Very, very welcome to SSAB and to our Capital Markets Day. Welcome to all of you who have gathered here in Stockholm, and very welcome also to all of you following us on the video conference. We are, of course, very happy that so many have decided to attend this meeting, and we are also happy that quite a few of you decided to visit us in Borlänge yesterday, which we really appreciated, of course. When we announced this Capital Markets Day in August, we couldn't foresee the quick downturn in demand that we were facing, and that led us into the decision, as you know, to inform you about the loss in the third quarter. We have, of course, already taken a lot of measures to handle the situation, and we will continue to do so.
This day, however, we will talk more about our business model, how we work together with our customer to develop their products and to develop our business. We can have a quick look at the agenda. We will start with a presentation from Martin Lindqvist, followed by Marco Wirén. Then we will have a Q&A session, and then a coffee break, and after that, our CTO, Karl-Gustav Ramström, and together with Eva Petursson, will talk about how we work with R&D and the development products we have together with our customers. And after lunch, you will meet our heads of business areas, Melker Jernberg, who is Head of EMEA, Martin Pei, Head of APAC, and Chuck Schmitt, who is Head of Americas.
And then, of course, after each and every presentation there, we will have possibilities to ask questions and make statements and so on. As I said, this is a video conference. We will really appreciate if you use the hand mics that will be handed out so that we can record the questions and the statements that you make. During the day, we will also have a quiz, and that's why you have colored papers on your seat. So don't throw them away, because the winner will get something by the end of the day. We hope that this will be an interesting day, and we are, as I said, extremely happy that you all have joined us today, and once again, very welcome. Now, I will leave the floor to Martin Lindqvist.
Oh, okay. Thank you, Helena. I will start with this picture, SSAB's vision, because I think this, for me, very well describes how we work and what we are going to talk about today. And here we state that the stronger, lighter, and more sustainable world, and what I really like with this is, together with our customers, SSAB will go further than anyone else to realize the full potential of lighter, stronger, and more durable steel products. And we'll come back to that during the day, during KG's presentations, and your presentation, and during the presentations from the business areas.
As you know, what we can do with our steel and our knowledge for our end users, for our customers, is to increase strength, reduce weight, lower fuel consumption, have longer productive lifespan, and higher load capacity, or combinations of the this, and this is what we are going to talk about. The way we work is, of course, one important factor is the properties of the steels, where we are unique today. We have a product, broad product range between 0.5 mm thickness, up to 160 mm thickness for Q&T. From very, very narrow strips, up to 3.5 m wide plates. But on top of that, on top of the properties of the steel, we have an extensive technical support and knowledge about how to weld, how to bend, how to drill in our steels.
That combination really differs us from other producers of these kind of steels. So far this year, we have conducted more than 900 customer development projects or customer development cases, and we will come back to what a typical customer development project is. On top of that, we have trained more than 2,600 persons out at our customers in technical seminars. So this is a very important part of our business model, and a very important part of how we are going to ramp up the investments and capabilities in quench and temper. To talk about SSAB and talk a bit about the future, I guess you need to start in the macroeconomic outlook.
This is a picture from one of the banks that we used in our strategy work this year, and you can see the difference in GDP forecast between regions. You can also see the blue line showing the expectations one year ago. So this is obviously on a lower level compared to the thoughts one year ago. We start with the Euro area. We are clearly in a recession, with a negative outlook for this year and next year. Sweden doing somewhat better, but still on very low levels. U.S., growth forecast adjusted downwards, but still on... I mean, compared to Europe, fairly decent levels. And China, slowing down, but still on plus 7% expected GDP growth, and that, compared to Europe, is, of course, quite amazing.
If we take the next step towards SSAB and talk about the general steel market, we see quite big regional differences. If we start with North America, the market dynamics are still fairly healthy. We see growth in North America at low energy prices. As you will know, we saw gas prices coming down substantially over the last one or two years, and we see a recovery within automotive. Latin America, which is a very important market for us as well, or increasingly important market for us. Stable demand for commodities, high investments in infrastructure, and a very big need for improved productivity among our customers as steel end users, but also among steel companies. Europe, a bit more dull picture. We have in Europe a structural overcapacity.
The steel capacity in Europe is built up from export to Asia and for higher production in of finished goods in Europe. We have a structural overcapacity. If it's 20, 30, 40, or even 50 million ton, remains to be seen. But there is, of course, a need to continued capacity closures, and also, I would guess, consolidation needed going forward in the European steel industry. The Nordic region, I said, a little bit better, or I would say much better than compared to Southern Europe. But we need to bear in mind that this region is fairly small, and it's also very industry export-dependent, with a high exposure to the Eurozone, but still better than other parts of Europe. CIS, and especially Russia, also an increasingly important market for us, doing very good or fairly good.
A region highly dependent on oil and gas and mining prices. We see a lot now of international OEMs moving into Russia, and I've been visiting them the last month. Komatsu and some others, producing in Russia, and they have a very good view of the future. China, today, we have an overcapacity for standard steels in China, and how that will play out going forward, of course, depends on how they will continue to run their economy. But we all hear discussions about more packages to fuel infrastructure investments and things like that, so... But currently, we have there is a structural over well, not a structural, but an overcapacity for standard steel. And as I said, GDP expected to grow with more than 7% per year.
Australia, also an important and strong market for us, with still a healthy mining business. And we will come back to all these regions and markets during the business area presentations. This is an old picture, but I think it's worth mentioning when we take the next step towards SSAB. If the last picture was a picture about the global steel environment, this is just to remind you where we are. We are active on the Nordic home market for standard strip. We're active on the North American market for standard plate, and then we are focused on two niches, quench and temper and advanced high-strength steel. And when we look forward to the demand development in this tiny part of the global steel business, quench and temper, this is our projections and what we have invested for, and what we believe is possible.
It's a bit more than doubling the volumes on the global market from 2010 to 2020. This will, of course, be done by all the benefits you can get from using these kind of steels, and we will be one of the main drivers in driving this market, as we have done over the years. We will continue to do that, but a quite healthy, I would say, growth. For advanced high-strength steel, we will not see that big growth, but this market will also grow. One of the main drivers here is, of course, automotive, and that will, of course, attract competition. It's a bigger market, and automotive, as you know, they are a big taker of steel, so this segment will attract more competition, and we see companies investing in this in different parts of the world already today.
We have invested, and we have now done the investments to take our part of this growth and to be able, capacity-wise, and capability-wise, to be one of the main drivers, especially within the Q&T area. We have invested in a new quenching line in Mobile that is now up and running and ramping up according to plan, and Chuck will come back to that. Some of you visited our new quenching line in Borlänge yesterday, QL7, up and running and ramping up. We have done investments in our caster in Oxelösund to reduce or to have better in-rig cleanliness when we produce really thick plate, up to 160 mm, and that is mainly for the big mining buckets and draglines in the mining industry. We have also inaugurated and are now ramping up our new finishing line in Kunshan.
So if we take a look at SSAB and our strategy, and we have gone through that this year as well, no real news, but we will be even more focused. What we are focusing on is global leadership in high-strength steel, or I would say quench and temper, to keep our position on our two important home markets, and to create leading value-added services, and I will come back to that. What will make us successful going forward is focus on flexible operations, high-performing organization, and superior customer experience. The goal, as you know, is to have 50% of the volumes within our niches, advanced high-strength steel and Q&T, at the latest, 2015.
The way we are going to do that is to maintain and strengthen SSAB's number one position, and by the broadened product offering we have now with the new quenching lines up and running. In advanced high-strength steel, it's very much about winning the heavy transport segment, and continue to be in the very small part with safety details in automotive globally, and continue to identify the niches in the niche. Marketing and sales and R&D is, of course, an extremely important part to be able to do this. We have increased focus on marketing and sales globally with a more structured segment approach, and we will hear later today about the R&D focus we have, and that we will continue to have.
Of these 50% of the volumes, a lot of this has to be done in emerging markets 7% of it will be in Latin America, and today we are well ahead of the plans we have to reach those targets. CIS, Eastern Europe, and especially Russia, 8% of the total volumes, well ahead of plans until today. We will reach these targets. And APAC, and especially China, following the plans to be able to reach those 50% of total volumes in niche products, 2015. As said, two other important areas is our home markets. We will defend and expand our leading position in the Nordic region. We are extending partnerships with major OEMs, not only in Sweden, but also in other areas in the Nordic region. We are further improving our logistics and delivery performance in the Nordic region.
We are strengthening the cooperation further between SSAB and our fully owned service center, Tibnor. In the North American market, where we also have a leading position, or number one today, we have a very good possibility that we will use over the coming years to debottleneck at a very cost-effective investment, and increase capacity with roughly 140,000 tons to stay, to create the volume to stay as the number one producer, not only volume-wise, but cost-wise as well in North America. We are right now expanding normalizing capacity in Mobile, and we have taken some very interesting long-term contracts for normalized plates towards rail cars and energy segments, pressure vessels. We will continue to work and secure our position as the preferred supplier among our customers. Wear service is an interesting area for us.
As most of you know, we have an extensive worldwide network with our Hardox Wearparts suppliers. Today, I think we have 110 of those globally, with a very strong penetration in Europe. With a fairly strong penetration, I would say, in North America, and with a lot of things to do in Latin America, Asia, China, Australia, Russia, and South Africa. Some of these Hardox Wear parts suppliers are fully owned by SSAB. Some of them are partly owned, but a lot of them are independent companies licensed to use the Hardox brand name. They are out at the sites, different sites, taking care of service for abrasive resistant applications, and backed up by a well-known and highly respected brand name, Hardox.
One of the pilots we have started, or have been up and running now since a year in this area, is a mining excellence center in Chile, where we are not selling plate. We are actually out taking responsibility to serve it, to serve abrasion-resistant applications in a mine. So instead of selling plates for kronor per kilo or US dollar per kilo, we are actually selling up times and repairing and building parts like this. It has been very successful, and right now in the pipeline, we have additional centers like this in a couple of locations in Canada and in South Africa. The ambition is to build centers like this in other mining-intensive centers in the world, like Northern Sweden, Indonesia, China, India, and Russia. So this will be a way for us to continue to develop the business model within the network and ourselves.
Productivity and cost efficiency is, of course, extremely important, and we have a strong focus on flexible operations. At our two mills in North America, we have a very flexible operations with electric arc furnaces, and the setup, and the outsourcing we have done there. So they are extremely flexible, and we need to maintain that flexibility and the low-cost position going forward, of course. Melker will come back and discuss and describe the importance of flexibility in our system in Sweden as well. But as we have communicated before, the ambition is to take down the break-even point in the strip system down to 70% capacity utilization, but Melker will come back to that. We have also, with our investments, tried to build a global production system. As you know, all the quench and temper plates were, before these new investments, produced in Oxelösund.
Now we have the capability and the capacity to do that in Mobile and Borlänge. We will try to focus these quenching lines over bottlenecks. QL1-QL4 in Oxelösund will be mainly focused, of course, of the high end and the thick and wide plate, and that is a very productive product program to produce in a quarto mill. QL5 and QL6 in Mobile will be mainly focused on high volume runners for Americas and APAC in the Steckel Mill, and they will be wide and medium, medium thick.... QL7 in Borlänge that you saw yesterday will be focused on thin and narrow Q&T globally. By doing this, we can utilize the bottlenecks we have and really improve productivity in this production system. On top of this, we will utilize the finishing centers we have close to the markets like Kunshan, and going forward, also continue to build finishing center.
Both to reduce, of course, lead times and serve—increase service to the customers, but also to be able to continue to reduce working capital tied up in the operation. Raw material flexibility is also very important, especially now, when raw materials contracts become shorter and shorter. We need to manage supplier contracts and shipments for lower costs, but we also need to implement new recipes for coke, alloys, and scrap grades, and this is what we are doing right now. So to conclude, before I let up Marco to the stage, if this is not, once again, the end of the world, we are very well positioned for the future. We have the strategic investments in place. They are done, and they will allow us to continue to expand within quench and temper.
We have a strong focus internally on flexible operations and productivity, and I think that is extremely important, given the outlook for the future. We have enhanced activities towards emerging markets in Latin America, Russia, building the new business area, APAC, and so on. With this strategy, I'm convinced that we will secure industry-leading profitability, as we have had previously, and we will continue to have a healthy cash generation. For us, it's extremely important to continue to build superior customer experience and to maintain leadership within R&D. With that, before we take questions, I hand over to Ms. Helena.
Yeah. Thank you so much-
Thank you.
Martin, for that introduction. As I said before, we will take the questions to Martin and Marco together. Now, we will make a deep dive into the numbers. The floor is yours.
Thank you, Helena. Just short update on Q2 and first half year. We saw first half year was decent. It was it wasn't as good as 2011, but decent anyway. But during the summer, we saw a slowdown in the market, and if you just look at the numbers for first half year, we had an EBIT of SEK 1.2 billion. Cash flow generation has been quite good in the company, and if you just look the rolling twelve months, so operating cash flow was SEK 4.8 billion, and about SEK 2.8 billion of that was generated during the first half year.
Then, of course, we saw those investments that we have done in the past years, taking into operation during the first half year, and we are continuing to ramp up those as well, which give us new opportunities, just like Martin explained as well. Then, when we go to the summer, we guided in our Q2 report as well, that we see some slowdown in Americas, but we couldn't see that the European market would go down even further from the levels that we saw in the beginning of summer. And that's why we communicated the press release as well, and said that we see a slowdown, much deeper than we thought, and we will have a negative results during Q3 as well.
Also, what we've seen, due to this slowdown in the market, that iron ore and coal prices has dropped quite a lot during the summer. And, of course, that will give an impact to steel companies as well. And I will get back to that a little bit later as well. Just a recap of what we actually said in our communication to you, to get you up to date what's happening on the SSAB, that our utilization ratio is, especially in the strip market or strip operations, is going down to 60%. And, as you all understand, we have a huge amount of fixed cost. So when utilization rates just go down, that will hit us quite heavily in a cost base. Plate market is more stable.
We can't see that big downturn in the plate market, and especially when you go to quench and temper plates. And as I mentioned, we communicated that we will have about SEK 600-700 million loss in Q3. And this picture is an example, and I try to explain and illustrate how the fixed cost is affecting us. We just take an example of a company with a normal output, about 3.2 million tons annually, and a fixed cost level of SEK 7 billion. If that normal production goes down to 2.4, which means about 75% of utilization ratio, the fixed cost allocation will be done in fewer tons.
So what we do in our books is that the difference between fixed cost at 2,200 and 900, we will take that difference immediately in our books during that period when that occurs. In our case, during Q3. And in this case, if the annual impact would be about SEK 1.8 billion total. And due to the situation that we've seen in the weakening market, we of course are acting accordingly as well. Those efficiency programs that we have put in place during the spring, we are accelerating those, and those will be finalized during Q1. The impact will be about SEK 800 million in our cost base, and that is divided in two different parts. Fixed cost lowering by a 0.5 billion and 300 flexibility.
Flexibility is something that we see as increasingly important due to the fact that the market is much more volatile today than we've seen in pre-crisis. And of course, thanks to those new investments we've done, we have a great opportunity to increase our top line into quenched and tempered steels. And of course, also giving us a good opportunity to optimize where we will produce and what we'll produce in our different sites. Now we have opportunity to produce quenched and tempered steels in Borlänge, Oxelösund, and Mobile as well. And, of course, we continue with good cash generation and financial strength is something that we have a very focus on continuously. Now we have done the big investments, and going forward, we don't have very much big strategic investment needs.
As you can see here, 2011 was a peak in our investments. This year, our guidance is that we will have investments between SEK 1.5 billion-SEK 2 billion, including maintenance investments. Maintenance investments are about SEK 1 billion ± something annually. And of course, if there's a need, we can always take down the maintenance investments quite heavily a year or two. But then, of course, we have to get back to the normal levels again. And after the acquisition of IPSCO, we got a surplus values, and this just illustrate how we are depreciating those surplus values. So far, we have had about $120 million U.S. dollars annually, depreciation on those.
Going forward, that will go down to about SEK 80 million until 2020, when it actually start to vanish. We have three business areas, SSAB EMEA, Americas, and APAC. And SSAB EMEA is the largest one, accounting about 47% of our annual sales, followed by SSAB Americas, about 34%. SSAB APAC is still in a growing phase, and we still are investing in, in that area. And of course, ambition is just like you saw that emerging markets will take a larger part of our niche products going forward. And if you just look to different countries we see that United States is the largest single country we have, followed by Sweden. And these, of course, are the home market areas we have, and then the other countries are following.
Those different product types that we have is quenched and tempered steels, advanced high-strength steels, and then we have standard plate in North America, and standard strip in Northern Europe. If you look at the different segments and which customers are most important, in quenched and tempered, we see that yellow goods or construction machinery is the largest segment. Also, the picture that Martin showed, the Hardox Wearparts, that's pretty much in the yellow goods segment as well. That segment is quite stable over the business cycle as well, and that's one reason why we are regarding us not only a steel company, but a service company as well. So our customers can not only buy the steel, but we are securing uptime going forward.
In advanced high-strength steels, the automotive is the largest sector, and those of you that visited Borlänge yesterday could get some more deeper insight what we're actually doing in R&D within the automotive sector as well. If you go to standard steels in the plates in North America, the energy sector is the largest sector, while in the strip in Northern Europe, the heavy transport is the largest sector. And as you all have seen, the raw material contracts that has been in past on an annual basis has gone to more monthly or quarterly contracts. That's the same development we've done with our customers as well. If you just compare these pies, the picture that we showed you in 2008, then we had a big part of these contracts were annual or semiannual.
