Ladies and gentlemen, welcome to this SSAB Q3 result presentation. With us today here is Martin Lindqvist, President and CEO, and also Håkan Folin, our CFO. We'll begin this session with presentations, and then after that, it will be possible to ask questions from the audience here in Stockholm and also from the telephone conference. But by that, let's start, and I invite Martin, please, take the stage. Start.
Good morning. I think we had a decent third quarter. We had a better profitability with almost SEK 400 million compared to Q3 last year. I think we had strong cash flow, net cash flow of SEK 1.3 billion. And I would say that we are well on our way to deliver on the target of a net debt reduction of SEK 10 billion, as we have talked about now for one and a half year, and I think Håkan will come back to that. We are seeing a stronger and stronger balance sheet. We have a net gearing just south of 27%. If you look into the divisions, I think within the areas we discussed with you in June, the strategic growth areas, I think we are on our way.
I think the volume growth in Special Steels was quite okay in the quarter. If you put back the maintenance outage in Oxelösund, the margins were close to decent. We still have extra costs for transportation. We ship a lot still, or during Q3 by truck, which we usually ship by boat or rail to customers to help them and to fill the holes in the stocks. Maybe we have been also not quick enough to compensate for raw material price increases in Special Steels, but that is, I would say, fairly natural with the big problems we had after the breakdown in Q1. Europe, I think, continues on a good level. No dramatics there. Americas, we had good deliveries.
We had one order that was volume-wise, quite good. Profit-wise, nothing special, but I would say, given the market situation and EBITDA margin of 14%, I would say is also okay. Tibnor, on paper, slightly lower result than Q3 last year, but the underlying performance is improving, and we had some help from inventory gains last year, and I think the delta between this year and last year was roughly SEK 26 million. So I would say a decent quarter for them as well. Ruukki Construction, decent market, good sales. We have not been able to fully compensate for increased steel prices in our selling prices, so a bit of a margin squeeze in Ruukki Construction. But I would say, all in all, a fairly decent quarter.
If we dive into the figures then and start with the market, I think in Europe, the market was good. We saw the usual seasonal slowdown, which we typically always see during the vacation period. We saw low imports, we saw inventories in balance, and we saw spot prices increase somewhat during the third quarter. In the US, we experienced more of a wait-and-see mode and apparent demand a bit sluggish, and especially steel service centers being on and off in the market. And I would say a wait-and-see mode. We see low inventories in the supply chain. We saw spot plate prices decreasing during the quarter. We saw scrap prices going up and then fading off a bit and decrease at the end of the quarter. So no dramatic changes compared to previous quarter.
A bit more wait and see, maybe in US. If we look at the figures, as said, almost SEK 400 million better than Q3 last year. Higher prices, higher volumes, but also higher costs of raw material. And as said, a strong operating cash flow, almost SEK 1.6 billion. If we dive into the divisions, we saw increased demand in special steels within mining and construction machinery, but we also see, I would say, better willingness for upgrading. I think we also, as a company, handle upgrading in a more professional way compared to a number of years ago, so a positive momentum. And, of course, the result was down compared to Q2, but that was due to the maintenance outage we had in Oxelösund in August. Europe, strong demand, continuous strong demand in heavy transport.
I think the automotive growth, the premium automotive, up 28% compared to Q3 2016, quite strong. In total, we had roughly the same volumes as Q3 2016. So as we have talked about before, this is about changing the mix. We saw the seasonality, seasonality in the shipments, then we had the maintenance outage in our mill in Borlänge during the quarter. Americas, shipments, 21% higher than Q3 2016, so good demand in the energy segment. But as said, wait and see from steel service centers in Q3. EBIT was up SEK 360 million compared to Q2, and the biggest difference was, of course, the maintenance outage we had in Q2. And we have had now maintenance outages, Q4 last year, end of Q1 this year, and beginning of Q2 this year.
And as you know, we have maintenance outages in our mills in the US roughly every second year, or between 18-36 months or something, but roughly every second year. So now the mills are in good shape, and you shouldn't expect any planned maintenance outage, at least for next year. Tibnor, solid performance, sales up versus Q3 2016, but seasonality, of course, even here in compared to Q2. Underlying performance, as said, better than a year ago, but with a delta of inventory gains of 26, so the actual figures were a bit lower. But I would say underlying, better than a year ago. And then Ruukki Construction, where we typically see a seasonally higher demand in Q3. And I would say that demand is higher in most markets compared to previous year. This is what changes it a bit.
We haven't been able yet to fully compensate for higher steel prices in the Ruukki Construction business. But I would say also a decent performance during the quarter. Håkan?
Thank you, Martin, and good morning, everyone. I will dive into some more details on the financials. If we start by looking at sales, shipments, and margin development, you can see that the sales were slightly down in Q3 compared to Q2, 5% down, which is basically volume, because the shipments were also down with 4%. But if we look year-over-year and compare Q3 to last year, sales were up as much as 20%, and that's coming basically half from shipments, up 10%, and half from prices, also up on average 10%. Margin-wise, EBITDA margin was slightly down now in Q3 compared to Q2, but not very much, and actually still about 12%, which, during the last few years, is actually at a quite high level for us.
Given that shipments only slightly down, margin only slightly down, we stay at an EBITDA per ton of slightly above 1,000 SEK per ton, which is actually, during this period, it's the second-highest quarter that we have had. Martin said before that we improved profitability with close to SEK 400 million between Q3 last year and Q3 this year. We got a strong support from higher prices, and here the main contributor is SSAB Europe, but also we get a positive impact from SSAB Americas. Volume-wise, SEK 370 million positive impact. This is mainly coming from special steel with a good volume increase, but also coming from Americas.
