Arcelormittal SA

Good afternoon and good morning, everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you very much for joining today's call. The focus is to discuss the results of the first half 2021 and the strategic progress we're making at ArcelorMittal. This was covered in depth in a detailed presentation published alongside our results this morning. So as usual, the format of this call will be some opening remarks from Mr. Mittal and Aditya, followed directly by a Q&A session. So as such, we should be able to complete this call in about 45 minutes to an hour. First, some housekeeping. If you would like to join the Q2 Ask a Question, please do press star one on your telephone keypad. I'd also like to remind you of the disclaimers in our presentation and also the fact that this call is being recorded. And with that very brief opening, I'll hand over to Mr. Mittal.

Thank you, Daniel. Good day, everyone. Thank you for joining today's call. I hope you are all keeping safe and well. I am joined on this call by Adit Mittal, our CEO, Genvino CFO, and our head of mining, Simon Wanke. Today is an important day. We have reported our best set of results since 2008, even keeping in mind the reduced scope, which is very satisfying to see. We have also announced a new target for the group to reduce our carbon emissions by 25% by 2030. These targets are very important. Turning first to our financial performance, as I mentioned, this was the best quarter since 2008 by some margin. Performance improved in all the steel segments. Net income for the first half was $6.3 billion, and includes a billion-dollar contribution from JVs, highlighting strong performance at R. Sumitra Lipan Steel India and R. Sumitra Lipan Steel Calvert. Now I'll hand over the floor now to Adit. Adit?

Great. Thank you, and good day to everyone. I hope you're all keeping safe and well. Before I turn to our second announcement of the day, which is the carbon report, Let me first address our health and safety performance. In the first six months of the year, we have reinvigorated our Global Health and Safety Council, which provides leadership and guidance to all our segments. We have done this because, although we compare favorably with the industry, we are not satisfied with our safety performance. All segments are adopting new initiatives, and I'm hopeful we will see improvement in our safety performance as time progresses. Despite the COVID-related turbulence of the last 18 months, our actions to streamline and optimize our business and balance sheet puts Arswar Mittal on the strongest footing it has been for many years and positions us well to address one of the biggest challenges the global economy has faced, decarbonization. As we talked about at the time of our 2020 results in February, our ambition is to lead our industry's efforts to decarbonize. This, I hope, is reflected in our second group climate action report, which we have published today. The report details a new group-wide target of a 25% reduction in carbon emissions by 2030. We have also increased our European target to 35%. These are ambitious targets, and it will be a big challenge, but there's a lot of positive engagement across the company to show the world what steel is capable of. As you know, engineers love a good challenge and there is arguably no greater than this. We estimate capital investments of $10 billion to achieve these targets. Given the technologies that will enable these reductions are not yet competitive, we're looking for equal support through targeted policy that takes into account both the initial capital spend and the higher operating costs during the transition period. We're continuing to base our transition plans on the two technology routes we've talked about previously, i.e., innovative DRI and smart carbon. But as it stands today, the 2030 target will lead more towards innovative DRI, particularly in Europe, where national governments are prioritizing the availability of green hydrogen at competitive prices. This underpins our recent exceptional announcement that Ars Vermittal Sestao will become the world's first full-scale, zero-carbon emission steel plant by 2025. There is a lot of information in the report about how ArcelorMittal will decarbonize, which I hope you will find useful. Steel is already the material of choice due to its lower carbon footprint and infinite recyclability. The world will continue to need ever-increasing amounts of steel. That won't change, but the way steel is made will. We hope to be at the forefront of this change. So in summary, we continue to enjoy strong market conditions and are doing all that we can to ensure that we take maximum benefit from them while simultaneously transitioning for longer-term success. Thank you. We're happy to take your questions.

Thanks, Aditya. So we do have a queue of questions forming. To repeat, if you would like to join that queue, please do press star 1 on your keypad. And we'll take the first question, please, from Alan at Morgan Stanley. Go ahead, Alan.

Yes, good afternoon, everyone. I have two questions. The first one is basically on your JVs and associates. It seems that it doesn't matter how high the profits go in India or Calvert, the market still chooses to ignore them. I guess the attributable EBITDA in Q2 annualized alone is around $2 billion. It's still not clear to me how you plan to convince the market to recognize the value of these assets. Would a partial listing be an option or maybe a buyout of your partners? What's your thinking there? That's the first question.

Thank you. I appreciate the question. I think it's not just a matter of the JVs, right? If you look at the results today, the EBITDA performance, the level of shareholder return, or even our net income, I think overall we're being undervalued. So I think our improved disclosure on the JVs at least helps emphasize what the JVs are worth, but there is an overall value issue when you look at the company.

Thank you. And my second question is around your dividend policy. Should we expect the semi-annual capital returns to become the norm from here onwards? And then come the year end, will you be very close, if not net cash? Are you starting to think about an update of your capital returns policy, somewhere above the 50% that you've set?

Sure, thank you. We just announced the capital policy in February. There's no plans to change our capital return policy. I think it's quite effective. I think what we did in the second quarter demonstrates that. We've also utilized the proceeds from the sale of AMUSA and returned that to shareholders. So as far as we're concerned, the capital policy is well positioned, works well. Clearly, we have strong visibility of cash flows in the second half. And therefore, we decided to pre-pone the dividend, but I would not read this into anything other than that. There's no plan to change the policy.