Now we have short-term contracts in all areas. Just going to balance sheet and the financial position, and just want to mention that. We have a pretty healthy situation and development in our financial position. The net gearing, we increased the net gearing due to the investments that we decided to do, because we saw the huge potential in quenching temper, but also the payback time is very good. So that led to our net gearing went up, but we've seen that when we have finalized those investments, net gearing is coming down continuously. And by the end of first half year, the net gearing was 56%. And of course, the net cash flow supported that as well, which led to the net debt went down by SEK 1 billion as well to SEK 17.4 billion.
We have excellent liquidity preparedness, about 24% of our annual sales. And that's something that we, during the poor times that we've seen, we have kept a very good preparedness in case of any needs of cash. And if you look at the term of our debt portfolio, you see that the debt is maturing about in average 5.2 years. And actually, we don't have any major maturities until 2014. And if you compare this picture that I've shown you earlier, we had actually SEK 5 billion in 2014, now we have decreased that to SEK 3 billion. And the green bar here illustrates the backup lines that we have, including cash. So you see that we have pretty good backup plans as well.
We are continuously working with our debt maturity profile to keeping that in a healthy, good position. In this picture, you can, you can see the net gearing development. As I said, after the big investments we've done, more than SEK 5 billion in our quenching lines and thick plate development, we ended up at a net gearing of 65, and now we have come down to 56. We believe that we have pretty good debt portfolio and also the debt level and interest rates are pretty competitive compared to our peers as well. That's something that we are benchmarking as well. Couple words about our FX exposure. Although we are a Swedish-based company, the real exposure actually is between euro and U.S. dollar.
Here, you can see the cross currency flows that we have. In net, we have about SEK 7 billion- SEK 8 billion outflow of U.S.. .dollar due to the fact that we are buying coal and pellet in U.S. dollars, while we are selling in the euro market. So we have about EU 7 billion- EUR 8 billion inflow. And that's the hedge we are doing between euro income and U.S. dollar cost. And our policy is that the same day we are actually signing, or same week, we are signing a purchase contracts, a longer-term contracts, we also hedge the income related to that purchases, so the cost base. So we actually, what we're doing basically is we hedge the margin. And here, just illustrating the cash flow in different business areas.
As I mentioned, the past 12 months, operating cash flow has been SEK 4.8 billion, and during the first half year, SEK 2.8 billion. Of course, Americas and EMEA has contributed well because of the size of the business areas. We also, comparing us with our peers and the peer group that we have used for several years back, is based on what kind of business they're doing. Basically, they are in a flat business type, and also they don't have mining exposure. If you just look, not only first half year, when we actually were number one, but also past, we've been the top three in past years, several years in EBITDA margins. Just like Martin said, our ambition is to be most profitable steel company.
We are in a steel business, but we, we can always see that we are the best of the steel companies, and we are measuring that by EBITDA margins. The other measure that we are comparing is the net gearing with our peers as well. And if you just look past quarters, behind, and the development, I believe that we are, among these companies, we are the only company that has actually decreased the net gearing quarter by quarter, while the other ones actually have increased the net gearing. So in summary, we believe that we have a very good liquidity preparedness, and, we have worked, with our cash flow generation, and, and this company has shown in, in history, as well, that we are very good generating cash.
Now, when the big investments are behind us, we believe that we have a very good position to generate cash going forward as well. As you know, we don't have any governance in our debt portfolio. Just a couple words about raw materials. We have one supplier of pellet, and we use only pellet in our blast furnaces in Sweden, and that supplier is LKAB. As you know, LKAB is located quite close to our operations in Luleå, and we have actually R&D development together with LKAB as well, to secure that we are getting the best type of pellet, which is most suitable used just for our blast furnaces. Different blast furnaces are different, so that's why it's very important that it's just suitable for SSAB.
Also, we have a freight advantage because we are just, you know, very close to LKAB in Luleå. As you see, to Oxelösund, we ship two different ways. In the wintertime, we take actually the Narvik way, and the summertime, just directly from Luleå to Oxelösund. We signed a new contract with LKAB in the summer, and that contract, compared to Q1 contract, was actually a decrease in U.S. dollars, about 6%, but due to the strengthening SEK, it meant a slightly increase in SEK cost. And, in your right-hand side, you can see the LKAB price to their customers as well. The blue line is the pellet which we buy, and the red one is the fines price.
The contract that we have is annual based, but there's a threshold or corridor. If the spot price is going up or down outside of this threshold or corridor, then we will have a renegotiation. As you've seen, the prices went down quite heavily during the summer and continued, and only recently, we saw an uptick on iron ore prices due to the fact that the Chinese government announced subsidies to their market in China. That created actually a purchasing boom for iron ore, which helped that iron ore prices went up a little bit. We are actually going to renegotiate our prices for Q4 and Q1, but due to the inventories, this will not give any impact during Q4 yet, but in Q1.
Also, we've seen a price decrease in coking coal due to the lower demand in steel. Actually, both coal operators and iron ore miners are actually postponing and cutting down their CapEx plans as well, due to the fact that prices are going down. We purchase about 60% of our need from Australia. That's on a monthly contracts. The remaining part, 40%, from United States, and that's on annual contracts. If you look at the prices on a monthly basis, you see that September prices were about 39% lower compared to September 2011. If you look our annual contract prices, they were about 25% lower in this year compared to year before.
And the contract year with, with both LKAB and, American coal suppliers is actually, the Asian fiscal year, starting first of April and ending end of March. Scrap, in U.S., we have, electric arc furnaces, so we only use scrap in, in those mills. We have one, one mill in Alabama, in Mobile, and one in Iowa, Montpelier. Scrap prices has been quite volatile, and, we saw the demand for steel products, to weaken in end of Q2, and most of the steel companies, just like we, had bought scrap on the basis of continued stable deliveries. When that didn't occur, all steel companies had too much scrap in, in their hands. So during the summer, the activity was quite low, and that's why prices went down.
On the other hand, when they have eaten up all the inventories in August and started to buy simultaneously, the scrap, scrap prices jumped up again. Now, in the past weeks, we've seen gradual decline in the scrap prices. It's very difficult to predict how the scrap will develop, but of course, import is one, or export from Americas is one factor affecting that, and that has not been supported during the summertime. Only thing we believe that scrap will be volatile, but how volatile, it's difficult to say. How are these input materials affecting us? These pictures just illustrate that we have a big part of our cost from input materials.
As you can see here, about 46% of 2011 costs were input material, about SEK 20 billion. Larger part of that, of course, is scrap, iron ore, and coal. Scrap is both in U.S., but also some of that is going to EMEA, while coal and pellet is only in the EMEA business. Just a curiosity to understand the sensitivity in this. If we take 2011 and keep all the other factors as they are, and just decrease the prices of coal and iron ore by 25, 25%, we had SEK 2.5 billion in EBIT 2011. That would increase to SEK 4.9 billion. So we would get SEK 2.4 billion impact just if we decrease prices by 25% on all coal and iron ore.
As you've seen in the previous slides I've shown you, prices has gone down quite heavily. And, of course, that impact will affect EMEA business. But we have, as a steel industry, we have a challenge. If just look how the input materials has developed in the past decade. Between 2000 and 2010, you see that input materials, part of the whole cost, part is going from 25% to those 46%. And, of course, in when the markets are weak, it's difficult for steel companies to pass by this increase to their customers. While when the markets are good, just like in 2007 and 2008, it's easy to do. Just a couple words about the emission rights as well.
In Europe, we have regulation and we so far been given the free allocation of CO2 emission rights within the steel industry. This phase that we are into now is ending by the end of this year, and the next period is from 2013 to 2020. The allocation is not yet finalized or there's only a proposal, which means that from a normal levels, they would decrease that by 10%. But how the final allocation will be, we will see in coming months. But of course, many of the steel companies are not producing full volumes today, which means that just like we are allocating surplus emission rights. And those emission rights, we are actually allowed to use in the next period as well.
Just a couple words about the summary and what I've been talking about. Thanks to those investments we've done in quenched and tempered steel, we see that the product mix will try to improve and give us benefit on the bottom line as well. And also, we've seen in the past, quenched and tempered steels are more stable over the business cycle. Those programs that EMEA and Melker will deep dive those a little bit more will give us a good benefit and cost reduction going forward. The flexibility will be here in the future as well, and by adjusting ourselves in the flexible environment and securing that our costs are more flexible as well, that will help us going forward.
As I mentioned, the fall in coal and iron ore prices will not give an effect until Q1 and forward next year due to the inventories that we have. We have one blast furnace in Oxelösund idled, and until the market situation is different, we will keep it like that as well. The EBIT for Q3 will be approximately minus SEK 700 million due to the weakening market we've seen. Thank you.
Thank you very much, Marco. Now I'd like Martin to come back to the scene, and I would like to invite you all for questions or comments or statements. There are two ladies here with microphones, so please use the microphones and state your name and where you, where you come from. Please, over here, Christian, please. Oh, sorry.
Thanks. Christian Kopfer, Nordea Markets. Thanks for the presentation, Martin and Marco. A few questions from me. Firstly, in accordance with the update you sent out a couple of weeks ago, if you call it that, you mentioned that you had 60% capacity utilization, and that was quite heavily impacted by inventory drawdowns. And you said that you were back at approximately 70% capacity utilization in the beginning of Q4. I mean, now we are on the beginning of October. I guess you are quite confident with the order book in October. So is that picture still valid?
The picture is still valid, but you need to remember that running at 70% is not great either, but it's much better than below 60%, yes.
70% is still? You also mentioned that you are able to take down the sustainable CapEx levels in worse times. How much are we talking about here? I mean.
We could, single year or two, take it down to approximately, I would say, SEK 500 million. But over time, the maintenance CapEx need is a billion, give or take SEK 100 million or SEK 150 million. But a single year or two, we can take it down to SEK 500 million.
Fine. And on the debt portfolio, you're, I mean, Martin, you said that you are continuously working with this. Still, you have also mentioned that you are trying to get down to, is it, 30% gearing?
Yes.
In the long, in the longer term or, say, two-three years. Is this still your ambition?
No, but to be honest, we have done an extensive CapEx, strategic CapEx program that has meant, I mean, when you invest, you have negative cash flow from those investments. They will now and are now starting to generate cash flow. So the difference between instead of paying out money to do the investments, have money flowing in from the investments is quite big. Then, as you say, we can manage the maintenance CapEx as well, and so yes, we will continue to take down our Net Gearing.
Thanks.
Okay. Can you hand over to the gentleman two rows behind?
Good morning, it's Alex Haissl, Morgan Stanley. The first question that I have is on a major business. I mean, what is your plan B? You mentioned it's a fixed cost, it's a volume business, and given your outlook for next year, with Europe negative GDP means volume should go down further. So my key question is, what is your plan B? Because cost savings are unlikely to offset the volume drop. We've seen it in the third quarter, you have impact nearly SEK 1 billion. So what do you think could trigger really to take out permanent capacities at your own sites in order to bring up capacity utilization? That's my first question. The second question that I have is you indicated the 70% capacity utilization for the fourth quarter.
Given that you don't get the full effect from the cost savings and the raw materials, no support, it's pretty likely that also the fourth quarter is loss-making in Europe. The third question that I have is also on the EMEA business. You mentioned you only use pellets. Is this the right production route in an environment with low capacity utilization, given the fact that clients are unwilling to pay the premium in this market? And the last question that I have in the European business, can you give us more insight, who are your end users in terms of automotive industry? I would rather assume it's the volume producers that you're targeting right now. Thanks.
To start with, plan B. Our plan A and plan B is to take increased flexibility and take down the break-even point to 70% in the strip business, and to utilize the investments to increase also the volumes of niche products, and to... That is our plan A and B, and we have taken out capacity. We have closed one of the galvanizing lines in Borlänge, and we could do other things as well, but our plan A and B is to do exactly what we have communicated.
Q4 last month.
Q4, let's come back to that when we release the Q3 report. This is, I'm not going to give you any EPS estimates for Q4 today, so let's skip that one.
What about pellets?
Well, pellets, we have no choice because we have no sinter plants, so we are fully dependent on running with pellets, and that may be a quarter or two could be wrong decision, but over time, it's the most cost-effective way of producing. We are not going to invest in any sinter plants and start to buy fines. We are continuously going to work with pellets. Gives us a lot of benefits when it comes to fuel rates, when it comes to call it environmental efficiency and things like that. But a quarter or two, maybe, I haven't done the math, but it could have been more beneficial to run with fines and own sinter plants, but we don't have that possibility.
What we can flex with is the proportion of scrap in the converters that we could flex between 15%-25%. But we can't produce with anything else than pellets in Sweden. And then lastly—
Our end users.
End users in automotive are the usual suspects, I would say. The big three in North America, the European producers and Asian producers. But remember, we are not a big automotive steel producer. We are not producing any body in white steel. We are just focusing on bumpers, crash boxes, side impact beams, and what do you call it, seat rails.
Mm.
And that's the only thing we do in extremely ultra-high-strength steel, cold-rolled material, like to call 1400, and that kind of material. There we have a very good position, but we are not aiming to produce anything else to the automotive industry or sell any other types of steel to automotive.
Follow-up?
I'm sorry. One follow-up question on this plan A and B. I mean, you're running at 70% capacity utilization. Given your cloudy statements or outlook for 2030 in terms of European demand, where do you see capacity utilization in coming quarters? What is incrementally getting better from here? Because the shift from away from commodity to niche products, it's more.
That will help us in the coming quarter, where the capacity utilization for the European steel industry will be in Q4 and Q1. I don't know, to be honest. This was not our projection. This was what I showed was one of the big banks' projection for GDP. We need, of course, in the short term, to adjust and be cost effective and productive, and even focus more on ramping up niche products. But our Swedish system is not as flexible as the North American system with electric arc furnaces. We are running coke batteries, we are running blast furnaces, and you can't adjust that production system day by day. So the important part for us is to increase the flexibility.
And if the base load, so to say, is 70% or 68% or 72%, well, beats me, but it's impossible to run that kind of system at 30%, then imagine that you would earn money.
Last question. Do you believe it's a cyclical downturn, or is it really a structural adjustment? Because if we have no GDP improvement, it's pretty likely that the European steel demand-
No, but as I said, I believe that we have structural overcapacity in Europe, for sure. If it's 20, 30, 40 or 50 million ton, I'm not sure. But we have a structural overcapacity, and we are seeing now capacity closures in Europe.
On the demand side, is it a cyclical downturn that you see? It's a cyclical weakness, or is it structural weakness, given that we have no growth in Europe?
I would say a combination.
Okay. Next question, please. Over there.
Good morning. Three questions, please. Firstly, what is a high volume runner?
High volume runner is, I would say Hardox 400, or may I say Hardox 450 in medium thicknesses.
What do you use it for?
Yeah, you will see a lot of examples today, so I will remember that question to my summing up. But tippers... You will see a lot of examples today.
Okay, thanks. With regard to increasing flexibility in operations, what specific changes in either working practice or salary terms would you most like to push through to improve your flexibility in Sweden?
Now, what we are talking about is to have a manning for a base load not being 100%, and then have flexible, what do you call it, contracts, to go up and go down from that base load. We're also talking about, and Melker will come back to that, but, focusing on what do we really need to do ourselves, and what can someone else maybe help us with? And we have a very good experience of that in our North American operation, where we are producing today roughly 2.5 million tons with, is it 1,000 people or something? Of course, we can never come that far because we have a different production setup here.
But the thinking, and we started that thinking some while ago when we brought over Paul Wilson as head of production in EMEA, but there is a lot of possibilities to be more and more flexible. And what we are aiming at now is the 70% capacity utilization, and as said, that will be done during or be ready during Q1.
But in addition to that, are you looking for further flexibility measures which can improve your profitability after the SEK 700 million, sorry, the SEK 800 million?
Sorry, after the?
After the current cost-cutting program.
We are always working with that. It's not a program in that respect. It's a continuous work, so to say. But what we have communicated and what we are talking about now is the 70% capacity utilization. I think that in an integrated system is quite good.
Okay. You talked-
But I'm not saying that we have—I mean, that we are fully ready for forever with that.
No, I... Okay, so nothing, not nothing that you can put any quantification to at the moment?
No.
Youre referred yourself to the structural overcapacity in Europe, and you've also made it very clear that your main area has been commodity steel, strip steel, in the current market. Have you conceptualized any workable projects where SSAB could permanently cut its own European slab production or commodity strip capacity without reducing niche production capacity?
I mean, one example is, of course, the idling of blast furnace number two, and as Marco pointed out, we will not restart that or reignite that blast furnace until we see that there is a demand on the market. And that blast furnace is mainly producing slabs for the Borlänge system . So that is one thing.
Okay. Idling compared to closure, what, what's the cost difference?
Not that big. It depends how long you have it idle, but of course, we don't have people sitting in the rooms just looking at the empty screens. I mean, we don't have any manning there, of course, when it's idle. And when we start it again, then we of course need to restructure the manning, but as we see it right now, we see no need to start that blast furnace.
Okay, great. And then finally, you had strong margin-
Then, of course, there is a difference because you need to do some maintenance and stuff on the blast furnace. So, I mean, if you tear it down and dismantle it, so to say, then, of course, you reduce it a bit further.
Okay. Well, the question would be: at what stage do you make that decision?
When we feel it's necessary.
