Ladies and gentlemen, welcome to this presentation by SSAB of the Q1 2018. Especially welcome also to you that follow us via the webcast. My name is Per Hillström. I'm Head of Investor Relations at SSAB. And this is the agenda for today. We have our President and CEO, Martin Lindqvist, will take us through the Q1 performance by division. We have our CFO, Håkan Folin, will talk about the financials. Martin will come back here and talk about the outlook. And after that, we open up for questions, both here in Stockholm, from the floor, and also from the phone lines. So by that, please, Martin, take the stage.
Thank you, Per. To start with some kind of summary, I would say that the market is quite okay. I think we generally see good demand in most markets, most segments. We saw that in Q1. We see that going into Q2 as well. I also think that we saw good demand and good development in our strategic growth areas, Q&T, automotive, and so on. When we look into Q2, we have a positive outlook when it comes to volumes and prices. We improved earnings. We had internal inefficiencies. I will come back to that, or operational headwinds. I will talk a bit about HYBRIT, and I will also mention that we, or the AGM, decided also to take a dividend again in SSAB, which I think is a sign of strength.
But to start with the part where I'm not happy is this picture. We had two bigger disruptions or disturbances during Q1. First of all, we are very dependent on the railway between Luleå and Borlänge to ship slabs. As you know, we have the slab facility or the hot end up in Luleå, and then we have 900 kilometers of train transport down to the rolling mills in Borlänge. This Q1, there was lack of rail cars. A lot of the rail cars were being broken and being repaired, and then we suffer. We can't really feed Borlänge with slabs. We try to mitigate that by shipping by boat to Oxelösund, and then take it up by railway to Borlänge.
But when this happens, we lose rolling capacity, or we lose rolling volumes, we lose delivery volumes, and we have higher transport costs. That is sorted out. It was during Q1. Now, the winter is more or less gone, not completely gone, but the trains are moving again, as they should. The second part where we were incapable or had problems was in Oxelösund. When we are tapping the blast furnace, you drill a hole in the tap hole, and you need to drill it in the middle, and we have a laser pointing out where to drill. We missed, and we hit the mantle, so we had to stop the blast furnace for two weeks for repair, and then we lose production, slab production.
And then we had,I mean, when you lose slab production, you also lose rolling, so we lost 2 weeks of slab production or steel making, and we lost a bit more than a week of rolling, and that gives lower volumes and higher costs. This is also sorted out now into Q2. But these are. So if the external factors are with us, during the Q1, we had internal problems or disruptions or disturbances during the Q1. Taking a look at the market and prices on decent levels, we have increased plate prices in U.S. with $200 per ton so far this year, and you see this is spot prices.
They are on a high level, and if you measure spot prices for plate over spot prices for scrap, we are on margins that we haven't seen for a while. So I would say that market is good, prices are decent, and the inventories in the supply chain are not extremely high. They are on a good or, or even a low level. To sum that up for SSAB, we made an EBIT of SEK 916 million in the quarter. Higher prices, higher costs of raw material, Håkan will come back to that. The production disruptions, but still ended up 200 better than a year ago. We had a decent operating cash flow. Håkan will come back to that as well, SEK 761 million, and we continued to decrease the net debt during the quarter.
We look into the divisions, Special Steels. I would say good demand in most markets or all markets, all segments globally. Good growth, volume-wise, and we saw prices moving up in Q1, which we expected. We had higher cost of raw materials in Oxelösund, and then, of course, affected by the standstill in Oxelösund, in the blast furnace and the rolling mill. Europe, good demand continued in all segments. EBIT was down compared to Q1. We had higher prices, higher raw material cost, transportation issues also leading to lower volumes. Shipments lower than one year ago in Europe. Americas, we saw the positive trend during the quarter. So March was definitely better than January. And we see that demand continued to improve during the Q1, and prices continued to increase during the Q1.
