we can also then produce electricity in our power plant in Raahe from those gases. We will continue to do that. Maybe have slightly less consumption of electricity ourselves and then on the margin sell more to the market.
Could you help us with the quantum of how much electricity you're selling or how much revenue that makes up?
No, I really can't. As Leena said, electricity is around 3% of our total costs, and we produce roughly 50%. If you take away U.S., which is a different story, we produce roughly 50% of what we consume ourselves from using gases then and producing not only district heating, but also electricity.
Okay. That's clear.
It's not.
Maybe just one more on the Raahe. Sorry.
What I'm trying to say is that it's not a game changer in any way.
Sure. With the Raahe outage, I mean, if the market stays where it is, would you bring it back today or would you rather keep it on maintenance, at the end of that, 6-8 week period?
That of course remains to be seen. What we have decided now is six to eight weeks, which I think. This is a timing issue. I think the timing is good to do it now. We need to do it anyway, and we expect the market to be better within a year or within one and a half years. Depends. I mean, there is an uncertainty in Europe, of course, given the war, the inflation, the energy prices, of course, for Q4. We don't really know how Q1 will look either. Of course, if worse comes to worst, we have a possibility to prolong that outage if the market so requires. That's not the current plan.
Okay, that's clear. Thank you. I'll turn it back.
The next question is from Tristan Gresser with BNP Paribas Exane. Please go ahead.
Yes. Hi. Thanks for taking my questions. The first one is on the U.S. plate market. We've seen prices come up a bit and they are now stabilizing again. Can you discuss about the dynamics in the market there? Maybe is there now a structural reason for higher premium versus HRC than in the past? It's been some quarters we talked about it, and every quarter you're kind of surprised to the upside. Also you mentioned the infrastructure bill. Have you quantified the positive impact in terms of demand for this market?
To start with, I mean, last year we saw strip prices being higher priced than plate prices, which is typically abnormal. Now we see a more normal pattern. I agree. I mean, the difference is, at least from an historical perspective, quite high. We have seen plate prices coming off a bit, but we have also seen raw material prices coming off. We still have good margins in North America. I would say historically high margins. That will of course. I mean, to be honest, the most volatile business we have is typically over time, at least, the U.S. standard plate market. We have seen some changes also structurally in U.S. We have some of our competitors that are dependent on imported slabs that used to take it from Russia.
That is not possible anymore. On the other hand, we have in end of Q4 or beginning of Q1 a new facility coming on stream, not mainly targeting our segments and customers, rather some of our competitors. It is hard to see exactly whether this will go midterm. For Q4, we are fairly confident because we have the order book. When we look a bit more long term, we see possibilities without having quantified them externally. We see possibilities with this infrastructure build and also the need for other types of segments to invest that requires plate.
Okay. That's very clear. My second question is, if you can discuss a little bit the patents you flagged with the Hybrit technology. Am I right to understand that anyone using a DRI plant with hydrogen will do something similar to what you've been doing? And how does that work with those patents? And also, it was pretty interesting the press release you had on the superior mechanical properties using hydrogen with the DRI facility. If you can also comment about that and give us some details on that. On what the findings are, that would be appreciated. Thank you.
First of all, we have filed for a patent. We haven't gotten the patent yet, but we have filed for a patent. Exactly as you're alluding to, I mean, these are very much about mechanical properties. Typically, when you produce this type of DRIs, you briquette it, so it's called HBI, Hot Briquetted Iron or HBI. You need to briquette them. We have developed a technique where the mechanical properties and other properties are so good, so you don't have to do that. You can skip one step, and then you have a much easier to ship it because it will not fall apart, and it will not either take back any oxygen into the iron.
If everyone else needs to use this or not, I'm not sure. There are probably other techniques, but this is a very cost-effective and technique developed by Hybrit with good mechanical and other properties. That's why we thought it was so important. We thought a bit about if we should keep it secret or try to patent it, and we decided to patent it because that also gives a possibility, if it would so decide in the future for Hybrit to license out the technique.
Very interesting. Thank you.
It is very interesting, and we are, to be honest, extremely proud of the Hybrit Development. We have put a lot of efforts in together with Vattenfall and LKAB into R&D and a lot of money into it. We are quite proud so far.
Thanks.
The next question is from Rochus Brauneiser with Kepler Cheuvreux . Please go ahead.
