Good morning, everybody, and very welcome to SSAB. We're going to present the results for the first half year, 2012. And before I leave the word to our CEO and our CFO, I just wanted to remind you that this is also a teleconference, which is followed by people on the website. And so therefore, I would like to remind you that you introduce yourself with your name and organization before you ask any questions, and also to use the microphones, which will be handed out afterwards. Once again, you're welcome, everybody, and I'll leave the floor to our CEO, Martin Lindqvist.
Thank you, and good morning. Glad to see so many of you here in the middle of the summer. Start with some highlights. The EBIT for the second quarter amounted to SEK 755 million, and the cash flow, operational cash flow of SEK 948 million. So we continue to produce healthy cash flow. So far, the latest twelve-month, we have had operational cash flow almost, or a bit more than SEK 4.8 billion. We saw higher prices in Q2 compared to Q1, and that had a positive impact on SSAB EMEA EBIT. We also started to see a positive impact within EMEA from the efficiency and flexibility program that we are running.
In Americas, we were affected at the end of the quarter by a softening demand in North America. But during the quarter, we were running the mills in North America at normal capacity utilization, and in EMEA or in Sweden, we were running at approximately 80% capacity utilization. The introduction of steels from the new production lines, the new quenching line, QL7 in Borlänge and QL6 in Mobile, is ongoing. We are now selling material and introducing material to customers, and we have material in our stocks as well, so we have started development programs, and we have also started deliveries according to plan. The sales amounted to SEK 10.8 billion, with, as said, an EBIT of SEK 755 million.
The EBITDA per ton, which we follow and compare with the competition, amounted to SEK 1,230 per ton delivered steel, which I would guess is fairly competitive, what I've seen so far, at least. Take a look at the market, and if we start by product, the demand for quench and temper is still on a good level, and we see a healthy demand. The demand for strip is still a bit more hesitant, as we have seen for the first six months of this year. And as said, we saw the demand softening somewhat in North America during the latter part of the second quarter. If we take it by segment, heavy transport, demand still healthy in EMEA, but weakening somewhat in North America.
In North America, within heavy transport, the railcar builders is the strongest segments, and they remain very busy with good order books, and that is an important segment for us in North America. Automotive, a bit slower. Light vehicle sales in European Union were down the first six months with almost 7% compared to the first half of last year. In APAC, we also saw a slowdown within automotive, and especially in China, during the first half year. But China car sales is expected to grow for the full year with almost 10%. Yellow goods demand still healthy both in EMEA and Americas, and we saw the Chinese lifting industry picking up in Q2.
As we said, when we released the Q1 report, they were consuming material out of stock in the beginning of the quarter, but we saw an increase in their production. The after-market demand in general remains positive. Mining still also positive. Australian mining remains strong. Indonesia is an important market for us, is also positive. The only slowdown we have seen in the mining market so far is mainly within energy coal mining in North America, where we have seen the miners being less busy and producing less quantities. Energy line pipe inquiries have slowed down a bit in both U.S. and Mexico, and the wind tower demand is also slowing down.
As you know, the expectations are that the tax credits will expire during this year, so, so it's expected to slow down even further in 2013 if they don't take a new decision regarding tax credits. Service centers, I think this is the third or fourth quarter in a row where we say that the order placement is, cautious. This time, we say very cautious. They only buy what exactly what they need. The inventories, which we, which we typically measure and look into at the end of every quarter or every month, are on a level, equal to 3.1 month of, of supply, and that is a bit higher than we saw at the end of Q1. I think we had 2.8 or 2.9 or something.
It's still on a fairly decent level, but higher than we have seen the last at the end of last quarter. We take EMEA, they had an EBIT of SEK 383 million after two quarters of loss. The shipments were lower compared to Q2 last year, and also lower compared to Q1. Niche products accounted for 49% of the shipments during the quarter, and prices were, for standard steels, 12% higher, and the reason for that is, of course, what we talked about during the Q1 report, that we took volumes during Q4 with low prices, and that affected Q1, and then you see this big change of 12% in average of prices. The gas pipe damage we had, or breakdown we had in Oxelösund, affected us.