Then, we get the negative impact on the variable COGS, SEK 840 million, and here we actually saw higher cost for, compared to last year, iron ore, coking coal, and scraps. All the three main raw materials had a higher cost this year. Fixed cost also up somewhat. It's partly due to that we are running more shifts with a higher overall production rate, and we also had the maintenance outages in Oxelösund in Q3 this year compared to Q4 last year, impacting fixed cost as well. Somewhat negative on FX, but if we're below SEK 100 million, that's actually quite low for us in a quarter. Other also slightly negative. There we have some items being positive, but we have the maintenance outage in Oxelösund Q3 this year impacting under absorption, which we have also here under other.
But all in all, an improvement of SEK 400 million Q3 over Q3. If we instead then look and compare what happened Q3 with Q2, we see a small decrease in profitability. It's slightly more than SEK 100 million, from 1,205 to 1,089. And here we have a small positive impact from prices coming mainly from special steel. We have a negative impact on volume, and here we see quite large decrease in SSAB Europe. We see some decreases as well in special steel and in Tibnor, but that's actually basically smoothened out by an increase in SSAB Americas. So to a large extent, this is Europe-based, you can say. Somewhat positive on the variable COG side. We had a lower cost for iron ore and coking coal. On the other hand, mitigated by higher cost for scrap during the quarter.
Then we have a quite large positive impact from fixed cost. And for those of you who've been around a few years, you know that every third quarter, we have a seasonally positive impact, where in the Nordic operations, and given that such a large portion of our employees are in the Nordic, we have this dissolution of vacation reserves that typically happen in the third quarter. So when we look into fourth quarter, it's more likely that fixed costs will be more similar to the second quarter than to what we see now in this third quarter. FX, also quarter-over-quarter, quite small impact. Other, quite large impact, and this is especially then due to the maintenance outage in special steel in Oxelösund and also in parts of SSAB Europe in Borlänge.
You can say that this under absorption is basically, mitigated by this, temporary fixed cost, lower fixed cost. But all in all, somewhat lower than Q2, but actually no major change compared to the second quarter. Moving on to cash flow, we had a fairly decent cash flow in the quarter. We had a net cash flow down here of SEK 1.3 billion. We had an operating cash flow of SEK 1.6 billion, and that's actually despite them having a small build of our working capital also now during the third quarter. So far, after three quarters this year, we have, a net cash flow of SEK 2.5 billion.
As Martin was talking about before, with this strong cash flow that we've had during the year, we are now only SEK 400 million short of achieving the target or even the promise of a net debt reduction of SEK 10 billion that we set out when we announced the rights issue in April 2016. As we have said many times before, we will deliver on this SEK 10 billion target, and now definitely below only SEK 400 million left, we will for sure deliver on the target. Moving on to the balance sheet. Given the cash flow in the quarter, we saw net gearing and also net debt decreased. When we announced Q2, we were just on the level of our financial target of 30% gearing. Now we are at 27, so slightly below.
And also net debt continued down and is now at SEK 14 billion. And if you look in this graph, you can see that both net gearing and net debt is at the lowest level during this 5-year period. But also, if you look back a bit longer, it's at the lowest level since before the acquisition of IPSCO in 2007. If we take another gearing metric, and we look at net debt over EBITDA, we are now only slightly above 2x. So I would say with, when we will move into 2018, we will do that with a fairly solid balance sheet as well. Maturity-wise, we have around SEK 5 billion maturing now in the remaining of 2017 and in 2018, that we either then need to refinance or repay.
As you can see, we have as much as SEK 12 billion in backup facilities and in cash, and out of those 12, around SEK 5 billion is actually cash. So we will use part of that excess cash to actually repay what we have maturing in the coming year and a half or so. We have already done that partly by reducing the commercial paper. It's SEK 400 million maturing in 2017, but it's all in all, it's only SEK 600 million, so that has been on the decrease since we've had available cash, basically. Finally, on the balance sheet side, the duration of the debt portfolio and also the interest rate, we saw in the quarter that the duration decreased from 5.2 to 4.9. That's quite simple math, actually.
We didn't do any major refinancing in the third quarter, and then when one quarter has passed, well, our average duration will have decreased somewhat. What we did do on the other hand, we have been looking into increasing slightly our average interest rate. It's now at 1.1. It used to be 0.8 at the end of the second quarter, and we are doing this given that the longer-term interest rate have started to move up slowly. We are also then adjusting our average interest rate. In terms of our interest rate duration, in terms of interest rate cost, it was up somewhat in the quarter, 3.4 versus 3.27, mainly because we have lower commercial paper now. So that's it on the balance sheet side, and I will now move into raw material.
We could see in the quarter that our purchase prices for iron ore and scrap went down quite a lot. Oh, sorry, iron ore and coking coal. If we start with coking coal, they were down as much as 25% in Swedish krona, 19% in US dollar in Q3 versus Q2. I think it's important to remember, though, that given that we have winter stocks for coking coal in Luleå and in Raahe, we do the majority of our yearly purchases in Q3 and in Q2, and that means that what we consume and what will hit the P&L in Q4 is more likely to be what we bought now in Q3. The Q3 buys will more materialize later on in Q1 and Q2 next year.
For iron ore, we also saw a decrease, not as much as for coking coal, but it was down 15%, our average purchase prices in Swedish krona, but only 8% in U.S. dollar. And that we have there, we have a faster turnaround, so that's more likely then to have an impact in Q4. We buy the majority of iron ore from LKAB. We also buy from Severstal, and with LKAB, our contract is valid until the end of March next year, but prices there are adjusted on a monthly basis. So we do see an impact also during the quarter when the spot prices fluctuate. Finally, from my side, then, on the scrap prices, we did see scrap prices in the U.S. during the quarter increase somewhat.
They were 6% higher at the end of the quarter compared to the beginning of the quarter. But if we compare it to one year ago and look at the average, well, we had clearly higher costs now in Q3 for scrap than we had in Q3 last year. What we can also see on this chart is that in October, scrap spot prices have decreased quite a lot, actually, in Americas. They're down around EUR 30-40 per ton for the October buy. So moving into outlook.