As you know, spot prices increase, you will see the effect in SSAB's figures, but there will be a delay, of course, due to contract structure and so on. The result was up compared to last year, higher prices, higher volumes, but last year, we had the maintenance outage in Mobile in Q1, Q2, which we didn't have this year. We also saw higher scrap costs, but we saw margins gradually improve during the Q1. Tibnor, for flat products, I would say decent development. What we suffered from was building-related products or building-related volumes, where we had lower shipments during the quarter compared to one year ago or compared to the Q4. And Ruukki Construction affected by the harsher winter than we had a year ago.
So if there is a lot of snow, there are no roof repairs, and so on. So, so we definitely felt that during the Q1, and sales were lower than one year ago when we had a milder winter. So when we sum up it, we see lower volumes and lower margins, but this is, I mean, call it an accelerated seasonality than due to, to a lot of snow, especially in the Nordic region. Håkan?
Thank you, Martin. Good morning, everyone. I will, as usual, take you through some more details on the numbers. We'll look at the bridges, cash flow, and also the debt situation, and raw material. I will start with this overview, and we can see again, that despite the issues Martin mentioned, we see an improvement year-over-year that continued. Actually, on all these parameters, if we start with sales, sales is up 10% compared to Q1 last year. Shipments are up 4%. On EBITDA, we went from SEK 1.6 billion in Q1 last year to SEK 1.8 billion this quarter. And EBITDA per tonne delivered steel from around 900 up to 1,000 krona per tonne. So what was the drivers then of the improvement?
If we compare Q1 last year to Q1 this year, we went from 700 to a bit above 900, so a little bit more than SEK 200 million in result increase. We saw higher prices, and this was in all three steel division, Americas, Europe, Special Steel, mainly highest impact coming from Americas. On the volume side, it's a zero there, but it's some pluses and minuses. Higher volumes in Americas and Special Steel, offset by lower volumes in Europe, Ruukki Construction, and Tibnor. On the variable COG side, we had a negative impact of more than SEK 1.1 billion. If you only take the raw material part of that, it's actually SEK 1.2 billion, so basically offsetting what we have seen so far on the price increase side.
Then we have higher fixed cost in this quarter compared to last year, some higher activity level in the downstream operations, also general salary increases. What I think is important to mention, I think I did that last time as well, is that in terms of fixed manning, we are actually at exactly the same level that we were after we had finalized the redundancy programs at the end of 2016. What we have done to manage the increased activity level is that we are using more temporary manning, but fixed manning is exactly on the same level, so we can quicker, if and when the downturn comes, adjust our manning as well. We saw quite a lot of positive impacts from foreign exchange, SEK 280 million.
That's because the Swedish krona has strengthened against the dollar, and we buy for the Nordic operations the coking coal and the iron ore in US dollar, so stronger krona there helps us. On the other hand, the krona has actually weakened against the euro, and we have a lot of sales in Euro land, and then when we translate that back to Swedish krona, we get the positive impact. The last part here, other, is mainly due to that in this quarter we have higher, we are running the facilities at a higher pace. We have lower under absorption compared to last year. Well, all in all, adding up to a bit more than SEK 200 million improvement. When we look at it sequentially, you can see it's actually quite a small improvement in result. It's only around SEK 75 million.
But you should remember that in Q4 last year, we had SEK 265 million in compensation for the breakdown that we had in Oxelösund one year ago. So if you would adjust for that, the increase is around SEK 350 million. Higher prices compared to Q4, all three steel divisions, Americas, Europe, Special Steels, biggest increase in Americas. Volume moving upwards, Special Steels, Europe moving in the right direction, but Ruukki Construction, Tibnor, going down compared to Q4. And on the variable COG side, we see actually a higher increase than we see on the price side, given that the raw material has, I'll come back to that, but has increased quite a lot. Somewhat lower fixed cost, partly because we had a maintenance outage in Q4.
Also here, some positive effects for the same reason, and then other being around SEK 200 million negative, and the biggest portion then being this insurance compensation of SEK 265 million. If we look at the cash flow then, as Martin mentioned, we had a decent operating cash flow of SEK 800 million. We also had a positive net cash flow of SEK 300 million, and we did this despite having a working capital buildup of around SEK 800 million. And I think this all in all is rather okay if you look back at what we did in Q4, where we had a working capital release of SEK 1.7 billion. We typically have a working capital release in Q4 because we sell less towards the end of the year.