It took away 10,000 tons of Q&T during the quarter. Some of it was expected to be delivered during Q2, but a bigger part during Q3. And as I said, the new steels from the quenching line in Borlänge is now gradually being introduced to the customers on the global market. So we are now selling Hardox material, and we will, during this year, introduce higher grades of the Domex, and then after that, also higher grades of Weldox from that quenching line. As said, the efficiency and flexibility program within EMEA runs according to plan, and we have, during the second quarter, started to see some effects out of that. Americas had an EBIT of SEK 537 million and an EBIT margin of 11.5%.
The shipments were fairly on the same level as in Q1 this year, in Q2 last year. Niche products accounted for 25% of the shipments, and prices, both for niche steels and for standard steels, decreased during the quarter. So did the scrap cost, but there is a lag between. I mean, typically, when scrap costs decreases, prices go down, but there is a lag. So, I mean, for a couple of weeks, you get the margin squeeze until you have consumed the old scrap that you bought for a higher price. The new 200,000 ton quenching line in Mobile was commissioned during the quarter, and we have started to produce and started to deliver material from that quenching line, mainly Hardox. So, so far, only Hardox material to customers.
APAC had an EBIT of 40% and an EBIT margin of 6.1%, which is fairly low. Shipments were lower than Q2, but somewhat higher than Q1. Demand was affected by destocking in segments such as automotive and heavy transport, and in the beginning of the quarter, also from destocking within the lifting segment. Local prices for niche steel decreased with 3% during the quarter, and the new finishing line in Kunshan was inaugurated also during the quarter. We still have certain test runs to perform, but we are producing material and starting to deliver material to customers from that quenching line. The new R&D center is fully now up and running, and fully staffed with equipment and people.
Tibnor had an EBIT of 67% and an EBIT margin of 4.1%. Shipments were lower compared to Q1, and Q2 were much lower compared to Q1 and Q2 last year. And the lower shipments of steel was mainly related to lower volumes of strip products. We had a cash flow of almost SEK 100 million out of the Tibnor operations. To say something about the market environment and the outlook, global steel production increased by 1% during the first six months compared to last year, and U.S. steel production increased by 8%. We saw also increased import of steel to the U.S. during the first six months of the year. The macroeconomic outlook in Europe remains uncertain, and the recovery in the U.S. weakened somewhat towards the end of Q2, partly seasonally, but partly due to other reasons.
The strongest segments for us remains material handling, large construction equipment, and the U.S. energy sector. Spot prices during the second quarter weakened somewhat. With that, I think I hand over to Marco.
Thank you. First, couple highlights. Result, EBIT level was SEK 755 million, and we had net sales that went down about SEK 1 billion compared to same period last year. The main reason for that was the volumes decreased. Just Martin said, the operational cash flow was very good, SEK 948 million, and our ambition is to continue with a very good cash flow generation going forward. We have efficiency programs in place and focus on that area. Net gearing went down to 56%, and compared to year-end, that was 60%. Here you can see, quarter two this year, SEK 755 million EBIT, and last year, we had SEK 1.3 billion.
If you just look at the major items that affected that decline in EBIT, so we see the prices went down about SEK 350 million, and volumes affected about SEK 370 million. Also, lower production levels that we have this year compared to last year affected our EBIT about SEK 90 million negatively. Raw material prices, both on coal and iron ore, but also scrap, affected positively about SEK 220 million, and that gives us about SEK 755 million in EBIT. Looking at cash flow, the last twelve months period have generated operational cash flow about SEK 4.8 billion, and also net cash flow last 12 months is SEK 1.9 billion. The Q1 operating cash flow was SEK 948 million, and net cash flow was - SEK 309 million.
In that includes investments about SEK 700 million, but also a dividend of SEK 648 million. If you look at our financing and liquidity position, we have excellent liquidity preparedness with our liquid items and backup facilities. The preparedness is about 24% of 12 months sales. As I mentioned, net gearing went down to 56% at the year from the year end at 60%, and in Q1, it was 57%. Net debt increased by SEK 700 million, mainly due to the currency effects that affected net debt negatively and amounted to SEK 17.4 billion. The average term in the loan portfolio is 5.2, compared to 5.3 at the end of Q1.
