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ArcelorMittal NY Registered Shs (MT) Q1 2021 Earnings Call Transcript | The Motley Fool

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ArcelorMittal NY Registered Shs (NYSE:MT)
Q1 2021 Earnings Call
May 7, 2021, 3:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Good day, everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you for joining this call today to discuss the results and progress we’ve achieved in the first quarter of 2021. Present on this call today, we have Aditya Mittal, our CEO, we have Genuino Christino, CFO and we also have Simon Wandke, Head of Mining.

On our website this morning, we published our results presentation with detailed speaker notes. So as usual in order to be as efficient as possible the intention today is just to have some opening remarks from Aditya and then move directly to the Q&A session. [Operator Instructions]

Finally, I would like to remind everyone that this call is being recorded and draw your attention to the disclaimers on Page 2 of the presentation. And with that, I will hand over the call to Aditya.

Aditya MittalChief Executive Officer

Thank you, Daniel. Good day and welcome everyone and thank you for joining today’s call. Before we answer your questions, I would like to begin as usual with a few remarks. ArcelorMittal has enjoyed a strong start to 2021 recording our strongest quarterly EBITDA in a decade. The operational performance is a testament to all the hard work and resilience that our teams across our operations have demonstrated. We came out of 2020 stronger than ever trying to support our customers as their end markets recover. And we are very well positioned to maximize the opportunities that this recovery generates. While our first-quarter performance benefited from higher shipments and steel spreads, there is much more to come given our order book and contract lags. I’m encouraged by the still visibly low levels of steel inventories in the supply chain, I am encouraged by the fact that China is looking to control the steel production and exports and I’m encouraged by the measures taken by governments in our core markets to stimulate, to rebuild infrastructure and transition to more sustainable low-carbon and circular economies, all of which will be steel intensive.

In recent quarters, we have consciously provided more information and updates on the performance of our key joint ventures. Both AMNS India and Calvert performed very well this quarter. And the fact that our JV and associates line represents 20% of our net income shows how important these assets are both strategically and to our shareholders.

Combined our JV and associates and our equity stakes and Cliffs and Erdemir are valued at more than $10 billion or 25% of our book equity. Beyond the strong financial and cash flow performance, the Company made further strides during the quarter on our decarbonization journey. A milestone this quarter was the launch of XCarb which brings together all of ArcelorMittal’s low and zero carbon products as well as green innovation projects. We also detailed concept plans to significantly reduce CO2 emissions in key jurisdictions.

Finally, I wanted to touch on our capital returns to shareholders. All the hard work we have done in recent years to reposition the balance sheet and optimize our business means that we’re in an excellent position to consistently generate and return cash to shareholders.

So with that brief opening Genuino and I will now happy to take any questions you may have.

Daniel, should we begin the Q&A?

Questions and Answers:

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Yes. Thank you. So we have a queue of questions lined up and we will take the first question please from Alain at Morgan Stanley. Please go ahead.

Alain GabrielMorgan Stanley — Analyst

Yes. Good afternoon gentlemen. Two questions from my side. I’ll start with the first one is around India, which is an asset that is clearly exceeding all expectations. It ended I think $1.6 billion in EBITDA. From my conversation with investors, it seems that the market is not assigning anywhere close to what this asset is worth. How do you plan to unlock value from this asset going forward? That’s my first question.

Aditya MittalChief Executive Officer

Okay. Thank you, Alan. First of all, clearly we are still in the COVID environment and we have all seen the harrowing images coming out of India. It’s really heartbreaking situation down there. All our support is to our colleagues and I think we’re doing a tremendous job not only keeping themselves safe but their families, running the business and also helping the communities. I’m not sure if you’re aware, but ArcelorMittal is supplying 210 tonnes of liquid oxygen a day, which can support up to 21,000 patients. And in record time, very proud of the team, we’ve built a makeshift hospital with 250 beds in 72 hours and we’re growing that capability to 1,000 beds. So really the focus right now is to take care of the community and the people around our facilities and obviously our thoughts and prayers are that this situation dramatically improves in the near term.

In terms of the business, I think you asked the question correctly, there is tremendous potential. We continue to see areas that we can further improve the business. Post COVID we would expect that demand would be restored and growth would be significant levels both in the medium and long-term and we have growth plans both at Hazira, where we can do brownfield expansion. But as you know, two months ago we also signed an MoU to build the greenfield side on the east coast of India. So, clearly focused on improving the business, but also capturing the growth opportunities as they manifest.

Alain GabrielMorgan Stanley — Analyst

Thank you. And the second question is around Cliff. Can you remind us when your lockups end for the common shares and the preferred shares and what is your strategic thinking around the fit of this investment in your portfolio?

Aditya MittalChief Executive Officer

Yeah, sure. So, as you know, we are the largest shareholder of Cliffs. We’re very happy with their performance. I think the team is doing a great job there as well. In terms of lockup in specifics, I would refer to the 8-K filing of Cleveland Cliffs.

Alain GabrielMorgan Stanley — Analyst

Thank you.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Great. Thanks, Alain. So, we’ll take the next question please from Jack at Goldman Sachs.

Jack O’BrienGoldman Sachs — Analyst

[Technical Issues] something we’re grappling with is just trying to understand the sort of true spare capacity in the European market. Obviously, we’ve all seen the price backdrop. No signs of higher prices abating for the time being yet when we speak most steel producers any idled capacity has returned and they’re operating at or close to full capacity. So, just very interested if you can quantify from your perspective how you see the European supply demand backdrop as it stands today?