Thank you. So looking into Q4 then we expect to see apparent demand for heavy plate in North America to be stable on a low level. In Europe, we expect demand to continue to be good, and demand for high-strength steels, we expect that to continue to develop positively going forward.
Overall, we say that shipments are expected to be in line with Q3, and as always, shipments in Q4 will be very dependent on the price momentum into Q1. If prices are expected to go down in Q1 a lot, then shipments in December will go down, and vice versa.
Overall, realized prices somewhat lower than Q3, and then we have the maintenance outage in Finland. We have it in Raahe, and we have it in Hämeenlinna during Q4. And we expect to see the usual seasonal slowdown second half of December, but that will, of course, be dependent then on price momentum going into Q1. My last picture, we posted new sustainability objectives today, I think. And, when I think about this, I mean, the steel industry has always been regarded to be a big part of the problem. In SSAB, we have felt that with our products, with light weighting, taking out weight, increasing life length, reducing fuel consumption, helping customers to reduce emissions, we have seen ourselves as part of the solution.
I think with these new objectives, where we state that we will be, among other things, fossil-free, completely fossil-free, 2045, I think we take another step in showing that we are not only part of the problem, but we are definitely part of the future solution. Of course, HYBRIT is one important part in this promise, but there are other things as well, where we need to continue to work with fuel-related emissions. We also have what we call sustainable offerings. We say at the latest, 2025, we should help our customers to reduce 10 million tons of carbon dioxide during the user phase of their application, and that is equal to what we emit today.
We emit roughly 10 million tons of carbon dioxide, and that's a lot, of course, but as you all know, we are also the most carbon dioxide-effective steel producer in the world. So you could claim, and I'm probably not allowed to say that, but you could claim that 2025, we should be carbon neutral, and twenty forty-five, we should be completely fossil-free. We're also raising our ambitions when within what we call responsible partners. So important for SSAB and a clear statement for the future. So with that, Per, I think we, as usual, open up for questions.
Yes, please, and we can start here in the room, and please, please state your name and your company. And also, it's perfectly fine to ask more than one question, but please state them one at a time to give the gentleman a chance to answer each question here. So we begin with Olof there, please.
Olof Grenmark, ABG Sundal Collier. I wonder if you could please clarify your outlook, to what extent it's market-related or seasonally driven. I'm thinking about that you're guiding for unchanged deliveries, Q4 versus Q3, which would imply less increase year on year than it was in the third quarter. I'm thinking about your comment about realized prices, where you also relate to seasonally worse mix. What, what's happening out there?
Nothing special on the market. I would say underlying demand, if anything, not moving in the wrong direction. Then, we... It's always hard to predict apparent demand, and it's also hard right now to have a clear view of pricing in Q1. But to be honest, we don't foresee any major changes into Q1 either. So, I mean, this is our guidance right now, and there will always be some seasonality and a weaker mix. So by that I mean that color-coated and galvanized will go down, which is typically this in Q4. You will have seasonality in Ruukki Construction and partly also in Tibnor. So I would say nothing special. So it's more, if anything, an apparent demand issue, I would say.
Okay, and then regarding cost, this quarter, you for the first time and several other producers mentioned graphite electrode costs. Could you, to some extent, give that, give us a number regarding that?
It hasn't, so far, it hasn't impacted materially on... This is, this will especially impact on SSAB Americas, where we have the scrap-based production. We haven't seen that impact yet, and what we have done is we have secured, so we know that we will have the volumes needed for 2018, but we haven't yet agreed on the price level. It's still moving a lot like this, up and down. So, it's a bit too early to say how much it will impact, but it will most likely have an impact on the cost in 2018 in SSAB Americas.
I assume it's substantial then, given that you mention it.
Well, it's not substantial in the level of how much scrap can turn up and down, but it's substantial given that it has not actually had a major impact before. It's been fairly stable before, but now it is moving up, and it will have an impact on cost in Americas, yes.
Thank you.
Ola Södermark, Kepler Cheuvreux. A follow-up on the outlook. Can we expect a seasonal pickup in Europe, as we have seen before, previous years, and maybe lower volumes in Americas, and that makes up a stable demand or stable volumes?
We'll see, but, I mean, as said, underlying demand is not moving in the wrong direction, neither in Europe or in North America.
But you have a, you had a large order in Americas during Q3.
Yes, volume-wise, we had a large order in Americas, that's true, during Q3, and if I would guess, I would during parts at least of Q4 expect that the wait-and-see mood will continue among steel service centers. And on the other hand, I said in the beginning, I think the supply chain is not overstocked, so I think it's not that easy to give a clear answer on that question, but if you look into 2018, I mean, demand is picking up.
But you are seeing a normal seasonality in Europe so far?
I mean, October, we don't have any seasonality. October is, so far, October is not over yet, but usually quite okay.
Okay, and when it comes to raw material, do you expect lower raw material cost in Q4 versus Q3 overall?
Well, I think if you take Americas as such, you say there is scrap, and we consume it very fast. We saw a downturn now in October. On the other hand, usually scrap goes up in the winter season. That remains to be seen. In Europe, and then for special steel mainly as well, then we saw that, yes, iron ore have gone down. That will have a positive impact if it stays on that level. On the other hand, as I mentioned on coke and coal, we bought quite a lot there in Q2 at a reasonably high level. So even though coke and coal purchases were down in Q3, the, the cost will basically be what we bought for in Q2. So no major changes on the raw material side, I would say.
Hi, everyone, it's Johannes here, Handelsbanken. So I wonder if you could talk a little bit about prospects for better volumes and better prices for special steel, not just for the fourth quarter, but perhaps more on 2018. Because we clearly can see that orders are booming for companies like Volvo Construction Equipment and so forth, and mining equipment companies. So what's your feeling there? Is there any sort of new prospects for hiking prices because of this?
