ArcelorMittal SA (MT) 2005 Q3 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the third quarter 2005 Mittal Steel company earnings conference call. My name is Audrey, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Julien Onillon, Director of Investor Relations. You may proceed, sir.

Good afternoon, everyone. And welcome to Mittal Steel Company third quarter results presentation. Before we start the conference call, I would like to read out a short disclaimer regarding forward-looking statements. This conference call contains certain forward-looking statements. Forward-looking statements include for example, statements about our plans and expectation and what we anticipate or believe and management's plan or objectives for future operation.

Also we believe that the expectations reflect in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to have been correct. Actual results may differ materially from those implied by such forward-looking statements on accounts of known and unknown risks and uncertainties. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements, is contained in Mittal Steel filings with the Securities and Exchange Commission.

On today's call, we have Mr. Lakshmi Mittal, Chairman and CEO, Mr. Aditya Mittal, President and CFO, and Mr. Malay Mukherjee, COO of the Company. I would now hand the call over to Mr.Lakshmi Mittal.

Thank you, Julien. Good day to everyone, and thank you all for joining in today's call. I would like to start by giving an overview of our third-quarter results followed by a short update on current pricing dynamics, before passing over to Aditya Mittal, the President and group CFO. Our results for the third quarter are solid given the current market conditions.

We have experienced highly challenging global market conditions in the past quarter, with significant steel prices declining in all regions that has affected our profit. Despite this, we have produced results in-line with the expectation and guidance, and thanks to synergies and productivity gains, and cost management in our Company. Which has enabled our ROIC to remain at impressive levels of about 15%.

In this quarter, we have completed the Hunan Valin transactions for $338 million cash, consideration for a 36.67% stake. At Hunan Valin we have expanded our foreign presence, and the first foreign steel company to have a stake in a channel steel producer, and providing a platform for future growth in this market.

We have total net debt reduced by $600 million, about $600 million for 3Q '05 before acquisition, and we paid about $338 million in cash, and after this acquisition, we have reduced our debt by $243 million. Perhaps all of you know already that we have been selected as the winning bidder for KryvorizhStal in Ukraine, a company that means significant value, and we believe we can transform it into one of the lowest cost, highest-margin steel plants in the word. We are quite excited about it.

The next slide demonstrates how steel prices have reduced in Q3 in all global markets. There have been signs of recovery in Q4, particularly in Europe and U.S. but nation prices have remained slightly depressed. I will expand upon this point later in this presentation.

With this, I would now like to pass over to Aditya Mittal, who will talk you through financial results and provide guidance for the next quarter. Aditya? Thank you. Thank you very much. I'm on the next page of the presentation, in which I'm going to walk you through the second quarter 2005 results, compared to our latest quarter, 2005 third quarter. Our third quarter was a difficult quarter. There was a seasonal impact, which was more pronounced in Europe, than in other parts, but August is a slow season in any case, both in the U.S., and in Europe. We can see prices were down significantly compared to the second quarter. This was in-line with the production costs that we maintained, and as the Chairman mentioned before, we see recovery in the fourth quarter.

The results are in-line with guidance, but just on a high level, let me walk you through the results are. Sales in the third quarter, $7.05 billion, which is 7.3% less, than the $7.6 billion we reported in second quarter of 2005. It should also be noted that the second quarter results exclude 15 days of ISG, as ISG consolidation only began on April 15th, 2005 and as such, the reduction in revenue is more pronounced.

The increase in depreciation from 192 to 215 is a reflection of the full consolidation of ISG in the third quarter. Operating income is also significantly down in the third quarter it was $765 million, compared to $1.391 billion in the second quarter. I'll walk you through the main drivers of why the operating income is significantly down as we move forward in this presentation.

The net income is also significantly impacted. $479 million for the third quarter, as compared to $1.09 billion for the second quarter. Shipments are up, shipments are up 6.5% compared to the second quarter. This is on a level basis, on a pro forma basis, shipments are largely flat, up 1% compared to the second quarter.

Overall, operating profit is down to $60 in-line with our guidance, clearly a difficult quarter, the third quarter. In terms of per shipment numbers, globally, we shipped in the third quarter, 12.976 tons, short tons of steel, compared to 12.811 million tons in the second quarter. As I mentioned earlier, that on a pro forma basis, is a 1% increase.