... You had strong margins versus peers in the first half of the year, as you showed us. In fact, best in class. But it looks as if your Q3 margins are gonna be worst in class.
Okay.
Apart from looking at the first half margin comparison, do you have any other indicators or evidence to support your assertion that you have the best margins in your peer group?
Well, what we are talking about here is what we had during the first six months, and what we have had during the last years. I mean, what Q3 results will be and margins will be for other steel companies, I don't know that yet, and I guess neither do you. But, the ambition and what I'm a strong believer in, with the strategy we have and the investments done, we should be. You should expect from us to have an industry-leading profitability. If that is number one or number two or number three, well, that will may differ over years, but you should expect us to be top three, as we have been in the history, and I can't see any reason why we shouldn't be there.
Okay, thank you.
Okay, any further questions? Yes, over here, please.
Rutger Smits. You showed a slide on the finalizing of the strategic program. I take it there are very little of new investments in the near future, so close to nil. Is that it?
You mean strategic investments?
Yeah.
I mean, as we said, I mean, we have invested to capture the market growth we see. Then, of course, there could always be minor projects, and if we see something very interesting, we will probably consider that. But the big investment program and the need we have to reach our targets, that's done.
On the following slide, you showed the depreciation and amortization of surplus values. I must confess, I'm ignorant of what those surplus values are, but I guess that it might have to do with the IPSCO acquisition.
That's a good assumption, yes.
On top, off the top of my head, it from 2013 onwards is still some $600 million to be depreciated. And then on top of that, there is a goodwill value of SEK 18 billion-SEK 19 billion on that has to do with the IPSCO acquisition. And my question is: What's the point in having these high values? I mean, it's not in the cards to sell the American acquisition, of course, but still, why have that high book value when in today's market it doesn't reflect the actual value?
I mean, when we did that acquisition, we followed the IFRS rules, and we do an impairment test.
Still do.
And we still do, of course. We do an impairment test every year, and it has not been a problem so far, and we are not expecting it to be any problem. We have had very good results and very good cash flow generation from that operation. And just to give you a reminder, we have probably regained a bit over 70% of what we paid out in the investment so far, with, of course, a big part being the divestment of the tubular business. But still, over time, as Marco showed, I would say, decent cash flow from that operation.
We have no plans to sell our U.S. operations either, even though people from time to time ask if it is for sale, but we turn them down because it's very important and part of SSAB.
Okay, we have a question down there as well.
Hi, Fredrik Allgårdh from Handelsbanken. I have a question. When we entered this year, you were quite open on that we shouldn't expect any niche expansion from your new investments in 2012, but it would take some more time to get that out into the markets. And now we're approaching the end of this year, could you give any similar guidance looking into next year from your initial contacts with customers?
No, but what I said at that time was that I expected it to ramp up according to plan, and what we see right now is it is ramping up according to plan. What we will talk about today is how we do that and how we... I mean, these are, to some, in QL7, it's new products. It takes customer development projects, and we will see that today, and working together with customers to convince them to change material and change design. And we will spend an hour, 1.5, or 1 hour to do that. No, I'm not... It's ramping up according to plan.
We haven't said officially what, what that plan is, but I'm very convinced that we will be able to deliver of what we have decided to deliver.
We are quite confident that by 2015, we will keep the 50% of niche share.
Not by reducing ordinary volumes, because then we could do it faster.
But is it a linear development, or is it gonna be sort of back-end loaded in your, in your-
It's a gradual increase.
Mm-hmm.
It's not backloaded, and it's not front loaded. It's a fairly steady pace, I would say.
Okay, we have a question here.
From Nora. I have a couple questions on spot sales. Firstly, you've brought your, your contracts in terms of your, your sales contracts.
... down to a more shorter term basis, what's the justification or what's the rationale behind having the bulk of your raw material contracts still on an annual basis? And is there a plan to move that to more quarterly quarterly contracts? And then secondly-
Maybe let's take them one by one, because my memory is not that good.
Yeah.
The reason, I mean, raw material contracts are getting shorter and shorter. We felt that this last year and this year, that we could enter in. I mean, if you take the coal contracts, they are monthly now, and on the market, a lot of the iron ore contracts are quarterly. We felt last year and this year, that we could enter into a yearly contract because we had the lockup clause in the contract. And the corridor to either for us to renegotiate or LKAB to renegotiate was not that. It was fairly narrow. So we felt that we were not, we were not taking a big risk by doing that. I would say quite the opposite.
We came out fairly okay last year, and we will come out now when we know that we will renegotiate the contract, fairly okay this year as well. I mean, for us, over time, the only important thing for us as SSAB is to come out over time as index. We are not trying to do any smart businesses to beat the market. So as long as we come out as index over time, that is perfectly fine for me, because our competitiveness lies in the other part of the value chain, so to say, with our products, with our way of working, so.
So this year, if you take the rest of your peers in Europe, for example, as the index, I would imagine over the next. Well, in from the second half of 2012 to the first half of 2013, you would probably have lagged your peers or, or lagged the index, given that raw material costs have been falling.
Well, if they have spot contracts, we have definitely done that. But over time, I said, I mean, we could, of course, be a winner at a certain quarter or a loser a certain quarter. But for me, over time is the most important part, medium term, so to say. And we will be winners one quarter and maybe losers for another quarter.
Yeah, but I guess in a falling, and now that the raw material cycle seems to have turned, I guess, on the way up, you know, if you're on an annual contract, there are windfall gains that you get from the miners by being on the annual contract while spot prices are rising. When that raw material cycle has turned, as it seems to have done now, and it could continue to fall till 2014, 2015, being on a shorter term contract means, I guess, that you capture the fall every quarter rather than, you know, be stuck at a high price.
No, but we haven't decided to sign another yearly contract for pellets or iron ore. We haven't started those discussions. Those discussions will probably start in March or something, and then it's a new decision point, and then we will decide if we will go for a quarterly contract or a yearly contract or something else.
Second question is, just wondering if you benchmark your fixed cost per ton at, say, 70% utilization rate versus your peers. Is there any more color you can kind of give around that?
When it's possible, yes.
How does SSAB fit there versus European peers, for example?
Well, it depends what kind of product mix you have. Of course, we have higher fixed costs per ton when we're producing niche products. And we, I mean, we are not cost competitive when it comes to standard products, to sell that, to export that to China or North America or something. The standard products we do in Sweden, in the strip mill, is mainly for the Nordic region and call it Northern Europe, where we are cost, could be cost competitive. But, I mean, there is no chance with the scale we have and in the transport cost that we can beat ArcelorMittal in Southern France, just outside, just outside the gates of their mill.
But in the U.S., we are to the very left of the cost curve, with not only the best quality, but also the lowest cost per ton, regardless of where in North America. But in Sweden, our standard products can't afford to travel all over the world.
Okay, so one final question on the demand side. Obviously, Caterpillar have come out and lowered their guidance for the medium term. And then you've got, you know, pretty shocking numbers coming out of China in terms of-
Mm.
year-on-year fall in demand for excavators. Is that something that worries you, or is this... I mean, how would that impact the SSAB?
What we can do as a medium-sized company is to focus, to try to manage this in the short term, of course, but then focus, as I see it, on our strategy to produce and sell more products that are less volatile and where we have a very good position. Then, of course, it worries me, but I can't really change that, and we can't really change that. So we just need to live with it. Try to do the best we can, short term, for sure, but long term and medium term, stick to our strategy, and that will be the difference of success and failure for SSAB, as I see it. And as I said, I mean, I'm convinced that we will deliver on these targets. Fully convinced.
Okay, next question, please.
Hi, it's Stephen Benson here from Goldman Sachs. Your guidance for break even at 70% utilization, does that assume SEK 500 million fixed cost reduction?
It's a combination, and Melker will come back to that, so maybe we'll ask him to answer that question in a better way later. But it will be to take it down fixed cost with SEK 500 million , and then to make SEK 300 million per year flexible.
So, we could assume that-
From fixed to flexible costs.
If we had flat utilization from now till the end of the first quarter-
At a time.
You would be at break even, assuming fixed costs come down by SEK 500 and then maybe SEK 300 of variable?
That's correct, yeah.
...Okay, and could you give some specific examples of what you've accelerated on fixed cost reduction in the fourth quarter?
What we are doing, we are reducing the manning, but thinking about a lot of other measures, and Melker will come back to that. We are also, I mean, as said, focusing on learning the lesson from our North American operation, what should we do ourselves and what should we not do ourselves? And the things we are not doing ourselves, we will outsource at flexible contracts, as we have done in U.S.. So there are a lot of actions going on, and what we have said is that we saw the opportunity when we started, we said that this will be done during the first half year of next year.
When we started to deliver, we felt that we actually have the possibility to accelerate this, to be ready at the end of the first quarter next year.
Okay, any more questions? No. Well, if not, we will take a coffee break for 20 minutes, so we, we'll see we meet here at 5 minutes past 11, then. Welcome back.
Okay, can you please take your seats? There will be some more people coming in, so I think we still have some more seats. There will also be new handouts printed because I think there is a lack of handouts for some of you haven't got that, but we will arrange that in a few minutes time. Now, we will make a deep dive into our R&D, our research, our development, and also our customer projects, how we work together with our customer to develop their applications and their work. So first of all, I give the floor to our CTO, Karl-Gustav Ramström. Thank you.
Yeah. Hello, everybody. I think it's good it's raining outside because then you're not tempted to go out. You would rather stay here inside. Yes, I think, we all, faced the headwind from the market today, but personally, I think this is also a moment of opportunity to hunt and develop new business. And, I have learned that when you are out in the forest and approaching a target, it's better to have headwind than tailwind. Is that correct, Martin?
That's great.
Okay, good. So we have a good opportunities now. Let's get started. Do you know what this is? I hope it will explain itself, but otherwise, I will say a few words. This is... Do you see what it is? This is, in fact, an illustration of the world's broadest product offer in advanced high-strength steels. It's a Hardox 1 mm plate. In fact, we can even roll it 0.5, but from practical reason, this is a 1 mm, so that's a plate we use already now in projects. And here you see the thickest grade in Hardox HiTuf, 160 mm from our latest development in, in Oxelösund. So this is a huge and wide product program we now can offer to the market. When we talk about advanced high-strength steels, we, we have four main brands. One is the Hardox, wear-resistant steel.
It's a wear plate, and then we have our structural steels, Domex and Weldox, and the cold-rolled Docol, mainly used in the automotive industry. Another way of expressing this is to look at this chart, and here you see it starts from megapascal. We talk about the yield strength here. The blue bars are structural steels, the red bars, wear steels, and the black bars are engineering and tool steels. And you can also say that it reflects the evolution in time. 20 years ago, we started to develop products with around 700 MPa yield strength and Hardox plates with, in that case, we express it in Brinell, the hardness. It was 400, and then over time, we developed more and more advanced steels. But of course, it also differs whether it's a thin or a thick grade.
So we have also a lot of very advanced, thick grades here in, let's say, in the 700 MPa or 900 MPa range. So it's not only the hardness itself that is important. That leads me into the next picture, because for us, modern steels are more than hardness and strength. It's. We talk very much about hardness and toughness. It should resist a lot of things, it should not crack. We talk about strength, but also formability. So the challenge for us is really to develop new steels that behave as ordinary mild steels. And when you read the data sheet, you will find a lot of competitors that also claim that they have the same strength or the same hardness as we have.
But I would say what differs us from many competitors are other parameters that makes it more easy for the users to utilize these type of steels. So for example, different grades, different hardnesses are different when you use them in the workshop, when you cut them, or when you join them or bend them, for example. To have the right properties to make it easy for the customers to have high productivity and high quality in the production, that's really key. And we also see now a trend to develop what we call tailor-made steels for certain applications. For example, spot welding or other type of applications, roll forming, for example, that is becoming more and more popular in the automotive industry.
Another very important area is to understand what can happen with these steels, and to avoid it, it to happen. For example, here is a bar here that has been tested in a strain test here, and here you can see the piece, not broken in this case, but here you have the thinner part, which is the high-strength part, and here you have a mild steel, and then you have a weld joint in between. And when you did like this, you can see it was not the SSAB steel that was the problem. It was not the weld, it was the mild steel. And that's exactly how we want it to be, because then we haven't introduced a weak part in the design.
Now we can take advantage of the high-strength steel, and that's exactly how we work with customers to help them take advantage of these type of steels. And then, of course, there are other areas like stress corrosion, to help them to avoid this to happen. Also, to make sure that we have enough toughness so we can avoid brittle fractures, especially when it's getting cold, you know, the big, big mining trucks operating up in the Arctic mines or in Siberia or in Canada. They really have an advantage if they use our steels with very high toughness, because the risk for brittle fractures will be less. And also something which is not talked so much about in data sheets, too, is the consistency of the products.
When we talk about parameters, and it's a fairly wide range, but we are really narrowing it, and we also, every time we produce it, we make sure that we are in a very narrow bandwidth with those parameters. And this will ensure high productivity in our customers' processes. Less variatios in Shape if they do something with the products, and a lot of things like that is highly appreciated by our customers. And of course, we also have expertise to make sure that this will not happen. And just for your information, there is no SSAB material in these cases. It's a wind tower there up that has buckled and fall apart, and then there is a track here. It's the frame beam here, but as I said, not SSAB material. And we have the expertise to help customers to avoid this.
When we do our development, we always want to be as market-driven as possible. We look at the end user and the steel fabricator, and try to find out what are their demands, and how can we help them to be more successful and utilize these high-strength steels. And then we try to develop something that suit them with, with our steels, but also to help them with applications and, and how to work with these steels. It could be tool selections, or it could be, recommendations, how to, how to join, join the material, and so on. And you will hear more about that later. And when we do it, I think it's extremely important to have the whole supply chain in mind.
We talk very much about lightweight designs or durable designs, but we have to understand from the end user point of view, but also the OEM putting together this equipment, the sub-supplier doing something with the steel, and make sure that we have the right products available, easily available, for the user. So everything needs to be taken into account when we develop an offer to our customer groups. Just take a look at this fabrication, for example. There are different kinds of fabrication, and a little bit simplified, we talk about one-piece production, heavy machines, where you maybe make the design for exactly that piece of equipment, and then you start to produce it.
You have what I call serial production, where you do more than one, and you make a drawing, and then you produce maybe thousands of them. And then you have mass production, where you make millions of components and parts. And here, it's extremely important that these properties are in place because you can't afford to have problems in your production, low quality, high scrap levels, and so on. So it's about splitting material or cutting it, it could be forming it, or it could be joining it. And just a simple example, I mean, also on the ordinary steel, if you want to laser cut it, if it's not flat enough, then you can easily damage the laser cut head.
And we know that some of our lower grade Domex, for example, which we sell here in the North Europe, are very appreciated because they are so flat, so they don't have any problem in the production. And here, we have a small premium, even though it's a, what we call an ordinary steel. Now, you will see a movie, more looking at end-user value, and I won't say so much. You can look it. It's, of course, a Hardox bucket. But here you see a modern design of a hanging on a big truck. You see these big rocks, very, very lightweight design, thin material. It's very elastic here. Springing back, the spring going back. Compare this with a very huge, heavy, stiff design. And here you see the wear application, and the frame made in Domex.
I think this is a very good example of how important it is to design the right way and have the right properties. You couldn't see any dents coming from those big rocks coming in. It could stand the wear when you were tipping it. It was a huge weight reduction in the design. And all these things you have to bear in mind when you do something to take full advantage of these steels. And today, I was driving last week from Munich to Stuttgart, and it was a big, big road construction ongoing in parallel with the highway, and, you know, it was a lot of excavators and trucks. And all the trucks that I could see were really built according to, to these design models, and we were part of that development 15 years ago.
So I think we have been really in the forefront of working with these materials and designs connected to it. So that was nice to see. And I think we have huge opportunities in our new markets to really transfer this know-how and technology into new markets. I talked a lot about properties, but I don't think we should forget about the environment, because utilizing these high-strength steels means that you need less steel for the same function in the design, and that, in turn, will lead to less CO2 emission in producing less steel. And then the second, so to say, value will be for the end user. If you develop a new tipper body that, let's say, is 25% less in weight, that will also mean that you have less fuel consumption when you drive this car, and that will also result in less CO2 emission.
So using advanced high-strength steels is really a part of the solution to become more use of environmentally friendly. That is sometimes forgotten a little bit. We always talk about the, our other end user values, but I also think this should be known by the society, that this is really good for the steel industry, if we can contribute with this. We have also talked about being customer-oriented, customer-driven, and when we develop new products and new offers, we always start with a customer group, a certain segment, and try to find out what are their challenges, what are their needs, how can we help, how can we make sure that if we sell them steel, that they can get something positive out of that.
That's the way we, together with our sales organization, try to define how we should steer our R&D development. Then we produce application facts and offer this to the market as segments offers. It could be for the material handling applications, in the mining application, it could be for the heavy transport trucks, and so on. So we do this in a very consistent way and do it for different customer groups. So that's. So we don't anymore just develop a steel. We try to have something in mind when we develop it. And I think that's also a differentiator compared to some other steel companies. And I will also use this picture and try to explain how we see how we can develop the market.
In the lower left corner, you can say that we have our existing application and our existing customer base. And here, it's important to have the right customer base, the ones that are leading the market, that are growing, because those customers are most often the most eager ones to try something new, to become even better. And then we go to the right lower corner, upgrade them, because they don't-- we don't need to push them. They are, they push us. But then up to the left, here we have new geographies, new customers, and here we can take what we have already today and bring it to them. And I use this German example with trucks, but if you drive in China today, you can still see a lot of trucks, but they are mostly based on the old design.