But this quarter, I would say, was extraordinarily large, and we had an operating cash flow of close to SEK 3 billion in Q4. So given that, I think what we achieved this quarter is actually still quite okay. And if we look at it at the longer trend, how does it look then? Well, this is rolling 12 operating cash flow from start of 2014 up until today. I would say we used to hover around maybe SEK 3 billion here, but now we are actually lifting ourselves up to SEK 6 billion. And when I look forward, we believe we can generate better profitability, helping cash flow. We will have a CapEx that's clearly lower than depreciation and amortization. We have potential to continue to reduce working capital over sales, that ratio.
We did that again in Q1, otherwise, we would basically not have been able to have a positive cash flow. With lowering, lower absolute level of our debt and also with increased credit performance, we will have lower interest costs and with a tax rate of around 20%. Adding these factors up, we are rather confident that we can continue and will continue to generate good, solid cash flows. I will not spend too much time on the balance sheet side, but, some words about our maturity profile and our net debt situation. We have, in the coming three years, 2018, 2019, 2020, around SEK 9 billion in maturities. Not so much in 2018, quite a lot in 2019, and then again, quite small amount in 2020.
We will, during this year, start working with how to improve the situation then for 2019, so we don't enter 2019 with that statement looking the same way. We have an overall duration of 5.5 years, so it's actually quite a long duration on that portfolio. On the net debt and on the net gearing, they both decreased somewhat during the quarter. Net gearing from 22% to 21%, and net debt is now down at SEK 11.4 billion. Coming back into the raw material, as I talked about in the bridges, we have seen overall purchase prices have increased, and we start with the main components for the Nordics operations, then, iron ore and coking coal. Our purchase prices both increased during the quarter: iron ore, 18%; coking coal, 23%.
For iron ore, part of the increase that we get on purchase prices during Q1 will also impact the result in Q1, and that's mainly for the operations we have in Luleå, where we don't basically have any stock of iron ore, but we get it on a daily basis from LKAB, and then it also quicker hits the P&L. If you compare with Oxelösund and Raahe, we will see the impact of that price increase for us coming more into Q2 instead. Purchase price for coking coal increased actually in percentage-wise more during the Q1 for us. However, the main purchases for coking coal we do in Q2 and Q3, given that we have this winter stock in Luleå and Raahe.
But also that we will see an impact of higher raw material cost in the Q2. If we move then to the US operations, where we use scrap, the upwards trends that we saw in Q4 also continued moving up now in Q1. And our purchase prices, they were up with 23% in Q1 versus Q4, which obviously then... These we turn around rather quickly. It's about around a month of lag from when we buy until it goes into our P&L. So we saw these higher prices already now in the Q1 in Americas. When we look at spot prices, and this chart is spot prices, we actually also see that in April, scrap prices are continuing moving upwards. And this long trend of increased scrap prices from basically beginning of Q4 and up until today, it's actually quite unusual.
Typically, when the spring season comes, it's easier to collect scrap. Prices usually move down. But we have not seen that so far this year, and the main and the logical reason for that is that EAF steel producers, just like us, are running at high capacity utilization, the increasing demand for scrap. Okay, moving to the outlook, Martin.
Thank you. So when we look into the Q2, we see that in North America, demand for heavy plate is expected to continue to remain strong. In Europe, the demand for strip and heavy plate is also expected to remain good. Underlying demand for high-strength steel, also good. And prices realized in the three steel divisions will be somewhat higher during the Q2 compared to the Q1, and I would say especially for SSAB Americas. And if we look at the volumes or volume trends, higher volumes in Europe and in Americas Specialty. We had a very high level in Q1, so we expect it to be fairly stable or slightly lower in Q2. So looking externally for demand and prices and so on, it looks quite okay going into Q2.