If you walk through the various regions, we can see that in Americas, we have the most impact, shipments were down 3.7%. 6 million to 5.8. This is primarily due to market conditions, and seasonal weaknesses in the U.S. market.

If we move to Europe, shipments were largely flat on a percentage basis, down 1.9%. Again, seasonal weakness in August. And if you look at Asia and Africa, we had a significant increase in shipments of 17.2%, primarily because the hot strip mill is up and running in Kazakhstan, and could resume normalized shipments.

In terms of the selling price, Mittal Steel on a global basis reported a 10.7% decline, and a cost decline of 4.3%. The price decline is the main driver for the decrease in operating income, and if you break it up by region, we can see that in America, price decline was about 6%. Again, primarily driven due to market conditions, but also some mix impact that we had. We had a good performance, in terms of cost in the Americas. Where we could offset the increase in cost in actual gas, by a reduction in costs of coal prices, and in pellets, and in certain productivity and efficiency improvements.

In Europe, the price impact was much more pronounced than in Americas, primarily because we have less contract business, and more spot business. Again, there was a cost reduction primarily due to lower prices of raw material. In Asia and Africa, primarily spot business again. And there, the price decline is similar to what we saw in Europe. Limited reduction in costs, primarily because we are vertically integrated, so the scope of cost reduction is also less.

Moving forward to our margins, all these factors contributed to significant decline in margins on a global basis, margins declined from 18.3% to 10.9% on an EBIT basis. Decline in America and Europe, in Europe we expect the margins to improve in the fourth quarter, but significantly low margins. The good news with Asia and Africa, where we were able to largely maintain our EBIT margins.

Move to the net income breakdown, we reported about $30 million worth of other income. $10 million comes from continuing activities within the organization, and $19 million from our joint venture, which is Macsteel in South Africa. Again, something that was forecast in the near term.

We also had two significant adjustments. We had a $35 million recovery of liability that relates to a guarantee we provided to a local bank in the Czech Republic, which is no longer required, and therefore, reversed the liability. And we also lost an arbitration case in Romania, which had a $38 million charge to the Company. We have an indemnity from the government, and intend to recover this amount from the Romanian government.

In terms of financing costs, our financing cost was down from $55 million, to $50 million, and our 4X cost was about $10 million. The total financing cost was $60 million. This obviously will increase, due to the additional debt that we will take on as part of our KryvorizhStal acquisition in the fourth quarter. Our tax rate became closer to our normalized or forecasted rates, came in at 22%. And was about $170 million.

The minority charge similarly reduced, as our income reduced, very sparse is the word, resulting in a net income of about $480 million, and $0.68 on an EPS basis. In terms of our net debt, as the Chairman mentioned earlier, we reduced about $600 million of debt in the third quarter. $334 million went to the acquisition of Valin. The remainder directly to the balance sheet. Resulting in a net debt position of $1.74 billion at the end of the third quarter.

Just commenting on our liquidity, at the end of this quarter, we had $2.1 billion in cash, $3.1 billion in liquidity facilities around the world, as well as post-30 September, we entered into a new revolving credit facility at $3.5 billion, for the acquisition of KryvorizhStal. As we are paying $4.8 billion for KryvorizhStal, the net liquidity impact is $1.3 billion if we excuse any [ROCS], therefore the liquidity of the company remains very healthy at approximately $4 billion, post KryvorizhStal.

Moving forward, in terms our CapEx strategy, the CapEx amount in third quarter was $310 million, higher compared to what we have recorded in the first two quarters of this year, primarily this is a reflection of the acceleration of our CapEx in central Europe, in terms of value-added investments, as well as the [hot] shipment in Poland. As a result our CapEx estimate for fourth quarter is also increasing to $500 million, and this is primarily because of the advance payments we are making for some of the equipment purchases. This is still lower than the guidance we had provided, for the full year CapEx is coming out at around $1.3 billion, which is lower than the $1.5 billion we had forecasted earlier on in the year.

Lastly, we'll be maintaining our dividend and there's no intention of changing the dividend policy, at $0.10 per share per quarter. In terms of our gearing, the balance sheet still remains strong. Clearly these numbers exclude the impact of KryvorizhStal, working capital remains healthy at $2.8 billion, this will be proved if you consolidate KryvorizhStal. The [gearing cost] in KryvorizhStal is greater than 50%. Clearly high, but clearly a number that we remain comfortable with as a company, demonstration of that is our ratings will be affirmed by Moody's, as well as Fitch.