Just looking the graph here, you can see that we have continued to work with our maturities. If you recall the presentation I showed you in Q1, looking to 2014, that bar was SEK 5 billion, so we have pushed forward about SEK 2 billion out of 2014 maturities. 2012 maturities is basically commercial papers amounting to SEK 1.4 billion. Here you can see the duration and debt cost. Debt cost still very competitive, below 3%. If you just look at the long-term debt portfolio, the maturity or the term is 5.6 years. A couple words about the raw materials. So as Martin mentioned, we have signed a new annual contract with LKAB.
The prices compared to Q1 prices, or shipments in Q1, was down in U.S. dollars about 6%. But due to the currency in Swedish krona, the prices went up about 2%. This will give impact in Q3. The agreement is a 12-month agreement, but basically the same type of agreement as we had a year ago. When it comes to coal, we buy about 60% of coal needs from Australia. That's on monthly contracts. And during the winter, we don't buy coal, so the purchase we've done in late Q2 entails price is about 30% down in U.S. dollars compared to the purchase we've done in the fall, and that's about 25% in Swedish krona.
The same goes for the United States, where we actually buy on annual contracts, and that's about 40% of our needs. And scrap, we buy continuously, and you've seen perhaps also that prices have declined during the first half year, especially in the second quarter, and are now 24% lower than in the end of last year. And then back to you, Martin.
Okay, thank you. So to sum it up, as we see it, the uncertainty or the uncertain situation in Europe remains, and that has also started to affect other parts of the world. Customers have short-term planning. They typically have that during the summer, but I would say that is even more so this year, which reduces the visibility for us and other companies going forward. As said, we have signed new annual iron ore agreement, a yearly contract with a corridor where we have the possibility, and LKAB has the possibility to renegotiate that contract. The volumes in Q3 will, as normal, be affected by the planned summer outages in Sweden, which is going on right now as we speak, and for a somewhat weaker demand for standard steels.
The efficiency and flexibility program within SSAB EMEA proceeds according to plan, and we started during Q2 to see the effects of that program. As said, we had a healthy cash generation the last quarter and the last couple of quarters, and the ambition is to continue with a healthy cash generation going forward. The work to increase operational flexibility, to reduce the break-even point, continues according to plan. And, in general, steel producers are cutting back production. We see that in Europe, but we also see that for the first time being done in China. We have not seen that before, producers taking away or idling capacity.
The new quenching lines in Mobile and Borlänge is ramping up according to plan, and as said, the material is being now introduced via stocks to end users and via customer development programs, projects to customers. With that, I open up for questions and comments.
Who would like to start?
... Good morning, Christian Kopfer of Handelsbanken Capital Markets. Firstly, you're mentioning that you are starting to deliver out your, your new capacity of quenched temper steel. But at the same time, you, you say that the demand for quenched temper steel are quite stable. So how do you see the customer behavior in rolling out the new capacity?
When we roll out the new capacity, there is a combination of new products and products already produced in other places. We see a lot of opportunities. We focus a lot on customer development projects together with the small medium-sized customers and also big OEMs, and we see a lot of opportunities. So even if the underlying demand, so to say, is stable, for as we see it, for quenched and tempered, there is a huge potential for what we call upgrading, doing development projects together with customers. The example I showed last time with the new tipper body in China, where we were able to reduce the weight with 50% and take away a lot of weldings and bendings and stuff like that. So that is what we are focusing on.
That's why we are positive that we will follow the ramp-up plan we have, or the market plan we have.
So the ramp-up plan is essentially in line with what you have believed earlier, so to speak?
Yes. Yes.
Okay. So, we will see impact from this continuously during the second half of this year?
You will see the impact gradually over the coming years. I mean, as we have talked about before, a typical customer development program, project takes between six months up to two years. It differs, of course, but. And then you have also, products that going directly to, to, to customers already using, quench-and-temper. So, so it will be a gradual ramp-up over, over the coming time, yes.
Okay. You haven't said anything about price trend. What do you see there in terms of next quarter?
No, we haven't said that because the visibility is not that good. I mean, we have seen spot prices coming down a bit during the second quarter, and that will, of course, affect Q3, but we haven't seen, so far, any massive price movements in any direction.
We heard from Ruukki, for example, that they expect price increases in Q3 based on what they have heard from ArcelorMittal, for example. That's for European market.
Well, if the prices go up in Europe, that will affect us as well.
But have you seen that so far?
As said, I mean, the visibility is not that clear. It's typically not extremely clear during the summer with a lot of shutdowns among customers and among steel mills. But we have seen attempts and discussions of price increases in the market, yes.