I would like to end with this picture, talking a bit about our project HYBRIT. The way we try to figure out how to produce steel without carbon dioxide. We closed the pre-feasibility study in Q1 2018, and we have found nothing in that pre-feasibility study that makes us believe that this is not possible. I would say quite the opposite. So we have decided to start to build a pilot plant together with LKAB and Vattenfall in a joint venture. We will have the first groundbreaking, or the groundbreaking ceremony during the summer, and we will build this during a, it will take one and a half year, and then we will start to do bigger trials, and then we are planning to build a production plant or a demonstration plant from 2025.
So, so far, so good, and we have also, in laboratories and in tests, produced the first steel according to this method. And we will now, as said, start to build the shaft, the hydrogen generation, and also the hydrogen storage in a pilot scale up in Luleå and Malmberget. So to sum it up, generally good demand, most markets, most segments. Good growth in strategic areas, special steel and automotive. Positive outlook, volume and price. And we saw in Q1, despite the problems we had, and the problems amounted to somewhere between SEK 200 million and SEK 250 million, those two examples I gave you. Despite that, we saw improved earnings compared to Q4 and Q1 last year. So with that, Per, I think we open up for questions.
Yes, and we can start here in Stockholm. Please state your name and company, and also to make it more easier, if you have several questions, please state them one at a time, so they can answer in between here. So we start with Ola there, maybe that's.
Yes, Ola Södermark, Kepler Cheuvreux. Very good that you quantify the problem you have in Oxelösund, or had in Oxelösund, and with the logistics to Borlänge. Is it possible to split it? How?
Call it roughly 50/50.
Around SEK 100 million each, or just over?
Yeah.
Okay, thank you.
Morning, it's Johannes here, Handelsbanken. I have two question. The first one is basically on, on Q1 and pricing, and, and you indicate that prices are up, and at the same time, input costs like coal, iron ore is also up. Could you perhaps talk a little bit about those two moving parts together? I mean, basically, I'm after the EBIT per, per ton or margin or so, and so forth. Thanks.
If you talk about Americas, if you start there, we saw, you know, increased prices, but on the other hand, you saw how much the scrap was increased, and we saw that the result as such was not, you know, fantastic. What we saw during the quarter in Americas was that clearly, the longer the quarter went, the more we got our price increases implemented, and therefore, the result gradually improved during the quarter, and that's basically what we're expecting for. That trend we expect for the next quarter as well. If you take the Nordic operations then, or the production using iron ore and coking coal, there was a sharper increase on the iron ore side than we had expected, and that came, you can say that came after we had negotiated the Q1 contract.
In that sense, we got a bit of a margin squeeze in Europe, especially, I would say, because that's also where we get the quicker impact from the higher iron ore cost.
But is it fair to say that most of the higher iron ore prices, coal prices, are in the books or in the P&L in Q1, and we should see more of an effect, but less effect on a sequential basis in Q2?
I would say you will see, if you take iron ore and coking coal again, you will see higher cost in the Q2 as well, but not as much. If you compare Q2 to Q1, what we see right now, it shouldn't be as much as it was Q1 to Q4, if you understand.
Less sequential negative effect.
Perhaps also another moving part, FX. You have a very strong euro. You mentioned that also in the earnings bridge. It's positive, but I also know there is a lagged effect when it comes to FX. We will see more of a head, sorry, tailwind from FX, would you say, in the coming quarter?
Well, I would say if, if euro stays, EUR/SEK stays the way it is, that yes, again, since we sell more euro than we have cost, that will have a positive impact, yes.
And then I'm also wondering a little bit about, the price levels you had on average, at least for If we look at average prices for special steel, it actually looks like it's slightly down quarter-over-quarter. Do you agree on that, or is it more of a mix effect, or what, what's going on there?
It's mix and other things, but, but the prices are not per product moving down in the Q1. I would say the opposite.
No, they're up.
They're up.
Okay, there seem to be no further questions here right now, so I will ask the operator, please, to give the instructions for the phone lines.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypad now to enter the queue. Our first question comes from Alain Gabriel of Morgan Stanley. Please go ahead, your line is open.