In terms of the outlook for the fourth quarter, we expect shipments to improve in Americas and Europe, and to be stable in Asia and Africa. Price, as the recovery has begin in the steel industry, we expect price recovery in all regions. In terms of cost, we have a natural gas impact in the U.S., which compared to the third quarter is approximately $107 million. We expect costs to be stable in Europe, Asia and Africa. Our operating income, we expect it to be higher by about $10 per ton as a result of the price is up, costs are up, specifically in the U.S. Our tax rate will be normalized at 25% for the year.

With that, I hand it over to our Chairman for further remarks. Thank you, Aditya. Now, I will spend two minutes talking to you about the market outlook, and our vision and strategy. On the market side, market outlook, I will speak on three different regions. U.S. and Europe and China.

Our outlook for America is that real demand is growing. Production we have seen the behavior of the steel companies, and they seem to be behaving very well, with following the production starts, and trying to maintain supply/demand balance. More import may come, because of the price difference between U.S. domestic price, and import prices or prices in Asia and China. Today, the difference is quite large, so we expect some more imports to come in to the United States.

We do not expect that inventory buildup will take place, we have seen inventory buildup last year, and since then, the producers have been very cautious and careful in oversupply to the market. And we believe that that inventory will not take place in the Americas. So, conclusion, economic growth is continuing and real demand will continue to grow.

In Europe, we are seeing that real demand in growth is there, and [Euro fora] just announced a strong markets in Europe, and this is a positive sign for the European market. And we are also seeing that in Q3 we have seen that the major European producers have cut productions, and this also, Mittal Steel has also been proactive in cutting down the volume, to maintain the demand supply. We basically see that Europe inventory level to continue to decline, and market stable in Europe.

China, China's real steel demand growth is slow. What does it mean, that they have been growing at the rate of 30%, but now we are seeing that growth is going to be about 20%, which means also they may increase their volume about, volume could be the same, but in terms of percentage, the growth is going down. At this time, China is exported in last month, some export materials, but we believe that this is not sustainable exports.

There are a few reasons for this. One, we have stated before that China is not a natural exporter. Their costs are high, and at these prices, in domestic markets, many of the Chinese mills are making loss, except a few bigger producers. Secondly, we believe that China government is also very cautious and careful. Specifically, there has been a meeting with all the Chinese producers, and they have been warned of oversupply, and the drive which we hear in the market, China's companies will have to resort to production cuts, up to 5%. And we will see the impact of this going forward in the next two quarters. Imports in China have slowed down.

Imports in China have slowed down. But because of the low domestic price, and thirdly, we believe that China will not be able to export large quantities to different markets, because they are worried about the anti-dumping initiative by the various countries, and fourthly, China, there is a fear that China's government could abolish or reduce this entity, that export rebate, which is 11% in the finished product at this time, like what they have done in the beginning of this year, they reduced the export rebate to [semi to zero]. So overall, what I believe that the situation will balance out in the next six months, the next two quarters because of the reasons which I explained before.

The next slide is on what we are doing as Mittal Steel for our internal and external growth initiatives. I will speak on a few subjects. One is the new opportunities with KryvorizhStal. Second, what are we doing to reduce our raw material dependence with Liberia and acquisition of KryvorizhStal. Then how we are going to benefit from growing Chinese market. Hunan Valin, and from India potential in Jharkhand, and what are the new initiatives we have started in marketing and value-added investments, and we will continue to focus to reduce costs with acquisition synergies, and continuous improvement programs.

With the acquisition of KryvorizhStal, we believe that, we believe that we have synergies of up to $200 million, which we have already identified, and we believe that the can be captured at KryvorizhStal before the end of 2006. Generally speaking, these can be split into sales and marketing and procurement areas. We also have plans to maximize KryvorizhStal's existing capacity, and invest to expand the product portfolio into flat products, and as we are all aware, that KryvorizhStal is sitting on [iron ore] mines, and it is very close all the raw material supply sources. So we believe that this is, that we will endeavor to make it one of the largest single site steel plants in Europe.