Aditya MittalChief Executive Officer

Sure. Thank you. We can’t really comment on what others are doing with their capacity or the overall capacity structure of Europe. But if you look at ArcelorMittal, I think the same is true. We are running all of our assets. Clearly in Q1, not all of our assets were online. The biggest was obviously the Ghent blast furnace which was undergoing a reline. The reline got completed in Q1 and so you will see the full impact of the Ghent furnace in the second quarter and beyond. Other than that, all assets are running full and so your statements are appropriate.

Jack O’BrienGoldman Sachs — Analyst

Just a second question, if I may. Very keen to hear how you’re thinking about working capital build through the remainder of the year given first quarter performance, but also given recovering volumes and prices where they are?

Aditya MittalChief Executive Officer

Genuino?

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Yeah, let me take this one, Aditya. Jack, so you have seen them and we have invested about $1.6 billion in quarter one. We were quite pleased with that performance, as we have been saying, focused on making sure that we retain some of the efficiencies that we have achieved in 2020. Out of the $1.6 billion, I would say that about $1 billion is internally linked to seasonality, as typically in quarter one we increased shipments and that’s what you see. Then, of course, there is also a marked element. Prices have moved up, not only our prices but also raw material prices. And then as we move forward and we think about that going forward, as you know, we don’t provide a guidance for the year, but I think it’s fair to assume that given how the prices have been evolving recently during the quarter and then after the end of — that we will continue to see prices rising — realized prices rising. And it’s also a fair assumption that we will continue to see some improvements in shipments as we move into quarter two. So, I think, in Q2, we will continue to see an investment in working capital, but at this point, I would say most likely level that we have in quarter one. And then after that, I think it’s too early to comment, we will wait to see how the markets evolve.

Jack O’BrienGoldman Sachs — Analyst

Just following up on that, do you think you’ll be able to maintain or keep the working capital build at a lower level than what was seen in 2018?

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Well, that’s the focus — that’s the focus. I mean we will of course — it’s going to be dependent of course what happens in the second half as we have been saying consistently. But the focus is — we think the efficiencies and then — I think then it’s going to be your assumptions how do you see the price environment pursuing to the second half, Jack. But the focus is of course to keep that very tight and make sure that we don’t let go to simply the efficiencies that we achieved in 2020.

Jack O’BrienGoldman Sachs — Analyst

Okay, thank you.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks, Jack. So we’ll move to the next question please from Bastian at Deutsche Bank. Go ahead, Bastian.

Bastian SynagowitzDeutsche Bank — Analyst

Good afternoon, gentlemen. I’ve got two questions as well. My first one is just on the — on your capital allocation side. I mean, obviously, if we look at margins, prices and margins have gone way beyond where I think people could expect them to go probably when you last updated us also on capital returns and I guess given the cash generation run rate, we’re running at even post working capital investments. I think you’re probably pretty well on track to be almost debt free by the end of this year. So with all of that capital having become available, how do you think about capital allocation? Are there any strategic projects which have basically clumped up the gain and how do you think about the strategy side?

Aditya MittalChief Executive Officer

Sure. Thank you, Bastian. Fundamentally, there is no change in our capital allocation. Capital allocation remains the same. We remain very focused on delivering consistent returns to shareholders. You know our capital return policy, 50% free cash returned to shareholders. In terms of capex, we outlined some low capex relative to the amount of EBITDA we can generate in emerging markets as well as taking advantage of our mining infrastructure that remains the focus. So there is no fundamental change in how we are viewing our capex priorities. The same on the M&A, the real focus is to ensure that we can supply our customer base, ensure that reliability is much better in the second quarter relative to the first quarter, where we had reliability issues with some of our facilities and ensure that we get full benefits of the spreads that are today into the bottom line.

Bastian SynagowitzDeutsche Bank — Analyst

Perfect, thanks. Aditya, just a quick follow-up on that and also on Alain’s question at the beginning. I mean, obviously, if we look at India, the business is running extremely well. You’ve already earned your cash needs for the year even at a lower run rate. I guess you’d be very well positioned to cut your debt on the entity down by another $1 billion or so. So do you have any plans to potentially own both the asset and also is there any contractual option in your contract framework with NS which would allow you to either buyout the stake or at least increase the stake if you needed to or would it be just like a bilateral negotiation process?

Aditya MittalChief Executive Officer

Okay, great. The drivers you have pointed out are absolutely correct. The company is performing well, it’s generating free cash, net debt will come down this year quite significantly as well. It also came down last year. The acquisition is doing well. In terms of future prospects, changing the JV terms, consolidating it, it’s all a bilateral discussion with Nippon. At this point in time, that’s not our focus. Our real focus is to grow the business. Clearly, we see tremendous potential of the business, both based on the existing assets that we have, but also in terms of future growth whether it’s at Hazira or on the East Coast of India.

Bastian SynagowitzDeutsche Bank — Analyst

Okay. Thanks. Very clear. Thanks, Aditya.

Aditya MittalChief Executive Officer

Thank you.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

We’ll move to next question now from Seth at Exane. Go ahead, Seth.

Seth RosenfeldExane BNP Paribas — Analyst

Good morning. In your prepared remarks, you touched on the increasingly tight outlook for steel within China with increasing domestic production restrictions and export limitations as well. As the largest ex-Chinese steel producer, how do you think about your ability to respond to that? Do you see lower Chinese steel exports? Is there an opportunity for Mittal to produce more or to adjust your mix domestic versus export tonnes in any of your key regions? How should we think about that under the medium term, please?

Aditya MittalChief Executive Officer

Sure. Thank you. In terms of China what we saw was a reduction in some provinces because of the level of pollution or carbon emissions and a small increase in electric car production. And so I think we are just deducting, right. I mean we are not absolutely clear as to what is the Chinese steel industry focus or plan, but it seems logical to assume that they don’t want to incentivize steel production due to the whole agenda of decarbonization.