Thank you. On the recurrence of the H1 or the semi-annual dividends? Is that the one off?

Yeah, as Aditya said, so we are not really reviewing the work date in the policy. So our commitment, as you know, is to distribute 50% of our free cash to shareholders, so that is not changing. Now the timing, I mean, as Aditya said, we just felt that at this point in time it's a no regret given our expectations for acceleration of free cash flow generation in the second half. But as he said, I mean, you should not read that we are at this point in time changing our policy.

Thank you. Thanks, Alain. So we'll move to the next question, please, from Jack at Goldman Sachs.

Good afternoon. Thanks for taking the question. The first question is on the contract structure you employ. Obviously, as it stands today, a combination of sort of annual pricing, last quarter and current quarter. I'm just interested, based on the strength in the market, the extent to which you could amend your contract structure going forward such that it's more predicated on spot prices so that you don't leave dollars on the table.

Yeah, Jack, so our focus is really to make sure that once these contracts come back up on the table for renegotiation, then we can secure the spot prices that we are enjoying today, right? I mean, I think it's fair to say, and we have been discussing that this year, These contracts, in terms of profitability, they were, of course, lower than what we could secure on the export market. So you're absolutely right. So that will be our focus as we sit with the OEMs to negotiate these contracts. I mean, I guess all we want is our products to be fairly valued. But having said that, at this point in time, we are not really considering changing the structure of the contracts. So, that's not really high on our agenda at this point.

Okay. Second question. Thank you for detailed climate report updates. I'm fascinated to read all about your latest activities in Spain and what that will entail. You touched briefly, Aditya, just on the fact that prices on a unit cost basis will be higher. Can you give me color there on what we should expect per ton? Sure. Thank you.

So we have not detailed it so specifically, but I can give you a sense of the trends so you can model it. I think the first thing I must emphasize is that it depends on geography because it's highly dependent on energy prices and the cost of iron ore, etc., etc. So if you look at the European geography, when you convert a typical coal-based blast furnace into a natural gas-based DRI facility, the energy cost increases because natural gas used in steel processing is more expensive. you also have to use a different type of metallics, and then clearly that also comes at a higher cost. And then on top of it, you're using electric energy to melt. So those are the three input parameters which change. That's just assuming you use a simple DRI, EEF, natural gas route. Roughly, I think what we're suggesting is that when you look at the CO2 costs today in Europe, the change in cost as a result of going down this new route is a wash. So there's no real benefit based on existing CO2 pricing. So that gives you a kind of a guide. Clearly in some markets it's more favorable if you have a smaller delta, et cetera, et cetera. But that gives you an order of magnitude of how these things work. And then if you go down the smart carbon route, it's a different set of economics. It depends on what you get for your biofuels or for your provision of chemicals, biochemicals to the chemical sector, et cetera, et cetera. But fundamentally, when you look at these various routes to decarbonize, there is an increase in OPEX, and roughly speaking, the CO2 benefit does not create significant net benefits.

Okay, thank you very much. And just one final question, just on the carbon border adjustment mechanism. We'd love to hear your thoughts on the pros and cons of that, as you said today.

Yeah, so fundamentally, the carbon border adjustment is critical because it creates a level playing field. And the steel industry needs a level playing field to remain competitive. So if you look at the discussions that are ongoing in Europe, that is the intent. Clearly, as the allocations reduce, there will be a carbon border adjustment which will match the reduction so that there is a level playing field. And this is important because then there is an incentive to decarbonize. There is a market structure to decarbonize. Otherwise, producers which do not have a carbon cost can obviously undercut companies which are decarbonizing. On a macro basis, I think this is good. It's a good development. because it forces other regions and other countries to also implement carbon plans and similar systems that exist in Europe so that they can have access to the European market. We see some developments, like I think China has announced that they now have a carbon price. And so I think the carbon border adjustment achieves two objectives, not only creating a level playing field, on a regional basis, but also motivates others to accelerate their carbon decarbonization plans.

Okay, thanks very much. Thanks, Jack. So we'll take the next question now from Tom at Barclays. Go ahead, Tom.

Hi, everyone. Thanks very much for taking my question. I've got two, if that's okay. I'll take them one by one. First of all, just on the decarbonisation, you were talking a bit about differences in geography. I was wondering if you could comment a little bit about your plans outside of Europe, maybe a breakdown of the 10 billion cost, sort of what is Europe, what is the rest of the world, and just a bit of your thoughts on the level of government support that you might expect Because I think in the presentation, in the appendix, you've only specified Canada as somewhere where there's an attractive regulatory environment.

Sure. So, Tom, we have not detailed out the CAPEX by region, but I can give you a sense that fundamentally the majority of the CAPEX will be in Europe, as the majority of the savings embedded in the report are Europe. Other than that, when you look at the regulatory environment, I will discuss two areas. One is obviously you mentioned Canada, but there's also Europe. And if you look at the legislation in Europe today, they have these various programs, whether it's IPSE or the Innovation Fund. There's also a change in state aid legislation. And the intent is that there needs to be some level of support for hard-to-abate industries to decarbonize, and steel is one of them. I think there's a recognition that today the capital spent has limited returns, and therefore there needs to be fiscal support to motivate and accelerate this capital spent. At the end of the day, I think regulators and industry players like us have a shared goal, which is to decarbonize, and we are sitting across the table and figuring out how best to do that. Based on the discussions we have had so far, I'm quite constructive. I'm quite optimistic that we will find a path to share the cost of decarbonization.