But more importantly, position it as one of the lowest-cost, highest-margin producers in the world, which will add significant value to Mittal Steel. We are all very excited about the opportunity, about this acquisition, and we believe that KryvorizhStal is one of the excellent opportunities for Mittal Steel and its shareholders.

Vertical integration has been part of our growth strategy. And we have always said that we would like to [maintain] our own reliability on the raw material supply source. This particular slide shows that how we are going to have additional 28 million tons of new [additional] supply source within the group. I will walk you through individually, Bosnia, we are going to 1.5 million tons, we have already realized 1.5 million tons of iron ore supply this year from Bosnian iron ore mines. Ukraine, 6 million tons will come from this acquisition of KryvorizhStal, which will be supplied to this plant.

In Mexico, we are increasing another 1 million tons of our own supply source. We are starting this project in 2006, and wish to complete in 2007. As we have announced before that we have seen with the Liberian government to explore and produce 10 million tons. The reserves are already explored, and the results are already proven, and we intend to begin this project work in 2006, and wish to complete, plan to complete in 2007, with an initial capacity of 10 million tons.

In Bosnia, where we already started producing 1.5 million tons, we intend to increase it by another million tons, and we plan to complete this project in 2007. In Mexico, apart from this 1 million tons which I just said, we are further looking at new mining opportunities, which is will give us additional 1.5 million tons.

And Kazakhstan, we are working on increasing our mining capacity another 1.5 million tons, and Ukraine on KryvorizhStal's site where we have existing 3 mining operations, we believe that we can produce another 5 million tons by 2009, which will help us increase to our existing operations in Czech, Poland, and Romania. And then we have another project in Kazakhstan for 1 million tons, which will be completed by 2010. All-in-all, we are trying to get stronger in our iron ore supply with these projects, after realization of all these projects, we will be close to 82%, 80 to 82% of our own requirements will be met through our own mines.

Mexico at this time, we are having about 2 million tons from our existing mines, plus additional 2.5 million tons, which will make that 73% dependent on their own supply source. Kazakhstan is already dependent on their own supply source. With the additional production of 5 million tons in the Ukraine, which will help reduce the cost of our operations in Czech and Poland.

After the acquisition of Valin, after participation in Hunan Valin in China, we have also announced that we have signed an MOU with Jharkhand government, and this is a 9 to 10-year project, where we will build the capacity of 10 to 12 million tons in different stages, depending on the growth in India. Depending on the growth and demand in India, and we are not going to build up the old projection. It will be built depending on the demand situation.

Then we have several marketing initiatives, which means that we want to invest in value-added products. I have talked about this last time also, and I just want to repeat that we converting one of our galvanizing lines for auto supplies, with a capacity of 400,000 tons in the U.S., and South Africa is building 140,000 ton of galvanizing line to supply to the auto companies in African market. Poland, the progress is, we are making progress in building up this new hot strip mill with a 2.4 million ton capacity. Similarly the progress on building a new cold [bello] coating line in Poland, also organization work in Poland for the wire rolled mill is also going ahead. We have just completed the building up of a new cold rolling revamping, the cold rolling mill in Steel Mittal for 420,000 tons, and also we have completed building a new color coding line of 50,000 tons in Steel Mittal. That means the company is continuing to work, on increasing the value-added product mix.

Apart from this, we have initiated new marketing initiatives on [bi-ventral], template, and plate market, where the group also is a very large player in different regions. So I hope that this also brings additional values to the Company. We have announced before on the synergies to be captured out of the ISG merger with our previous inland operations, up to today, up to Q3, we have achieved $80 million of annualized synergy benefits, and we are on the target to achieve $250 million by 2007. This integration is going on very well, and very recently we have also got our new contract signed with the Union in [Inland], which will also help to improve the productivity, synergy, and cost of our inland operations in-line with ISG operations.

This is a very important development in U.S. business, and integration is going on very well as you can see, the behavior of the U.S. producers, including our behavior, when the supply/demand balance has been properly maintained, and we can also see the benefits arising out of consolidation of the steel industry in the U.S. Now, 55% of the production in the U.S. is by the top three companies.