I expect volumes... I expect Special Steels to meet the volumes targets we discussed 2020, and I expect that to be done at the latest, 2020. I expect to see continued good growth. In some of the areas, like mining, we see increased demand from very low levels. As you mentioned, yellow goods, they are after many, many years with reduced volumes, they are picking up now. So, I expect the volume development to be good in Special Steels for next year as well. When it comes to prices, we have not fully compensated for increased raw material cost, and we have been also having some extra costs for transportation and so on after the big breakdown that really affected us, maybe more than, than...
In total, in line with what we thought, but maybe more spread out in time, so to say. So, so I think there is a potential there to, to have somewhat lower transportation costs next year, and also there is a potential for better margins, yes. So even though, I mean, Q3, given the circumstances, if you put away, call it a low figure for the maintenance outage, 16%, that is not really where we should be.
If I can recall it right, I mean, you need to grow something like 7%-8% per year to reach the target for special steel.
Yes.
But how... You mentioned you expect good volume development for 2018. I suppose you will be higher than sort of the trend for the years to reach that target. Well, I guess what I'm asking for is that do you foresee like double-digit growth in volumes for special steel for 2018?
Well, I mean, we don't expect the underlying market to grow with double-digit figures, but we expect with a, call it a more professional approach or whatever, probably the wrong word, but when it comes to upgrading, we see further big potentials in upgrading. And as said, I mean, Q3 over Q3, 21%, well, I mean, that is of course very high figure, and we don't expect that every quarter. But my clear expectation and my clear belief is that we will reach the target at the latest end of 2020. That's for sure, and I think we can probably cut a quarter or two on that one.
And just a final question from my side. I mean, I heard Nucor talking about very good demand for Q&T in the U.S. Is that also what you foresee, and could you highlight, sort of update us on the volumes you are running at on Q&T in the U.S.?
We are running QL 6 full.
You share the view that Nucor has with good demand prospects for Q&T in the US?
Yes.
Okay. Should we then invite the telephone conference to ask questions? I will please ask the operator to give the instructions there.
Thank you very much. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. And our first question comes from Alain Gabriel of Morgan Stanley. Please go ahead. Your line is now open.
Yes. Good morning, gentlemen. Just two questions from my side. One on your pricing comments for Q4. You're looking at pricing being down Q-on-Q. Clearly, plate prices are down, but what do you expect in Europe in terms of pricing? If you can just clarify your earlier comment on that. And the second question is on your balance sheet. So you're clearly very close to achieving your target for debt reduction. What's next for the next 12 months? What should we expect in terms of your rebalancing between paying down net debt, reintroducing a dividend, or paying back some cash to shareholders? How should we think about your capital discipline going forward? Thank you.
I can take the second question and let Håkan answer the first one. When, I mean, we will reach the target of SEK 10 billion, and I think there are further potential in the balance sheet to reduce net debt then, and we see, I mean, as Håkan showed, we have still been building some working capital during the quarter and so far this year, and we see a bigger potential in working capital and capital effectiveness. So you should expect us to continue to work with our balance sheet. And then how to use those funds, that is more a decision for the owners and the AGM, so to say. But you should expect us to continue to strengthen the balance sheet.
Thank you.
On the pricing side, then you're absolutely right that, you know, spot prices in the US have declined for plate during Q3, and we had fairly decent prices in Q3, given that we also have the complex structure. But therefore, given the lag impact, yes, we will see lower prices in Americas. That's part of that pricing guidance. For Europe, in Q4, we have, price-wise, we have a worse mix in terms of that we sell less color coated and less galvanized material, and therefore, average prices in Europe will also be down. On the spot market in Europe, we have seen prices being slightly up in Q3, and overall, as of now, we don't foresee any major changes in the underlying prices in Europe. It's more that our mix will imply a lower price, average lower price.
Thank you.
As always, in Q4.
Yeah.
Thank you. Our next question comes from the line of Anssi Kiviniemi of SEB. Please go ahead. Your line is now open.
Great, thanks. Hi, guys, Ansi from SEB. Three questions from my side. First, kicking off with the U.S. market. The plate market seems to be going flat currently, and when we go to the latter part of the year and early next year, there's usually a trend of a shift in up demand. Given that the kind of outlook is flattish, how do you see the apparent demand acting if the plate prices are flat going forward?
What we expect for apparent demand is to be a bit wait and see in Q4 as well as we saw in Q3. And then midterm, we expect the plate demand to increase in North America.
Okay, great. That's pretty clear. Then a second question, also relating to U.S. You highlight the large energy order. Could you give us some kind of indication, how large was the order? Was it above or below 50 kilotons? And is this purely a one-off thing, or do you see these kind of orders increasing as the oil and gas activity is increasing in the market?
It was around 50 K ton, and there are always orders and when activity around in the market and when activity in the energy segment, I mean, there are orders like this in the market. They are not... This wasn't an extremely bad order, on the other hand, it wasn't an extremely profitable order either, but it was a large volume, yes, and they will come from time to time.
Okay, great, thanks. Then my last question on outlook. Flat volumes, pricing coming down, perhaps raw materials in Q4 look stable, and then you also guide for a slightly lower fixed cost. So this gives me an idea that, group EBITDA will be lower in Q4 compared to Q3. So is this a fair assumption, or is there something else that I should note?
What you should note is that we are guiding for fixed cost being slightly higher due to the use of the vacation reserve. Other than that, I don't have any comments.
Okay, great. Thanks, for this.
Thank you. Our next question comes from the line of Kevin Hellegard of Norman Sachs, sorry, Goldman Sachs. Please go ahead. Your line is open.
Morning, guys. I just was wondering if you could just add a little bit more color to your view of the US market at the moment. I think you said inventories are at a more normal level, but what is the current level of imports? Have they come down again after surging in the beginning of this year? And what is your outlook for sort of the destocking to end in the US?