Okay, very clear. And maybe second, just if you wouldn't mind giving an update, as you often do regionally for order books, particularly interested on ACES where there's been a little bit more weakness in spot pricing and whether or not we might expect to see that already in Q3 or if it's more of a Q4 phenomenon.

Thanks. Okay. Let me take this one. So why don't we talk a little bit about the drivers for Q3 overall? I mean, not only CIS, so that maybe that is helpful for everyone. So starting with shipments, so our expectation is that we should see shipments in Q3 relatively stable, slightly higher at group level. We are not really seeing We don't expect to see a lot of seasonality in Europe, as typically we've seen a recovery year such as this year, 2021. So CIS continues to do well, I mean, in terms of shipments, and we actually saw a nice recovery also in our South African operations this quarter. So, we don't expect weakness in terms of shipments in CIS. The rest of the division is also doing quite well. Brazil, as we continue to run full, and also NAFTA. Prices, as you know, because of lags, we expect prices continue to rise, and it should be the case in all of our segments. But at the same time, costs are also rising. But when we put it all together, our expectation is that profitability should expand. Of course, you have to take into account also the disruptions that we had in our mining division that we don't expect to reoccur as we move into Q3. But on the flip side, you probably saw that we had a positive result in our segment orders. And this is primarily linked to the fact that we had the disruptions in our mining divisions. Some of the inventories that we have in our steel division, of course, got consumed and not replenished by supplies coming from Mines Canada and Liberia. So as operations come back to normal, then we would expect that also to reverse as we move into Q3 and Q4.

Okay, thank you. And just to follow very quickly, with Europe and NAFTA, are they booking now well into Q4? What length are order books looking, especially for this year?

Yeah, order books continue to grow as we speak. We don't see signs of weakness in our order book. We are booking well into Q4 in Europe and in Africa.

Okay, very clear. Thank you. I'll turn it back.

Thanks, Tom. As we'll move to the next question, please, from Luke at JPMorgan.

Hey, thanks for taking our questions. First on decarbonisation and obviously the detail around the $10 billion CapEx to decarbonise by 2030. If I just think about the 2025 target where around 35% of that $10 billion is planning to be spent, can you give us a bit of a framework around how that CapEx will be deployed, can we sort of think around a sort of divided by four years remaining, so eight to 900 million per annum run rate, obviously on 100% share assuming, and whatever the government spends will be a benefit to that, but broadly around that level. And then historically, I think you said $3 billion capex or sustaining was the base in line with dna so should we be thinking 3 billion plus 8 to 900 million so towards 4 billion um is is the sort of relevant level obviously again before any governmental support and that's my first question look let me take this question so

So as you know, I mean, it's not really our policy to guide to annual CAPEX beyond the current year, right? But I can help you frame your expectations. So I think number one, so you have as a basis our CAPEX guidance for this year, right? 3.2 billion. So this is basically covering the sustaining CAPEX as well as the strategic projects that we have underway. We have also provided, as you know, our strategic APEX envelope. It's 1.5 billion through 2024, so basically four years. And for that, we expect about 0.6 billion in EBITDA benefits. The projects, as you know, we are talking about completion of the hot strip mill in Mexico, our project in Brazil, the expansion of Vega, Liberia. We do have some interesting high return CapEx opportunities within the portfolio. So our expectation is that this envelope will not get smaller as we complete Mexico. We will have some other projects. So in reality, I believe we can actually expect this envelope to be bigger. But as and when some of these strategic projects pass through, the appropriate approval process will update you and explain the projects. And then on top of this, I mean, clearly we have decarbonization capex, and we have said this $10 billion through 2030, of which $3.5 billion to be spent through 2025. This is, of course, a gross number, as you said, so you should assume some of this is supported by public funding, but we will update you as and when this is approved. So I think in conclusion, you should not expect APEX to be declining. So we have to fund the decarbonization transition, and we have some interesting organic high return opportunities within the portfolio.

Okay, great. That's really useful. And then just on to a prior question on the sort of 65 and carbon border adjustment mechanisms and changes to the ETS. With the decarbonisation framework now to 2025 and then ultimately to 2030, How should we be thinking around exposure to carbon and carbon costs? I think in the past you'd indicated over the very short term there was a minimal impact from pricing or carbon costs increasing from current levels. But now, given the sort of more aggressive change in targets in Europe, does that in any way affect how we should be thinking about that exposure to CO2? Thank you.

That's really the challenge that we have in front of us, right? And that's why we are very much focused on progressing with our decarbonization. So we're absolutely right. So as we progress and the free allowances are reduced, that puts pressure on us to also reduce our emissions so that we can offset this impact, right? I mean, that's the challenge. And that is also... A lot yet has to happen, right? So this proposal just came out, and we expect a lot of debate, discussion. So it's probably a little bit too early, but we know that what is the direction, right? So we know that the second phase of Phase 4, we'll see and we'll experience declines in free allowance. So it's up to us to accelerate as much as possible our emissions so that we can offset that. I did talk about also you cannot look in isolation only the free allowances. I think you have to also take into account the border tax, as Adita said. It's all about having the right level playing field. So look in aggregate, look at what we have in terms of plans. We feel confident that we're going to be able to navigate through this transition phase.