So here we have a huge potential. And then, of course, also up, up in the right corner, we are also working with some new, new businesses, but that will take some time until it generates high volumes. So I think the other two boxes are the most important for us when we want to grow short term, because then we can outpace the GDP growth. You see what I mean? Because we have an upgrading, an adoption possibility, and that's really what we're aiming for. And that's why it's so important that we also support our customers with application, and technical know-how when we sell it. So that we- so we don't just leave over, leave over the steel and say, "Do something with it." We tell them what to do, and how they can improve their existing designs. So how are we organized within R&D?
We see three areas. We talk about the application development closest to the customer, where we identify the opportunities, and where we help our customers with conceptual designs, how to take advantage of these advanced high-strength steels. Then we have the product development, and research, where we develop new grades. We are not at the end of R&D when it comes to new grades and new steels. There are many more things to do. And then also, we are focusing on process development, because to produce with consistent high quality, and high productivity requires a lot of know-how, and you can't just buy it from the line builders, and expect that you have a top-notch facility to produce advanced high-strength steels. We have put a lot of knowledge and effort into our own equipment.
As part of our commitment in R&D, we have just recently opened up a new R&D center in Kunshan, outside Shanghai. In the startup phase, the focus will be on advanced customer support, and application development. I think we have already a number of projects ongoing, which you will hear more about later this afternoon. We are not doing everything in-house. We also have a lot of collaboration with external research institutes, and one of the most important ones is with a research institute here in Sweden, Swerea KIMAB. But we also work together with another Swerea company, Swerea MEFOS, more focused on process R&D.
And we are also happy now because the government has approved an additional SEK 200 million in research for mining and metals processing, and we will take a very active part in these research projects. It's not enough with this. We are also working with some leading universities in material sciences. For example, in North America, we are working with Carnegie Mellon, Colorado School of Mines, and University of Illinois, and here in Sweden, of course, with the Royal Institute of Technology, Luleå University, and Högskolan. And I have already mentioned the research institute, Swerea, here. Application development, product development, yes, but and then I talked about process development.
Something maybe you don't think of immediately is that R&D can also help when it comes to optimizing our production flexibility, because using the latest, I mean, research, and ideas, how to run blast furnaces, for example, will widen up the range how we can run them. Normally, you can't say, "Oh, you have to run them at full speed." I don't think that is true anymore. We have learned a lot since the last recession, and we can still keep up the fuel rate at decent levels. But also how to use... Now we have a global production system. We can produce Hardox in Borlänge, in Mobile, Alabama, in Oxelösund. How to utilize that global production system in an optimized way to make sure we get the best result? That is also something that the R&D can help.
Not do it completely on their own, but be part of those optimizations. So I think R&D is really key in order to, to keep the, the competitiveness and, and improve it, and, because it's not only scale and cost. If you are a niche player, you really have to be on the edge with the latest products and the best offer. And here, R&D is enormously critical. And some of you saw this facility yesterday. It's the cooling line in Borlänge, and I think this is the most advanced cooling line of its kind in the world today. I'm pretty sure about that. It's very advanced. Delivered by SMS, but stuffed with knowledge and from SSAB, so you can't buy this on the market. And I think that has also been confirmed by SMS.
But we also have a top-notch facility now in Mobile, Alabama, so now that is ramping up. So we have now new capabilities, which we are very, very happy for in the R&D department. And you can expect a pipeline of new products coming out for the coming years. You don't have to read it, but you can see that already 2012 and 2013, new products are coming out, both from the Borlänge facility and from the Alabama, and then it moves on. So new possibilities now with the new equipment. And this is also a nice picture, I think. I talked about being in Germany last week with some colleagues here, and we visited this customer. It's a new, new member of Hardox I n My Body, and they, they are now using Hardox 400, 3 mm from the QL7 in Borlänge.
So they have replaced the steel in the drum, the yellow and blue part. And also the loop inside here. So I think they told us that they reduced the weight by 500 kg, around 20%. And also they have increased the life length of this part of the truck. And they told me it was important to balance the life length of the truck and the drum, because there is a secondhand market for this type of equipment. And in the past, this drum part was worn out faster than the truck, but now they are more in balance. And we are also discussing some other parts on this design to be replaced by Hardox material instead of mild steel. And this has been done in a fairly short period of time, I think three quarters or something like that.
This is the customer we like, the customer that is willing to take some risk, is very see opportunities, and they want to be the best, so to say, supplier of concrete mixer trucks in Europe. We will try to help them to be that. This is another example, more for the thick plates area, and here you can see these are components from the dragline part here, and then there are some demolition tools and rippers. So there are new possibilities with the new products we are introducing right now. We also have some software tools to help our customers to select some of the, our products, to find the right products. We have a wide range of products. It's not always easy to find out which one should you use.
Of course, we can help them if they call us or if we visit them, but now also we have a tool where they can find out by themselves, logging in to our website, and then find out which steel to use. We also have our own application, an app on the mobile telephone, where you can find a lot of information, how to contact us, product information, or different kind of events we have in the company. And then we have some other software tools, where we call it instant value calculation, where you can find out how much money you can save by upgrading your existing design to something based on our advanced high-strength steel.
Or when it comes to a wear application, we can help the customer to find out the right steel to be used in a mining operation, for example. Yeah, of course, IT tools are important and, helpful, but I don't think IT tools will replace the deep knowledge of a person. And, Martin mentioned in his, presentation that this was something that was unique for the steel industry, to have this as part of our market and sales model, to have this offer. And we have invested a lot in that area, and, you will now have the opportunity to listen to one of our real experts in this. It's a person with a PhD in steel structures and with a, a lot of experience working close to customers. Please, Eva, the floor is yours.
Thank you for the very nice presentation, Kåge. So my name is Eva. I've worked for SSAB. I've had the opportunity to work for SSAB for six years. Before this, I was an assistant professor in steel structures, dealing with issues directly connected to light structures and utilizing steel. I actually met SSAB in a research project that we had together. So back to this picture. There are challenges when using high-strength steel, and this was recognized by SSAB some 30 years ago in the beginning. So the technical support from our general technical technicians, and also the specialists, has been developed ever since. Here are the main challenges in the design phase, which is where I work.
It's keeping the stability of the structure, and also avoiding cracking, from misplaced welding or, or other types of details that could make it fail like that. And again, these are not SSAB customers. My work today is a combination of testing and learning in our facilities and in research project, giving very practical advice to our customers, and working together with them in, in project, developing their products. So I'm not involved in our product development, but for our customers' product development. Last week, you were in Germany. I was in Siberia. I was at a manufacturer of, of the freight car for trains. We spent three days, first discussing with the management about the possibilities of using our steels in their products, before reaching to the structural engineer, which is most important for me.
We were discussing with them the challenges, of course, that we can see, but also the possibilities, what kind of requirements are they having. We looked at drawings from different models that they have. Day three was spent putting everything on paper, which is very, very important in Russia. What I bring back are drawings from three of their models. We will, at SSAB, give suggestions for what steel they should use, maybe some suggestions of redesign. They will then do the calculations, the hard work. We will evaluate together, and see what will happen, in the future. I'm probably going back, I hope in the spring, because it's very cold I hear. So I'm in structural technology. I work with the business of carrying load. That's what I do.
Often at the beginning of a customer project, like the one in Russia, pointing out what to think about, and maybe helping them with the redesign, if that is necessary. The next step would be going into production using our steels. And then I have colleagues within the Knowledge Service Center, specialists in wear technology. They will also be involved very early in a project. I have colleagues in joining a lot with welding of our materials, forming, the bending, the shaping of the plates, and also production efficiency. What money is there actually to be saved by using high-strength steel in a modern design? I want to show you some examples, some applications, where our high-strength steel has been used for a long time, actually. Three new applications.
Those of you who visited Borlänge yesterday saw the automotive business and the safety parts in the automotive. I have three others. I also want to show you the difference between an ordinary mild steel and our high-strength steels. I want to finalize with a customer project that was actually shown last week in Hannover. I don't know if you visited that fair, no? In Hannover, where our customers showed their new product, their new premium product to the end user, and we participated from SSAB. So example number one, this is Pastre. It's a Brazilian company that manufactures sugarcane trailers. Their vehicle looks like this. The upgrading has given them 3-ton weight reduction for this vehicle. Of course, leading to less dead weight, more payload, good for the end user.
The upgrading has been done in 2 steps together with SSAB, and this has been going on for many, many years, and that's a very successful project. The lower part is using our Domex hot-rolled product. We have a lot of experience using our Domex 700 in these parts of trailer chassis. Over I looked before I went here, over 300 customer projects over the years, dealing with Domex and using Domex in these parts. The upper part of this trailer is done in Docol, our cold-rolled material, with a maximum thickness of 2 mm. Sugarcane or sugar is not an abrasive load. It doesn't wear out the material, the steel, loading and unloading, which is actually the opposite of this vehicle, my application number two.
This loads rocks and even rock cuts, as in the movie we saw before, that KG showed. Very abrasive materials to be loaded and unloaded frequently when in the mining area. This is a South African vehicle, and they have a very innovative shape of their tipper truck body. Very innovative and very good from a wearing point of view, and also from moving or the structure of the material or the vehicle when unloading. But being able to have this shape and still a very wear, abrasive, a wear-resistant material, they can get that from Hardox. It's hard, but it's shapable. They lost eight tons with this vehicle using the Hardox. They also gained a lot of life compared to the previous models. And it's a big vehicle. I don't know if you see the person here. This is a person.
My third example is from Sweden. This is the forwarder. The purpose of a forwarder is to bring logs from the clear-cutting area in the deep forest to the road for further transportation on a truck. They work in very, very rough terrain. You can find on YouTube very funny movies where they get stuck in the forest. Breaking down or a failure in the middle of nowhere is not an option. And in their new model, it's actually completely new. They've decided to work with Domex and Hardox. By using high-strength steel and a modern design, they actually also, despite... They lost weight, but they also cut the production costs by 30%. They could also, losing the weight of the structure, install a more environmental friendly engine, which is positive. We're talking about the environment.
This is one of the Swedish Steel Prize finalists this year. In November, we give out a prize. We, we've been doing that since 1999 with the SSAB. It's a prize for innovative and good applications using high-strength steels. It's actually been called the Nobel Prize for engineers. Okay, so how is this possible? How can we lose this much weight? I want to try to explain the difference between an ordinary mild steel, taking it up to a high-strength steel. So again, this is a bar chart. This is our materials, and this is representing the strength of the material. The Domex 460, 700, we're up at 960. This is represented by the new investment in Borlänge. This is where an ordinary customer starts.
This is the starting point for using an ordinary mild steel. So taking the step up with a stronger steel, less material can do the work, and they can lose weight in their structure. This is using 700, Domex 700. We've taken this up to 700 level. Very common, we have a lot in Europe, I think exclusively, 700 is being used.... Maybe now it's time for the next step. You can see it's almost done in steps, as KG pointed out. Now it's time for the next step. We have a lot of experience with the 700 now. This is the same, but for the wear-resistant steels, not only the strength of the material, the same here, but also the hardness is measured for the wear, abrasive steels.
It's difficult to state where is an ordinary, where do we start in the upgrading? But, but the Hardox, as KG pointed out, is a material that's very strong, very hard, abrasive from abrasive load, but it's also formable. Usually, you have to pay with a hardness, with a less formable material when you use ordinary steel, and there's nothing that beats, the Hardox on the market today with this combination. So using the strength of the steel, we could do a lot of redesigning. This is from a conceptual design, the conceptual study. It's connected to the U-shape that KU-- KG showed. This is a traditional design of a container, a container body.
This is in mild, ordinary steel, and I don't know if you can see it, but it's actually the sides need to be supported by ribs in order for the mild steel to take the load. I don't know. Can you see it? Using a higher strength steel, you can actually lose all these ribs. Not only are you losing weight this way, all these ribs are welded all the way, so a lot of production cost is cut also using a modern design. This is only possible using the high-strength steel. And I want to show a movie.
We put this container to the test, and pay attention now, not only to the face of the driver, which is very, very funny, but also to the deformability of the steel, how it bounces back after being hit by the weight, and there's almost no damage left. The top line would be the load carrying part, and as you can see, it has a very, very large deformation, but it bounces back. It would have been even more fun to do this test with a mild steel, because I think that the weight would have gone straight through. Would be good to just have to show, maybe in the next project. So upgrading to high-strength steel, we will increase the dent resistance, the capacity to take these hits.
With increasing yield strength, the strength in the material, we, we will increase this resistance or this capacity. But also we will increase, I would say, the need for knowledge. We were talking about that, the need for support for the customer in order to utilize this. They're buying a steel that can do much more, so they also would have to utilize it, and, and we can help with that. I want to show some test results, actually, to illustrate this. This is test results from a certain kind of connection, where we've changed the quality of the steel to be hardened stronger and stronger, and we measured the fracture load, the capacity of this joint. The joint is joining two plates together with a plug weld. Very common within automotive industry.
Not so much with the, with the trucks in the mining, but just to illustrate. This is test specimen that, with the results from the blue dots, where we applied the load on the connection in this direction, pulling it apart like this and measuring. What is the fracture load? What is the capacity for this joint changing to higher and higher strength steel? And as you can see, there's almost no influence in using the high-strength steel. We have the same capacity for this joint. We're using mild steel, or we're using ultra-high-strength steel. Not good. If we instead take the same, the same joint, same plates, plug welds, and we load it in this direction, try to pull this connection apart in this direction.
We can see that we have a strong influence in what kind of steel, what kind of strength in the steel are we, are we using. So the redesign, in this case, to utilize the high-strength steel was, is to try to avoid this, try to redesign, to not have the joint loaded like this, but more like this. And this is what we do in the Knowledge Service Center. I would say that this illustrates, in a very good way, the difference between a bad and good design in high-strength steel. In a mild steel, we said that that was about 200, 250, maybe 300 MPa ordinary. The difference between a bad and good design is not that much.
A bad design in terms of using high-strength steel, I would say, is perfectly fine, but the difference is a lot when trying to utilize the very ultra-high-strength steels. Taking the step from a bad design to a good design in terms of using material, that is what the Knowledge Service Center can do for our customers, and that's what we do. I want to end my presentation by showing a customer project that was finalized last week, or first step was finalized last week, I would say, because I think there's more to be done. It's a Swedish company, Modul- Systems. They do interiors, shelf system for service cars like this. This is what they deliver.
They have all their production in Sweden, but their market is worldwide, and they need to compete with the premium products like us, and on with price. So they contacted, approximately one year ago, they contacted SSAB because they, they met us, at a fair. We had, some meetings during the, the fall last year, just to look at-- we started with the shelf, itself. We looked at how we could design this shelf in a very, very thin Docol. The shape of the upper parts, taking actually a little bit of the knowledge that we have from the free hanging, the big, tipper bodies. But this is a, a Docol in 0.6 mm going in a service car, so completely different. Back and forth with the design during the fall, actually, SSAB supported with some computer calculations.
These are three different shelves. This one has the same weight as the final in high-strength steel, but using mild steel. When red color appears, the material is giving up. The next one to go is twice as heavy as the high-strength steel shelf using mild steel. This is what they finally went for, the Docol 1000 in 0.6 mm. This is from the fair. We lost 45% of the weight of these systems that they have. They were very happy with that. And this is a picture from the fair that was last week. It's using Docol, as I said. And at this fair, we had SSAB people participating to explain to the end user that this actually works, that this will carry their tools. And not only that, it would also be safe in a crash.
They will not have all the tools in the back of the head in a crash situation. But it is a stronger steel, and even though it's very, very light, almost the, the feeling of aluminum, it actually can take... They have all the functions that they want and they need. Okay, that was the end of my presentation.
Thank you very much, Eva. I would like KG to join Eva now, and we or they are ready to answer your questions or so, so please.
I prefer technical questions, okay.
Yeah, and I prefer non-technical questions. So we are-
So we are a good team.
Yes, that's right.
A good team.
Yeah. Okay.
So, Alex at Morgan Stanley. I have a few questions on this weight reduction. Basically, it also implies that the steel intensity is falling, and it also means that we need less steel going forward, right? So how has this evolved over the last few years, and how you see the total market for this kind of product? Because if we lose 20% in weight for a few applications, it would mean we need to trigger a volume replacement in order to offset the total decline in steel volumes. So my question is, how does this threaten the overall industry if this is accelerating going forward?
KG?
Yeah, let's put it like this. Of course, I mean, one for one, it will mean that we will use less steel, and the good thing was less carbon dioxide, of course. But on the other hand, I see small cars, for example, you can't build a small car safely today with that is fuel efficient without using this type of steel. So that will may, hopefully, also trigger some new applications, that in turn, I mean. And we will also be able to challenge aluminum now. And you see that kind of trend coming a little bit. I mean, first step was to lower the weight by using aluminum, and that you can still find it in the luxury cars, of course, but a small car can't afford to use aluminum to that extent. And here they see now new opportunities by using these type of steels.
So of course, maybe a little bit less steel consumption, but I think it's still good for the society to use more of this. And I'm not sure that the steel industry will be hit on their top-line revenue because we will probably get a little bit better paid for this type of steel.
No, it's not the top-line revenue, but it's the overall production-
Yes.
which is measured in volumes.
Yeah.
And, uh-
Yeah, yeah.