Simultaneously, they removed the VAT rebate on exports. So, they made exports of steel less attractive. When you combine the two, I think the impact is not so much in terms of tonnage and what share we can acquire and how we change our operating footprint. But it’s fundamentally on export China steel spreads. And clearly, Chinese steel spreads have been the final decider of what is pricing globally and to the extent that improves, that’s a positive for all of our businesses.

Seth RosenfeldExane BNP Paribas — Analyst

Thank you very much. And just one follow-up please. With regards to your Brazilian business, obviously, it seems like there is a strong inflection both in the domestic steel demand and also profitability for this operation. Can you please give us a little bit of an update on what you’re seeing in the domestic economy despite continued COVID headwinds? What’s driving the current strength and how should we expect profitability to progress going into latter quarters of this year?

Aditya MittalChief Executive Officer

Sure. Genuino, you want to take this one?

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Yeah, I can take this one, Aditya. So, yeah, Seth, I think it’s right. Very pleased with the performance of Brazil, this quarter’s strong performance. So we have increase shipping. That’s quite significantly domestically. So the demand domestically has been quite strong, has actually surprised — we are not really reviewing yet our apparent steel consumption forecast for 2021, but I think at this point, it’s probably fair to say that we’re going to be at the high end of that range or even see who will update that as we come for second quarter.

But we have seen — a very nice recovery over there. Teams are doing a fantastic job to make sure — the opportunities. So, everything seems to be pointing to a very strong year for Brazil. And this is despite, of course, the COVID situations — requires caution. I mean the infection rates too high, but more recently, we have seen it down. So, it’s a good sign. So, we’ll see how it progresses.

Seth RosenfeldExane BNP Paribas — Analyst

Can you just give a better color on your current mix-up in Brazil and how you’re trying to optimize domestic versus export sales please, to maximize margins?

Aditya MittalChief Executive Officer

Yeah, I think the long business that typically also export, I mean we are (Technical Issues) — as much as we can as the domestic market demand improves and the same with our flat business. Especially — so the flat business in Q1, we had a lower rate of exports. We had about 40% and typically, you would see more like the 50% to 60%. There is a better mix in terms of domestic exports also this quarter.

Seth RosenfeldExane BNP Paribas — Analyst

Thank you very much.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks, Seth. We’ll take the next question please from Alan at Jefferies. Please go ahead.

Alan SpenceJefferies International Ltd — Analyst

Following up on Bastian’s question around capital allocation, if there is no change in thinking around capex or M&A, what do you expect to do with the portion of free cash flow — dividend and buyback, which at this point looks like it will be quite material for the year? Are special dividends on the table, considering you’re already below your net debt target and seasonal working capital investment is now behind us?

Aditya MittalChief Executive Officer

Yeah, look, Those are all wonderful questions and wonderful points. And I think it’s very fortunate that we are at this point in time in our journey and in the cycle. Clearly, all the hard work that we put into create a strong balance sheet is paying dividends. And I mean that literally and figuratively as well. I think we just announced our capital allocation policy, where half of the cash is returned to shareholders and the other half is kept by the business. I reiterate, no change in terms of capex or acquisitions. So the other issues that we will address as the quarters progress and as the year closes.

Alan SpenceJefferies International Ltd — Analyst

Okay. Thanks. And on India, can you remind us the time that you expect to achieve the debottlenecking 3.6 million tonnes and then when you might be able to make a firm decision around that more medium-term extension for the potential new greenfield facility?

Aditya MittalChief Executive Officer

Sure. The 8.6-million-tonne debottlenecking should be achieved in 2023. We will have a ramp up next year already, but the full output of 8.6 million is expected for 2023. In terms of the Brownfield expansion, we would hope to make an announcement before the end of this year.

In terms of Greenfield, clearly the work is ongoing and that has a longer gestation, but we would like to announce our plans on how we want to grow the Hazira facility ideally before the end of this year.

Alan SpenceJefferies International Ltd — Analyst

Okay, thank you.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks, Alan. We’ll move to the next question please from Patrick at Bank of America. Please go ahead.

Patrick MannBank of America Merrill — Analyst

Hey. Good day. Thank you very much for the opportunity. I think just before I ask a question, thank you very much for the increased disclosure on the JVs. I think, step one to realizing some value for them in the business. So thank you very much. It’d be very helpful. I wanted to ask two questions. Can you give us a bit more detail about how to think about the lagged pricing kind of going into the rest of the year? I mean, if your order book and your lead times are out to almost at the end of the year, you should have a pretty good idea of what of what prices are going to be. I mean, how much of it has been settled on the kind of annual basis in the pricing is going to change? How much has lagged from Q1 into Q2 and Q3? And then the second question is just around ex-COB, I mean how should we think about the volumes coming out and what the potential volumes are? And is this is going to be a premium product do you think, realizing a premium of above kind of other non-carbon — low carbon steels? Thanks very much.

Aditya MittalChief Executive Officer

Sure. I’ll take the XCarb and then I’ll give Genuino to address contract lags. In terms of XCarb, it captures the improvements we’re making in our business to reduce our carbon footprint. We have two products, right, green steel certificates, which is basically net-zero steel. And the second is recycled and renewable XCarb. Both of these products are getting a lot of traction in terms of interest. A lot of customers from various segments are speaking to us and we are able to sell these products with a premium relative to other products.

I think it’s still early days though as to this marketplace and what the premiums would be, but it does demonstrate that there is customer interest and therefore, as we begin or commence our decarbonization journey as we further intensify it, there is also marketplace, which can also reward us.