Yes, good morning all, and thanks for taking my questions. I have a follow-up question on your Q3 production. I think looking at the Europe segment, it appears that you have overproduced crude steel by some, let's say 200 kT. To what extent is that higher crude production attributable to, you know, weaker apparent demand coming from destocking? And to what extent have you been surprised negatively on the end customer demand? A bit more flavor. What went wrong on the volume side would be appreciated as the first question.
No, we have been having stable and good production in the hot end, and we have been producing slabs in advance of outages. We have, I would say, on the margin, too high slab stocks, and that's why we also took the decision to take this outage in Q4 and to consume the slab stock. We can, if the market improves, improve slab production in Oxelösund and Luleå to some extent to mitigate that. I mean, this is a decision that we took because we expect the market to continue to be weak. We have good slab availability, and the timing was good to do that 12-18 months in advance of the plan to handle, among other things, the slab inventory and to release working capital.
Okay. Great, Martin. Would you expect, based on the realigned decision in Raahe, that the excess slabs you're holding are being removed by the end of the year, which would then lead to corresponding working capital releases? Is that what we should expect?
You should expect a decent working capital re-release in Q4, not only from slabs, but also to some extent from finished goods and from raw material. Because as said, we have been buying. We took the decision to be better safe than sorry during the turbulence this spring, where we decided to stop buying PCI coal and coal and pellets from Russia.
We had to find new suppliers. Then when you also find new suppliers, you need to buy a bit more than you actually need because you need to test the material in the blast furnaces and so on. That was a decision we took at that time, and that was the right decision. Now we have slightly higher stocks or higher stocks than we need, as Leena said during her presentation, and we will now consume that in Q4 and partly in Q1.
Right. Looking at the European market a little bit more holistically, I think you're now joining the party of others who have already taken decisions to take out capacity, and it appears that probably most of this is now concentrating on the Q4. What is your sense about the market evolving from here? I think some marginal production in Europe is taken out, wherever the energy costs leading to negative contribution margins. Do you think this can be handled by the market itself, or is there a risk that the imports are pushing more into the European market? How do you think this is playing out into the first part of next year?
One of the big exporters into Europe is gone now. I mean, there is no Russian material in Europe. We still have the slab imports, but that will gradually been taken down now to due to the new sanctions to the re-rollers. Yes, there could be from time to time import, and there will always be import into Europe. I think the steel industry as such has learned a lot over the last number of years, and in a normal business cycle, there is a very limited structural overcapacity left in Europe. I think my guess would be, without knowing, that the steel industry can handle this in a much better way than we did a couple of years ago, at least. Then it will be dependent what will the demand be then?
I mean, especially during the winter with energy prices, and especially during the second half of December, will customers take the opportunity to stand still due to high electricity prices and so on? I mean, that is what we are preparing for, and then we'll see how it plays out. We have a decent order book for Q4. For us it looks, I would say, almost okay in Europe in that aspect.
Okay. Yeah, got it. Maybe last final one on Special Steel. Compared to what you guided, volume turned out to be weaker, pricing came in quite strong, actually. Can you explain a bit more in detail the moving parts, why the quarter came out, turned out to be a bit different to what you expected?
We took a decision during the quarter to focus on price efficiency and did the calculation and the math and this was how we decided to run it. For Q&T, the underlying demand is still very strong, and we have a strong order book for Q&T into next year. What we have seen some effects is on advanced high strength steel and hot rolled products, where we have seen a slowdown. Apart from that, for Q&T, very good demand.
Okay, excellent. Many thanks.
The next question is from Patrick Mann with Bank of America. Please go ahead.
Thank you very much. I wanted just to maybe come back to Alain Gabriel's question on capital allocation. You know, big net cash position, working capital release into Q4 and Q1. What are you gonna do with all the cash? Thank you.
Well, as I've said many times before, that is a very positive problem. Of course at the end
Mm-hmm.
Decision for the owners, because this is not our cash, this is the owners' cash. There are different techniques for that, and all of them requires a decision at an EGM or an AGM. That is still my answer. You should expect us to, over time, even though we didn't do that in Q3, for obvious or explained reasons, continue to generate good cash flows. That is what we are focusing on. Then the rest is fairly easy to solve and a positive problem to solve.
Okay. We should wait for an AGM or for
No, I'm not saying that.
for a change in policy or.
I'm saying that some of the decisions to use that is decided by the AGM. I mean, as I see it, my responsibility and the company's responsibility is to continue to generate strong cash flow, and that's what we are focusing on.