On the margin development, for example, EMEA and Americas, I mean, when talking to you during the second quarter, I mean, it has definitely been looking that EMEA is, you know, really, really bad, and then you end up with 7% EBIT margin, and then you, you, you come down quite substantially in Americas. I mean, what, what is going on?
No, I mean, this is an effect of... I mean, you could say that we have not been extremely helped by the business cycle during Q2. I mean, having EMEA in a loss for the last couple of quarters is, of course, not good, and we are not extremely proud of the result in EMEA for the second quarter either. I mean, it's. We have taken a lot of measures to increase. For us, it's important to what we call increase flexibility. We have talked about that before, to be able to have a lower production rate without losing money or... And that is what we are focusing on. We are far from ready. We have started the project.
What I've said is that we have started to see some effects of increased flexibility and increased cost efficiency, but we see, I mean, we are far from ready there. So, I mean, we are not extremely proud of the results during the second quarter in EMEA.
Yeah, but still, 7% is quite high if you, if compared to peers. Okay, but-
I mean, if you compare SSAB, EBIT margin to peers, it's fair. If you compare to other steel companies, it's quite okay.
So, so-
But still, we are not satisfied.
Sure. But should we consider the EBIT margin of 7% not as a, you know, impacted by one-off? So it's rather that you expect some margin expansion there because-
There was no positive one-offs in EMEA during Q2.
And America, say, you mentioned that you have seen some impact from the lag effect, from lower scrap prices, so we should expect the margins to pick up there?
What we saw, I mean, yes, to begin with, yes, but then it all depends where scrap prices goes. I mean, what we saw during Q2, and to some extent during the latter part of Q1, but mainly Q2, was increased import of steel to North America, and that affected the North American steel industry. You could see that from other North American companies reporting the last couple of weeks. That affected us, and then we also was affected by the lag effect. When scrap prices came down and steel prices followed, we had still to consume the inventories, and you see some kind of lag effect.
Finally, for me, then, on APAC, you have always said that you expect margins between 10% and 15%.
Yes.
Is this still relevant going forward?
Yes. This was not a very good quarter.
Thanks.
Okay. Anyone else? If not, I will turn to those of you who have called in for, okay, we have one more question here.
My name is Rutger Smits. I haven't followed SSAB for the last few years. I would have expected niche products to be a higher percentage of your sales. Why is it that it's only 25% in North America? And, have you ever disclosed the difference in margins between niche products and your base?
... sales?
No, we have not been explicit about the margins compared to ordinary product. I still say that 25% out of the U.S. production, it's not extremely impressive, but still a very good level. What we have said is that at the latest, 2015, 50% of all deliveries should be niche products. We are currently at a rate of 39 or something, 37, and we are, I mean, with some ups and downs, following that trend to be able to reach 50%.
Okay. And lastly, as this new contract with LKAB, what do you expect the iron price to be in $ per ton?
That's a very good question that I can't really answer. I don't have any strong opinion if it will go from where it is today, up or down. I'm not sure. I mean, I don't know, to be honest.
Okay. Then we will turn to those of you who have called in for the phone conference. Please go ahead.
Our first question comes from Ms. Cedar Ekblom from Bank of America. Please go ahead.
Thanks very much. Thanks for taking my call. I've just got a quick question on your U.S. demand exposures. You mentioned construction, energy, and mining CapEx as your three big end markets. I'd just like to try and get an understanding of what your perception is for the U.S. going into next year, because of those two end markets, we're seeing quite a bit of weakness in terms of demand, particularly energy and mining CapEx. Do you have any optimism on demand in the U.S. market? And the reason why I ask is obviously that's the division that appears to be holding up weak Europe performance. So I'd like to understand the risk to demand and obviously earnings going into 2013. Thank you.
As said, regarding energy, we have seen a slowdown on line pipe inquiries, but there are still a lot of projects out there. So I don't really know where that will go in 2013. I'm not that pessimistic when it comes to line pipe. When it comes to wind tower, which is one of many important segments, I mean, the tax credits will probably, as I heard, at least, expire during this year, and that will, of course, affect the demand from that sector during 2013. When it comes to mining, we haven't seen. I mean, we are a small supplier in a big world, and we see a lot of opportunities, I would say, especially in Latin America, which is part of SSAB Americas.