Yes, good morning, gentlemen. Two questions from my side. If I may start with the first one on the outlook, if we go back to your comments. Is it fair to assume that you expect the spread between prices and raw materials to expand further in Q2? For Europe and specialties. And for Americas, in the same context, are there any contracts that we should take into account while calculating our forecast for Q2? Like we had two quarters ago, when you had fixed contracts that didn't allow you to capture the full extent of the spread movement for the steel prices. That's the first question.
Okay, if I understood you correctly, you weren't wondering about the spread, how that will move when we go into Q2. And what we guided for was that we expect to see price increases during Q2, and what we know right now on the raw material, that still develops during the quarter. I would say that, yes, we do expect some spread increase in Q2 as well. Yes.
Thank you. For Americas, would you capture the full extent of the spread movement, or are there any fixed contracts that we need to take into account, like what happened in Q2?
Yes, we have a structure of contracts, so we have a lag in Americas. So you will not see-
Usually.
There is a time lag between spot price movements and the P&L effect.
So the usual two-month lag, basically, right?
Sorry, sorry?
The usual two-month lag, right?
The usual lag. Yeah.
Okay, fine. And the second question is on capital allocation, and I was just wondering if your, how your views are evolving, on the trade-off between, your priorities on deleveraging versus seeking inorganic growth. Do you mind sharing with us your latest views on that?
I think, the steel company needs to have a strong balance sheet. And if I think about it, for SSAB, I think we should be able to do investments in our own facilities, regardless of business cycle, and that requires a strong balance sheet. I think we should also be capable of, over time, paying dividend to our shareholders. And thirdly, I think, in an opportunistic way, especially in a downturn, we should be strong enough to do things that will develop, SSAB long term, regardless of business cycle. So we will continue to focus on working capital efficiency, and as Håkan said, we have a very decent chance of continuing generating strong cash flows, and that what
is what we are planning, to be a much stronger company than the next downturn and able to do things that is long term, the right things to do for SSAB.
Okay. Thank you.
Thank you. Our next question comes from Tom Zhang of Credit Suisse. Please go ahead. Your line is open.
Hi. Thanks very much for taking my questions. I've got three, if I may. The first one, just on the U.S. demand supply dynamic, with Section 232. Could you just give an idea of how much, firstly, on the demand that you're seeing, how much of that is sort of underlying, and how much you think has been driven by sentiment restocking? And then on the supply side, what has been the impact of Section 232 on imports relative to demand? Can you give a sense of utilization prior and post Section 232, particularly with the recent exemptions? That's the first question.
Let me start with that one. I think that, there are a lot of, of exemptions for, for two three two. So, so I can't give you an exact figure of what, what, what is underlying demand and, and what is, potential or, or, or trade barriers. I think, the underlying demand, especially in the segments that consumes heavy plate, is moving in the right direction. And for us, I mean, 90% of what we sell in, in, in U.S. and North America, we produce locally in Mobile and Montpelier, and roughly 10% is exported from mainly Sweden, and to a small extent, from Finland. A large portion of those products are products that are not produced at all in, in North America.
For us, I mean, EU obviously has an exemption right now, but for us, this is, so far, at least from an SSAB perspective, not a big deal.
Okay, thank you. Also with the iron ore contract, I see that the LKAB contract is now completed. Has that been renewed? Can you share any details on how the pricing is determined, both with respect to the iron ore and the pellet premium?
Go on.
You're absolutely right. The contract was from first of April 2017 up until the end of March 2018. We are now negotiating with LKAB before a new, most likely than I'd say, yearly delivery contract, again, but those negotiations are not finalized yet.
Okay, fair enough. And very finally, Special Steels margins are down this quarter. Clearly, part of that is gonna be the production outage. But at the end of Q4, we were talking about a fairly weak mix, I think, last year. You've alluded to continued weak mix this quarter. Can you give an idea of how you think that'll progress going forward?
It's always hard to predict the mix. The only thing I know is that margins per product is moving up.
Okay. Thanks very much.
Thank you. Our next questions come from Seth Rosenfeld of Jefferies. Please go ahead. Your line is open.
Good morning. Thanks for taking my questions. Just starting out on your Europe and Special Steels businesses. Despite the operating issues that you flagged in those two businesses, when I look at your actual reported shipments, they came roughly in line with at least our own expectations. Can you just comment on how you're able to bridge that gap between disappointing production and pretty decent shipments?