Thanks a lot.

Thanks, Luke. So we'll move now to Phil at KeyBank. Go ahead, Phil.

Hey, thanks very much. My question broadly is just on automotive. Obviously, there's been some production cuts and some expectations that have been more muted as the year's gone on given supply chain challenges. What are your expectations for that end market moving ahead?

Yeah, thanks for the question. I think, Jen, we talked about it, right? We're very focused on getting fair value for our products. These contracts have been very painful this year because they were negotiated when the price environment was very different from what it is today. We still have these contracts in our business. Some of it is coming off in the second half. We have contract lag effects in the second half. But our focus remains to get fair value for our business as we enter these negotiations.

It was more so the question was just on the demand side in terms of what you're seeing, not necessarily on contract pricing.

Sure, thank you. So on the demand side, there is some impact of the chip shortage, but overall automotive volumes clearly are better than they were last year. Visibility remains limited into 2022 because everyone is still working through the chip shortage and it's slightly different OEM to OEM but fundamentally the trends remain very strong.

Thank you and if I could do one more here just on the networking capital side. I know that's a little bit of elusive because the market keeps evolving but is the expectation in the third quarter that you'll see a similar build that you saw in the first half in terms of rate or or should we anticipate that that rate slows?

As you know, we don't really provide a very specific guidance, a numerical guidance, but as we have been saying, the message is basically the same, so we continue to be focused on making sure that we retain the efficiencies that we worked very hard to achieve in 2020. So far in H1, And I'm sure you saw 3.5 billion of investments. And this is really a function of the higher prices, higher shipments, higher raw material prices. So it's, of course, we see it as a good investment and avoidable, right? So going forward, I mean, it really depends on your assumptions. So if you have a high EBITDA in the second half, then I think you should assume that there will continue to be investments in working capital. But clearly, as we know, the last part of December, because of the holidays, typically we have some lower levels of activity, so you have to take that into account. But if your assumption is high EBITDA levels in the second half, then you should expect investments in working capital.

Thank you.

Thanks, Phil. So we'll move to the next question, please, from Patrick at Bank of America.

Good day, everybody. Thank you very much. I just wanted to follow up maybe on the capital allocation and the share buyback question from earlier. You've brought forward a billion dollars from 2022 for this quarter. Is it possible that, you know, at Q3 you could look at how the business is doing and possibly look at something like that again to smooth it out? Or is this, you know, this is it until the end of the year now?

Yeah, Patrick, so I think it's – so we have a lot now on our plate, right? So we just announced this $2.2 billion program. It's much higher than the previous four programs that we have completed. So we are giving ourselves five months to complete this new program. So we should not underestimate the – the work that we have in front of us, right? Especially because we have some technical limitations in terms of the volumes that we can buy and the prices that we can buy. So it's not that straightforward, right? So it's early to talk about launching a new buyback in Q3. Let's see how we progress, how we do, how fast we can complete this one, what is the situation. But as Aditya said at the beginning, you should not read that this is a change that we're going to be announcing this on a quarterly basis.

Got it. Thank you. That's very clear. And then just one more follow-up, please, on the auto's outlook. So there's a bit of a narrative around that maybe the OEMs are still taking delivery of steel even if production is being slowed down because of chip shortages. And so, you know, when they rebound or the chip shortages ease, there might not be the kind of increased volumes from steel that we might be expecting. Have you seen any evidence of kind of the autos companies stocking up on steel? Or, you know, should we think about it that the volumes out of you are, you know, exactly matched to kind of what the OEMs production profiles are?

Yeah, thank you. So it's exactly matching. We have just-in-time delivery systems. There are EDI interfaces. We are connected to specific platforms. So it's an integrated supply chain almost. And so to build inventory in the system to try and achieve that is very difficult. And so we have not seen any evidence of that.

Brilliant. Thank you very much.

Thank you.

Thanks, Patrick. So, we'll move now to Tristan at Exxon. Go ahead.

Yes, hi. Thank you for taking my question. Regarding the guidance, you don't expect demand to deteriorate. You see positive momentum on spreads and less severe seasonality. How should we really interpret that? Do you believe the market right now is maybe in a more sustainable footing as of today as in the past, but maybe the metal spread and margins can be higher than in the past? How do you view the sustainability of this cycle?