Next year, clearly, the level of a product that we will have will grow. And again, it supports our overall franchise as a leading steel company being able to cater to all of our customer requirements.

Genuino?

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Yeah, Patrick. So to respond to your question, we have to go through the various segments, Patrick, because they are different. So starting with the easy one. You have CIS, the business is more export oriented. So the lags will be relatively short, 30, 60 days maximum. So we tend to see — we tend to the prices flowing through as a result much quicker. And Brazil is also quicker also so now [Technical Issues] contracts, yearly contracts with automotive but overall in the good picture, they are not so significant. So I would say that Brazil also relatively shorter — will also be to two months.

And then when you move to Europe, then there you have our flat business, 40% is yearly contracts in OEMs. We’ve different negotiations during the year. You have different — bit more complicated and then the remaining part is typically, we would say two months now with the tightness on the market, we have to take a little bit longer. And after following the USA our contract business has come down a bit. So it’s more in the range of 30%. And then the remaining, you have to take into account the lags as well for [Technical Issues]. and spot an index, you can take at least three months there as a reference.

Patrick MannBank of America Merrill — Analyst

Okay, thank you very much. Thank.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks, Patrick. So, we move to the next question please from Christian at Christian at SocGen.

Christian GeorgesSociete Generale — Analyst

Thank you. Thank you very much and just before I start a big stand-up for all your efforts in India. You and all the steel makers in India to provide those hospitals and the oxygen, I think, is a great effort. So thank you for that. I wanted to ask you on capacity. I think there was a question earlier where you highlighted that in Q1 you had Ghent only partially included. But if I look at Q2 and the rest of the year, we take out — we take back Ghent full on? We take out 1 million tonne per quarter from Hazira. And the rest of your system from which I assume is fully operating, there is nothing else which we are ignoring, which is coming in online in the next few months?

Aditya MittalChief Executive Officer

Fundamentally that’s absolutely correct. There is a small ramp up that is happening in our facility in Spain in Sestao and that’s an electric mini-mill. And as we ramp up, it helps that facility because clearly that’s part of our decarbonization journey and so we are working on debottlenecking and further enhancing its capacity base. So, there may be an impact of Sestao as well, but obviously the impact of Sestao is much smaller than the impact of Ghent.

Christian GeorgesSociete Generale — Analyst

Great. And ACIS and Brazil, everything else is on full capacity operating?

Aditya MittalChief Executive Officer

Yeah. So, they’re all operating at full capacities. But we did have operational issues, right, in the first quarter in ACIS as well, both in South Africa as well as in Kazakhstan. So those issues go away in the second quarter and so you would have a natural increase in the level of production. The same applies to Dofasco in Canada in our NAFTA segment in Q1.

Christian GeorgesSociete Generale — Analyst

Okay. And I’m right to assume it’s about a million tonne take out per quarter from Monlevade [Phonetic ]at present?

Aditya MittalChief Executive Officer

Genuino?

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Yeah. So, Christian, the level of production [Technical Issues] Q1 that close to 1 million tonnes. So that’s the number you should take into account.

Christian GeorgesSociete Generale — Analyst

Okay, great. My last question is the carbon rates at EUR50 still is climbing. Is this going to have an impact on your Q2 and your second half profitability? Should we take that into account and for next year as well?

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Well, I think — yeah, I think it’s as we see prices rise and we have discussed before, Christian. We have protected or hedged part of our exposure. So to some extent, we are protected, at least we have fixed our price for part of the exposure, not all of the exposure, right. And then to the extent that prices rise, then yes, I think we have to assume that there will be some impact in our results as we move forward.

Christian GeorgesSociete Generale — Analyst

Great. Thank you very much.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks. We will move to the next question please from Carsten at Credit Suisse. Please go ahead, Carsten.

Carsten RiekCredit Suisse — Analyst

Thank you very much. One question for me on decarbonization. When will we see actually the announcement of sizable capex commitments to the transformation to green steel in Europe in particular? Is that still a few years out until you get the agreements and political help from the respective governmental bodies? That’s the first one. And the second one I have is on India, because as you pointed out correctly the situation there is quite serious. India developed quite well in the recent quarter, but could the current COVID situation deteriorated performance short term at least domestically and would you consider in such a case exporting? Thank you.

Aditya MittalChief Executive Officer

Sure. In terms of capex cost in Europe, I think I would just make two general comments. The first is as we have been getting deeper into analysis and examining all the plans and the technologies that we have within our ArcelorMittal and as we engage more with government and we develop our ideas, I think I’m encouraged that we can make this transition economically.

Secondly, I think by June end, we will provide the second-quarter results much more disclosure as to what is this level of capex and what are we thinking till 2030 in terms of our decarbonization journey and it’s been an appropriate time to discuss within that, how much are we expecting governments to support. You’re aware that the funding mechanisms that are in place in Europe, such as the IPCEI funding, suggests that up to 60% of decarbonization capex, which has the hydrogen link can be funded. There are contract for different structures in Europe in place. So I think when you look at the whole combination and ensuring that there is a level playing field and not carbon footage clearly, a lot of work needs to be done, but you can imagine that the transition can be done economically.

In terms of India, as you correctly point out, it’s a very difficult situation and heartbreaking and all of our support is to all of our employees and the communities in which we operate. So far, we have not seen any impact, but I think we need to be watchful, let’s wait and see. As you point out, the facilities are coastal and therefore we do have the ability to export. But let us hope that the country can make tremendous progress in reducing the spread of infection.

Carsten RiekCredit Suisse — Analyst

Okay, thank you. That helps.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks. We’ll move to the next question from Luke at JP Morgan.