Conclusion. Mittal Steel has generated an ROIC above 15% in a difficult environment. I believe that the steel industry is changing itself, because of the consolidation and globalization, and Mittal Steel is definitely, way ahead as a leader in this process. And they have been able to maintain their ROIC at 15%, which is a very good achievement. We are also seeing that globalization, consolidation in the industry has helped the industry to weather the downturn in the market.

We are seeing a new pricing level, even in the downside of the market. In year 2003, or 2001, we have seen the hot rolled prices going down below $200, $250, but now we have seen that even in this softness, the soft market, the prices are not going below $400, which is a very good price, for even for the Asian producers in general, and this is a new pricing band we are seeing, which is a very good news. The KryvorizhStal acquisition will generate over $200 million of initial synergy, and as we further expand the capacity utilization of KryvorizhStal, and we go into higher value-added products, in flat, also in the long product, I think it is going to be one of the excellent acquisitions for Mittal Steel.

And this also completes our European strategy in a way that, we have got the low cost producer producing, in the large European context and this is a medium term strategy, also it is an excellent move, and excellent strategy which we have achieved. And which leaves us with our investments in Poland, and in Romania. We believe that we are moving towards increasing our market share in value-added products moving forward.

So these are my comments, and now I will invite questions from all of you. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] And our first question will come from the line of Michelle Appelbaum with Michelle Appelbaum Research. You may proceed.

Hi, congratulations on a really terrific quarter. I wanted to ask you, you guys typically have a deeper perspective on China, and more objective perspective than others, that we talk to from time to time. I wanted to ask you if you could talk about how realistic you think the announcements of 5% production cuts are in the fourth quarter?

And then also, some of your peers have been talking about that the Chinese government, is actually purposely trying to push down prices there, to force consolidations, and to force out some speculators that have grown up in the industry in the last couple of years. And do you subscribe to that theory, as well?

This is good news is, Michelle, that at least there is a discussion going on in China about production cuts. And this is prior to their consolidating the industry. So that two three moves going on in China, as per our information.

One, the government is pushing for consolidation of the industry. And as I said before, in the last call, that they want to have the top 10 companies producing more than 50% of their production. Near term, and 75% in the longer term. And at the same time, they definitely want domestic prices to go lower. But they cannot afford to do it, because of cost of the Chinese companies are higher than the market price.

Many of them cannot afford to have these low prices, and there will be a shakeup in the industry, which is good for the industry, good for the steel industry, good for China. So that those uneconomically unviable producers, will have to go out. This policy will allow or force some of the states to relook at the industry. The 5% production cut, I do not know that whether we will see in the Q4. But I'm sure that once the initiative has begun, we will see them going forward. There is a mindset now to reduce volume, to match the demand in the country.

It's also clear from the comments, that from this kind of initiative, it is also clear that the government does not intend to promote export. They really want to balance the demand and supply domestically. And they have to, to take away this export rebate, which is 11%. They have done it in the past, and they have a rebate to bring it down to zero.

All those things will make it difficult for the Chinese companies to grow very fast, and they will have to shake out these economically unviable companies, and there could be a time situation here, because they are not quick to react, as fast as we have done it in Europe and the United States. Of course they're not consolidated. But it is going to happen.

Interesting. Do you think that there's a floor price to hot rolled coil in China has been sliding lower than 400 at times? Do you think that's going to bottom at these levels? What's your view on that?

I think you are right, around $400 is the bottom number. Below this if they go, they have to start losing heavily. They have only one or two producers whose costs, two producers whose costs would be lower than $400. But generally, they are in the region of $380 to $400. They have to have a transport cost, if they have to export

One more related question. September trade data from China, indicated that their net imports jumped to over 1 million tons again, and that's obviously a huge swing. But a lot of people in the industry question the data. Do you think China really became that large of a net importer again in September? And where do you think that number is going?

This number is one of the month number, I do not subscribe that this would be the trend, and they have to perhaps in the fourth quarter, we may say that their net imports are down.

Okay, great. Thanks so much.

And our next question will come from the line of Charles Spencer with Morgan Stanley. Please proceed.

Yes, afternoon. I have two questions. The first is just looking at your outlook statement, where you talk about the increased profitability of about $10 per ton for the fourth quarter. I wonder if you could break that down between, how much of that improvement is coming from cost cutting, and how much of that's coming from pricing.