Got it. If there were to be an update to capital allocation policy, can you give us any idea on timing or?
As I said, let me come back to that.
Okay. Maybe just a follow-up on the hydrogen DRI. I agree with the previous caller who said it was very interesting. I mean, these mechanical properties and what you're patenting, is it specific to hydrogen DRI, or do you think it could be applied to even natural gas DRI as well? Could you end up licensing this?
To be honest.
Natural DRI?
I don't know. I know it is attributable to hydrogen production and that we get better mechanical properties than if you would do the same with natural gas.
Mm.
I need to check with Martin Pei and the technical directors. I'm not an expert, but I know that the patents and the technique we have developed is very promising. As said, we are happy and proud about it within the Hybrit project.
Mm.
If that could be used. If I would guess, and I shouldn't guess, but if I was forced to guess, I would say probably not. But I don't know, to be honest. So take my guess for what it is.
Okay. Thank you. Very interesting. Thanks very much.
The next question is from Moses Ola with JP Morgan. Please go ahead.
Hi. A strong set of results. The only thing that obviously sticks out is the working capital build, and you touched on it briefly. You mentioned 50% of that is high raw materials, and you spoke on, you know, releasing finished good inventories over the next few quarters. How much of a release in finished goods could we realistically expect? You're guiding for lower shipments, which will probably continue for the next few quarters. Once Raahe comes back online, you're again probably producing, or you're tracking higher productions than shipments. You know, how much of finished goods release could we expect realistically over the next few quarters? And then also, could you give any color on the volumes from the Volvo offtake and any guide on volumes for fossil-free steel near- or midterm?
First of all, we are not guiding for any working capital release. We have, of course, internal targets that we are following up every week with the divisions, and Leena is leading that work. We have these operational calls as always every Monday 4:00 P.M. with the division heads, me and Leena, and this is on top of the agenda. I'm not super worried because we have managed to do this before, and we have good plans in place to do this. Exactly, on the Krona, how much it will be, let's come back to that, but it will be a working capital release in Q4.
When it comes to the second question, volumes, the problem we have today with fossil-free steel volumes, we are using the pilot plant, and then we are melting the produced fossil-free sponge iron in electric arc furnaces. We only produce one ton per hour when we are running the campaigns. There is a, I would say, huge interest among our partners to get those volumes and we have started with Volvo and some others. We are also building up the market for 2026 when we are going to produce in a larger scale and to start with in Oxelösund to some extent in Borlänge. We're building up that market together with partners and as well, starting to qualify products and volumes and so on.
We have also developed a small scale but very interesting own production of fossil-free steel powders. We are now with customers also starting to 3D print prototypes and so on in fossil-free powder, where we use offcuts, which you always will get from when you produce steel. We use the offcuts for fossil-free steel, produce powder, and then work with customers. We have invested in 3D printing.
We are not going to become a big 3D printer, but we are going gradually to increase our capabilities of producing fossil-free powder for 3D printing. It is a struggle to find the best homes for the volumes we produce today and at the same time build the market for 2026 and onwards. Unfortunately, we don't have yet the capacity in the pilot plant, of course, to fulfill the demand we have among our partners.
Thank you.
The next question is from Christian Kopfer with Handelsbanken. Please go ahead.
Yeah, thanks for that, operator, and that at the conference call here on the panel. Apologize, Martin and I gave all of the answers to these questions, but still a couple of questions from my side. Firstly, it's about specialties, say, in the midterm for 2023, 2024. Maybe for you, Martin, are you still sticking to your target to ship 1.6 million tons of specialties, Special Steel volumes next year?
Yes.
Very clear to you. Thank you for that. Secondly, it's about Hybrit and those sponge iron volumes that you plan to feed into Oxelösund, 2026, if I remember correctly. Are those sponge iron volumes fully expected to come from Hybrit, or are they expected to come also partly outside of Hybrit?
No, from the Hybrit project, and then we'll see who will be the actual producer, if it will be Hybrit or LKAB.
Oh.
It will be a Hybrit technique, and it will be Hybrit sponge iron. We are not planning to buy any external, fossil-free sponge iron. We will produce it within the cooperation of Hybrit and use this new technique and these patents and use that sponge iron. Then of course, we have the possibility also to use scrap if so required.
Yeah. I just wondered, Martin, if when you will decide if the production will be in Hybrit or if it will be in LKAB, when you will decide that?