Sure, thank you. I think it goes back to the first question. which was on valuation of JVs, and I responded by, just look at the fundamental valuation of ArcelorMittal. In terms of market dynamics, look, today demand is robust in all the markets in which we operate. We issued revised apparent steel consumption numbers. I know we sent you guys a lot of information this morning, but for anyone who's interested, it's on page 30 of our presentation. where you can see double-digit growth in almost all the markets in which we operate, and global apparent steel consumption, excluding China, growing at 12% to 13%. The question was asked on automotive inventory, where we don't see any buildup. The same is true more or less across the board. We have not seen the restocking of inventory, so these apparent steel growth numbers match well with real steel demand growth. And I think there was a lot of discussion as a business. We have not seen the full impact of spot pricing. The contract lag effects will come in the second half. On the medium term, the macro look, it's always dangerous to forecast. But fundamentally, if you look at a macro snapshot, if you look at the past 10 years and you look at the next 10 years, I think there are three changes that are worth mentioning. The first has been the change in China. There has been real action to eliminate the export VAT rebate. It was first just on hot band. This morning it's also been announced on cold roll and hot dip. There's a lot of chatter in China on reducing export of steel because why have excess carbon production within China and export the steel? Chatter on export taxes. Russia has done that, actually. They have implemented Russia export taxes. So the change in the Chinese steel industry, I think, can be very significant over the next five to ten years. Simultaneously, we spent a lot of time talking about our decarbonization plans, which clearly we want to lead the steel industry. We have the capability to do that. But there are also effects on the demand-supply balance of the global steel industry. We see new pockets of demand. This is renewable energy, whether it's wind or solar, but also I think the whole energy infrastructure will have to be rebuilt. And clearly that's a positive for steel demand. And in terms of supply, I think there's limited interest of anyone to just grow steel capacity. I think clearly their focus is to decarbonize, as you see from our announcement this morning. So I think that's another positive trend. And I think we all saw post-COVID the amount of stimulus funding that has started in various markets. And clearly, again, as you know, steel is very tied to infrastructure, so we see a lot of investment infrastructure. Again, that's positive for overall steel demand. So that just provides an overall perspective where we think that the next 10 years should be better than what we saw the last 10 years. And clearly the market environment presently remains very strong.

All right. Thank you. That's very helpful. And if I just have a quick follow-up, changing topics and going back to ETS, there are some peers in Europe that have started to implement carbon surcharge. Is it something also you would be considering?

Yeah, I think that's a fair question at this point in time. We have not come to a definitive decision. Clearly, at this point in time, we're not doing that. Our focus is not so much as a carbon surcharge, but our focus is how do we decarbonize our business effectively? And that's what we are trying to achieve with the report this morning. For example, in Europe, we have accelerated our ambition from 30% by 2030 to 35%, and that includes Scope 2 as well, before it was just Scope 1. So Scope 1 and 2, 35% reduction of a 2018 baseline. We also are in the market with various XCAR products. So an XCAR product fundamentally is moving towards carbon neutral steel. We have two products. One is green steel certified, where a customer buys a steel product from us which is certified to be carbon neutral, so they get the benefit of their scope three emissions. We have recycled and renewable steel. Based on all the discussions we're having with our customer base across various segments, I think there is a very high level of interest and we have been very positively surprised by the interest that the market has in the products that we have to offer.

All right. Thank you.

Thanks, Tristan. So we'll move now to Alan at Jefferies. Go ahead, Alan.

Thanks. I just had one left. It's on the hot strip mill in Mexico that's going to be wrapped up pretty soon. The guidance you've given around kind of a $250 million contribution after ramp-up, I'm assuming, is under more normalized spread assumptions. If that was operating now, what do you think it could generate?

Yeah, so I think you guys know the price of hot bands. You guys know the price of slabs. So the margin would be quite significant. And so we're focused on getting it up and running. It's a great project, not only for this market environment, but for the foreseeable future. Because not only for the EBITDA that we will create, but it will change the profile of our Mexican flat business. We did that successfully in Tubarão in Brazil. So if you looked at our business in Brazil 10, 15 years ago, it was primarily a slab producer. Today it is amongst the largest domestic players. So from a 2.5 million ton slab producer, today it's a 7.5 million ton slab producer with a hot strip mill with capability of 5 million tons. It has automotive capability. And clearly we are an important player in the domestic market. And the same applies to Mexico, apart from the EBITDA. I think this is a strategic change because what we're doing is we're changing the profile of the business from an exporter of semi-finished steel to a downstream finished steel manufacturer. But I get what you're saying, and if it was six months earlier, we'd be even more thrilled.

Okay. Thank you very much. Thank you.

Thanks, Alan. So we'll move now to Rokas at Kepler.

Yes, thanks for taking the question. I have first one question on the EBITDA outlook for Q3. I think you explained most elements. What I'd like to understand to what extent you have been benefiting from windfall gains in your distribution business in the second quarter like most of the peers and how shall we think about directionally whether to what extent this number will be lower in the third quarter?

Rokos, this is a little bit too specific. So I think in my message, trying to help you guys to model quarter three, we talk about the big drivers, right? And the fact that our expectation is that profitability should continue to improve, right? We are not really seeing any significant impact in our distribution business. And in the overall picture of the group, that doesn't make such a large impact to change your, how you model the results.

Okay, fair enough. And then can you also update us on the overall envelope for your cash needs on taxes and others? as obviously the tax expenses will go up. And can you remind us on your kind of normalized tax rate that we shall consider for 2021? Yeah.

Yeah, so we talk about the CARB tax, right? So that's one change. And then we are not really changing our guidance for the interest component that remains the $300 million. And then really the only other moving part, of course, is taxation, as you said. And we continue to believe that for the year, you should assume that our ETR should be in the range of between 15 to 20%, right? And in the past, we have always said that for the extra EBITDA that you take compared to last year, you can apply as a rule of thumb, you know, 15% to 20%. That is in line with our expectations for the ETR this year.

Okay, great. And coming back to the 10 billion Capex, you're flagging in context is the decarbonization. Can you give us a rough split how that applies to, you know, the investments into HDRI and how much could be reserved for smart carbon and other elements. And in that context, can you give us a sense about the timeframe you expect until a regulatory framework is in place, which would allow you to start with the actual CapEx you are considering?