Sure. Most of the improvement is coming from improvement in price, that we are seeing in some regions, as well as shipments, I think. Shipments and price are the key drivers. The major cost impact that we're facing is natural gas in the United States. Compared to the third quarter, our natural gas cost is $107 million higher. This is not the direct impact.

The direct impact is about $15 million less than this, but we are reducing production in Mexico by 300,000 tons. And conservatively, based on what we think the Company will earn in the fourth quarter, that is about $15 million of loss of income, because of less production. We're reducing production because the costs are going up. Combined the natural gas impact is about $107 million. This is a net number.

We also have hedging benefit, which is --, primarily the fourth quarter guidance is improving, primarily because of shipments and price. But being offset by the cost increase, specifically in the U.S. and Mexico, because of natural gas.

Just before I go to my second question, could you put a bit more color on the pricing breaking it down by region? And then when you look at your costs, can you talk about your cost-cutting efforts, and how much that might contribute to your fourth quarter?

Okay. By region, if we review our selling prices, they're marginally up in the U.S., marginally up in Europe, and marginally up in Asia and Africa. Right? The cost-cutting is occurring primarily in Europe and in Latin, Asia Africa. The cost-cutting in Europe is there, because of lower raw material prices, and improvement in volume or shipments.

EBITDA is largely flat in most of the regions, but improving in Europe. Again, this is volume-driven and cost-driven, and the fact that prices are improving. So in terms of performance, the main improved performance will actually come from Europe. In America, the improved performance is being offset by natural gas impact and Asia, Africa, it's largely flat.

Okay. That's very helpful.

Does that give you enough information, Chuck?

Yes. That's great. Looking out to next year, can you talk a bit more about maybe identifying on a per ton basis, how much of a benefit you see coming from productivity and cost-cutting benefits? You talked about ISG. Can you sort of put that into your per ton sort of analysis? And also looking at your 5% productivity enhancements, how much of that do you see, assuming pricing doesn't change very much from here, how much of cost benefits could we see next year, versus where we are today?

We should achieve the synergies in ISG next year. In terms of cost benefit, cost support. As we get into next month, in December, we will be reviewing budgets, and clearly we'll have more idea, as to how we can capture the synergy potential of our U.S. operations. There should be similar ideas in Europe, which will come up in the budget discussions.

In terms of productivity, we are on-plan for this year, in terms of 5%, expect to be on-plan for 2006 as well. The scheme is continuing across Europe in the third quarter in [Cenitza], and we mentioned earlier on, that the inland contract was ratified, which allows us to capture productivity benefit as well in the U.S. Those thrust areas will continue in 2006. I do not want to give a number at this point in time, because we've not completed our budget sessions, and it's slightly premature. But the concepts and ideas remain and there's no reason why we believe the opportunity is less than before, rather, the opportunity is equal or greater.

Maybe I can ask it in slight a different way. If you annualized the natural gas cost increase that you're identifying for the fourth quarter, will you see enough cost-cutting and productivity enhancement next year, to offset that more than $400 million increase in natural gas costs?

I would say it would be a combination of price and mix improvement, in terms of perhaps additional shipments, as well. As well as cost. And if you take all of that into consideration, you are taking me to a guidance which I don't want to give for 2006. But generally, the target would be to offset the natural gas cost increase. When we get into budget session. Whether we achieve that or not, is a whole different question, and something we should address when we talk again in February.

Okay. Thanks very much.

And your next question will come from the line of Aldo Mazzaferro from Goldman Sachs.

Good morning, good afternoon. I was wondering if you could talk more about your project in India, which I'm wondering as you expand the project, is there an opportunity for you to export iron ore from that project to your other operations, or does the iron ore need to be used 100% internally at that project?

Our agreement is that we will use the iron ore to produce within the country at this time. And the progress in the project that we are going to start the DPR, detailed project report, and it will be six months before the detailed project report is complete. And then we will initiate the construction.

Right. I see.

And as I said, that we will be doing this project in two phases. We do not want to overproduce and oversupply the market, either domestically or internationally. We would like to phase the project in-line with the demand growth in India.

Right. So it sounds like the steel output of that project would also be largely destined for India, then?

That is our objective.

Right. Thank you. And I wonder just another quick one, on your Valin, could you describe how much equity income you derived from Valin in the quarter? And whether there's, that company is one of the ones in China that is now losing money? Or what is the outlook for earnings in Valin, would you say, over the next few quarters?