So if you're right, and you're—
But that's, you know-
20% less, you would need less—
But I say internally, I hate the word tons, you know, when we talk about this industry. I want to talk about something else, you know, the products we and the applications we provide. Tons is the old way of expressing the value and revenues. We should change that into something else.
But how big is the market? Which applications you see next where advanced high-
But I think we have just scratched the surface on tipper bodies in China, for example. I, maybe Martin can explain it, but, I mean, there are so many trucks in China not using this. I don't have a good picture of that because it's not that easy to go get these statistics, but the potential is huge, and it's a little bit our own imagination or lack of innovative thinking that is stopping us rather than the markets.
Okay, thanks.
Thank you. I think was here first.
Thanks. Christian Kopfer again from Nordea. We have witnessed a number of presentations from you on, I mean, the investment case behind the upgrade from standard to niche steel products. And obviously, the potential of this market is still, as you said, KG, enormous. And I can recall a number of years ago, before Lehman and all that, you said, I think you said that you could deliver some 30% more of QT than you could produce. And besides the macro that we all know, what would you say have happened since then? In terms of competition, in terms of your challenges to explain to your clients, the future clients, to, you know, upgrade from standard to niche steel products.
That is sometimes a bottleneck internally. I say our way of working with customers, I mean, it's highly appreciated, and we need to do even more going forward. We are expanding these resources. I would say that our R&D centers in China is a good example of how we want to increase our presence in the Asian market here, because we need to be stronger there. It's, yeah, that's, we are working constantly with it. Latin America is another market where I think also we are increasing our presence.
Would you say it's... I mean, when, when you explain the investment case, I mean, to me, it's very clear, and it sounds of mostly very, very logical.
Mm-hmm.
I mean, is it tough to explain to the clients? Or what's the—
I mean, a small customer or sometimes they don't have enough resources or knowledge, so they can't go on their own. So they are a little bit hesitating. They, they want to do something, and then they need our expertise. Big customer, automotive industry, they have their, their own knowledge and so on. Then we are more dependent on model changes and so on to come in, right, you know. And of course, when it comes to high volume application, we see also competition increasing for, for, I would say, structural steels. That's the area where we meet the most competition, I would say.
Okay, before we take the next one, I see some gentlemen standing over there. There are some free seats over here if you want to sit down. Please go ahead.
I guess, a couple of questions. Similarly, kind of, overlapping with this last question. Firstly, what's the, I guess, the biggest piece of pushback that your customers give you in terms of the upgrade to advanced high-strength steel? Secondly, could you also give a bit more color in terms of the threat of aluminum or the competition between aluminum and advanced high-strength steel in autos? And, like, how strong is aluminum-
Mm, mm.
Relative to about that, and how, how heavy? And also, like, things like the cost, you know, could you give us some sort of idea as to how much, what, what the price per ton?
I think I'm not an expert of prices. I don't work with that. But with aluminum, I think there's a factor of three that works. I think the factor three in price, I think the factor three in how much it weighs, and also in the strength that's actually possible to have in an aluminum. And I would say that the aluminum is not hitting us, it's the opposite. We're going into their business, us replacing what's formerly had to be used aluminum because the weight is crucial. We're hitting them with an alternative that's much more in production, and much more cost efficient and cheaper to buy also. So it's the opposite, I would say, with aluminum.
And in terms of, so it's cost as well, you're talking about a factor of three?
I think so. I'm not sure, but I think it's about that.
It's a rule of thumb we're using, so it's, yeah.
Okay. And the biggest piece of pushback from clients, you know, why wouldn't they upgrade? Is it a cost issue, or?
It could be, but it could also be that, CapEx. Maybe cost, but when I go into a—when we go into a project, I think that we're always coming forward in a nice design and high-strength steel.
But maybe one example, I think we participated heavily in the development of the Fiat 500, which was the first small car to receive this 5-star Euro NCAP crash test, and that wouldn't have been possible without using high-strength steels. And that was also a very lightweight car. So that was a little bit the start, I would say, in the industry. Now, I mean, there are new designs coming, so I think there is both, I mean, safety reasons and fuel consumption that are the driving forces in the automotive industry.
Maybe if we can't redesign for the customers to utilize the material, that of course is a cutback. But in most cases, it's actually, with the experience that we have, it's actually possible to do, to utilize the material.
We have one more question at the back of there.
Hi, Fredrik Allgårdh from Handelsbanken. Yeah, I have a question on niche is a very wide expression, and I think that what you have been saying historically is that the price increase is everything from 25% to three times standard steel, depending on what you use it for. Within the niche, sort of the mix, in the mix, how much of these shipments are actually shipments where you are participating in engineering, and how much of this is bulk shipments? You say that larger producers normally have their own engineering teams. And where are you, or sort of, where in, in. To what extent are your development skills crucial in driving a mix?
... So you are, I could just start to answer.
Mm-hmm, yeah.
With a very, very big company, like the ones, the one I visited in Russia, the input from us is a little bit less. We just inspire, we talk, we talk about what we have, we talk about the challenges, and they can adapt and do the calculations themselves. So for a very big company, our input would be limited, so to speak. But for a medium-size or a small company, they need a lot of support. They need to have us there present, many times maybe, or over the phone, or just getting ideas back and forth. So it's very different. And of course-
Mm
... a bigger company buys more, but-
Yeah. But also, I think what you have talked about, I mean, we if we start a relationship with a customer, maybe they don't go for the most advanced day one. They start maybe a little bit lower, and then, I mean, we create a relation. Then if they feel that this was good, and they are successful in the marketplace, they come back and go for the next step with us. So that's a little bit of, say, we. Then it's important to have the right customer base that are willing to take some risk and are, so to say, also a little bit innovative in their own way of thinking. Those are the ideal customers. But we go from small to big customers. That's, we, we have all-
With a small company shaping up their product, so to speak, we can grow with them. They can become bigger with a better product.
Yeah, and how much... If you look at your shipments of niche today, in your definition, how much of this is today then smaller companies, where you have an active involvement, and how much of it is actually more shipments,
Do you know?
If you would, just percentage wise?
I don't have a figure like that, because, of course, when we have a successful project, and then, let's say, that design will then generate volumes maybe over three-four years, the lifelines of that design, of course. And then we don't need to support them on a daily basis when the design is in production. Maybe they come back and ask some questions, and they have problem in the production, and say, "Okay, can we help them?" But from a design point of view, it's really the project. So it's a little bit hard to say, but let's say 25%, something like that. But some of the customers we helped maybe five years ago. So how do you calculate that? I mean, it's not that easy.
Okay, so just a follow-up on that then. If you look at the companies where you have had an active involvement-
Mm
... historically, you mentioned Fiat-
Yeah, yeah
... for instance, lightweight car, how sticky are these customers? I mean, how do, how loyal are they to, to SSAB?
Fairly loyal, to be honest. Even though we are a small player in North America, you know, we are together with ArcelorMittal, supplying to, I mean, General Motors designs, and that's because we are so helpful, not because we are a big and large-scale producer. I think it's the knowledge and the way of working we, they appreciate. I don't think General Motors will accept us as the single source supplier of this material, but they allow us to be one of their suppliers, because our way of working. So I think they are very loyal. They have even asked us sometimes when some of the big producers have problem, if we can come in with more volume, and sometimes it has been possible.
It's also because we have good steel.
Good steel, of course, yeah.
Yeah.
I mean, we very often are regarded as the best steel, having the best steel. I'm a little bit bragging maybe, but, I think it's, I think it's true.
Okay, just a final question on that then. On best steel, we heard some questions on aluminum and substitution. How big a threat is good enough from other customers? Once you do the development, you do the engineering, and then you have competitors supplying high strength or a Quenched and Tempered steel that is not perhaps your quality, but it's similar.
Volume-
So are you losing volumes to other high-strength steel producers that are cheaper?
It happens.
Sometimes, of course. I mean, if it's not obvious that, I mean, the extra, let's say, properties, I mean, we have, it's not used at all. I mean, of course, there are cases like that. But, I mean, our strategy is really to help them take advantage of these properties, and I would say that is the most common situation, but sometimes, of course, we lose because of price.
It creates a very good and trustworthy cooperation to go even further in taking a next step. So I think most of the cases we have very loyal customers.
Okay, thank you very much.
Thank you. Any additional question? Yes, over here.
Rutger Smith. I just wonder about the intellectual property rights?
Mm
... about these niche products.
Yeah.
Can you forcefully avoid competition by such rights?
It depends a little bit, but it's something we are looking very deeply into now. And there are some, of course, protection on the brand side, for example, the Hardox brand and so on. And we see some abuse and so on, taking place now in certain markets, in China and Turkey and so on, where they put this Hardox sticker on and so on. So which we are trying to, to, I mean, chase them. But... And also, some of these are-- So far, we have, as I said, the cooling line in Borlänge, it's stuffed with our knowledge. It's not something you can buy on the market. And of course, how do you protect it? Partly with patents, partly with not talking so much about details. So it's a combination.
Okay. Any further questions? Yes, over there.
Okay. Anders Gillefors . Two questions. First, you give good, a lot of good examples on changing from mild steel to Hardox or whatever. Do you have some examples of changing from aluminum to Hardox or Weldox?
I've been involved in a project with a large, let's say it's furniture, and in tubes, where you don't actually see how thin the high-strength steel is, but you can feel the difference, and there we hit the aluminum with the price.
But there are also some automotive components-
I think so, I think so.
I think the silo, for example.
I see.
I think there are some bumpers also that are on discussions ongoing. Yes, yeah, there are examples.
Oh, okay. Second question, do you have some benchmark on how much cost you have on marketing and technical service compared to your, your main peers?
Now, I might need some help here, but we have a little bit more, but I don't— Yeah, of course, we have a little bit more.
Okay.
No, no big difference, but, yeah, I mean, hmm.
Yeah, anyone else? If not, I would like to thank Karl-Gustav. I would like Eva to stay on the scene, and I would like you all to pick up the colored sheets that were on your seats when you came in, and then Eva will guide you through an exciting quiz, which will test your knowledge of steel and high-strength steel.
We will have some fun. This is a quiz that we had last year in a big event at the Swedish Steel Prize, actually, with 400 customers or 200, maybe, customers. Educating our customers for years and years, we had a very, very good result from the quiz with the customers. So let's see how you do. Some of the answers you could actually find in the previous presentations. Okay, you have three colored cards. I will put six, six questions to you. You will have 10 seconds to choose a color, and then I want to see the colors. And we will have a winner appointed after lunch, or when?
Later this afternoon.
Later this afternoon. So three colors, the questions have three alternatives, and you choose one, and you have 10 seconds. First question: This is a test specimen, a tensile test of a Hardox 450, 1.2 millimeter thick. We put this in a testing machine to evaluate the characteristics of the material. This is something we do every day, of every coil that ever leaves or every plate that ever leaves SSAB. So, if we put tension to this, to this test specimen, or if I put compression to this, test specimen, which will sustain the highest load? Red for specimen in compression. I want white for specimen in tension, and blue if you think it's the same. You have 10 seconds.
The colors, I would have, you know.
Vote. Okay, I see all three colors actually, in an equal spread. What do you say?
Maybe red was a little bit higher in the beginning, but some people changed.
Okay, so this is the result. This is from our testing machine. Red curve will be the one in tension. It sustained almost 4 tons, actually, and the failure looks like this. If we put compression in our machines, the resistance is this, only 180 kilo, because this will not keep the shape. It will buckle. This is one of the major challenges that we need to tell our customers. If you want compression, you have to do something with the geometry. So the right was green by 20 times. Ah! White. Will this continue with the colors, or just this one? I'm talking to the back now. So the back will interpret the coloring. Green is the same as white all through?
Yeah.
Okay. Let's take next question. If I weld a Domex 700, 700 is a measure of the strength. I weld it to a Domex 240. I weld with a material that has a strength of 470. I put this in tensile testing. Which one? Where will I have the failure? Will I have the failure in the thinner Domex 700, in the weld, or in the mild steel? This is red, this is white, and this is blue. Let's see what happens with the answer.
This is a test of who was sleeping.
Okay, I see a lot of red. Yes. So red. You interpret the color. Red is the right, not the purple. We will have the failure in the thicker, mild steel. We will have stronger material here and also in the weld, which is actually a place that we study the strength of the weld. This is a very important issue.
That is often a very weak point in a design.
Yes.
Yes.
I will show you why later.
Mm.
Okay, this is another tensile test, a bigger one than this, much thicker material. It's in Weldox 1300. We put it through a tensile test... just using the base material or our material, the virgin material, and with a little weld stitch, just a little weld, in the middle. Which will sustain the highest load? Will it be with the weld, without the weld, or would it be the same? Red is with the weld, without is white, and equivalent is blue. Static strength. I'm only pulling very slowly and see the strength of the test specimen. Okay, colors? A lot of white and blue, so a lot of the same and last without the weld. So let's see the results. No weld, blue line, red is with the weld stitch.
The base material for this one took about 1369, the weld stitch, 1367, so it's a little different, but equivalent. Is it blue in the back? It's blue. Was blue, the right? Okay, so let's do the same test, but not static. We will load and unload these two specimens. You saw that they took in static about almost 1400 in strength. Let's put it to 650 and load and unload, and measure how many times could we load and unload at a level of 650 before we have a crack or a failure. Which will last the longest? Which will have the longer life? Would it be with the weld, without the weld, or will it again be the same? A lot of red and white again. Right, KG?
Mm-hmm.
So, the longest with the weld or without, which would it be? Red is the right, not green. It's completely mixed up. The one with the weld will have less life than the one with only the base material. We're very good at having... This is called fatigue, and this is actually a big issue in any vehicle because it will be loaded and unloaded many, many times during its life. And how many times before we have a failure is very important. So we're very good at having fatigue strength in our material, but if you put a weld, you're actually destroying a little bit this fatigue life. So the right one was white, right? So the next question, how much longer life does the non-welded specimen have?
It will be difficult maybe to point out the winner in this. How much longer was the life without the weld stitch? Was it 6.7%, 67, or 670%? So again, mostly blue and white. So blue, 670% or 67% more life. Let's see, what was the right answer. With the weld stitch, we could load and unload 42,000 x before we had a crack. Without the weld, just the base material, we could, in average, because we've done this many, many times, 281,000 x at 650 stress level. So the right was blue. Are you keeping track of how many, how many rights you have?
You have to be honest. You have to be honest.
There's a prize involved. Because I'm confused now, I'm just delivering the right answers. 670%. When we put, when we put this question to our customers last year, we were very happy to have many right answers, because this is a very, very important issue dealing with vehicles, because they're loading and unloading, as I said, and where we put the welds is very important, determines the life of the vehicle. Okay, so continuing with fatigue, loading and unloading. We have two specimens with a welded plate like this. It's going out of the board like this. We have one specimen, we just welded the plate, and the other one, we actually drilled a hole. This is a hole. We put it to... It's a Domex 700.
We loaded and unloaded at a level of 100, I think, and then we measured how much life did these two have, and what is the difference? Which has the longest life? Is it with the hole, without the hole, or is it equivalent? So red and white. What do you think, KG? What is the most-
This is a nice mix of the French.
The French flag.
Yes.
Okay, let's see. 100 was the load level that we had, and we measured how many times before we had a failure. Without the hole, we could load almost 1 million times at a level of 100, before we had a crack or a failure in the weld. With the hole, we could load it 1.5, even more, 1 million times before we had a failure. So drilling a hole is actually a good thing, and I have an analogy. That was red. Red was right. Are you keeping track now? The analogy is that we have a lot of stresses when we're pulling and pushing in the specimen. And a weld is a critical area. That's where we have the cracking after some cycles.
It could be equivalent—the hole could be like a rock in this streaming water. Behind the rock, there's calm water, not so much disturbing or stressing the weld, which means I have longer life. So red was the right. So how many of you had only one right answer? There's a nice prize.
Or zero. You can ask zero to start. .
How many had two? six, six . How many had four rights? Good.
Mm-hmm.
Four?
Mm.
Five? Now, this is good. You visited Borlänge. I remember you.
Yeah, but he, he learned something, so that's a good, good sign, yes.
Even six rights, how many?
Okay.
No one. Okay, good.
We said that we should offer the person that had six rights, I mean, a senior specialist position at the knowledge service center, but unfortunately, we didn't find anyone. But
Thank you!
I'm very happy because-
I was about three, you know
... then I can keep my position. Okay, so those of you who had five rights, which were they? Which were you? You two?
Three of you. You are three person.
Three?
Five rights. one, two, and three.
Okay, so since there's a prize, we will have a question for you. To have a winner, of course. And the question is, this is the Eiffel Tower. Gustave Eiffel built this at 1892 or something like that. He's one of my heroes. He's a very, very... He was a very, very good structural engineer, and he made money also being good structural engineer. I don't know about nowadays. He made this structure.
You have to build the Eiffel Tower.
Now we build the Eiffel Tower. It's a very light structure, and the question is, you can put a number on the back of the white. It's a number question. The height of Eiffel Tower is 324 m. If we were to melt down all the steel in this tower and put it on the ground that it's standing on, how high would that plate be? Write it on the back, and we'll see who's closest. Huh? No alternatives.
No, no.
Now we will distinguish who is closest.
Closest right answer will be the winner.
You can write your name also. Sandra wants your name on, and she will hand it in. You don't have to be official with your suggestion. Remember, it's a very light structure. He was ahead of his time. The winner will be announced later after lunch. Okay, so we will announce the winner later, but I will give you the answer. It's actually only 60 mm. This is a very, very big area. It's a very, very light structure. So 7,500 tons of steel is only this high in the structure. Okay.