As said, we have seen a slowdown when it comes to energy coal. It's not an extremely big taker of our products, but still, it affects us. But where the mining CapEx will go in Latin America, I'm not sure about the exact figures, but still, even though our abrasion-resistant steel takes longer time to wear out, it will still wear out. So as long as the mines are up and running and working, there will be possibilities for us to sell abrasion-resistant steel.
Okay. Just a follow-up question. Is there any way that you can quantify out of those end markets that you have mentioned, sort of what percentage of sales you think is exposed to the wind power sector and the mining CapEx sector in North America? Because that's obviously the areas where demand looks to be softening. So we can get an understanding, is it 20% of sales where demand is softening, or is it, you know, 50% of sales where demand is softening?
Out of Q&T, which is a part of the sales we have in Americas, I would guess, mining-related, 15% to maximum 20%.
Okay, and then in the wind power market, do you have any data on that?
Well, that's a bit more tricky because that is mainly, and or I would say, only ordinary steel, and that goes directly to producer. It goes via service centers. I can't give you an exact figure, but it's not. My guess would be it's not as much as 15%.
Okay.
I would say below 10%.
Okay. And, just in terms of how the U.S. market is shaping up, if you look at the investments that have been made in that market over the last three years, I mean, obviously, you can't control demand, but, you know, are you comfortable with those decisions and how they're positioning SSAB going forward when we see some of the big end markets not growing?
Our investments in North America?
Yes.
Yes, we are very confident with that. Yes. I mean, we see, we don't see a big oversupply for standard plate produced in North America. We see for quench and temper, we have today a capacity. Before QL6, we had a capacity of 100,000 tons. We are now adding 200,000 extra tons, and we see no big problem at all with that capacity expansion. Quite the opposite.
Okay, perfect. Thank you very much.
Thank you. The next question, please.
Our next question comes from Mr. Alexander Vilval from Carnegie. Please go ahead.
Good morning. I was wondering a little bit about the APAC margin. If you could please elaborate a little bit on what impact did it compare to earlier quarters regarding prices and and sort of margin resiliency regarding that it is mainly a niche product area for you?
... Yes, it is, and we had, compared to last year, we had lower volumes in Q2, but we also had the lower prices compared to Q1, and then we had some, call it, we don't call it one-offs, but extra costs, that we were changing the logistical setup and changing stocks and things like that. So, I mean, this was, margin-wise, a very slow quarter and not where it should be.
Okay. So, even at sort of the current volume levels, you expect that you will be able to come back to the 10%-15% that you mentioned earlier?
That's my expectation, and we have also, during the quarter, been manning up to have a good starting position. We have started up K2, the plate service center. We have fully manned up and equipped the R&D center. We have also increased the manning within sales. So I think we have. We discussed it as late as this morning. We have a very good starting position on a very big market. I mean, on that market as well, I mean, it goes with the customer development projects, and we are increasing the volume of, or the number of customer development projects within tippers, within buckets, within concrete pump trucks, within lifting.
So, we see, I mean, so far, the volumes we sell on the Asian and especially the Chinese market is just a fraction.
All right. You saw that, local prices for niche steels decreased a little bit compared to Q1.
Yes.
Is that price pressure still there?
It differs from quarter to quarter. I mean, they are fairly stable over time. Sometimes we manage to get prices up a bit, and sometimes they go down. It's a combination of price pressure and different mixes.
Okay. Thank you.
Thank you. Next question, please.
Our next question comes from Mr. Johannes Grunselius from ABG. Please go ahead.
Yes, hello, Johannes Grunselius here. I have a few questions. First, if you can elaborate on the volumes for EMEA going into the third quarter, what do you see there?
I mean, to start with that question, we, this is a normal summer, for us. I mean, we typically, during a normal summer standstill in production between two and three weeks, closer to three weeks than two weeks, and that will, of course, affect production volumes. And, I mean, I don't know, but within the strip business, with something between 120,000 and 150,000 tons normal year, and within the plate business, 30,000-40,000 tons or something.
Okay.
So, nothing special this year. It's a normal summer stop.
So you basically expect the same seasonality, negative seasonality as typical. I mean, you don't expect volumes to come off more because of the tough economic situation in Europe?
I mean, we saw a tough economic situation in Europe, as I see it, in Q1 and Q2 as well.