Valin did not earn much money in the third quarter. It was still net income positive. I believe it was closer to about $10 million in the third quarter. Their outlook for fourth quarter remains weak. Similar to those numbers, that I have just outlined.

Right.

The improvement in China, as we said, should occur post-fourth quarter, as consolidation takes place. The government measures, in terms of production cuts, or shakeouts take place. We forecast improved results for Valin in 2006.

As a result, there is zero income from Valin in any of our numbers. And also the transaction goes later on in the quarter, it closed post third quarter, or right at the end of the third quarter. So it couldn't have been there.

I see. Thank you. And as you look at your operations today, with KryvorizhStal included, what would you think a good run rate for shipments would be, something 57, 58 million tons?

Yes, I would say perhaps slightly higher than 58, 58 to 60, depending on what we do at KryvorizhStal next year. Our run rate should improve in the fourth quarter, as well. We should be marginally improving our shipments. I don't want to give a specific number.

Right, right.

But a couple hundred thousand tons, at least. And then KryvorizhStal should add to that 58 million tons is a good number.

Is KryvorizhStal going to come into the, do you think it will be included in fourth quarter a little bit?

Yes. We expect to close the transaction shortly, in the next two weeks to three weeks. And therefore, there could be a minor inclusion in the fourth quarter in December. I don't think it will materially impact the results or the guidance for fourth quarter. But from an accounting perspective, you're absolutely right.

Thanks Aditya. Thanks very much.

Thank you.

And our next question will come from the line of Daniel Altman with Bear, Stearns, you may proceed.

Hi, good morning. I guess a few questions. Firstly, on the Asia and Africa section, segment, the revenue per ton fell I guess more dramatically than the other divisions. I wonder if you can explain within that segment, why or who was had the largest price declines? The second question is, within the European segment --

Can you repeat your first question, please?

The revenue per ton for the Asia and Africa segment fell pretty dramatically in the third quarter. I wonder if you can explain which country within the group, or which countries, saw the largest price declines?

And the second question is, within the operating income for Europe, only 47 million during the quarter. Are there businesses within the group, that are negative operating income during the quarter?

Good question. There were many businesses which were basically breakeven within the third quarter in Europe. This included our downstream operations like Romportmet in Romania. Romania performed more poorly compared to the other companies. We had the best performance in the Czech Republic, followed by Poland, and then Romania, and then Romanian downstream. The long products were largely breakeven as well in the third quarter. And that is why we forecast markedly improved results in the fourth quarter.

In terms of your price per ton decline in Asia Africa, it's very similar to what we witnessed in Europe, slightly larger, obviously. This has to do with exposure that we had in Asia and Africa to China, more than other parts of the world. As we know, Chinese prices decline more severely than what we saw in the U.S. specifically, as well as Europe.

Okay, great. Just one other question, then. Given what you know now, and I know this is a regular question, but do you have an updated feel on the coal and iron ore negotiations for '06?

We are like any other steel company, we are expecting that, coal prices to go down a little bit. And we are hoping that iron ore prices do not go up, because they have already increased 71% this year. It will all depend on the negotiations with China, because they are clearly the largest importer, and they will really lead the process, and we have to wait and see. And looking at the iron ore Chinese domestic prices, it will be very difficult for them to allow increase the iron ore price.

Right, okay. Thank you very much.

And our next question comes from the line of Vincent Laurencin with Exane BNP Paribas, you may proceed.

Good afternoon, gentlemen. I had two questions if I may. The first one was, could you please comment at least qualitatively, on the QC performance of your Dubai trading operations, particularly compared with Q2, to see whether that impacts into the Asia and Africa results there?

And on iron ore in Ukraine. If I remember correctly back in Q2, you had mentioned that you had seen spot prices for iron ore at the end of Q2 about $20 below the benchmark price for iron ore, I was wondering whether you had seen a continued drop in Q3?

Also, if there is some acquisitions to come up for iron ore mines in Ukraine, I know you intend to be fully self-sufficient for KryvorizhStal. But would you be interested in buying some of these to potentially supply your other facilities in eastern Europe? And I was wondering whether the logistics was actually reasonably good to get from these mines to Poland, Czech Republic or Romania? Thank you.