Luke NelsonJP Morgan — Analyst

Hi. Thanks for taking my question. Firstly, just on Ilva, can you break out how much of the contribution within Europe was from Ilva from an EBITDA point of view?

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

You can assume that it’s marginal in Q1.

Luke NelsonJP Morgan — Analyst

I mean it was below the average EBITDA per tonne or it was zero EBITDA?

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Clearly zero EBITDA. I think marginal — you can assume that it’s marginal.

Luke NelsonJP Morgan — Analyst

And then just a follow-up with you. But there is obviously the first stage of the deal with the government has been done. But the final tranche I suppose is early next year. There is a couple of conditions precedent set out to finalize that. Can you just remind me exactly what they are? I think you’ve broken them out in the quarterly, but maybe more so what the critical path is and what risks you see to them maybe not happening or not happening within the time frame by May next year?

Aditya MittalChief Executive Officer

Sure. So it’s basically environmental approvals and the removal of the criminal seizure, to put it very simply. So it’s a judicial process that is running. If we don’t get these approvals, then you are right, this transaction reverses, but so does the whole acquisition. And as a result, we are in line to receive the monies that we have invested in the asset. So it does not mean — it’s not just a condition precedent to this investment, it’s a condition precedent to the full acquisition as well. And that’s why, if you remember, originally historically, it was considered a lease asset till all of these condition precedents were met. So, we’re happy to sit with you and provide you more details offline if you’re interested, but the big picture is there is a public-private partnership in place today. The focus of the government and focus of us is to make Ilva viable both from an environmental perspective, social perspective, and economic perspective and clearly everyone is working to ensure that these condition precedents are met. If they are not met, there is a criminal seizure that exists on the steel facilities. So, then the whole viability of that steel facility comes into question and all the transactions reverse.

Luke NelsonJP Morgan — Analyst

Okay, that’s very clear. And second question just on iron ore, perhaps one to Simon. Be interested just to see or an update on Liberia and the potential expansion there and is there any opportunity to maybe fast track that just given how strong current prices are at the moment? And then I suppose a follow up, given the wider discussion around decarbonization, is there any discussion or consideration of potentially adding on a DRI facility or HBI that could it be used to import into the European market?

Simon C. WandkeExecutive vice president, CEO ArcelorMittal Mining

Thanks, Luke. Good question. I’ll start with where we’re at right today with Liberia. Clearly, this is really now a construction project, if you will, because I think you recall vast majority, 85% a procurement was done 60 tenants civils, 90% of engineering. We have tweaked the plant a bit and changed to wet to dry tailings, but essentially we have started work on the ground in terms of understanding the status of the construction materials like concrete testing. Detailed engineering is getting ready for award etc., a lot of activity will start to happen later this year. So the plan is get going on the ground, understand the condition of what’s been sitting around for about six years. And on the fast track, yes, we have to be careful about this as well. There is a potential always to compress the schedule, but at the same time, we have to be aware that we do have certain risks with regard to equivalent that’s been sitting around. We’re now relatively comfortable with the care and maintenance program, it’s been spend good and so fast-tracking is on the table and we’ll just work through that over the coming months.

Luke, on the broader question. Yeah, it’s a really hot thing. I think this Company, particularly given our very strong R&D routes and value in use, you know about 90% of our iron ore is actually beneficiated and we do that because we are after low impurity, high quality materials and so we’ve also been working in the background for a few years now on what else can we do across the mining sequence to upgrade materials into that sort of DR segment. And I think the world is now caught up with the value in use or value over volume that’s been in this Company for many years and we’re now ready with a few projects just reaching the stage of potential investment decision this year which are — what I would call DR pellet feeds. We’ve also got, I think, the significant opportunity with the size of the resource in Liberia, and of course AMMC in Quebec, also we are already producing DR pellets is a great foundation for potential growth of DR pellet into the group and to DRI to EAF or HBI to EAF. So, I think the opportunities are there. We’ve got good projects delineated in the mining sequence and into the pelletizing and that’s something that’s on our plate for calendar ’21, Luke.

Luke NelsonJP Morgan — Analyst

Thanks a lot.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks, Luke. So we will move to the next question please from Grant at Bloomberg Intelligence. Please go ahead, Grant.

Grant SporreBloomberg Intelligence — Analyst

Hi. Good afternoon. Thanks for taking my questions. I have two. The first one is just around NAFTA and back to the sort of capacity question. So would you — given you had some issues in the first quarter, would you be able to give us sort of a rough idea what your current capacity would be? And then just a follow-up in terms of how the mix might change? I think in the quarter, it was roughly 30% long 70% flat, is that indicative of how it’s going forward?

Then the second question is, I’m just curious on the cash flow statement, there was a line of other investment proceeds of somewhere above $800 million. I’m just curious to know that refers to or what that’s for? Thanks very much.

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Hey, Grant. Let me take your question. [Technical Issues] we disclose our production levels for — so running full — the run rate of 5 million tonnes. Our business also running quite well [Indecipherable] and Mexico. So, we pointed out some operational issues linked to the weather disruptions that we’re facing as Mexico receives a lot of gas from US. But other than that, the business is running well. So the flat business. In terms of mix, you are right. With the disposal MUSA mix changed a little bit, so we were more 80%, 20% and now more like 70%-30% flat in loans. That’s the mix. And then to the cash flow question. There are two basically, and you can see some more information in our earnings release as well, one is of course the disposal of the 40 million shares that we sold for Cliffs, and part of the short-term investments that we made at the time of the disposal also of MUSA [Technical Issues].

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Hi, Grant. Did that cover your question?

Grant SporreBloomberg Intelligence — Analyst

Yes, sorry, just right at the end Genuino got cut off.