Sure.
We haven't seen any extremely worse situation, so to say, in the beginning of Q3 compared to how it looked in Q1 and Q2.
Right.
So it will mainly be the seasonality, the normal seasonality.
Yeah. You also mentioned that there were some lagging negative effects of the declining scrap price in the U.S. Does that mean that you expect some margin recovery in the third quarter?
Depends where scrap prices goes, of course, but typically, the way it works is when scrap prices go down, that put pressure on ordinary steel prices, so to say, and there is a lag effect of a couple of weeks when we consume out of our scrap inventories. Then, of course, if scrap prices flattens out, then steel prices normally flattens out, and then margins flattens out. If I mean, steel prices or scrap prices go up, steel prices goes up, and then initially, you see, a margin expansion. So it depends where scrap prices will go. But everything else equal, we will see somewhat in the beginning, somewhat better margins, yes.
Right. And, final question from me. Can you elaborate on the euro weakness, how that impacts your Swedish operation? Do you see more competition now in Sweden because, you know, other non-Swedish steel companies are taking advantage of the strong SEK?
We haven't seen any big changes in that. I mean, a strong Swedish krona is not, of course, good for us with production in Sweden and sales in euro and other currencies, that's for sure. We haven't seen, in the short term, any massive movements or materially into the Swedish market. It's still a fairly small and distant market. So I would say that the problems with the strong Swedish krona lies in the currency effects.
Okay. Thank you very much.
Mainly. But then, on the other hand, I mean, you could potentially see increased imports into Sweden from other countries, of course, but we haven't seen that so far. Not to a large extent, at least.
Right. Thanks a lot.
Thank you. Then the next question, please.
If you'd like to ask a question, please press zero one on your telephone keypad. Our next question comes from Mr. Alexander Haissl from Morgan Stanley. Please go ahead.
Yes, good morning. It's Alex Haissl at Morgan Stanley. I have one question on your EMEA operations. I mean, when you look over the last 12 quarters, I mean, volumes are down some 12% on average in the second quarter. Do you think your efficiency program is enough to prevent margins? Because what we have seen over the last few years is that all companies are taking out significant costs, but margins are going to deteriorate further. So my question is, if it's a structural problem, then, we won't see volume growth, and we won't see so much margin improvement, right?
No, but, I mean, we have taken out capacity. We are currently having one of the blast furnaces in Oxelösund idle, and that is due to the market situation. Then, of course, when you work with efficiency and flexibility, I would say it's a constant struggle. I mean, you can never say that now we're ready, now we've done everything we can. I mean, we have a program right now that will reduce the costs with approximately SEK 800 million. We will probably continue to try to be more cost effective and more flexible regardless of the business cycle. So if that is enough to increase margins or not, well, that depends, of course, of the business cycle. But, so far, we have we are at least following the program we have launched and starting to see the effects.
We will see the full effects during next year. But so far, we are doing what we have decided to do.
But do you think it's enough to take out temporary capacities? I mean, if we're going to see a restocking cycle during the fourth quarter, we will have the same situation again, that mills bring back capacities, and we have exactly the same dilemma again. So-
I mean, long term, my guess would be that, there is, there could... I mean, if the business cycle stays where it is today, we have a structural overcapacity in Europe. Then it's, I mean, of course, someone needs to take that capacity out. If it's, I can't really say from the top of my head who that should be, but someone needs to do that. Yes, for sure.
The other question, this is a more general question, in terms of contract negotiations with your clients. Has there been a deterioration over the last, let me say, 6-9 months, in terms of negotiating, meaning that it's even more difficult to push through prices in both directions? So if prices go down now, did you get less even that the costs are going down? Has there been a general deterioration?
In general, on the market?
In Europe.
I can't really... maybe. I mean, we haven't seen that. We have a somewhat different approach when it comes to price discussions. I mean, we typically, when it comes to niche products, offer more than just a piece of steel. I mean, we offer efficiency or productivity or reduced weight, and then you typically have a different kind of discussion. I mean, if you take a look at the niche prices, and especially quench and temper prices, they have been much less volatile compared to ordinary steel. But for ordinary steel, I can't really say that in Europe. We are mainly selling ordinary steel in the Nordic region, with some small exemptions in Europe.
Okay. Many thanks.
Okay.