... semis inventories in those two businesses? And if so, should we expect some rebuild inventories into Q2, or otherwise an impact on your cost base? Thank you.
If you take the shipments, take one division at a time, and start with Special Steels. Their shipments were definitely good. And you should remember, there is a lag from when we produce in the blast furnace until we actually get the material out and ship it to customer. So the impact wasn't that large in Q1. Also, for Special Steels, Oxelösund is one site, and it's the site that's being managed by Special Steels. But we produce these type of products also in Borlänge, Raahe, and in Mobile, and we sell a lot from stock in Special Steels. So therefore, the impact on Special Steels was not seen in the shipments, as you concluded.
On Europe, on the other hand, shipments in Europe are down 4% in Q1 this year versus Q1 last year, and that was actually, to a large extent, due to that we had these rail transportation issues.
In the case of Special Steels then, given the differential by product or by, by production site as well, should we expect any change in your operating costs going into Q2? Or will you need to rebuild those inventories looking forward, or ostensibly, should we assume a full reversal of that SEK 200 million-SEK 250 million cost headwind that you flagged earlier?
You can make it easier and just say that those around 200 should be coming back in, or should be adjusted for in Q1 when you check the run rate going into Q2.
Okay, thank you. And, and one last question, please. In the U.S. market, we've heard from some of your peers, perhaps something of a divergence in pricing expectations, people expecting something of, of sustainability, kind of flat pricing on the flat product side, but perhaps a bit of a catch-up coming through on long products. How would you classify the current pricing environment for plate in the U.S.? Do you think there could be potential for further upside, or is flat about as good as we can hope for right now?
I think the prices are, if you look at spot prices, or at, I would say, spot margins, spot prices over spot scrap, they are at somewhere around $600 per ton, which is historically high. I mean, the long-term historical equilibrium is somewhere around or below 500. So, in the last couple of years, we have seen margins between 350 and 400. So, I think, without giving any prognosis of US plate prices, I think the margins, spot margins are on good levels.
Okay, thank you very much.
Thank you. Our next question comes from Carsten Riek of UBS. Please go ahead. Your line is open.
Thank you very much. Just a couple of follow-up questions from my side. The first one on the net working capital, because you mentioned you had a very, given the facts of where we are, in fact, a very good net working capital, or not as much net working capital build-up, let's put it that way. The operational issues clearly helped here, I would say, as, as well as the, the FX. Could, could that actually have a negative impact going into the next quarters, because those effects might actually reverse? That's the first question.
No, not really. Not major negative impact, no.
No, you should expect us to become better and better managing working capital. We are running a project, and we measure capital turnover, and we see that we are gradually, slowly and gradually making improvements, and we still have a way to go.
I was just hinting on the 200,000 tons you have to rebuild in your, in your inventories, which definitely don't go unnoticed, I would guess, in your inventory build-up.
But if you take, if we take the problems that we have with the rail transportation, we were actually still producing the slabs. We only had problems getting them from Luleå down to Borlänge. It took longer time. We didn't get them in the right sequence, so we actually had those slabs in the company. It's just that we couldn't get them to Borlänge and roll at the time when we wanted to.
We will move into finished goods and then ship material during Q2. But the slabs were produced.
Let's even in Oxelösund, I'm just trying to actually tie the knots here, because you said it's a 2-week outage in the blast furnace, which you can't produce material, but you still managed to produce material? I'm just getting a bit confused.
No, no, no. We are talking about, Håkan was referring to the problems with the transport, railway transport in Europe. In special steel, yes, we lost production, and we need to catch that up, yes.
Okay, good. Then I understood it correctly. On the financials, if I look at the improvement year-over-year, it looks like the most positive effect came out of FX, because if I take out FX, there was not as much improvement. Do you expect that this is actually going forward to look a little bit better, that underlying the operational result gets stronger?
Yes.
Okay, perfect. That's all from my side. Thank you very much.
Thank you. Our next question comes from Anssi Kiviniemi, SEB. Please go ahead. Your line is open.