Aditya MittalChief Executive Officer

Yeah, I would just add grant that the proceeds were the Cliff shares that we then use to buy back our own, and it was the TSR online that was an investment in the fourth quarter. Again related to the sale of AM USA. I think just overall on NAFTA, the key point, I would make is under 70%, 30%, or long flat, I think that excludes Calvert right. And if you adjust for Calvert you will see that we have much more flat shipments into the NAFTA market.

And also, when you look at the profitability numbers for NAFTA Q1, their operational issues, Mexico, we highlight, but also Dofasco didn’t do so well. Those should normalize into Q2 plus if you look at the overall franchise that we have in NAFTA, then we should also look toward Calvert performance.

Grant SporreBloomberg Intelligence — Analyst

Got it. Thank you very much.

Aditya MittalChief Executive Officer

Thank you.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks, Grant, so, we’ll move to the next question from Myles at UBS. Go ahead Myles.

Myles AllsopUBS Investment Research — Analyst

Great, thank you. Could you just provide a bit more color around your order books, how they are looking further out?

But also, has there been any impact from the chip shortage? We’re seeing some curtailments at auto plants, whether in Europe and US, is that starting to be visible in the order books is the first question?

Aditya MittalChief Executive Officer

Sure, so in terms of the overall demand situation, clearly, as we mentioned in our — as I mentioned in my remarks, visibly we don’t see any inventory build up, so inventory through the supply chain remains low. Order books continue to lengthen. There remains demand into at the end of the year as well. We are obviously not taking orders into Q4.

But, order books remain quite long, abnormally long, I would say, because we have had everybody in the industry has had difficult time and matching the demand requirements of service is also down.

In terms of automotive, it is not so appreciable at this point in time, but clearly when we look at the ongoing forecast for automotive pull, it’s lower than what we would have anticipated, perhaps, three, or four months ago.

And that under the margin is positive because clearly, all of these automotive contracts were agreed at different periods in time, but not — and are not reflective of today’s spot pricing.

So to the extent that there is less pull, we can transfer those tonnages into the spot markets.

Myles AllsopUBS Investment Research — Analyst

Okay, so helpful and just going back to your, the emissions question earlier. How — more proportionately emissions are not covered by the free allocation in Europe?

I mean, how big is that exposure?

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

So, that we have been discussing open the end, but I’m sure you have a good indication, I mean everybody, as you know, short, right, so you have the benchmarks.

So, what we tried to do is to make sure that we can fix our costs to some extent, and that’s what we have been doing now for quite some time.

Yes, I’m not very clear on this particular question is, if you probably have seen that is more speculation about the certificates, so we have been a little bit more careful around it, and we don’t want to incentivize that, so that’s — otherwise we are sure that we feel good with our positions at this point in time.

Myles AllsopUBS Investment Research — Analyst

Okay. But, one very last question on the European safeguards, and how concerned by you that these may be lifted in June?

Aditya MittalChief Executive Officer

Sure, the safeguard is designed to safeguard right from a surge of imports and that risk remains, the safeguards were put in place, section 232, was put in place in the United States, Section 232 remains in place in the United States, so the logic of safeguard is still there. So clearly this remains a discussion, but fundamentally the aspect, that we need to safeguard from the surge of imports is present today.

Myles AllsopUBS Investment Research — Analyst

Okay, that’s helpful. Thank you.

Aditya MittalChief Executive Officer

Thank you.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks, Myles. So, we’ll move to the next question from Rochus at Kepler. Go ahead, Rochus.

Rochus BrauneiserKepler Cheuvreux — Analyst

Yes, thanks for taking the question. I have a question on your DRI strategy. Can you share what your initial thinking is today?

Where to put these dry facilities rather closer to the mine or the pellet plant for the hot charging, or you thinking more about proximity to the steel plant, which I could refer from your ideas, and projects now in Germany and France?

And secondly in this regard is do you intend to cover all the DRI needs internally in the future, maybe more color on that would be appreciated. And then I have another one.

Aditya MittalChief Executive Officer

Sure. Thank you for the question, as you know, we are there was largest producer of DRI, right, so we produce DRI in almost every continent of this planet. We have tremendous capability. We have both technologies within ArcelorMittal whether it is the Tenova, HYL, or the Midrex technology. And on top of it, we are the first company in the world, which is experimenting in Hamburg, Germany with injecting hydrogen into DRI facilities. We also have DRI facilities which are linked to our steel plants in terms of hot charging etc., etc. So, we start from a position of relative strength, and relative knowledge. Your inference is correct, at this point in time, we are evaluating, whether the economic case along with funding support and contract for differences there, to set up facilities along our plants in Europe because, there are obviously some benefits in doing that. As we develop our strategy more and we outline exactly what we are doing, I think that will be the time to get into more detailed discussions and typically what we would like to do is announced the project and then explain the rationale versus explaining the rationale before we announce the project.

Rochus BrauneiserKepler Cheuvreux — Analyst

Okay, yes, that makes sense. Maybe on this Hamburg pilot, just can you clarify, whether that pilot has started operations? And what do you think is the kind of time frame you need on such a pilot in order to have a complete, or a good picture about the performance metrics? And what do you need to do to make sure that this hydrogen based DRI production is working the way you like it?

Aditya MittalChief Executive Officer

Yeah, so the pilot is running and the hydrogen into DRI is working. Clearly there are some other aspects to sort out as we take it to steel making, but those are aspects of the research that we’re doing. I think we are in the process of examining how we can expand it to a demonstrator plant. So growth on the pilot to a demonstrator plant and that may be an announcement that we make in 2021, and we’ll keep you briefed.