I, I just want to mention something that the Eiffel Tower was actually sold by a con man, not once, but twice for scrap in the early twentieth century.
I hope you heard that, that the Eiffel Tower was sold as scrap.
When it was built, it was not intended for staying as a tower.
No, no.
It was meant to be brought down-
Yeah
... within around 20 years.
It was meant to be brought down, but it's still there, you know, so that's-
I read that it was supposed to be brought down because it was so ugly, but Eiffel had to support two-thirds of the price. He had to pay himself in order to do it. So he wrote the contract that he would have the income, the... If there was any income, he would have that for 20 years, and in only one year, he had his money back, and that's why it still was standing. And in 20 years, it was a landmark for Paris, so no one wants to bring it down now.
... Thank you so much, Eva, and thank you all for testing your knowledge of high-strength steel. Now it's lunchtime! ... So welcome back, everybody. Hope you enjoyed the lunch. Now we will give you a deep dive into our three business areas, and we will start with EMEA. And I will welcome Melker Jernberg. Floor is yours.
Thanks. For those of you that participated in Borlänge yesterday, I hope you liked the visit, and just want to say that it was very much appreciated from our side. I hope also that you had a lot of good dreams about solutions, how you can use our high-strength steel in different applications. So you are very welcome with all your ideas after the presentations today. And I also hope that you still feel safe in your private cars, even though Robert from Knowledge Service Center showed a lot of, let's call it, opportunities within safety in the automotive industry. I will give you my view of the EMEA region, both the market situation, as well as what we are doing and what we are going to do inside the company.
So let's start with the market situation and our current environment. I mean, it's quite obvious, we are in a tough situation in Europe. We have overcapacity, we have hesitation from customers, we have uncertainty in the underlying demand, and we have price pressure. We have seen a big difference with the worst situation in the southern part of Europe, compared with the northern part. And our outlook now is that we also will have, let's say, limited growth in the Nordic area. But we also have other part of EMEA with stronger growth. For example, Russia, which is a really good market for us, part of Middle East and part of Africa. However, I think we need to remember that that is from lower levels. Large potential in upgrading. Now, I must say this from the beginning.
We've seen it the whole day yesterday, and we've seen it also during a lot of presentations during the day. But I nearly get crazy, I get nuts, when I think about all the possibilities we have. And it's not the question if we are doing it or not today, because we are doing it today. But for every customer and every case, we are doing it, we find one or two new ones. So the potential here within customers, segments, applications, markets, regions, it's enormous, and that's only within EMEA, and then you can think about the rest of the globe. Some customer trends. Many of our customers are decreasing their stocks down to really low levels, and of course, put a lot of pressure in the system when it comes to delivery precision and lead times.
We see also that production capacity continue to move east, and the trend with outsourcing within our customers also continue. And outsourcing is both a threat, of course, but it's also a big opportunity, where we can help our customer with the steel activities, so to say, so they can focus on what they are good at. Let's take a look at. This is April figures from World Steel Association when it comes to apparent steel consumption. And still in April, the forecast was a small growth, also in Europe 27, between 2011 and 2013. And I'm quite sure that we, I think it's next week when we'll have the October figures, that will be much less optimistic for next year.
So as I said, our belief is that we have an overcapacity in the European system. I don't know how big. But also, important to see here, in the rest of the MEA area, we have a growth on something between 5%-15%. Important to remember. Going a little bit deeper into our relevant customer segments, starting with heavy transport. What do we mean with uncertainty? We can take truck manufacturers as an example here. We have some of them are going down in volume, some of them are keeping the volume, and we also have examples that are increasing the volumes. The tipper producers, they are slowing down. Trailers, we can see everything from business as usual, to this is really, really bad.
So I think we depends on if they are niched or not, or and what kind of segments the trailer producers are in. If you look into automotive, so far, it has been fairly stable in the northern part of Europe. Russia has been good. Germany has been both good and bad. France, Italy, Spain, bad. Construction equipment, yellow goods, has been okay so far, but we also there see signs now of a weakening market. Mobile cranes, I think the summary of mobile cranes is that the second part of this year will not be as good as the first half, and next year will be approximately the same as 2012. Going into mining, for EMEA, mainly areas for mining for EMEA is Russia and South Africa.
I would say remain or even a little bit on the positive side, still on mining. Of course, the volatility and uncertainty in the mining business is, in the long run, not good for us, of course. Industrial application, building, is going down in all our relevant segments, and building for us is the Nordic area, it's the U.K., it's the Netherlands, and partly also Poland. And the service centers in the Nordic area, it's uncertainty, it's a big competition, and they are also affected by the weak euro or the strong Swedish krona. Let's jump into the organization and look a little bit what we are doing and what we are going to do.
I will come back to some of these points later in the presentation. We will secure the Nordic home market leadership. We will continue to ramp up our QT business. We will speed up the EMEA emerging markets. It's not only Martin and Jacques that have emerging markets, we have them in EMEA as well. The coming years, we will double our Hardox wear parts business. And our shape business, which is our business where we supply our customers not only with the steel, also parts, components, kits, et cetera. That will have a growth over 10% per year, the coming years. How? How to do this? What is a superior customer experience? I mean, we have 500 different steel grades. We have obviously a lot of technical and engineering know-how.
We can deliver not only steel, but also parts, kits, as I mentioned. We have fantastic logistical setups, etc. . So the customer experience is to use all that and help our customer to become successful. That is what we mean here. And also, continue to be even better on delivery, performance, and lead time. What we're doing there is that we are going more and more towards a flow-oriented production, a flow-oriented sales to delivery process. We are coming from a, as Katie said, a ton environment, but the flow thinking, also in the steel industry, will help us a lot. So we are now turning a little bit towards that.
Strong leaders that develop leaders, strong leaders that develop employees, strong leaders that develop entrepreneurship is key, and we're putting a lot of effort into this for the moment, and we will continue to do, and we have done it for a long time. I'm also proud to say that our focus on safety issues is high. We have learned a lot from our colleagues in America, and we also have a good trend and really good records within this area, the last period. Without taking away customer benefits, we are working inside our product program to reduce complexity, because it's a lot of money and productivity if you can take away complexity but still keep the customer advantages. And last but not least, increase the flexibility in operations.
So I just had a small feeling from the first presentation and the questions to Martin, and maybe you are interested that I start with the flexibility and the cost issue. So why is this important? The volatility in the market seems to be much higher. The demand pattern seems to change more often, and the amplitude between high demand and low demand seems to be higher and higher. So I think it will be crucial to be able to adapt to a new situation quick, and also very efficient in every utilization step. We said in the beginning of the year that our aim now is to be profitable above 70%.
Then we need to, of course, decrease the cost base, and we also need to move a lot of fixed costs into variable costs. You cannot. The only thing you can do, in my view, is that you can have a flexible manning. You can have you can also outsource part of the operation, so someone else that are better to be flexible in exactly that operation will help us with flexibility. But the biggest part here is actually to be really, really good in the different production setups, in the different production steps. So exactly when we are running in 70%, then we know exactly the setup, not only the manning. What are the most optimized energy setup when we run 70%?
We saw it in Borlänge yesterday, one or two ovens. How combined Oxelösund, Luleå, Borlänge? What speed in the hot strip mill, etc.. It's thousands of questions. To be really good and optimize it 70%, 75%, 80%, 85%, 90%, 95%, 100%. Predefined quickly to that setup. And that is new for us, and that is the work that we are verifying now since the spring and during the time here. Just an illustrative picture. Coming from a situation more or less with a full utilization base cost, and a low degree of flexibility, going to a situation where we have a defined base cost when we run at 70%, and then are really quick and good in ramping up and down. So are we on track or not?
I can tell you that I'm 100% confident that we are on track, and we have also said now that we will—we read a little bit before that we said, I don't know, in the communication with the Q2 report. So we will be ready in the end of the first quarter next week, next year. Next week, Marco got happy there. I can say also, if you ask me, is this tough? Yeah. Yes, it's tough. Is it a lot of people inside the organization working with this? Yes, it is a lot of people working with this. This is a challenge for the people. They love this. That's the biggest insurance why we will succeed with this.
Our latest investment in our quenched business, the QL7, that you saw yesterday, up and running, obviously. Technical and KG also promised that we'll have a lot of new products that we can produce and sell from that equipment. Ramp up our business according to plan, but of course, it's tougher to ramp up in a tough business environment if you compare it to when it's really good market out there. But according to our plans, and if you look at the comments and the feedback we get from the customers, it's really good, both when it comes to the wear and structural applications. And maybe the best of all, it's solid margins in this business. That is good.
We have also invested in, in our casting in Oxelösund, and that's—I mean, the QL7 investment and this investment in Oxelösund is what brings us with the broadest, thickness range now within wear. KG said, 1 mm, I say 1, 0.7 up to 160. And of course, this will help us with a lot—possibilities with a lot of new customer applications. So this is a, this is a good tool for us when we are talking about upgrading.... How to secure the Nordic home market leadership? First, we have a strong setup in, in, in Sweden and in Nordic area. We will utilize that fully, and also continue to, to improve and use our cooperation that we have with Tibnor. It's an important cooperation. We'll continue to build shape.
One example is the acquisition we did a couple of months ago, the EMEA, EMEA company in, in Borlänge. We have in this area, the closeness to the mills, which is a big advantage. We have all the fantastic technical know-how. Long-term customer projects, long-term customer commitments, the cooperation here, is important, and we're really, really good in the Nordic area when it comes to that. And we also have other strong channels, for distribution in, in Nordic. So growing, capture market shares, and, and no doubt, Nordic is extremely important for us. And we shall be, and we will be, king in Nordic. Okay, I said that we also have emerging markets in, in EMEA. Let's take a look at Russia.
Maybe Russia will go a little bit up, a little bit down, if you, if you look, 10, 15, 20 years ahead, I don't know, but I'm quite sure that we'll have a big growth here. It's a perfect match, what they need, and what we have. Our products, our business concepts, our technical know-how. We will, we will double the volumes 2011, compared with next year in Russia. In South Africa, we have a really good starting point. We have a excellent service center down there with a lot of knowledge, and it's also a really good base from where we can grow into rest of southern Africa.
Also in Middle East, we see a lot of opportunities, but we need to come back exactly what to do there, but it's an interesting market, both in structural, but especially in wear, I would say. Some customer examples. PS Logistik, it's a Swedish company from Kristinehamn, I think. This is a container for rejected tops from the forest, from the woods. And the case here was not so much to reduce weight, or improve lifetime, or increase loading volume, or capacity. Of course, that is good, but the main issue for this company, in this case, was to lower the production cost. So, the design, of course, we helped them with the design, and also we delivered not only the steel, but also prefabricated parts into this project.
It was reduced weight, et cetera, and by that, also a lot of fuel savings and CO2. But for them, they had direct 14% reduced assembly and welding cost in the production, which is straight ahead to the bottom line for them. So that is more a case for our customer. The next case is a case for our customer's customer. ILAB, one of Sweden's biggest container producer from Tranås. Of course, quality and lifetime, they wouldn't, they didn't want to decrease or worsen the situation, but the same level as they had before was good enough. But to reduce weight here, so their customer could improve the payload, was really important. Normally, when the history of doing a container is trial and error, it's really practical.
You build a container, you try, you try it, and if it's good, you use it, otherwise, you try something else. Here, we added our knowledge, really prototyping the full from prototypes to ready products, also calculating at home, of course. Two different high-strength steel in the final design. And going down 800 kg in weight. 800 kg, yeah, it seems to be a lot, but it's interesting to see the MD from the company. He said, "Our customers can carry 600 tons more per year than a regular container, but at the same price." Of course, if you transport potato compared to iron ore or something else, of course, 600 ton per year is a lot of money.
The slogan for ILAB, I like it very much. In Swedish, it is, "We gör det lättare." And in English, that is, "We make it lighter," but also, "We make it more easy." So that is, this is a really SSAB partner, I would say. Small summary. Tough market in Europe. Opportunity in the rest of EMEA. Both in short term, but also sustainable in the long term, the cost and flexibility question. Of course, the launch now and the ramp up of our quench products, increased market shares, Nordic, home market, and continue to work close to our customers. I would like to finalize with this picture. I love it. You have seen it yesterday. You have seen it in Martin's presentation. Why is it good? Because it's for real. This is for real.
This is not one page and one paper in the annual report. It is as well, but that's not, that's not the thing. This is for real. I will also put it from another angle here. We're working with our customers, knowing our customers' business, helping our customer to be, to be, successful. So that is a win for the customer. To be able to do that, of course, we need to put a lot of effort in our employees inside the company. We need to develop our, our employees. We need to let our employees grow. Then they help our customer in a good way. Eva is a fantastic example of that here today. Then we have a win-win situation. And with this, we will bring value to our shareholders, which is the third party in this. Then we have a win-win-win situation.
I think it's important that it's a prerequisite that you have this to have a sustainable system in the long run. But, and this is the beauty about it, if you just go to work every day producing steel or selling steel, develops steel, produce steel, whatever, what will then happen if you also put the fourth dimension and an even higher meaning on what you are doing? And that is making a stronger, lighter, and more sustainable world. Isn't that fantastic?
Thanks a lot, Melker. Now I'll open up for questions from the floor. Please. Or was it so crystal clear? Yes. Just a second, you will get a microphone.
Alex Haissl, Morgan Stanley. A few questions. Can you give us a bit more insight, what are your own thoughts on the individual regions in terms of growth rates? Because you've, you've shown from World Steel Association, and normally, they are lagging. So what is—what would you see on the grounds in terms of demand? What has changed?
In which area? In total or-
No, in Europe 27.
I think we'll see more or less flat. Little bit down, maybe a little bit up, maybe. I don't know. 2013, it will not be a much better year than 2012, is my personal feeling.
Okay. And can you quantify what is Russia and South Africa's share within EMEA? And are you growing also profitable growth, or is it just top-line growth in these regions?
For Russia, for example, I said that we will double the volumes from last year to next year. And Russia is not a small company from the beginning, and for sure, it's profitable growth. Absolutely.
The last question is on the margins, the quench tempered being replacing the commodity steel. Can you give us more insight what incremental margin it means? So, is it a 50% higher margin, or is it a 100% higher margin? So that we can put a few figures behind it.
The quick answer is no. No, I mean, it differs a lot. We have within ordinary steel, this difference. We have also a big difference within the QT business. It depends on the steel grade, but it also depends on what application and what customer, etc. . So it's not... I cannot give you a clear one-line answer on that one.
But is the ordinary steel heavily loss-making right now in the Nordic market? And can you, sorry, can you just give us a more figures, what's the share of service centers that you're selling right now?
I mean, we ran the strip business during Q3 on 60% utilization rate. And you also can see in the figure how much of that is ordinary and not maybe. And that resulted for the total company in a—of course, this was a big part of the total company that we released two weeks ago on the SEK 700 million loss. So the answer on your question is yes.
Sorry, the last question that I have, you said 2013 not going to be much better than 2012. How much can we expect in terms of additional quenched and tempered being replacing ordinary steel? And because giving you a few, you don't expect utilization going up from 70%. Because you said 2013 is pretty much the same for the European market, which implies that for next year you expect your EMEA business running at 70%.
I don't get the question. Do you mean if the total utilization rate will go above 70 or not? Or the split between-
No, I just took the statement you made for 2013. Basically, it's not getting much better. It's pretty much flat from now, which implies that next year you're not expecting any profits for your EMEA business.
That was a comment. That, if I have to clarify, that was a comment regarding the whole Europe 27. That's what you were asking, and that was Melker answering. So, and we don't give any outlook for 2013, as you know.
Okay, thanks.
Yep.
Rutger Smits. A question regarding the overcapacity in Europe. I mean, that's a fact, and it will not go away. Have you seen any tendency as to what the larger players intend to address this problem? Do you think that they will try to stay it out now and see what weaker players will go under? Or will someone take the lead and start closing capacity?
I cannot guess. The only thing I can see is that if I calculate now, my best guess is that so far it may be some 20 million tons is taking away from the system right now. And for the moment, that doesn't seem to be enough. And what they will continue to do or not, I have no idea.
Okay.
Hi, it's Steve Benson from Goldman Sachs. You mentioned that you expect next year, the volumes in Europe might be flat. Our own analysts would be, be it construction, expect construction spend to be down 2% next year, and autos demand down 3% in Europe. So let's say that they're right. What contingency plans do you have next year if the market is down 5%? But what will happen in the EMEA region?
For SSAB?
Yeah, for SSAB. What, what, what levers have you got to pull?
If you are right, 2% down and 3% down, then that would be right. I mean, my guess is from your... We are running a system on, in Europe, on some 200 million ton or something. My guess, my answer was on Europe 27 as a total. I mean, the volumes for SSAB can, of course, and the development from SSAB EMEA volumes can, of course, differ a lot, compared to the total market. Hopefully, if we are good, if we are doing what we are saying. What the implication for SSAB will be if it's -2% instead of a flat, that I cannot guess.
Okay, we have another question over there, please.
Thank you. Anders Gillefors . First question on capacity, capacity utilization. You are talking about 70% will be your break-even point in the future. What is it today? How much do you need to make break even today?
Where is that? Do you have to guess, Marco? You need to help me now.
Yeah, it's definitely above 80% today, as you've seen in the strip business. And that's why we are aiming for a lower level, because we believe 70% is something representative for a long-term climate.