Okay, thank you so much. Next question, please.
Our next question comes from Mr. James Gurry from Credit Suisse. Please go ahead.
Hi, guys. Thanks for taking my question. Most things have been addressed, but I've just got a couple of things on the iron ore side of things. I think you know, probably since you signed the annual contract, spot prices for iron ore have probably come off 10% or 12%. We know that last year you were able to renegotiate the contract. Do you think the same will happen again this year? And just further on the outlook for the rest of the year, if it is gonna be tough, is there any prospect of doing emission rights sales again, like we saw last year?
To start with the raw material question, that will be, the future will give the answer, so to say. I mean, we have exactly the same setup as we had last year with the corridor of where we or LKAB has the possibility to renegotiate the pellet prices, depending on where the prices for spot iron ore goes. So we will see. When it comes to emission rights, well, I mean, if we are producing less than full production, so to say, there will obviously be some excess emission rights. What we decide to do with them, well, that will be, in that case, that will be a later question.
Okay, thanks.
Thank you for calling. Next question, please.
Our next question comes from Mr. Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yes, good morning, gentlemen, and thanks for taking my questions. I've just got two brief ones left. To follow up on the comments you've already made on the quenching lines in Borlänge and Mobile, when should we expect a notable margin contribution from these projects? You mentioned that that would be very gradually, but when will we really see that reflected also in the margins? And then secondly, again, on raw material prices, obviously, it's very difficult to say where steel prices will go from here, but if we just assume that they would remain stable around where they are today, would your margins still remain stable in the third quarter versus Q2? Thank you.
I can take the first question and let Marco, Marco, answer the second one. But, I mean, we have not been very specific when it comes to the ramp-up plans of QL6 and QL7. I mean, we are not filling up that capacity in a very short period. It's a gradual ramp-up. And as said, I mean, we are introducing a combination of steel that we previously also produced in Oxelösund. So we are trying to optimizing, call it, it sounds extremely ambitious, but just to give you an idea, trying to introduce, call it a global production system, to produce different types of gauges and widths for quench-and-temper, where it's most cost-effective.
So typically, thin and narrow material for the CPT industry, for the lifting industry, and, to some extent, abrasion resistant material for dumper bodies will be everything else equal produced in Borlänge. Medium gauges and wide material will be produced in QL6, and the top grades, and the full range, or the full spec of the QT products will also be produced in Oxelösund. We will also use QL6 in Mobile to serve, of course, the North American market and the Latin American market. So, we are not only, I mean, we are seeing, call it, an efficiency effect or a cost efficiency effect in these production setups as well.
That will, I mean, contribute to better margins going forward.
When it comes to raw material prices and their impact on our price setting, as Martin mentioned, on standard steels, we have higher co-correlation between raw material cost and our price setting, while niche steels, we have different price setting. Of course, if prices are stable on raw materials, then we might see or should see less volatility on standard steel pricing as well. Of course, depending if something drastic is gonna happen on the market in general, that will, of course, unbalance that correlation. But going forward, in longer term, that should be the case.
Mm-hmm. Just on the very current developments which we've seen, so you basically assume current prices remain stable. We know your costs are coming down. So how much of that is already reflected—has already been reflected in the second quarter numbers? So sequentially, third quarter versus Q2, would you expect the per ton margins to remain stable or even rise? Because of the possibility-
I mean, as mentioned, the lower coking coal price will affect us from Q3 and onwards. I mean, so far, or up until the end of Q2, we have used coking coal from our inventories, and those inventories were bought during end of last year.
Mm-hmm. Okay, and then a final question on currencies for Marco. And I know there was a question already, but just looking at the krona, obviously, it has strengthened quite significantly, in particular, towards the end of the second quarter. Could you guys guide us towards the FX impact, which we should expect for Q3? Thank you.
We have our EMEA, we have exposure to euro. About half of EMEA sales is in the euro area. So of course, weakening euro in the longer run will affect our sales and EBIT as well. But consider that we also hedge currencies, both in purchasing and sales, when it comes to EMEA area.
Mm-hmm. So that means that will only impact with a certain time lag?
That's correct.
Yeah. So when will most of the hedges run out?
We actually do hedges continuously, so it's not just one time, it's a gradual transformation to new levels.
You will see the effects coming, but you will see it with a certain time lag.