Well, import has come down, and if anything, I would say that the inventory is in the supply chain on the low side. So my guess would be then that there is not much room for destocking and left in the supply chain.
Also quite related to the US. So what is the impact of the higher graphite electrode cost for you guys, and have you sourced all the material you need for sort of 2018?
Yes, we have. Will be no major impact at all in Q4, and we have secured deliveries of electrodes for 2018.
Is there a big delta 18 versus 17?
Sorry?
So the volume secured for 2018, is that at a much higher price than 17, or is this a contract going further back in time?
We haven't really fixed the prices. We have just secured the deliveries.
Okay. Okay, thanks.
Thank you. Our next question comes from the line of Seth Rosenfeld of Jefferies. Please go ahead. Your line is open.
Good morning. A couple of questions on the outlook for your special steels business, please. You mentioned earlier, perhaps the inability to pass on higher raw materials costs to customers, or at least disappointing ability to do so. Can you give us a bit of better sense of why that was? And given your positive comments on demand for special steels, do you think conditions are supportive of better pricing power going into 2018? And then second, on the elevated shipping costs in Q3, given the Oxelösund outage, can you give us a sense of any scale of benefits we might expect in Q4 or going into 2018 as the shipment headwind is alleviated?
... Thank you. No, but to be honest, we have been mainly focusing in the sales and market organization to help customers with volumes after the big breakdown. We lost 90,000 tons of production in a fairly good market. So we have been focusing on helping customers and I mean trying to sort out problems with volumes for customers, and moving volumes that should have been produced in Oxelösund, to Raahe or Borlänge or Mobile, which has, of course, increased shipping costs. And maybe it's a bad excuse, but we have not focused maybe enough during that period to cover for increased raw material costs. That is my conclusion.
So, volume, yes, good development, and we expect that development to continue, maybe not in the same magnitude quarter after quarter, but over time, we will reach the target of 1.35 million tons, the latest end of 2020. Now, I would say that the majority of all the problems with the logistics and so on are behind us, and we are producing at a decent level in Oxelösund, and we should go back to normal shipping patterns and normal, call it more normalized discussions, hopefully with customers.
Is there any chance you can give us a sense of how to quantify that shipping cost?
I don't have that on top of my head, but, I mean, it has been complicated. I mean, if you produce material in Mobile to be shipped to Europe, it comes with a higher cost, of course, and longer lead times.
Thank you.
So it complicates, call it an already... not complicated, but it complicates our logistical setup.
Great, and one last follow-up, please. Within autos, it appears that you're taking some quite significant market share in European auto shipments. Can you give us a better sense of what sorts of products and customers you're gaining share in, and perhaps how you're seeing the impact from discussions with customers, given the pending consolidation in other key automotive steel suppliers like ThyssenKrupp and Mittal?
We are taking, call it market share, then, it's within the highest grades, the martensitic steels, the 13, 15, and 17 megapascal martensitic steels. And I would say that we are taking probably market shares from press hardening, because we can produce a product that could be roll-formed, and at the end, have the same weight, the same energy absorption, but for the end user, be a much more cost-effective solution. So this, I mean, why we are growing now is that we have a very strong product offering in that small niche within automotive. And we. It's mainly safety details. It's things like side impact beams, bumpers, seat rails, and so on.
Great, thank you very much.
Thank you. Our next question comes from the line of Tom Zhang of Credit Suisse. Please go ahead. Your line is now open.
Hello. Hi, it's James Gurry here from Credit Suisse, along with Tom sitting beside me. I just wanted to ask on the costs, again. Can you tell us exactly how many electrodes and how many refractory bricks you're expected to use, each month or each quarter, in 2018? And whether there's obviously some cost pressure here. Do you think, you know, costs will be up 30% or 300%? Just a broad indication. And on the DRI or the HBI that you're inputting into the operations in the U.S., I know it was evident that you purchased some of this. How quickly is iron ore costs reflected in the price that you pay for the DRI or the HBI?
If the pellet price goes up, how quickly is that reflected in the purchase price for that input in the U.S.? Thanks.
I mean, we will use maybe from time to time a very, very small portion of HBI. We mainly load our furnaces with scrap.
Okay.
So we are, I would say, to the large majority, using scrap, both in Mobile and Montpelier. And from time to time, we buy some pig iron and some HBI, but that's on the margin.
I would say we are still in a bit of a trial phase to really find the optimal equilibrium. When is it more profitable for us to use more HBI, and when is it more profitable to use only scrap or only a very small portion of HBI? But, but so far, that's, as Martin said, fairly insignificant. Our aim is to increase it over time and find this optimal mix, but we're not really there yet.
That will, of course, differ over time as well. I mean, this is, for us, about flexibility and to be able to, what do you call it, mitigate the big swings in scrap and/or iron ore and try to optimize the cost structure at each given time. But so far, it's fairly limited.
All right. Yeah, that's quite clear. I mean, it did introduce a level of flexibility that I suppose you didn't used to have. And what about on the electrodes and the refractory bricks? What are you thinking about the cost inflation there? Is it double digit or triple digit?
I think, first of all, you asked the question, how many we use? Unfortunately, at least not me, and I doubt Martin is the right person to answer that. We'd have to look into that in more detail. In terms of cost-wise, we have secured the supply, but we haven't yet agreed on the pricing for 2018, so we don't know exactly what the impact will be. I said before. It hasn't really been a question that we have looked into so much into detail before, but now it will have an impact on overall cost in 2018, yes, but exactly how large that is, still actually yet to be determined.
So I understand you've secured supply for electrodes. Can I confirm that's for global productions, or is it just U.S.?
We mainly use it in, I mean, we have the electric arc furnaces in U.S.
Do you use any in refining for your European operations?
We use, yes.
Yeah, and those are secured as well?
Yes.
What about refractory bricks? Do you have any supply negotiations in place for that?
We have secured that as well for 2018.