So one answer here was that the break-even point now is above 70%. Of course, it's around 80%.
Around 80?
Yeah.
Continue the question. What about-
For strip business, sorry.
For strips.
Yeah.
Okay. And what about in U.S.? You said it much more flexible today. Where is the break-even point in U.S. or Americas?
Oh, final question, not for me.
But we saw in U.S. during 2009-
Microphone, please.
I want to keep this one.
We saw during 2009, when volumes came down in the U.S. quite substantially, that the cost per produced ton in the strip system increased with quite a few hundred SEK per ton. But in the U.S., the cost per produced ton decreased to 50 SEK per ton, so that system is totally different. We have a flexible pay system, we have flexible contracts, a lot of things outsourced, so these two systems are not comparable. And on top of that, in Sweden, we have coke oven batteries and blast furnaces, and you can't just turn them on and off that easily. But in the U.S., we have two electric arc furnaces, and that is to exaggerate a bit, but that is a red and a green switch.
Mm-hmm.
So it's that system is extremely flexible.
I know the furnace types, but what I am asking for is, is it 60% break even, or capacity utilization of 60%, or what do you estimate?
We have, I don't know the exact utilization, but, it's-
Well, I assume-
... an exact figure. I mean, it's not an exact figure, but just an estimate.
Not to, uh-
You have it, right?
Okay, you've got that on. To avoid the question, but, you know, there are, you know, you, you look at the example that Martin described in coming out of 2009. There are other factors in place beyond just the straight utilization rate. I can't give you that a utilization rate equals X EBITDA. It, the factors in play are the mix at the time. If we go back to 2008, for example, when utilization rates fell, and coming back into 2009, utilization rates were quite low. However, there was a lack of import available to feed the market.
... and scrap prices collapsed to severe lows. With the dynamics in the scrap market right now, going month to month, as Marco showed earlier, that any within the quarter and within any particular month, the dynamics of raw materials matched by whatever our mix in the market is at that time, the contracts that we have in play with major buyers could dictate, you know, profitable levels at 70% or 75% or 65%. So it's a, at least from my point, a moving target.
As Martin described, our ability to move our production very quickly, I mean, within 24 hours, we can shut down a furnace and cool down furnace and begin working on it, and at the same time, we can fire up a furnace, and within 24 hours be in full production. That kind of flexibility gives us great latitude. So it's maybe a poor answer, but I think an accurate answer that that utilization rate is highly dependent on other factors.
Okay, thanks. Continuing
Hey, I just want to say, for those of you who didn't know Chuck Smith, that is our head of the operations in Americas, and you will hear him later on. Please go ahead.
Continuing the question on flexibility. You are talking about outsourcing, and you said that Americas had already outsourced. As to my opinion, you have two main areas, IT and repair and maintenance. What are you going to outsource in EMEA?
That can be two of those areas that we are looking at, but we are looking broader than that.
What is the third area?
I didn't say it was three, but we will come back with that when we know exactly what to do.
Okay, thanks.
Okay. Any further questions? Yes.
Yes, Ola Södermark, Swedbank. Just out of curiosity, how long can you have the second blast furnace in Oxelösund idle if you see that the market is not improving quite soon? Is it for a year or...
It can be idle for forever, I would say.
Okay. But when-
But, I mean, if we in the long term not going to use it, then, of course, Martin said that earlier today, it's not so expensive to keep it idling, and it's not. But of course, we do some maintenance on it, but it's SEK a couple of million per year, maybe.
If you decide to close it down more permanently, what's the book value or closing cost for it? Ballpark figure.
Excuse me, what?
The booked value for blast furnace number two, if we close it down.
Uh-
Here, can we have the microphone over here, please?
Actually, if we close down it permanently, we have to also look the steelworks and the whole chain, going downstream as well. So it's not easy just to close down, blast furnace itself. So the whole chain would be different than today, and then we have to check what kind of mix we will have and which assets we would close down as well.
Okay.
Thanks. Christian Kopfer from Nordea. Just to follow up on the segments in EMEA that you highlight, I guess you highlight mining and material handling as one of the bright spots or the only bright spot, maybe. Could you, I mean, what do you hear from the mining companies in terms of them trying to push CapEx further down the road?
As long as it is that volatility that it is today, and when it's a lot of insecurity on the prices, of course, a lot of the long-term projects will be hit. And I don't think they close. I mean, take the iron ore projects, for example. On a global level today, I think it's 320 different iron ore projects in different phases. And of course, they are on different places on the cost curve and where the break even for those mines are. And if the price is very low, of course, many of them will not succeed.
Okay, so you haven't seen so much of those.
I mean, these projects, it's long, it's long projects, and, of course, they, they pull the brake in, in a normal investment. But, I mean, the big, the big, the big mines, open new mines, I don't think you take that decision so quick because it's a long-term project, but I think it will come. If, if the, if the prices are low, it, it will come.
Sure. Thanks.
Okay. Any further questions to Melker? Otherwise, thank you very much.
Thank you.
Now I would like to introduce to you Martin Pei, who is head of our business area, APAC. The floor is yours.
Thank you. Okay, so I will spend some minutes to talk about our business in Asia. I am quite sure that you are following the development in this market very much. Starting with just a few words about China. You heard about this when Martin made the introduction this morning. We see, of course, the slowdown also in the Chinese economy recently. There is a number of reasons for that.... But on the overall level, still, that there is a strong confidence for the future. Even the slowdown is now felt in many areas, still going forward in the midterm, that everybody believes that the development will still be about 7% of GDP growth.
And this is, of course, very, very important for the confidence for the overall development in the whole region. It has also quite strong impact in other areas, like just we talked about mining, for example. This slowdown that we are feeling right now in China, of course, is one of the reasons is the global development that has slowed down, affected the export from China. The second reason that we see also is that the Chinese government has been trying for quite some time to slow down the growth, to change the growth of the economy from earlier, a lot of investment driven now towards the consumption-driven development going forward. And this is an effort that we see has taken some effect.
Recently, as you all also are quite aware of, that there will be a leadership change during this autumn and the beginning of next year. This also has slowed down some of the actions that otherwise might have taken place. This is about China. In the long run, we still feel a lot of confidence in the growth overall. Spend just a couple words for regarding some other countries. Mining, of course, is very, very important for Australia and Indonesia. Very much focused in those regions for mining, especially during the first half of this year, we had a very strong development in these two areas. In the second half, we see some slowdown due to the volatility of the raw material prices. India has had a lot of expectations.
We saw quite a struggling situation in India. The development didn't take off as many people hoped, and it's quite a difficult situation in many, many areas. But in the long run, there is a strong belief that India will come. It's only a question of time. Japan has had a lot of expectations after the big disaster last March, that the rebuild of the northern areas should have taken off, but this had taken longer time than many people hoped for. But right now, we see quite interesting development in Japan, that especially our deliveries to some customers making scrap containers, trailers, and so on, has now show very good growth. Korea is otherwise a country very exciting also. It has a huge dependence on export.
When the overall market is slowed down, we felt the difficulties in the Korean industry. Here is not mentioned, some other countries, also very exciting. We have Vietnam, Thailand, Philippines, all with great opportunities. And another country that we are now trying to develop into is Mongolia, which is having a very interesting potential for the mining companies. So in this region, there are a lot of growth opportunities. It's only a question for us to catch. Spend also a few words regarding the main segments that we are in. Heavy transport is an area that we are focused a lot. Because here I have a couple of examples later on to show you, that we can leverage as a company from our success in Europe into this huge market.
For tippers, especially these off-road tippers, there are a lot of potential I will show later. The automotive industry has been recovering very well, especially in China, like, it's growing. The expectation of India was high, as I said earlier, but the so far development has been quite low. Korea has had the trouble, especially with export. Now, recently, we see also interesting situation where with conflict between China and Japan regarding the territory conflict, the Japanese car manufacturers are having big trouble. But this gives opportunity to some other producers. We see, especially Volkswagen, is doing really very well in China. Construction machinery is one of our main areas, our segments.
The overall slowdown in the infrastructure investment in China resulted in a slowdown in the lifting industry for us, but now we see a pickup, going forward. So this is positive for us. So these are just some highlights regarding the market. Market showed a huge potential for us in the quenched and tempered business going forward, especially the growth potential you see in Asia. This is just a picture showing that only in China, this demand for heavy plate, 2011 was 74 million tons of heavy plate that was consumed in China. Out of these, less than 1% is quenched and tempered plate. If you compare with the, what the percentage normally is in Europe, for example, it's around 7%. So there is a huge potential for us to catch, and this is for China.
For some other countries, the situation is quite similar as to China. So compared with the major markets, SSAB has a great potential to really explore this market. And we are now driving the development in many of these areas, which I will show later. So, where are we then in our development of the business in, in APAC? We have created a very strong base for future growth. We have a very strong brand name in the market. It's well known in many, many of our customer segments. We have also now created a local presence with our own service people and distribution network in most of the important countries and regions. We have now commissioned the finishing facility as part of the big investment program.
It's up and running, and we are now leveraging that advantage in the market, which I will describe in next slide. We have also now a state-of-the-art R&D center, as KG described before lunch. And we are constantly developing our distribution service network wherever we want to be. So the finishing facility, this is a part of the program that we invested in. It's up and running, and we are now taking semi-finished products from Sweden and the U.S., and we can make cutting, blasting, painting, packaging from this facility. So this provide us with significantly shortened the lead time compared with what we did in the past to the Chinese customers.
With this facility, we can improve the delivery performance to our customers, really increase the satisfaction to many of our customers. This provides also the customer with a huge opportunity to lower their own inventory levels. In the past, they had to put a lot of our plate in their stockyard to buffer the long lead time, and now they don't need to do that anymore. So we are gradually introducing this to our customers. With this facility, we can also, in a much better way, to have a ready-made stock program located in various areas where we have closely to our customers. And we can quite quickly, from this facility, make tailor-made products as our customer needs arise. So this is a very important step for us to increase our service levels in China.
The R&D center, as KG described, is an integrated part of our service model, that we can run customer projects very quickly with local competent people. We have engineers speaking Chinese that can work together with our customers, make upreading activities much quicker. We work a lot with our specialists from EVA's organization visiting us. We have also specialists that are living in China, from Borlänge and Oxelösund in this R&D center. Here at this facility, we make training for our own personnel. We make also training for our customers that can come to the facility and make training. So our position in the market, we have a leading position in this high-end market, and we are now well prepared to take on our next step development.
Of course, facing a lot of interest from our competitors, but we believe that with our capability, with our business model, we will be leading this whole development. We have a very strong service, service offering, and today, we have competitors in the market since, it's in a market that is growing, that attracts a lot of competitors.... So that's quite, obvious. But we are taking the leading position, driving the conversion, upgrading activities, and in the end, we will be the winner for this market. There are a lot of local Chinese steel companies trying to enter this business, and that some of them, in the end, maybe, become good, better than others. But we strongly believe that with our, know-how, with our business model, with our service offering, we will have a lot of, loyal customers going forward.
In the advanced or high-strength steel area, the market is huge, as Martin showed in the morning. And this attracts, of course, a lot of very, very big players into this market. And we are picking really the high-end niche areas that we try to be strong at. We're not playing out there in this huge market with volume products. I have two customer examples. This is a very similar application as KG showed in the first video, with a U-shaped tipper. You probably, some of you have heard a company named Dongfeng. This is one of the largest truck manufacturers in China. Normally, the tipper looks like this, which, if you have been in China, you see a lot of them.
This kind of tippers is made approximately 150,000 such tippers every year is made, and all of them look like that. We have been working with this conversion since quite a long time back. We introduced the design concept, and we now have run several such projects where we use our design, and then we can cut the Hardox plate in the Kushan facility. We can bend them in our facility, make this as a kit, provide this to the tipper manufacturer. They weld it. We, before they weld, we make the training for their welders, and during welding, we have a specialist on site to help them to check the quality. And now this is coming into the market right now.
So if you have a chance to visit Shanghai in end of November, there is a big exhibition called Bauma Shanghai. You will see quite a lot of such applications. What is interesting here is that you see that changing the design from this traditional box-type design to this U-shaped design, for the OEM, there is a lot of savings. First of all, it's a lower weight, 32% lower weight, so less material to be used. 56% less cutting to make this tipper. 70% less bending, save a lot of manufacturing cost, and 64% less welding. So for the manufacturer itself, of course, our steel is more expensive, but they save quite a lot in our manufacturing cost.
To the end user, this give a lower fuel consumption, higher payload, which is actually where the money actually is generated for the end user, and it has a longer service life. So this is a very, very good example of leveraging what we have done in Europe, now in China. Another example, this is an off-road tipper. A company called Yunli in Yunnan Province has done. This is a design that our engineers together developed with this company, and they have now used this truck as a prototype for some months, and they are really very, very satisfied with this. So the customer, in this case, has already ordered quite a lot new units to be manufactured. Now we are helping them now. So all of this will be generating business for us going forward.
We are not only doing customer projects with the tipper, we are doing in many other areas as well. So a short summary. We see a great potential for SSAB in the APAC region, and we have created a very strong starting position. So going forward, we will leverage what we have done in Europe and become absolutely the market leader in this huge area. And we are continuously investing in this market to take a big market share going forward. Thanks.
Thank you, Martin. Now, do we have any questions for Martin? Yes, please, over there. Can we have the microphone over there, please?
Just a question really, on pricing. I mean, could you give us some sort of sense, given the increased competition and potentially slower demand? How you're seeing the price premium for some of these niche products evolve, let's say, over the last 12-24 months, and then, you know, what that looks like today?
Sorry, can you just repeat the beginning?
Yeah. So, how are you seeing the price premium-
Mm.
change, given
Yeah
The increased competition and also potentially reduced demand as well?
Yes, of course. I mean, the competition is increasing, and this will be always increasing going forward also. So we have to work very much focus with the really getting the customer appreciate the value creation that we can do. And that is what we need to focus on. So only selling steel, just to get a premium and depending on that, will not work for us and has never worked for us. So we will constantly work to really together with our customers so that they are ready or prepared to pay a higher premium for us. So that is our model, and we will continue to work like that.
Have you seen that premium, I mean, across the market in general for these types of products, have you seen that premium decline at all?
Depending on how you compare the premium, because the standard steel price has decreased quite a lot. Think about the premium, I should say that our premium has increased, but the overall price level has decreased quite a lot due to the oversupply situation.
Are you seeing, I guess, with these types of products, I mean, if it's such a you know, the scope for upgrading is so large, are players offering, you know, be willing just to break into the market and to develop the market? Are they willing to take a discount to build the relationship?
Yes, of course. I mean, we see that, especially at the customer accounts, the competitor coming in, what they do actually is to buy market share. And some of our customers will take that opportunity. But in the long run, we try to develop a strong customer relation, and we are driving the application development constantly. So those are the customers that we call them the right customers, and we really focus our efforts on those.
Thank you.
Okay. Do we have any further questions?
Yeah.
Yes. Oh, yeah, sorry.
Okay, thanks. I mean, you've previously been very clear about talking about margins in the APAC, saying that you will arrive in the 10%-15% EBIT margin range. But in the last couple of quarters, you have underperformed that range. I mean, basically, what do you see there go forward? When do you think you will come back to that kind of...
I will just have a short explanation what happened in the past. Of course, going forward, I'm not allowed of my boss to talk. You know that we have invested quite a lot in the market. We invest in the new facility, the R&D center, and also employed a lot of people to cover the huge area. And we make a lot of training for our own people. We send our people to Sweden for quite extensive training. We have experts from knowledge service center, visiting market and so on. Of course, this is a huge cost that we spend in the market. And in the short term, we are investing this into the market.
When the general market has not developed as what we would hope that will develop, then the volume didn't come in the same, say, pace as what we invest in the market. So that gives us the lower EBIT margin, what we had in the past. I think that is a explanation of the current situation right now. But going forward, we are very confident. As I explained, market potential is there. We have whatever... We're really creating a good condition for future growth, so that is still, of course, our strong belief that we will be profitable in the long run.
Okay. Over there, please.
Anders Gillefors . Obviously, there is a good market situation in China, but can you tell me the three worst Chinese competitors that you see in here just now?
We have, in different applications, different stronger local players, of course. There are a number of them that are investing very much, and we see that, there are a number of quenching lines are being built.
Yes.
But this, to get really to the level where they can be threatening our business to that extent, I still think will still take some time, but they will come, so no doubt. I don't want to really name specific competitors, but I think you will find them quite easily in the market.
The second question about European and Japanese competitors.
Yes.
What competitors do you see there in China?
Yeah, we see since this is the market still are growing, even say the rate has slowed down a bit. So this is an area that attract most of the players we have.
Yeah.
So in principle, every European player you have in Europe, they are also in China. And the big companies from Japan and Korea, they're also in China. So I think you can very easily recognize them.
New answer, obviously.
Okay. Thank you very much. Any further questions? ... Yes, please.
Jan Wengelin, Dagens Industri. You said that the automotive industry in China has an increasing demand. Can you be more specific? Is it national Chinese brands, or is it Western companies producing in China who is asking for your premium steel?
The recent development actually is, the Western brands has strengthened their position. After the crisis, in 2008, 2009, there was a big stimulus package encouraging people to buy small cars, and that stimulus money mostly went to the local Chinese brands, like Geely, like Chevy, and so on, Chery, and so on. But that program has now finished. So what actually right now is happening is, Volkswagen is doing really, really very, very, very good in China. So the European brands is now increasing much faster than the local brands. In the meantime, there have been some incidents with local brands that has really put a lot of people thinking about safety and so on. So the local brands are right now in a quite tough situation.