So if your average, let's say, delivery times are probably around somewhere between two or three, maybe three and a half months, so that would be the time, probably, when we would have to expect it to hit the P&L?
Yeah, I would say a little bit longer, even than that, due to the effect before we get a raw material price increase or decrease impact in our P&L, and that's about the same effect we get in our hedges as well. The fact that when we buy the raw materials, we usually hedge those as well, and the same time, we hedge also the sales for that raw material consumption in our P&L. So I would say it's a little bit longer impact than two-to-three months.
Okay, perfect. Thank you.
Okay, thank you. Thank you very much. The next question, please.
Our next question comes from Mr. Alessandro Abate from J.P. Morgan. Please, go ahead.
Good morning. Most of my questions have been already answered. Just, a little one on the CO2 emission rights. Can you please explain a little bit the mechanism of your possibility of selling the rights, or in case you decide not to sell, if there is any kind of carry forward effect into next year? Thank you.
I mean, we are obviously not running the production in Europe or Sweden at 100%, and that, everything else equal, gives us some excess emission rights. We have not seen yet what kind of emissions emission allowance we will get for the coming years. So, I mean, at the end, it's up... We need to decide if we are going to sell excess emission rights or if we are going to save them for the future, so to say. Depends also what we will get for the coming five years, and we don't know that yet.
Thank you.
Okay, no more people calling in. Do we have any other questions from here? Please go ahead.
... Julian Beer from SEB Ens kilda. Firstly, could you reiterate what your 2012 CapEx guidance is?
It's roughly SEK 1.5 billion.
Okay, so about the same CapEx, second half as first half. In EMEA, could you quantify the impact of the efficiency program on the Q2 result, and how you expect it to trend going forward?
No, I mean, to be fair, it's not a huge impact out of those 800. It's a smaller impact. But what you have seen is the effects of it in flexibility. But I mean, the cost effect is not that big. It will come.
Over what time frame will it come?
It will come gradually this year and next year. So the full effect, I think we said, will be at the end of 2013.
As a starting point, could I use a straight line from zero at the end of Q1?
Yeah. Could be a good approximation.
Thanks. When you, to the earlier caller, gave an indication of the volume impact of the summer shutdowns in Sweden, for strip and plate, was that for mill production rates?
Yes.
You've had something like a 20% year-on-year fall in EMEA shipments Q2. Would you expect a 20% fall year-on-year in Q3?
Depends on the market situation. No, but, I mean, we can't see any, I mean, massive changes so far, at least. I mean, the business cycle or the underlying demand is where it is. It's not extremely good.
Okay. But just to understand or to make it clear, your shipping rates and production rates don't correlate in Q3 because you build inventory?
To some extent, yes. But long time, they correlate, of course.
Okay. Do you have any scope to catch up on the missed production from after the Oxelösund gas line incident by limiting your downtime Q3?
This is the net effect.
Okay, so that's including any catch-up Q3?
Catching up.
But that is the net effect, yeah. Just about 10,000, 10,000 tons.
Right. And will that be a shipping issue for Q3?
Mainly for Q3, yes.
Okay. Okay, then finally, I think you've covered this mainly, but just so I can understand. I think historically, for scrap inventory in the States, you talked about two weeks on hand. Has that changed during Q2?
Not really. I mean, we. It's typically between 2-4 weeks, I would say. Depends also, sometimes you have some, buy some more scraps and so. It differs between 2-4 weeks.
Okay. But if I remember correctly, the scrap spot prices actually fell about 2-4 weeks ahead of the plate prices in Q2. So I'm at a bit of a loss to understand why this has had a margin impact in Q2.
Just Martin said, there's a lag, and depending when you buy or how much you buy, and especially when you see that we said that we saw a weakening in the end of the quarter two. When you see weakening and you still have purchased the scrap prices for another volume that you actually are delivering, then you have purchased too much for coming volumes, and then the lagging is even longer, and that's what we've seen in American operations.
I mean, no, no huge changes, but, but still changes compared to normal.
Okay. But you do expect a positive effect, at least in the first month of Q3, to turn around the pressure you have?
We start to get a balance again-
Yes.
In that.
Okay. Thanks very much.
Thank you. Any further questions? If not, I would like to thank you who have called in, and also all of you coming here. Thank you.
Thank you very much.
Thank you.