Yeah, hi, it's Ansi. Thanks for taking my questions. A couple of let's, first of all, on U.S. plate prices, we have seen a tremendous rise. Are there any factors that would support the trend, meaning that we wouldn't see the normal, normal seasonality with plate prices coming down during the summer? What's the situation in the market? Everybody's raising prices. How are inventories and what are customers saying?
I nventories are on fairly normal to decent levels. So there is no big inventories as we can see in the statistics in the supply chain or in the steel service centers. When we talk to customers like yellow goods producer, agriculture, and so on, they have a positive outlook. So they are positive. So, I mean, we are not expecting a demand; underlying demand in Q2 will continue to be good. Then what happens with prices is always hard to predict. We are fairly certain of the price. I mean, we have visibility in Q2. What will happen after summer, we don't have full visibility in.
Okay, great, thanks. Then, a little bit on the capital allocation. You have highlighted HYBRIT project quite meaningfully during the past few quarters. And, just thinking about the future investments, looking at two to three years onwards, what kind of CapEx are we talking about when we think about HYBRIT? And will that, those CapEx figures offset your so-called normal business, or how should we look at the investments?
Over time, you should look at the investments within SSAB, that we are moving from coke oven batteries and blast furnaces over time into electric arc furnaces being fed by hybrid DRI, or what you call it, a sponge iron. From a pure SSAB perspective, that will mean two things. That will mean lower investment levels, because we don't have to reinvest or rebuild blast furnaces and coke oven batteries, which is typically very expensive. And secondly, this will mean better flexibility, because as you know, blast furnaces are built for running 24/7 without any stoppages for 15 years, and then you do a relining, and then you continue for another 15 years. If you exaggerate a lot, you can say that an electric arc furnace is a red and a green bottom.
So you and when you run, you push the green one, and when you don't run, you push the red one. So from a pure SSAB perspective, over time, lower investment costs and better flexibility. On top of that, also, with the prognoses for emission rights and so on, I would say also, better cost position compared to continue over time running blast furnaces and coke oven batteries.
Okay, great. Thank you.
Thank you. Our next question comes from Cedar Ekblom of Bank of America. Please go ahead, your line is open.
Thanks very much. Two questions from my side, gentlemen. The first one is quite simple: Can you just talk about Ruukki Construction? Obviously, losing money at EBITDA, I appreciate that there was some seasonality effects there because of the harsh winter. But is there more that you can do on the cost side there to improve profitability? And how do we think about potential exit of the asset? I know that it's been earmarked as non-core for a while. Is there any update there? That's the first question. The second question relates to spreads in your European business. If we assume that we add back the costs associated with the issues on the production and logistics in the Q1, and we normalize for currency, I'm only getting about a $10 per ton improvement in your margin in that business year-on-year.
Steel prices year-on-year on average were flattish in Q1 of 2017 and Q1 of 2018, but you've had quite a big tailwind from lower raw material prices, both iron ore and, and coking coal, if I look at the year-on-year difference. So I'm just trying to understand, is there something in the business that we should be aware of as it relates to your sensitivities to, steel and raw material prices on a spot basis, where your reported improvement in profitability seems to fall a bit short of, sort of spot improvement in profitability? And also on the downside, you know, when we saw the downturn in 2015, reported margins held up better than where spot margins traded to.
I'm just trying to understand the operational sensitivity or leverage to the price trends that we're actually seeing in the spot market, and how optimistic we should actually be on the potential for those improved margins to come through in steel companies' bottom line. Thank you.
Okay, if I try to answer the first question then. Of course, there is always more to do within cost effectiveness in all areas, and that includes Ruukki Construction. So I think what we saw in Q1 was a stronger seasonality, call it like that, with a lot of snow in the Nordic region and so on. I expect to see a normal seasonal pattern when the spring and the summer comes. But having said that, of course, we are working with costs, and we're working a lot with continuous improvements in Ruukki Construction. Then when it comes to keeping the whole or parts of Ruukki Construction, there is no update.
We will come back, if and when we decide to do something.
Okay.