Rochus BrauneiserKepler Cheuvreux — Analyst

Okay, very good. And maybe allow me a last one on your announced reporting changes today. So you’re changing the way you report your marketable iron ore, so you will only show the Canadian and Liberian operations as a separate mining segment, if I got that correctly. Can you give us some color what you expect in terms of operation improvement from shifting the rest back to the steel plants?

Aditya MittalChief Executive Officer

Okay. I think this is a reflection of how we are managing the business. Clearly, as we have streamlined the organization, there is much more regional or national responsibility and we find that having one unified organization in the countries in which we are doing both steel and mining is better for various reasons. And as we have made those changes we want to reflect it and how — in our segmentation, right, we should reflect how we run the business and how we report our results. The mining team will still be intimately involved in providing technical assistance because they have the capability and the expertise in terms of mine plan, ensuring that the safety ordered — safety plans are done properly, tailing them support, ensuring that the same innovation technology is R&D capability, that we are developing for mines generally is also transferred all of these captive assets.

So, the technical support assistance from the mining group would continue, but the day-to-day operational management ensuring that we maximize synergies, reduce complexity in the organization have synergies in terms of capex buy or procurement buy, or discussions with stakeholders is what we would achieve.

Rochus BrauneiserKepler Cheuvreux — Analyst

Okay, great. Thanks for the color on that.

Aditya MittalChief Executive Officer

Sure.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks, Rochus. We’ll move to the next question please from Phil at KeyBanc.

Philip GibbsKeyBanc Capital Markets — Analyst

Hey, thanks very much. Coking coal pricing coming out of Australia right now is really weak. But the rest of world pricing looks firm to rising. So there spreads between Aussie coal and rest of world coal pricing is getting large, which historically is unusual. So, I’m trying to calibrate your costs on the coal side. Should we peg your costs more off of the Aussie levels are more off of a kind of a 50-50 blend of what we’re seeing across the rest of the world, because you’re a big buyer, and we’ve got an unusual situation obviously?

Aditya MittalChief Executive Officer

Sure. Most of the coal buy that we do is based on of seaborne and Simon is on the call, so he can further elaborate on what he is seeing in terms of the coal business and what is the impact on ArcelorMittal.

Simon C. WandkeExecutive vice president, CEO ArcelorMittal Mining

Yes. So, Phil, mine is skewed of course toward the Australian index. I mean, you know the trade situation at the moment with Australia and China is causing that two-speed world. Basically, you’ve got a very high CFR, China arrival prices at over $200 today, and you have Australian coal, which is pegged on the index today at about $109, $110, but it is not moving into China and there’s still ships stuck in ports. So, that two-speed world is available to ArcelorMittal and ArcelorMittal can take advantage of the lower end of that spectrum and that’s the area what the company does.

Philip GibbsKeyBanc Capital Markets — Analyst

Thanks for all that color.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks, Philip. So we’ve got time for maybe two or three more questions before we reach the hour mark as we will move to the first of those from Andreas [Phonetic] at UBS. Go ahead.

AndreasUBS — Analyst

Thank you very much for taking my question. Just a quick update, if you could, on your operations in Mexico and the US in terms of Calvert, and what you’re doing in Mexico as well, in terms of ramp-ups. And referring to that as well, you obviously mentioned you have a little bit of upside potential in the US on your current mills. So just if you can give any further thought to what you’re going to do there just given that prices are quite strong and supplies is obviously under pressure in the US. Thank you. Those are my two questions.

Simon C. WandkeExecutive vice president, CEO ArcelorMittal Mining

Yeah. Andreas, [Indecipherable] so we had some operational issues in Mexico right, so we are back on track. We lost some production and we should get back now as we move into quarter two. And [Indecipherable] also had some — also some operational issues that we should be recovering. Expectation is for production to increase as we move to quarter two and total shipments. And then, I mean we talked about targets as well, so, we’re running at a very [Technical Issues] already at 5 million tonnes so close to full capacity. So we are operating our facilities full. So of course should take advantage of on the very strong market conditions that we see.

AndreasUBS — Analyst

Okay. And on the upside potential in the US, any further thoughts there?

Simon C. WandkeExecutive vice president, CEO ArcelorMittal Mining

I think, we upside will come as we produce more and increase our shipments. That’s exactly what — that’s your point, Andreas. Maybe, I did not understand your question properly.

AndreasUBS — Analyst

No. I just thought you had a little bit of a capacity upsides potential in the US beyond what —

Simon C. WandkeExecutive vice president, CEO ArcelorMittal Mining

No, on the flex side clearly not, so we are running all facilities full.

AndreasUBS — Analyst

Got it. Thank you very much. Appreciate that.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thanks. We will now move to, I think the penultimate question from Alain at Oddo. Please go ahead.

Alain WilliamOddo BHF — Analyst

Yes, good afternoon and thanks for taking my question. First one, do you see a risk of demand destruction because of the high prices? Is that a real treat? And second question, could you investigate the possibility to debottleneck AMCC beyond the 26.5 million tonnes nameplate capacity?

Aditya MittalChief Executive Officer

Sure, so in terms of demand destruction look steel has very low elasticity. So we do not see that in our end segments. We still see robust demand in all of our end segments and virtually all geographies. Clearly if these prices were to last into the long run, then people would examine what other cost saving measures or how do they reduce their steel intensity. But, if you look at the materials universe, steel is, I mean obviously maybe we are all biased, but it’s a fantastic material, because not only for value per ton, and quality and characteristics that you get, it also has among all the materials today, the lowest carbon footprint per tonne. So you already begin with a material which is on the right side of decarburization, and as you know, it’s infinitely recyclable. So clearly when we look at how demand will evolve for steel, we see some support in terms of the stimulus investments, the infrastructure spend, and the clean energy infrastructure spend that is also coming.