Yeah, sure. So in terms of the CAPEX, I think the most CAPEX intensive is really the DRI-EEF. So a significant part of the CAPEX is DRI-EEF. The other benefits of our investments are electric furnace capability or scrap processing capability where we can enhance the use of scrap. And then we also have solutions which don't require that much of CAPEX to decarbonize. In terms of smart carbon, it is part of the overall CAPEX envelope, but it's not as significant clearly as the DRIEF route. And again, that's driven by the maturity of those technologies, the value that we can create out of those technologies, and the regulatory support as well surrounding those technologies. In terms of when we can start, look, we're very focused on hitting the ground running. We talked about 30% to 35% of the capex in the first half of this decade. We talked about where we want to be ready with a full-scale zero carbon emission steel facility by 2025. So we're working with all key stakeholders on that timeline.

Okay, and is it possible that you share with us a kind of a rough figure to what extent the 35% decarbonization target for 2030 is being achieved by the usage of HDRI and other tools?

Yeah, so that's a fair question. Just for everyone else on the call, the global number is 25% and the European number is 35%. Just to make sure. If you go through the carbon report, I know it's quite extensive and we just published it this morning, but there is a nice waterfall and it's also in our investor presentation, I think on page nine, and where you can see the key initiatives that we have which basically show the global 25% carbon reduction. So a significant portion of this is steam making transformation, which is primarily DRI-EEF using natural gas. We're not planning, yes, of course, we will be using some hydrogen, but this plan is not based on, the success of this plan is not based on hydrogen. It's based on the other initiatives that we have outlined on this chart. So this is clean energy, scrap use, energy transformation, offsetting residual emissions, as well as steam making transformation.

Okay. Thank you very much.

Thank you. Great. So we'll move to the next question, please, from Bastian.

Yes. Thanks, Adalind. Good afternoon, gentlemen. I only have two quick follow-ups on the decarbonization capex as well, if I may. So if we look at your positioning as a company with presence in many countries, in my view, you've got probably one big advantage with your PSC as a starting point. You can basically pick and choose, and you can go and start decarbonization wherever you see most support, and that obviously puts a whole lot of pressure on the governments wherever you operate and basically puts these governments also in competition. So when you look at the $10 billion program, is the funding support, which we should expect here, for the decarbonization capex similar to what we've seen at this point? Do you indeed expect the governments to absorb their fair, say, 50% share as we've seen in the past projects? I guess the visibility is probably better on the 3.5 billion part, which you expect to be spending until mid-2025, but maybe you can give us your early view on the whole program, please. That is my first question.

Yeah, sure. So maybe a few points. Fundamentally, when you go through our carbon report, we have also broken up the regions into accelerate regions, which we think are accelerating and regions in which we're moving, which we define as move. And so a lot of our decarbonization CapEx intensive investments are in the regions which are accelerating. On your second point, I agree with you. I'm convinced that our storm middle can lead the way. Not only do we have the best talent in the steel business that ever is committed, motivated, but we have been and are the technology and R&D leader. We have size and scale advantage. And as you mentioned, we have a head start, right? We have launched our X-Carb product suite. We have launched our X-Carb innovation fund. We have investments under the smart carbon route. And we are the largest DRI producer in the world. So we know how to run DRI. We also know how to run EES. 20% of our overall group production is through the electric furnace route. In terms of the regulatory support, I think you're right that we are starting off, and clearly there's greater visibility in the medium term. But we believe that, based on the conversations we are having, that there is a shared interest. And there's a recognition that capital returns on DCAB investment are limited, and therefore there needs to be appropriate regulatory support.

But it's probably too early to say whether you'll, on average, basically get close to that 50% ratio?

Our focus is 50% funding support. That's what you see in terms of legislation support or intent and And if you look at the renewable sector, I mean, for about 10 years, there was significant support provided to the renewable sector.

Okay. Thanks, Aditya. Then my second question is more a technical one, actually. It's related, but technical also. So the decarbonization capex obviously will flow through your capex line as a gross number, and then separate to that you will have the funding support via grants, et cetera, as we just discussed. And that's obviously more like a mitigating item. Where should we expect those mitigating items and the grants to flow through and are they technically easing the capex burden in your FCF definition or will they possibly flow through your cash flow statement below that i.e. in the financing line so maybe you can give us some early guidance because obviously that will determine your free cash flow probably which you'll be handing back to shareholders as well.

Yeah, go ahead, Germano. I was going to address. It's a technical question. So to the extent that you have the grants, and the grants are specific to that particular project, then most likely what you're going to see is capex for a net amount. So you're going to have the gross minus the benefits. So it's going to depend a lot on the form of the grant. But our expectation is, as I said, to the extent that they are clearly linked, then you're going to see a net amount. Okay.

So you net it out directly. Great. Okay. Thanks, Gene, we know.

Thanks, Bastian. So we'll now move to Grant at Bloomberg Intelligence.