Well, we are discussing that within Hybrit and no decisions taken yet. It could be either or.
All right. For the full CapEx program for Oxelösund, that's still valid that you have seen previously?
Yes.
Right. Just to follow up on that, Martin, because we have seen, you know, giant cost inflation across the industry. How are you able to maintain the CapEx budget despite everything going up?
Well, budget is always a budget, and we have seen cost inflation. We will see also. I mean, prices are moving up and moving down. We haven't. But so far we have not really changed the big picture when it comes to the budget. That means, of course, that we had.
Okay. Thank you.
We had in that budget some contingencies and other.
Of course. Yeah. Thanks.
The next question is from Bastian Synagowitz with Deutsche Bank. Please go ahead.
Yes. Good morning, all. I've got a couple of questions left, and I'd like to start with costs, please. You say costs are going to be stable, and of course, there's still more expensive inventory you will have to chew through. Overall, I guess the raw material basket and also energy costs will give you some relief over time. I understand you probably have also built in a bit of cushion for scrap prices, which may typically rebound for seasonal reasons. Would you still describe your cost guidance as conservative from today's point of view? I'm asking because in each of the last quarters, you kept parts of your guidance framework on the very conservative side and then basically kept delivering better. That would be my first question.
Well, I don't know, Leena, are we too conservative?
I like to be conservative.
No, I don't think that we are too conservative.
Yeah. No.
I mean, we are trying to describe the situation we see and the outlook we see, and then obviously we missed on volumes in Q3, and that happens, but we are not sandbagging or trying to be conservative or anything. We try to describe
Mm.
What we see and what we expect. I would hope that we are often right and sometimes we are slightly wrong.
Fair enough. Thanks for that. Secondly, could you give us some sense on how far you're currently utilizing your capabilities on the defense-related segments, and do you still see a growing order book on that front?
Unfortunately we see a growing order book on that front, and that is not, I mean it is positive for SSAB of course, but not positive for the world. We expect to deliver somewhat more to that segment next year compared to this year. It is, I mean we are fully booked in. We're fully utilized in Oxelösund, so it's about also shifting the mix. Even though we talk a lot about specialty steels, there are a lot of different products within specialty steels as well, where we try to improve the mix all the time. We divide it into what we call specialty products and call it mainstream, then the Hardox and the ones.
Within specialty products, Armox is one example with, I would say, good profitability. We are trying to meet the market demand, but also over time, not only for Armox, but for the specialty products, increase the volumes, which makes a difference also in specialty steels.
Yeah, sure. Of course. I think it's obviously much, much more profitable. Can you give us a little bit of sense on the quantity of the volume growth? Is this gonna be maybe even like 100,000 tons?
No.
Of growth that you could be showing year-over-year?
No, not that much. It's more on the margin. I don't know, Per, what did we sell last year? Was it 10,000 tons or?
Yeah, something like that.
Fully last year.
10,000, 20,000.
Yeah. 10,000-20,000 tons. It will not be another 100,000 tons.
Lastly, coming back on your green steel strategy. We obviously have seen electricity prices have increased a lot, even in the northern parts of Sweden. As you say, availability of large amounts of cheap and green energy will obviously be key for your decarbonization plans. What is your view on the current situation? Do you see more competition for this cheap electricity already? Also, have you already signed any larger PPAs, and what would you pay if you were bidding in a PPA today?
No, but we have a fairly good idea of what we would pay if we signed it today, but this is premature. We have not done anything like that yet. I mean, this will require, and the plans in Sweden and Finland are to build out fossil-free power generation and also build out over time transmission capacity. The biggest question is the relative price in the future in the Nordics compared to call it mainland Europe or Germany, France and so on. That we are looking into as well. We are pushing hard for now that I mean, not only SSAB, but the industry needs more fossil-free power generation. I think the new government has recognized that as well. It will be a continued intense dialogue with the Swedish and Finnish government.
Basically the increase is nothing. See, what you're sort of betting on is the spread versus mainland Europe. That's what is ultimately relevant for you?
No better than betting, but I mean, there are so many factors you need to take into account. Costs of emitting carbon dioxide, the relative electricity price, the cost of producing sponge iron. There are a lot of factors to take into account and that we are drawing different scenarios on. When we do that, we see that for SSAB and also given what you can get for fossil-free steel in the future compared to the cost and what you can get for non-fossil-free steel in the future compared to the cost of producing it. We think this is the right way to go for SSAB.