Okay, great. Thanks very much.
Thank you. Our next question comes from the line of Bastian Synagowitz of Deutsche Bank. Please go ahead. Your line is now open.
Yes, good morning, gentlemen. I have three questions left, please. Now, the first one is again on the US. I was quite impressed by your US performance, in the current environment, and even though your prices per ton were down in SEK, they were obviously up in dollars. Now, my understanding was that you're realizing prices on a one- to two-month lag versus spot. But, obviously, if we do the math here, I think the realized price has been much better than, I guess, whatever the spot indication would have been. Did I understand you correctly, that there was a larger project which has been driving this? Or was there also a positive effect from product mix, which led to those higher prices?
Maybe you can give us a bit of color around the situation and how you're realizing prices versus spot. That would be my first question.
You're right about this larger order that we commented before, which was around or slightly above 50,000 tons. So that's one part. The second part is that the mix we have between contract and spot is also similar to the mix we have with either selling directly to end user or service centers. And given that service center has been more in a wait-and-see mode, our average has been more tilted than normal towards end user segments, where we generally have more quarterly contracts. So in that case, your observation is right, that this quarter you would have seen a longer lag in realized prices than you might see in a more normal quarter.
Got it. Thank you. Then my second question is just, again, following up around, on the situation around graphite electrodes. I appreciate that we don't have the final number on cost, and I've been hearing from some places that cost could be up, by around 40-50, $50 even, for the contracts on a per ton, per ton basis. But say, given that part of your competition does not face this, the, this amount of cost increase because they produce via the blast furnace route, how confident are you that you can fully pass, pass this on to customers, given that we at least currently have an, an environment where prices obviously have been drifting?
That will be a question for 2018, then, where we will, in that case, see the cost increases, and we don't have a clear view on the pricing sentiment and the apparent demand on 2018 yet.
Okay. Okay, got it. Then my last question is just again on maintenance charges. So, just looking at your maintenance schedule, you've been incurring SEK 350 million of charges and costs for maintenance in the third quarter, but then also the temporary fixed cost relief, where the release of the holiday reserve is around SEK 370 million, which means the total effect has been totally neutralized, if I understand this correctly. Now, looking at past year, I think the situation around the holiday reserve did completely reverse in the fourth quarter. Now, can we expect the same in this year?
Because, what I really try to get to, the maintenance schedule obviously tells us that we will have a cost relief of SEK 100 million, but then if we deduct the benefits from the holiday reserve, it would imply that the net impact on cost in Q4 sequentially will be actually SEK 300 million negative. Is this how to read the situation, or?
I think that's a reasonably fair assumption. Out of those 370, it's not all that is this related to vacation reserve, but it's around 300 or slightly above that. So you will see, let's say, give or take, 300 being reversed then in Q4.
Got it. So basically then, when to think about your fourth quarter results, essentially, we will get essentially this reversal of the holiday reserve, let's call it SEK 200 million-SEK 300 million negative. And then on top of that, we will get the negative mix, and, say, probably a bit of a margin squeeze in the U.S. business. So essentially, this is, those are your key moving parts, or is there anything else I'm missing?
No, I think that's reasonably fair. I guess you're missing a bit that we had the big maintenance outage within special steel that we will not have in the fourth quarter, so that should be, from special steel point of view, more of a, call it, clean quarter. But, otherwise, I think that's fair.
Okay, thanks so much.
Thank you. Our next question comes from the line of Carsten Riek of UBS. Please go ahead. Your line is now open.
Thank you very much. Two questions left from my side, and I will stick to two. The first one is on special steel. We have seen that the revenues per ton here dropped most, which surprised me a little bit, simply because that is a business which is usually more stable with regard to revenues per ton on the up as well as on the downside... Could you explain, please, why that happened? Is it FX related, or is there anything else in there? That's the first one.
It's to some extent, it's a little bit what Martin was talking about before, that we have, given the breakdown situation in Oxelösund, we haven't been raising prices as we probably would have done otherwise. And then from a second point of view, in Swedish krona, yes, it's also FX related. Given the change in the Swedish krona that we have, and that Special Steel sells, quite little in Sweden compared to the overall sales mix, it's very much US dollar and, euro related.
Okay, perfect. Thank you. The second one, and you hinted on it, is on the working capital. The inventories went up, at least what I could see from the balance sheet. Could you give us a bit more granularity where this buildup happened? And at the same time, we had a very interesting move in the payables. Could you also explain why the payables moved up way more than the receivables?
One reason why both inventories and payables moved up is what I was talking about before, that during the second and third quarter, we increased our purchases of coking coal, and you saw that, and especially in the third quarter. That has an impact on inventories going up, but it also has an impact on our accounts payable for these coking coals. I would say that was the main reason you saw those two increases.
For us, we can't bring in coking coal during the winter to either Luleå or Raahe. We need to build a seasonal stock, as always, because the ships are too big, and they are not ice class, so we can't bring them in during, I would say, end of November until end of March, something.
Yeah, I understood. So it will be a reverse going over the winter then.
Yes.
That's absolutely fine. Perfect. Thank you.
Thank you. Our next question comes from the line of Robert Redin of Carnegie. Please go ahead. Your line is now open.
Yeah, hi. Three questions, if I may. This large order in energy, in Q3 in North America, is there anything like that in the order book for Q4?
We don't want to comment on the order book as such, but I mean, as said, there are orders like that and from time to time in the market, and we always look at them and discuss and decide if we should participate or not, so. But I don't want to comment on the order book.
All right. And on this automotive high-strength steel in Europe, the growth is 28% in the quarter, still really strong growth figures. Could you talk about anything about sort of the comparisons there going into the next couple of quarters? Can you keep this 20%+ growth?