Hi, good afternoon. Thank you. Good afternoon. Yeah, I'm going to change gears slightly, just slightly more detailed question. just on on the cost line in in steel europe um i noticed you you deconsolidated ilva and i would have thought that the costs would sort of go down if you could just sort of maybe just give us a little bit more color on the dynamics of of how the costs evolved um in steel europe um that would be our first one and then the second one is just just on the capex i know it's a small number in the in the big scheme of things but Is that just simply for higher refurbishment and more sustaining capital because of the higher activity, or you're actually just adding a little bit, or you're de-bottlenecking certain areas of your production base? Thanks very much.

Grant, so on the first part of your question on the costs in Europe, the dynamics that we are seeing, and if you go back, you will see that, I don't know, prices continue to They have been rising now for a number of quarters, right? We saw also coal also moving up this quarter, scrap prices, energy. And that takes some time for the impact of this cost to impact our results, the same way as selling prices, right? So they are inventorized, so it takes a little bit of time. So what you see in Europe, pretty much similar to what you see in other parts of our business as well. So you have these higher costs also flowing through our results. In terms of CapEx, so this is really, it's not really a new debottlenecking. So based on our previous expectations, so we were not assuming that we would be running all of our facilities full all year round, right? And that's exactly what we see right now. So as a result, I think we have to allow some higher maintenance capex so that we can keep production stable, we can maximize production, and try to benefit from these strong markets that we are enjoying right now.

okay thank you so just just on on the costing in europe so basically what you're saying is the the cost benefit that you you would have got from deconsolidating ilva was totally overwhelmed by the increase in the raw material cost well i mean um in terms of costs uh uh

Yeah, so that's probably a good way to see it. I mean, costs are rising, and they are rising across the board, so there is an offsetting element to that.

Okay, great. Thank you very much.

Great. So we'll take the next question, please, from Christian at SockGen.

Thank you. Genevieve, just going on what you were just saying, if we look to NAFTA, there we seem to be seeing a a quite impressive cost reduction. I'm talking about your cost excluding raw materials. I'm seeing like 30-40% in the second quarter. In that quarter, have you had some specific elements which support a very low cost of activity or is this something we should be looking at as a new cost base after you sold out a more expensive part of the business?

That's one aspect, Christian, but that happened already in, so I don't know what is the reference, so what are the periods that you are comparing, but in Q1, I mean, as we highlighted, we had some issues because of the winter, so it impacted our productions in Mexico, and at that point in time, we said that there was about $30 million impact, so that is, of course, not reoccurring again. And after, of course, they have some level of integration to, I don't know, especially Mexico, right, that you don't really have in Europe. So you will have that in CIS. But that's really – but then the other items, the units that are exposed to raw materials such as the FASC, so the trends will be similar.

Okay. So Q2 would be a normal kind of cost environment?

Based on your... Well, I mean, so the same trends, right? So it depends what happens to, I don't know, prices. So we close Q2 with an average of 200. Let's see. We have seen prices going a little bit higher. Coal prices specifically higher, although that should not really impact so much our NAFTA operations this year because we have yearly contracts. But that's what you should take into account.

Okay. And a separate question on DRI. So you're going to have one DRI now in Spain. You've got one in Hamburg, I think, one in Quebec. As you're saying, you're the largest operator, and you're going to get one for free, I suppose, in Italy. If we go forward in time, as you potentially convert more of your blast furnaces, is the idea that the DRI should be located next to the electric furnaces the most cost efficient or should we expect you perhaps to either buy your DRI from outside or have another location where you can produce DRI for whatever needs you may have?

Yeah, sure. So look, there are advantages of having the electric furnace next to your – sorry, having the DRI next to the electric furnace. Clearly, like hot charging of DRI is one that we do in some of our facilities where we have DRI next to our EEF. And then you have to look at the energy balance as well. I mean, if energy is very expensive where you're making steel, then maybe you situate the DRI somewhere else. And then thirdly, there is a market for DRI, so you can always enter the market and buy it depending on your overall metallics requirements. So I don't think as you go down this path, there is one size that fits all. I think you look at your marketplace, you look at where your facility is located, you look at your logistics, you look at raw material availability, energy costs, and then you make the appropriate decisions.

Very clear. And very, very last thing, Aditya, you seem to be, if I'm not mistaken, you've become a lot more positive on the outlook for Chinese, you know, interference in the world market on supply. I mean, once upon a time, a vacuum would be there and China would come in. So should we see that in the future, you've got great confidence that China would be a much lesser interference in global markets?

I think if you look at the actions that China has taken so far, I think that's a safe conclusion, right? Because they removed the export rebate There's a lot of discussion on reducing the level of steel production in China. There is a carbon market in China now that is developing. So I think when you look at the totality of what they're trying to achieve, I think there is a shift.

And the ability to actually install capacity in other countries like Vietnam and Indonesia and so on seems to be a lot less clear than what they could do on the domestic market, right?

Yeah, I think that potential exists, but now you'll have a carbon border adjustment, so it'll be very difficult for such new capacity to penetrate some of the markets in which we operate. On top of it, I think if those producers are used to sell steel into China and then China exposes their low carbon, I think fundamentally that will also not work because that will be trying to circumvent the legislation. So I think finally everyone has to play on the same basis, right? That's the concept of a level playing field, and legislation will evolve and improve to achieve that.

Great. Thank you very much.

Thank you.

Thanks, Christian. So we'll move now to Carsten at Credit Suisse.

Thank you very much. Just two questions left. The one is just on taxation. Have you seen any increase in recent discussions with governments concerning tax increases to finance the COVID-19 bills? We've seen some governments coming forward already. So that's my first question.