On the second question, on the spreads in SSAB Europe, I think there are two things to consider there. One is that, if you only look at spot, I would assume maybe you look at fines for iron ore, and we are 100% pellet producer using pellets, and actually the pellet price have moved in a different direction than the iron ore fines. So pellets premium have increased quite a lot, and that will also have an impact on our spreads.
...So that's one thing when you compare Q1 to Q1 in Europe. The second one I would say is that, when for Q1 2017, we negotiated the quarterly and the half year contract around November 2016. And that was actually when the coking coal was at the highest price, and also iron ore was fairly high. So, a nd then we set the contract for the first half year, and then raw material prices went down. So at that time, we were a little bit lucky in terms of timing of raw material versus our sales prices. And if you compare Q1 this year, then actually, raw material prices started to increase in the beginning of the quarter, when we had already settled the contract during potentially around November, December 2017.
But I don't think there's any other things that are fishy or should be difficult to understand, except for those two factors.
Okay. Thank you.
Thank you. Just before the last question in the queue so far, just to remind participants, if you do wish to ask a question, please dial zero one on your telephone keypads. The next question is from Antti Kansanen of DNB. Please go ahead. Your line is open.
Thanks. Just one question from me, please. Still coming back to the mix issues in Special Steels. Could you comment a little bit about that? Is there a, is it due to seasonality? Is it due to certain end-use segments having better demand than others? Or what is, what is causing this negative mix for two quarters in a row? Thanks.
Oh, I would say that, the strongest profitability or the best margins we have are on the most advanced products, and they are typically produced in Oxelösund. So, so, I mean, if you take, Hardox 600 or 500 Tough or, or, those products, and, and thicker Hardox, we have, the best possible, or call it, the best, margins on those products, and then it differs. I mean, Special Steels are responsible of selling every, hot-rolled above 700 megapascals. So obviously, the Hardox 500 Tuf has much higher prices and better margins compared to a 700 megapascal strength or, or, Domex. So, so, and there is a, a spread there. So, so I wouldn't say that there is seasonality. It's more, what, what customers buys and, and, and, what we are able to produce.
So, I wouldn't say that customer segments demanding higher margin products are doing worse than other segments. I would rather say maybe the opposite, because it's yellow goods, it's mining, and some other areas that typically take those volumes that are also doing fairly well.
All right, thanks. And, you wouldn't say that the problems that you were experiencing in Oxelösund a year ago, that prevented a little bit of price increases, that they don't have any spillover effects that are causing this, negative mix or anything like that?
As I said before, I think we were having problems increasing prices in the right pace during 2017, and I think we lost maybe a quarter or two. And of course, there is always a bit of a challenge for our sales organization to discuss price increases with customers, more or less upset because of lack of volume. So I think we were not really on our toes when it came to that in 2017. We could have done better.
Okay. Thank you.
Thank you. As there are no further questions, I'll hand back to our speakers for the closing comments.
Okay. Do we have any final question from the... Yes, Johannes, if we can have, can we have a mic on? Yes, please. Thank you.
I'm curious, what's your view here on U.S. plate and supply? I've seen in the news flow that there is apparently an investment in Texas that will come out in the market, maybe 1920 or something like that. But what's your view on your own capacity? I remember a few years ago, there was thoughts about expanding in the U.S. and tweaking out more volumes. How do you see that now?
I think we will always have, due to continuous improvement, a capacity creep. I mean, the U.S. plate market is structurally undersupplied. We are not planning to build a new mill or something like that. But we are, of course, due to continuous improvements and debottlenecking, gradually increasing capacity, but we will not build another mill. And then the mill that already exists in Texas, what they are talking about is adding a hot end capacity. And they have probably been, like, historically dependent on imported slabs. And that becomes a bit more problematic now with the Section 232, and also with the tariffs. So the U.S. plate market is structurally undersupplied.
So, there, I mean, I don't see any big differences in that, the coming years, at least.
Okay.
Okay. Thank you. Thank you, Martin and Håkan, and thank you for the attention. And, by that, we close this conference and wish you a nice weekend.
Thank you.