Well, we said that we will double the volumes within automotive, with what we call premium automotive. I feel very confident, and the team in Europe feel very confident that we can do that until 2020. Then it will be ups and downs. I mean, we know that, we know pretty well to what models and what cars we have sold these solutions, and we have a pretty good view how it will look normalized for the coming years. Then yet, there could always be ups and downs. We have some interesting possibilities for cold-formed steel solutions when it comes to battery protection and so on, so we feel very confident that we will meet that growth target until 2020.
We have also had a very good productivity increase in our production line in Borlänge, where we mainly produce this, the continuous annealing line. So it looks quite promising. Then, I mean, of course, we can't have 28% every quarter, quarter out and quarter in, but we will meet the target, 2020 at the latest.
Do you expect higher growth at the start and slower growth at the end of the period, or how do you expect that panning out?
As said, I mean, this is a sales model where you typically, or where you definitely then are part of selling when they do create the model, so to say, create the platform. So we have a pretty good view how those platforms and those models will play out over time. Then, of course, that could differ a bit, depending on the demand from the car buyers or the end users. So I would say quite evenly spread. But of course, what we know, we have a better visibility for the coming one to two years than two to three years out.
Okay, perfect. One last question from me on the tax. Tax in the P&L has been really low for quite a while, and but now you had a book tax that was a bit higher. Could you guide us anyhow on that going forward?
Yeah, I would say going forward, I think you should assume that we should be around 20%, somewhat, which is, you know, what we have in Sweden and Finland. Reason why it was a bit high this quarter was, as I've said before, it's usually depending on where we earn or lose money. In this quarter, we had a decent profitability in North America with the higher tax rate, which then has an impact on the average tax rate for the whole group as well. But going forward, around 20%.
Okay, perfect. Thanks. That's all for me.
...Thank you. Our next question comes from the line of Oskar Lindström of Danske Bank. Please go ahead. Your line is now open.
Yes, three questions from me. The first one concerns the mix change or the product mix change strategy you have in Europe. Will this have any material traction in 2018 that we should expect?
Depends what is material, but it should have traction 2018 as well, yes.
So we should see independently of underlying market prices, that your product mix changes for the positive, sort of having a positive impact on, on average realized prices?
Yes.
Okay. Thank you, clear answer. And then, the second question is concerning special steels, where you've had, you had the problems in Oxelösund the beginning of the year, but it's really impacted the rest of the year as well. Is it could you give any sort of indication of how much sort of catch up effect we will have in 2018 as these problems are no longer impacting specialties?
But then we should see a normal pattern with normal shipping costs, I mean, more normalized. As, as we have said before, I think, the biggest upside in SSAB is within special steels. We have done, all the investments, so, so we don't, I mean, need to do a lot of, of big investments to, to meet the target of 1.35 million tons. We have also, I would say, to a large extent, the fixed cost in place, the manning in co- in place, and so on. So everything else equal, the, the, the margin on those extra tons should be better than, than the average, so to say, of, of the existing business.
So you should also there expect a positive, call it, mix, not mix improvement, but pro-profitability growth in line with or due to that volume growth.
In 2018, the problems relating to the Oxelösund breakdown should no longer have an impact?
No. And having said that, knock on wood, but no, it shouldn't.
Yeah. Thank you. My final question regards your new sustainability objectives, and I'm mainly sort of interested in will this have any implications for your CapEx or investments in coming years? And will it lead you to, I mean, if you're looking at capacity expansion, will you favor scrap EAF over BOF?
Over time, what we're aiming for is, with this new HYBRIT project, to come up with a completely new way of producing iron, liquid iron. And instead of emitting carbon dioxide, emitting pure water, if you put it bluntly. And, of course, that will require investments. On the other hand, I mean, keeping a coke oven battery alive or a blast furnace relinings are also extremely expensive exercises. So I would say over time, it will require some probably higher investments, yes, over time. On the other hand, we believe that and hope that emitting carbon dioxide will also become more expensive over time. So when we have looked into this, we have done it like, call it an investment case, even though it's not just an investment case.
But financially and environmentally, this makes sense for SSAB, and that's why we have taken this decision.
Now, I know your final sort of deadline is 2045, which is quite far away, it feels like. But it is far away. But when should we... You know, any kind of indication of when the technological shift for that you were describing will happen?
We are—I mean, we have formed a joint venture together with two other Swedish companies, LKAB and Vattenfall, and we are aiming to start to build a pilot plant during next year.
So, I mean, this is not if things work out within five years to sort of start investing in your Swedish and Finnish plants. That's not the realistic-
I don't have the exact time plan off the top of my head.
Oh.
But so far, we haven't come into anything that makes us believe that this is not possible. And then it should be finally up and running full speed at the latest, 2045, and then it's a lot of steps. I mean, we need to, we will definitely then, of course, not invest in new relining of blast furnaces in Oxelösund. We will not invest in a new coke oven battery or refurbishment of the coke oven battery. We need to do some other immediate investments and so on. But this is a long-term plan, which we believe in the end will be not only very good for the environment, but also financially very good for SSAB.
All right. Thank you very much.
Thank you. Our next question comes from the line of Luc Pez of Exane BNP Paribas. Please go ahead. Your line is now open.
Hi, gentlemen. Thanks for taking my question. Most of them have been answered, but I have a couple left. Could you maybe explain what you would be guiding now on CapEx for Q4? Because I think you're running well below what you've guided for 2017. And if you could also be a bit more specific as to where you see CapEx next year.
... And, second question, still related to free cash flow generation. Looking at working capital requirement, could you be a bit more specific as to what you guide for Q4 as well? Thank you.
I can take the last one first. I mean, we are not guiding for any working capital release in an absolute term in Q4. What I'm saying is that over time, there are still things to be done when it comes to working capital. And we expect, as we said a year ago, we expect cash flow going forward to be fairly decent. And I would say that we have always been confident that we will meet the SEK 10 billion net debt reduction target, and we will at least meet that in Q4. And then, but you should also expect that we continue to generate decent free cash flows for the coming years.