Yeah, I think that taxation exists, right? Because there's a significant carbon price that companies are paying. I mean, if you look at the European steel industry as an example, the allocation system is only providing roughly 85% coverage. So when you look at the 15% that is uncovered and you multiply that by volumes and the price of carbon, I mean, these are significant amounts of, you can call it tax or whatever, but carbon costs that exist in the system.

No, that was more on the general tax rate, because we have seen that the UK increased the tax rate.

I appreciate the question, but I think it's, let us see what happens so far. The mechanism to pay for decarbonization, I do believe, is through either the cost of carbon or CBAM. Maybe it's through higher taxes, but so far, At least my framework is that that's how the system will work. That could be different geography by geography. I appreciate that. But that's what we're seeing at least in the European context.

Good. The other question I have, what we see in China right now is actually that they lower their effective cost base for the manufacturers of steel goods. Could we not see a carbon leakage by China just exporting finished goods, means cars, refrigerators, ACs, et cetera, et cetera, and by that actually circumventing the carbon border adjustment?

Yeah, I think those issues will remain, right? And at the end of the day, the carbon border adjustment will evolve to ensure that such types of leakage or such types of circumvention is prevented. I think we saw this in the past, right? We started the anti-dumping action and then there would be circumvention of the dumping action through different mechanisms and then the action would improve and capture that circumvention. So clearly that will evolve and that will continue But fundamentally, I think if you think of decarbonization, it is also a function of technology capability, first mover, the ability to use size and scale. So I see no reason why we would not be competitive as a steel company in decarbonizing our business.

Perfect. The last question may be on Liberia. You had the shipment issue there. Is it solved? And maybe you can give us a quick update when those operations will be back to normal.

Sure. Simon? Yeah, thanks, Carsten. So in Liberia, after the rail incident, we were down a couple of locos, and the replacement locos have been procured. We expect those to be on site in early September and then back up to our normal capacity around 5 million tons per annum. Perfect. Thank you very much.

Thanks, Carsten. So we'll move now to Myles at EBS.

Great, thank you. Just on the 25% global target for decarbonization, are you going to tie that into management remuneration? That's the first question.

Yeah, absolutely. We will be releasing those details towards the end of the year, but the idea is to tie it to exact remuneration. Okay, that makes sense.

And then just thinking about China cutting steel production and prioritizing decarbonization, do you think this could drive a decoupling between the iron ore price and the steel price and give you non-Chinese steel mills the potential to see a super, super cycle for spreads here if iron ore prices nosedive because of China? but steel prices stay high because there's less imports. How realistic is that potential scenario?

I think today we see the decoupling, right? Because there's a different price of steel in China and there's a different price of steel outside. Clearly, the world is changing. I think it's too early. to sit here on a call and speculate as to how the world evolves. I think we can talk about the three trends that we're seeing. Clearly, there's a shift in China. I think you have asked the same question. Others have as well. We see that as well, so I can confirm that. Number two, decarbonization will throw opportunities as well, whether it's on the demand side or changes in the supply environment. I think that's a fair assumption, and clearly the stimulus impact. that is also flowing through the steel cycle is also very positive. So the next 10 years will be different than the last 10 years. And I think that's the exciting part. And as I mentioned earlier, and as we all talked about, I think Arsha Mittal has a key role, a strategic role to lead the industry in terms of decarbonizing. We are a first mover. And I think that implies that we will build our competitive advantage. And that finally, that will mean better returns for all.

Okay. Good luck. Thank you.

Thank you.

Thanks, Miles. So we're going to make time for a couple of follow-up questions, the first of which we can take from Phil at KeyBank. Go ahead, Phil.

Thanks very much. Just a follow-up on the Mexico hot strip mill investment. It looks like it's coming on later this year and probably going to be helpful to next year, but Is this just a pure mix change from your standpoint, or should we assume that your volumes in NAFTA are going to go up as well? I just wanted to be clear.

Yeah, in terms of NAFTA volumes, it's primarily a mix change because you're moving from export of slab to domestic hotband. There could be some incremental increase in the throughput of our Mexican facility, So then you would have increase in production as well as in volumes.

Okay. Thank you.

Sure.

Great. So we can move to the final question, which we can take as a follow-up from Luke at JPMorgan.

Hey, thanks for the follow-up. Just a quick one on iron ore seaborne volumes. In the past, you've given... volume guidance for the mining division. I was just wondering whether you can give a sense of what volumes will be for this year and maybe whether you'll start bringing back the guidance.

Luke, thanks. Yes, thanks. Thanks. Yeah, look at this point we're not giving any guidance. I mentioned Liberia one point. AMMC is back on track post disruption, later disruption. And so I mean, you know the maths in terms of capacity in Canada. But at this point, no guidance for the balance of the year, but I'll update later. Sure, thanks.

Great. Thanks, Simon. So that's our final question, Mr. Mittal. So I will hand the floor back to you.

Thank you very much. Thank you, Daniel. Thank you, Adit and Genvino and Simon. And thank you everyone for participating. I saw very useful discussions, very interactive discussion on climate change, on our performance. and you also saw our excellent results. So thank you for joining and I wish you and families a happy and most importantly safe summer. I look forward to speaking with you soon.