We also need to remember that over time we talk about more or less the same amount of money between the two options of investing in new production sites, Mini Mills, or to keep the existing production sites alive. We'll get much more flexibility and much more effective production with much lower lead times. There are a lot of moving parts in this calculation that you need to take seriously and do a lot of different scenarios and thinking around.
Okay, perfect. Thanks, Martin.
The next question is from Grant Sporre with Bloomberg Intelligence. Please go ahead.
Good morning, and thanks for taking my question. I've just got two. The first one is on Tibnor, and you've obviously had a sort of an inventory revaluation loss in this third quarter. My first question is this, you know, done? Do we sort of get a return to more, if I can use the word, more normal inventory position and, let's say, repricing environment for the fourth quarter.
That will of course depend on the price, where the price is moving in Q1. I mean, what we have seen during the first half of the year is positive revaluation of inventories, which is typical in a wholesale business like Tibnor or a stockholder business like Tibnor. Then we saw a reversal of that in Q3 with writedowns or negative revaluations. In Q4 it will be dependent on where the prices will move in Q1 when you do the revaluation at the end of Q4.
Okay. Got it. All right. Got it. Thank you. My second question is, and Leena alluded to it. In terms of, on your cash flow statement there is, you know, the other financing activity, and I think that refers to the revaluation of some of your U.S. assets.
Yeah.
I just wanna make sure that I understand that dynamic correctly. Let's for instance, say we had a revaluation of the Swedish krona versus the dollar.
Mm-hmm.
Would that turn negative going forward?
Well, depending on the FX rate development, yes. If we compare to last year to date outcome was negative, and this year, now that the Swedish crown is weaker, it's the opposite impact. That is depending on the FX definitely.
Okay.
I said it is mainly U.S.
Fair enough. Sorry, I mean.
U.S.-based assets that are bringing this positive impact in this quarter. That is a quite substantial positive impact. Yes.
Got it. Okay. Thank you very much.
The next question is from Andrew Jones with UBS. Please go ahead.
Hi, Martin. I'm just curious about the progress of this 1.3 million ton sponge iron project. You talked about, you know, it still being up in the air as to whether Hybrit or LKAB operate the project. Given the fact that you've all jointly funded this, jointly agreed some European financing, and the IP is within Hybrit, is there a risk that you do not see a third of the profits from this project? I mean, could LKAB essentially do it fully on their own? And how do you get compensated if they do operate the project alone? Fundamentally, how, I mean, how do you see yourselves as a company going forward? I mean, do you see where you add value as being on the steel side, or are you know, very keen to move upstream and do more on the sponge iron, going forward? Thank you.
First of all, I mean, regardless of who will actually operate the demonstration plant, all the IP and all the knowledge will be within Hybrit Development, the company that we founded together with LKAB and Vattenfall. Secondly, I think it's so important to remember that SSAB has not changed our strategy. We will still continue to focus on mix improvement on Special Steel volumes to grow Special Steels where we have much more resilience over the business cycle, where we have better profitability over time, and where we have a very strong position globally. What we are changing is the way of producing steel in order to get rid of carbon dioxide emissions, which is one of the biggest problems within the steel industry.
As you know, the steel industry stands for almost 10% of the global emissions for carbon dioxide, and we need to do our homework. We have not changed our strategy. We will continue to focus on Special Steels. We will continue to focus on advanced high-strength steels and other niche products within SSAB, and continue to shift the mix to more and more profitable and advanced products. We will change the way of producing it, and we will do it in a more flexible and cost-effective way, and also in a way that avoids carbon dioxide emissions. That is SSAB.
Okay.
That will continue to be SSAB strategy.
You don't see it as a priority to control the upstream, you potentially would be happy to buy it from a third party?
We are buying pellets today as iron units, and for me it's not. That's not the big question. The important part is that we are a part owner of the technique and the patents that we are developing within Hybrit. Then we need to discuss within Hybrit and together with our partners who will actually operate, and that could differ. I mean, we have all three of us or both SSAB and LKAB have the possibility to operate plants like this. It could look one way in Sweden, another way in Finland, and a third way in U.S.
Okay. Cool. Thank you.
Gentlemen, there are no more questions registered at this time.
Okay. We can conclude today's conference. Thank you, Martin and Leena, and thank you all the audience for listening in. Thank you for all the attention, and we wish you a nice day.
Thank you very much.
Thank you.