In terms of your first question on CapEx, you're right. We have said before, we would be at around SEK 2 billion for 2017. Given where we are now, we know that we will be lower than the SEK 2 billion level for the full year. When we look into 2018, what we have said before, 2018 onwards, we will be around SEK 2 billion, and given that we will be lower this year in 2017, well, we will be around SEK 2 billion, potentially slightly above, but on that level, basically in 2018 as well.
Thank you.
Thank you. Our next question comes from the line of Fraser Jamieson of JP Morgan. Please go ahead. Your line is open.
Yeah. Morning, everyone. Thanks for taking the question. Just one very quick follow-up to an earlier question. Around the sort of longer-term targets on net debt and the balance sheet. You obviously said that the owners have the opportunity to decide. You clearly have an opportunity to make a recommendation. You know, are you willing to say anything around sort of longer-term net debt equity targets or absolute net debt levels, where you would be thinking that the balance sheet was getting to an under-geared position? Thanks.
I'm smiling a bit because we had a completely different discussion one and a half years ago. But, of course, I will give some kind of feeling or recommendation in due time. But I think we are on our way to deliver on the net debt reduction target. And as said, I expect us to have decent cash flow as well. And as Håkan pointed out, investments will not be a huge difference going forward either. If anything, maybe ... That's of course, mainly my fault, we invested a bit too much, too early. But I mean, I think, and we are obviously below our Net gearing target, and we are currently at a net debt to EBITDA of what is it? 2.04 or something.
So we feel, yeah, we are in a pretty good shape in that aspect. But what we are working on is to continue to take down debt. And then it's, as said, up to the AGM and the owners.
Okay. Thank you.
Thank you. Our next question comes from the line of Aris Mazoulas of RBC. Please go ahead. Your line is now open.
Good morning, gentlemen. Thanks for taking my questions. Just one question left on, from my side on, on pellets. We've seen, Chinese spot premiums, rising recently. Do you see a risk that this leads to higher premiums in the Atlantic market, which could impact your cost position? And assuming that happens, how much flexibility you have to move towards, lump products if the economics around the pellet consumption weaken in the coming months? Thank you.
Overall, we have seen in the market that the gap between fines and pellets have been increasing, and as you say, that trend has continued. We have one of the major global producer in Brazil being out of production for a number of years so far. They are expected to come back at some time, but we haven't seen that yet. When that happens, that will hopefully then pull down the difference between pellets and fines. But for us, we don't have any sinter plants left, so we are 100% pellet-based. And in the longer term, yes, if that difference between pellets and fine would increase, that would have a negative impact on our competitiveness versus producers only using or using to a majority, fines.
Maybe just in terms of the shorter-term dynamics, is the Atlantic market premium the most relevant indicator to follow?
That's more relevant than the spot prices in China, yes.
Thank you.
Thank you. Our last question comes from the line of Cedar Ekblom of Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Thanks very much. Two questions from me, guys. I want to just ask you again on the U.S. market. You've painted a pretty healthy environment for price increases. You're saying that inventories are low at service centers, that there's not much room for destocking. Imports have come down a lot, and yet, if we look at the scrap settlements that we saw in the U.S. over Q3, there was a very marked shift, to the negative side in terms of where expectations were for scrap during the quarter, and then where settlements actually happened over August and September. Can you talk about what's actually happened in the scrap market and why that seems to have moved in an opposite direction to the healthy environment for steel prices that you seem to suggest are setting up in the U.S. market right now?
Well, the-
And then on the-
I asked if I can comment that first question. Then I was probably not making myself clear. We don't see any healthy pricing environment in U.S. What we said is that we expect apparent demand to be fairly stable and for Q4. Over time, I think underlying demand will pick up, and that is maybe more for next year. So I'm not saying that there is a healthy environment in North America for massive price increases in Q4. That was not what I meant.
Okay.
Sorry.
And what actually... No, that's fine. What actually happened with scrap in the third quarter? If we can just understand why there was such a marked shift in where settlements had started to look like they would be and where they actually ended up being. Was it a case of demand is weak, or why, why that big move?
I think it was a lot of different things. I mean, you had these weather problems in Houston and in other areas that made scrap collection a bit tougher. It's also a matter of the strength of the U.S. dollar. When you see weak U.S. dollar, you typically see a lot of scrap export. There is seasonality in scrap collecting as well. So if one would guess then, so if, I mean, what the terrible thing that happened in Houston with the weather, with the storm, the hurricane, and was what happened in Florida and other places during this during the third quarter might have tightened up the scrap collection short term and will give some extra scrap midterm.
There's a lot of moving parts here.
Okay. And then if we just go back to the European market, can I ask you how you think sentiment is shaping up in terms of pricing? If we look at the price hikes that steel mills announced over the summer period, some of that's been secured, but not all of it. And over the same period, we've seen iron ore weaken, quite substantially. And I just wonder, if you're looking at sentiment in the European market, has there been a shift at all? When you're talking to your buyers, are they pushing back on price increases because of the move in raw material costs? Is that factoring into conversations at all? Thank you.
I wouldn't say. So far, we haven't seen any major shift, but that was also what we said. I mean, it will be volumes in Q4 for us will be dependent on the pricing sentiment going into Q1, as always. And we haven't started to negotiate prices for Q1 yet. That will be later during the fourth quarter.
Okay. When you are talking about prices with your customers, do they look at the raw material price?
They look at a lot of different things, but I mean, we don't have a cost-plus pricing at that aspect. So I mean, it's one part of the equation, yes.
Okay. Thank you very much.
But only one part of many parts.
Yeah. Okay. Thank you.
Thank you. There are no further questions at this time, and so please go ahead, speakers.
Okay, thank you. Do we have any final question from the audience? No, I don't think so. Thank you, Martin, Håkan.
Thank you.
Thank you, the audience
Thank you very much.
for the attention, and have a nice day.