And I know, I digress into longer-term demand picture for steel, but in a nutshell look elasticity is very limited. The medium to long-term prospects remain more favorable than perhaps a few years ago.

Simon, why don’t you answer the AMMC capacity capability?

Simon C. WandkeExecutive vice president, CEO ArcelorMittal Mining

Thanks, Alain. Well, actually today, I mean, the number is 24 million tonnes is the installed capacity, and AMMC Quebec, but that’s across the of course pellets and concentrate. There is definitely work under way. I mean, if you look at the total value chain from mine rail port the ultimate bottleneck is probably at the port and it’s somewhere around 30 million tonnes, 31 million tonnes we believe. Snd so we’ve got a number of programs that we’re looking at which are around debottlenecking, seeking to mine, no more additional volumes that seek to get higher yields through concentration circuits, etc., more efficient grinding, blasting concentration as well. Those projects, some of those have kicked off and others will be part of potential capital programs, all aimed at basically using that full value chain up to the port limiting capacity, as we see it today. So they are in the pipeline.

Alain WilliamOddo BHF — Analyst

Okay. Sure. Many, thanks.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Great. Thank you. I think we’ve got time to squeeze in one last question, which we will take from Andrew at UBS. Please go ahead.

Andrew JonesUBS Investment Research — Analyst

Yeah, just a couple, if I may. Just one on the one-off impact on NAFTA [Indecipherable] quantify that. I mean just secondly just on the market, as you said, in Europe, you are running close to 100% with demand, it doesn’t seem to be back to “normal” levels yet. Total destocking is the main reason for a lot of this pickup that we are seeing stocks in Germany for example the visible data we have is down. I mean, what’s your view — what’s actually going on here? What is and where is the — and what’s the market rebalances itself? Is this a shortage of imports issue, or how do you actually see it in your data? How does the market rebalances itself from now given the high price levels? Is it, you have exports coming out of India, is it maybe large export numbers we’re seeing coming out of China all of a sudden; OK, that gets choked off, but the numbers are pretty high for now? When do you see the market returning to balance in your view in Europe? Thank you.

Aditya MittalChief Executive Officer

So, let’s say the first question on Texas. Genuino you can provide —

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Andrew, the — so I mean, we estimate the number to be close — at EBITDA level to be close to $30 million.

Aditya MittalChief Executive Officer

Okay, great. [Speech Overlap] And in terms of — thank you. Andrew, look overall, this is not just a Europe phenomena. Right. This is a phenomenon that we’re seeing globally. So if you look at the Chinese domestic market spreads are up. If you look at the US, if you look at Europe, if you look at Brazil, if you look at India, all the markets, which are significant, we can see that spreads are up and in all of these markets demand is up. So we see the same trends vis-a-vis low levels of inventory, strong order books and the macro environment, which at this point in time is constructive and I think that’s the take away, I think it’s hard to project into the future as to how long this will last, when will the inventory restock be completed. As you’re aware, the inventory destock started in 2019, continued into 2020. Overall on the macro, when you move beyond this on the medium to longer term, I think that’s the more interesting discussion. I think clearly, we at ArcelorMittal are very focused on our four key priorities, which is sustainable development. We think, we can really make a difference. And we have leadership capability and decarbonizing at a more cost effective whether it’s capex or opex than our competitors. We have a lot of interesting projects, in which we can grow our franchise businesses whether it’s AMNS India, or Calvert, or looking at opportunities in Brazil, or expanding our Liberia business.

If you look at cost, I think we did a great job last year on variabilizing our cost, reducing our cost base, so the cost focus clearly remains, and we have a strong balance sheet, which allows us to provide consistent returns.

In terms of the steel industry on a medium-term basis, what we’re seeing is, and we have to better understand all of us, the changes that are happening in the Chinese steel industry both on our production, and demand perspective, but also the fact that they have reduced incentives to export. And then, I spoke a lot about changes in demand pattern not so visible today, but we can see that is happening due to stimulus, due to infrastructure spend and due to all the green energy infrastructure investments that are coming up, whether it’s solar or wind all of these are steel intensive. So that provides you with an overview of what we are seeing at this point in time, it’s also a good conclusion to the call, I believe. So I don’t know, Daniel, if you would like to say anything else.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

No, thank you, Aditya. That does bring things to a close.

Aditya MittalChief Executive Officer

Okay, fantastic. So, thank you everyone for your questions and continued interest. I wish you and your families the best of health. Stay safe. And we will speak soon.

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Thank you.

Duration: 64 minutes

Call participants:

Daniel FaircloughVice president-Corporate Finance and Head of Investor Relations

Aditya MittalChief Executive Officer

Genuino M. ChristinoExecutive Vice President-Chief Financial Officer

Simon C. WandkeExecutive vice president, CEO ArcelorMittal Mining

Alain GabrielMorgan Stanley — Analyst

Jack O’BrienGoldman Sachs — Analyst

Bastian SynagowitzDeutsche Bank — Analyst

Seth RosenfeldExane BNP Paribas — Analyst

Alan SpenceJefferies International Ltd — Analyst

Patrick MannBank of America Merrill — Analyst

Christian GeorgesSociete Generale — Analyst

Carsten RiekCredit Suisse — Analyst

Luke NelsonJP Morgan — Analyst

Grant SporreBloomberg Intelligence — Analyst

Myles AllsopUBS Investment Research — Analyst

Rochus BrauneiserKepler Cheuvreux — Analyst

Philip GibbsKeyBanc Capital Markets — Analyst

AndreasUBS — Analyst

Alain WilliamOddo BHF — Analyst

Andrew JonesUBS Investment Research — Analyst

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