But which producer is asking for your premium? Is it the Western Europeans, or is it-
We have business with most of the global companies. As we mentioned, the General Motors, Volkswagen is, of course, a big player for us. We are delivering, in principle, to most of their models in the automotive business.
Okay. Do we have further questions to Martin? Otherwise, we thank you very much.
Thank you.
Now, I will leave the floor to, Americas and to Chuck Schmitt. Go ahead.
Thank you, Helena. Good afternoon, everyone. The last presenter of the day. I'm sure you're looking forward to this. I know Eva did a fantastic job of talking and teaching us all about metal fatigue, but as I look out there right now, and some of the eyes, I see PowerPoint fatigue. So I will move relatively quickly through the Americas slide. Hopefully, I can pique your interest a bit on some different things. I'll try to eliminate any of the redundancies, and so we can have a discussion and conversation at the end to answer any questions that you might have. Oops, wrong way. Sorry.
Starting off, as the others, in our current environment, right now, we're seeing the economy, beginning in North America, is a bit fragile and cloudy, so to speak. Any of you that saw the news, I'm sure, this morning or the highlights, as I did, of the presidential debate for the U.S., which was sort of a debate about the glass is half full or half empty, in predicting where our economy is going to go, has an impact on the consumer spend and the outlook for our growth rates, at least in North America and certainly the U.S..
One thing to keep in mind, though, despite whether the adjustment of the GDP in the U.S. is adjusted further downward or not, it is interesting to note that manufacturing, the resurgence in manufacturing, where it now has, as a component of GDP in the U.S., is probably bigger than it was in the last 50 years. And there's a number of examples of that throughout North America, including quite a few European companies relocating to the U.S., in and around Mobile, one of our own facilities, as an example of that resurgence. So despite these headwinds, as we call them, there is a great deal of activity going on in the energy sector right now.
It's been referred to as a game changer in our natural gas developments in the shale play in parts of the United States and Canada. Automotive has been well promoted right now with an expectation that this year's build rate will land somewhere around 14.5 million units, an expectation of 2013 of at or over 15 million units. So still a great deal of optimism around the automotive sector. Moving to Latin America, and despite the growth rates in Brazil, not necessarily living up to what's been advertised, there still is a considerable amount of investment going on in the mining sector, not only in Brazil, but also in Chile, Peru, and Colombia.
I'll touch on that in just a little bit so you can see where our efforts are leading us in in Latin America. And despite some things going on, just a note, because there's a fair amount of protectionism talk driving out of the Brazilian government, especially around imported steel. But the products that have been named thus far by the Brazilian government do not impact any of the SSAB products in abrasion steels, high-strength steels... Touching on the segments just for a second, you've seen this time and time again, probably not as optimistic as I would paint it right now. And you know, I could debate some of it myself, but I've already touched on the energy.
It is a bit of a mixed bag, but by and large, between the shale play that I've mentioned, between the Western Canadian oil sands, and then the pre-salt production that's going in and around Brazil, it would be hard to argue that energy isn't a positive driver for both North and South America. Now, Neil asked me a while ago about the impact of wind tower, which has been a pretty participant for us in North America, both in the U.S. and Canada. And it's caught him in-- it's caught us in a bit of a political debate right now.
There is a strong belief that after the election, either party will likely put a tax credit back into play, be it short term or be it long term, that would incentivize that development going forward. But regardless of that, even Canada today it provides SSAB a fair amount of activity going forward, regardless of U.S. developments in the wind tower area. I touched on automotive already. Heavy transport a bit interesting right now, which tends to be tied to truck and trailer.
I think the interesting part of what's going on, especially in North America right now, the energy movement and the need to transport chemicals, petrochemicals, and so forth, and pipelines cannot be built fast enough, which is a huge consumer of steel right now, both large diameter line pipe as well as small diameter oil country tubular goods. It is really driving the production of tank rail cars and tank barges, which SSAB Americas is a heavy participant. The drag currently for our market in North America is here at the service center level. As you may know, in the North American market, three out of every four pieces of plate or steel are touched by service centers.
With a fair amount of capacity into the market, despite relatively good demand, and also historically high levels of imports, along with raw materials on the slide, has put service centers on the sidelines, being very nervous about pricing, particularly those service centers, not that we necessarily do business with, that simply turn inventory, that try to buy low and sell high, has put a great deal of this market impacting a great number of our competitors into a very, very soft market. That is without a doubt a depressing effect in the entire North American market right now. You've seen this slide.
I just wanna touch on a couple of things to really point out that within our strategic objectives for the Americas, we have some higher priority initiatives going on in each area. Melker did a very good job. I won't repeat what it means for the customer experience. I'll show you some examples, rather unique examples, I think, that are going on in Americas right now, and I do have a deep dive into a few of these that may be of interest to you. First and foremost, the home market leadership position. A bit different than what Melker and what we're dealing with in the EMEA organization. We have a sizable scale right now in North America as SSAB Americas.
Because we are participating in the export market, shipping product out of Mobile, Alabama, and some out of Iowa into China, into South America, we do, we will have the need to displace that to remain the number one producer in North America. So we do have some organic growth initiatives, as well as small investment in certain products that I'll touch on in here in just a minute. And then we also measure ourself in terms of performance for the the service to our customers, and I have a a graph on that as well. And then it's extremely important that we manage our our branded and high-strength product portfolio.
Because, quite a big difference than EMEA in the Americas, is we do have a sizable exposure to some of the commercial product, including, quench-and-tempered brands. Highly profitable, but different than how we go to market with Hardox and Weldox. And, it is of great importance that we don't cannibalize our position while maintaining a premium space, as well as, competing with, lower-cost producers and, competitors of the same product. And so we intend to leverage our position, both for our products as well as our SSAB brand, for, all wear, structural, and, including the protection applications.
Then lastly, the value-added services, we have launched in strong, strong measures in both North and South America, and that is, you know, the, that is our drive towards moving downstream, getting closer to our customers. The mining center is a prime and one of our best examples of that. Our Santiago, Chile, mining center has proven quite valuable in a very short time with the investments we've made, as a good example of value-added services. Touching on our investments, the quench line in Mobile has been discussed several times. The chart really describes where we are at in terms of our annual rated capacity.
And, keep in mind that there are a couple of drivers within ramping up to the capacity. It's not only the volume and the market to serve the volume, there are also, as KG showed, a wide range of wear and structural products that will take time to go through to the ramp-up process. But you can see from the chart, at least as where we are in Q3 today, we are on time, and the project has come in within budget as well. Our future investments that are on the board right now, relatively small, but the ability to drive revenue and profitability in the short term are centered around normalized plate. And I'll just take a minute to put on KG's technical hat.
The normalized product is a heat-treated plate, a much less sophisticated than quenched and tempered, but it is in very strong demand because of the energy market today for rail cars and offshore platforms. It introduces a toughness to the steel that obviously end users are interested in, as opposed to as-rolled. And there is limited capacity in North America of normalized plate. There's very little import of normalized plate currently. So we have some long-term contracts with a couple of the biggest rail car companies, not only in North America, maybe the world, in Trinity Industries, American Rail Inustries and so forth, that are looking for more and more supply from SSAB.
And so for a very small amount of investment, with a return, literally, over a month or two, we're moving very quickly in two phases at the end of this month to increase the capacity of this normalized plate. Then, early next year in a phase two, and all of these volumes of these capacity have already been put under contract. And then, two years ago, we launched the Latin America strategy. And, as Martin has described, we are ahead of schedule right now with a growth rate of 49%, our largest footprint being in Brazil. And, the Brazilian side of the business, as I've described, has been a little bit mixed.
Despite that resistance, we have performed not only in Brazil, the Chile expansion, as I've described, is going well. Through our global account coordination, we are already accelerating our ramp-up in Colombia in terms of working with mining customers that also are good customers of SSAB in Australia and in Europe as well. I'm gonna move on to some of the customer projects I think of interest in the Americas right now. I won't go into a lot of details. I think you understand what we're attempting to do.
I think our first example here, at least to me, because maybe because of the hypocrisy of it, that if you wanna drive a vehicle at 200 km an hour or so, the idea of safety maybe goes out the window. But at SSAB, we are looking for, you know, those opportunities, and you've learned a little bit about embrittlement and cracking failure and so forth. And so regardless of how you wanna drive the vehicle, we can make it a bit safer if you run into something. This is an example from the agricultural segment. As a matter of fact, this was a runner-up from a Brazilian company last year at the Swedish Steel Prize.
The winner, as Martin already showed, was John Deere, also in agriculture. But another example of working with our wear products in a segment and in a developing area to reduce their downtime, improve their maintenance programs, and overall productivity. Likewise, in the construction area, replacing mild steels with high-strength steels have the ability to raise uptime and, especially in such important mining areas as I've already described in South America, Western U.S., and Canada, the uptime is of critical importance to keep this equipment operating in faraway mining fields where maintenance is difficult, replacement is difficult. So these have been very good solutions provided by SSAB.
The next few slides here, as I describe, are our what I describe as our differentiators, where, in my opinion, and I think the overall, as you'll see, where we in the North and South America, around our production units, where you can see based on last year's shipments, we remain the leader in plate production for North America. I described the customer experience, and one of the measurements that we use in North America is a third-party survey. This is done by the industry. This is not a private survey. This survey...
The survey is published quarterly, and for over the past year and a half, as measured by, or again, in a model, that if you perform in all the areas that you're supposed to be performing in, then the customer is willing to grant you a premium, if not a preference of supply, and that's what we aim to provide. In the area of productivity and our Six Sigma programs and the work that we do at all of our facilities, not only our two big mills, steel-producing facilities, but our processing lines as well. Over the past two years, we have annualized savings that have achieved over $60 million.
In the area of safety of extreme importance because it is the measurement of our people for number one, and how we are looking out for our workers in the plants. Last year, in 2011, we led the industry again, as measured by lost time accident rate cases. As a matter of fact, Mobile was recognized as the single safest steel facility in all of North America. We have started out in 2012 maintaining a very strong position, including an improvement in Iowa that we have targeted for the past six months.
And then lastly, in the area of earnings versus or as measured with two of our biggest competitors for the past few quarters in EBIT results, we have outperformed our competition. Again, an emphasis to our low-cost model, managing the cycle, managing the product mix, and moving to segments that provide higher revenues and higher profitabilities, the whole concept of flexibility. So just in summary, as I began, there's a bit of uncertainty right now. Although demand continues to hold up reasonably well, there's no reason to believe that that would change dramatically, despite a few questions.
Our market leadership position, along with our low-cost structure, does allow us growth opportunities in certain areas and certain segments that we've identified. The future investments we will enact very, very quickly. The timing is important, and with the ramp-up of quench-and-temper at Mobile, is allowing us shorter lead times.
As, as Martin described, his needs and achievements in China, we have the, the same issues in, South America and even parts of North America, that for, a couple of years, the biggest complaint is SSAB is, while we love the product, getting it to them faster and getting it to the volumes that they have needed to, to round out their supply, we've, we've had a limited ability to do that, until we are now ramping up local production, and now we balance the, the fast runners, as we've described, with, some of the, the wider range products coming out of Oxelösund and out of Borlänge.
And then using all of those products to leverage the SSAB brand portfolio and the product portfolio to maximize our presence in the market and to maximize our earnings potential from operating in a premium segment. And then, you know, lastly, continuing to reach downstream in the organization, not only through the use of mining centers and other solutions, wear solutions, such as chrome carbide overlay, an acquisition that SSAB Americas completed last year, has a great deal of attention from the end user community. It also shows, it shows strong margins and our intentions to expand that service into Western Canada, into South America. And the need to move rather quickly ahead of the competition, because attention. That is my presentation, and I'm open for questions.
Yeah, please. Who wants to start?
Spot quarterly and annual contracts.
Can you stop there? We can one question at a time, please.
Okay.
Uh-huh.
The contract structure in North America?
Okay, Alexander, we agreed last night that whatever we talked about at dinner, stayed at dinner.
Okay.
You're talking on the customer side or raw materials?
No, no, on the customer side.
On the customer side of the business, and how we balance the mix of long term?
No, what your share is on the spot, on the spot market, which one is really priced on the spot business?
It would be difficult to give you numbers. I think in a typical mark-
Yeah.
Pardon me?
You have that in the slides Marco showed this morning. I can take that one.
For-
Yeah.
For just North America.
I think you mean the customer contracts, how much is spot-based, how much is short-term?
Yeah, and what's the time lag, basically-
Yeah
... when it fits through your P&L?
Yeah, 40% is spot, and then we have project-based, or short-term based, the rest of that.
Okay. And the second question is, just for my understanding, when does this depreciation of the new quenching lines hit the P&L?
Marco?
Yeah. It's already started in all of both in Borlänge and in Oxelösund for thick plate, and also in Mobile, quench and temper.
It started in the second quarter?
Yeah, they started right away when we ramped up or taking those in operations. We started. So in Q3 and forward, you will see the full impact.
Okay, thanks.
I would just comment back to the first question, that we don't necessarily have a target for what would be in the share under contract, whether it is long-term, quarter. We tend to look at the market dynamics in a rapidly growing market or a declining market, to decide where we want to commit tons, and depending on what the product is, whether the product is premium brand or the product is more commodity-directed towards energy or something. So the idea with this strategy is where we can make the most money, and the flexibility is to where we can move in and out of spot as profitability is presented.
Okay. Yes, please.
It's Anders Gillefors. On cost flexibility, you have different technical setup as in EMEA, but you also have a cost flexibility due to outsourcing. Can you tell us a little bit, what have you outsourced, and what is your experience on outsourcing? What areas have you outsourced?
Okay. You're absolutely right. There's a structural difference between our equipment. Our outsourcing is really in several areas, for example, in the general maintenance of our facilities that we use maintenance contractors. These are long-term contracts that do provide flexibility, whereas in downturns, you know, we can use our own people as needed in those positions. But at the same time, during high production periods and so forth, we can move companies in and around our operations, be it at the rolling mill or at the melt shop area. And also some of our services, such as painting or burning.
Handling our scrap is a very big one. Obviously, we tie up a lot of capital in scrap and movement of scrap, and despite looking at heavy bundles or scrap, you don't see much differentiation there. But I think we're help me out, KG, we probably manage 26 different grades of scrap and use of alloys and so forth. And so using contractors to manage those inventories and those products in and around our facilities is also use of contractors.
Okay.
Uh, one-
Yeah.
One question more. What about IT? Have you outsourced anything on the IT structure?
Some of that, yes. Yes, yes, we have. Now, part of what we're attempting to do, not to get into a discussion, but, you know, working within our IT within SSAB, trying to get on the same systems, working together with Sweden and Latin America, as you can imagine, and now with APAC, pulling together various parts of the world with different IT systems is extremely difficult. So, more of our work on IT, beyond our day-to-day, is our future desire and future attempts to get on the same system or something close enough that we can run our business globally, between sales, inventory, that is very critical to moving our products.
Okay. Do we have any further questions? If not, I would like to thank Chuck. And before I leave the floor to Martin for the concluding remarks, we will have a prize ceremony.
A big prize ceremony.
A big prize ceremony, and here is Eva with the prize. As they used to say, we have a winner.
We have a winner.
Yeah.
This is a roller ski, and it should have been green, or it's a roller ski. It's made of our Docol. It's very thin, and the special thing, this is a premium project because it deflects, so it feels like being on snow, which no other ski does. This is just possible using the high-strength steel. You demand the container and the hit and the large deformations and the formability. This is actually used in this ski. And we have a winner, and I hope it's a-
They get two.
They get two, yes. Maybe the other one is green. We have a winner.
Daniel Alenius.
I don't know if you want to reveal your guess for,
Uh.
The plate on the tower.
0.5 m, 0.5 m.
So only 10 xs wrong.
Yeah. Good enough to win a ski, I guess.
Congratulations. I hope you find use of it.
I will do.
Congratulations, and now I leave the floor to Martin Lindqvist.
Thank you, Helena. And first of all, thank you for visiting us here today and also visiting us yesterday at our mill. It has been a pleasure to have you here and to use this time to discuss challenges and possibilities going forward. And one thing is clear, we have a tough environment out there. We have uncertainty regarding the economy in a global scale and also in Europe. We have, as we have talked about, structural overcapacity of steel production in Europe. So we have some challenges as a company and as an industry. But we know how to handle these challenges. We have a lot of things ongoing, and we will continue to handle these challenges.
We also know, and we also hopefully have showed you, that we have a great potential in our business model and with our new products, how to handle the future growth of SSAB. And you have seen a wide range of examples of upgradings. And as said, I mean, the first nine months this year, we have done 900 projects together with customers and potential and future customers, and the hit rate when we do this upgrading work is fairly good. That the possibility of it ending up in material deliveries is fairly high, so I'm confident that we will continue to have satisfied customers using our material going forward.
And we have also tried to show that there are possibilities by leveraging what we have learned in Europe and done in Europe for many, many years in other areas of the world, but also still possibilities in Europe. So I'm convinced that for being a steel company, because we are a steel company, we are still in a cyclical business, we will be one of the most profitable steel companies, going forward. So with that, thank you very much for your attention today, and welcome back. And you are always welcome to visit our mills, other, our other mills in Sweden and in U.S. And if you feel to do so, please give us a call, and we will arrange that. Thank you very much.