I'm not really clear on your question on Dubai trading. The Dubai sales office is a sales office, and it reflects revenue for what it gets for selling our export products. And, therefore, the decline in revenue that we have in Asia, Africa, reflects those regions. And to the extent that sales are occurring in Dubai for Europe, they are reflecting in Europe, and to the extent that sales from American companies, which are not really happening, occuring to [bind reflects] in that region. When we say sales have declined 13% in Asia Africa, it has to do with those specific companies.

Okay.

On KryvorizhStal, let me say that we will continue to look at opportunities, first of all, to make it fully independent from our own mines, for which we will start, we have started initiatives. And we have said before that we will look at opportunities to expand or acquire in eastern Europe, or in Ukraine, to feed to our companies in Czech, Romania and Poland. Infrastructures are available. They have an excellent good infrastructure to supply from Ukraine to Poland and Czech, and it is close to [Lexiport] to supply to Romania if available. We are continuously looking at those opportunities.

Prices of iron ore remain flat since we met last time. There is no change. And continue to be where it was in Q2, and now the same price, as we reported for the contract.

Thank you.

Our next question comes from the line of [Hannah Kirby], Credit Suisse. You may proceed.

Good afternoon, gentlemen, I've got three questions if that's okay by you. Firstly the outlook for your auto contracts, particularly in the U.S. and particularly from the former ISG contracts.

Secondly, whether you have a long-term target for your raw material self-sufficiency, and finally with regards to your exposure to gas in the U.S., what is your split there, in terms of spot and contracts on gas?

Let me start with the natural gas. We do about 20 to 23 million mmbtu consumption per quarter as a company. Primarily, 90% of that is in the U.S. We are hedged by about $2 of that amount in the fourth quarter, and are hedging amount would decrease about $1 for 2006. So, in the fourth quarter, the benefit was about $40 million. Or will be $40 million, assuming the prices stay throughout the quarter. Does that answer your question on natural gas?

But you don't have a specific split between, you can't just say X is spot, and X is contract that we're on, so we can get a feeling for the exposure moving forward?

Well, we are roughly 78% hedged when it comes to the fourth quarter. But the net saving is about $2 per mmbtu, because the rates at which we hedged were also high. Does that help you?

Yes. Thanks.

Okay. Thank you. I will answer on contracts. Yes, we are already on discussions for the auto contracts. And we do believe that the discussions are going on well, and there seems to be definitely a positive attitude of the automakers, to see that the contracts are made on a win/win basis.

And our next question comes from the line of Richard [Sprakenhaus, Rabo] Securities, you may proceed.

Good day, gentlemen. One quick question. Can you give us already a feeling about what the Cap Expense will be for next year? You have mentioned lots of plans. Can you put a total figure on it, please?

In terms of CapEx, we need to add KryvorizhStal to the CapEx numbers, but we will still forecast $1.5 billion to $1.6 billion for 2006. This excludes any new projects we will undertake in 2006, in terms of converting KryvorizhStal into more flat production, or increasing its capacity.

In any case, if you were take such a position in 2006, I do not see a significant portion of that dollar, coming in the 2006 CapEx number. So 1.5 to $1.6 billion would be the guidance, pre any budget discussions we're having for 2006.

Okay, thank you.

And our next question will come from the line of Wayne Atwell with Morgan Stanley. Please proceed.

Thank you. Could you remind us again, what you said about how much gas you buy over a year?

Yes. 20 to 23 million mmbtu. The reason why I'm giving you a wide range, we're reducing production in Mexico, then that's less. On a quarterly basis. You multiply that by 4, and you get the yearly, which is about 80 to 92 million mmbtu.

Thank you. And obviously, you've been the winner of the Ukrainian auction. Where are you going to look in the future? Obviously that's going to occupy a lot of your time here in the near future. But where else, where else will you look in the world? And will these be large or small acquisitions, do you think?

First of all, we have already set up a team for KryvorizhStal, and this team will be headed by one of the most experienced CEOs in the group. And as soon as the transaction is complete, the team will be sent, and they will start working on this. We are very lucky to have a good team already set up for this.

And going forward, we have already outlined that. We will look at the opportunities which make product synergy sense for us. We do not want to give the names and the opportunities. If the we look at the U.S. market, in the Americas, the consolidations that have taking place in Europe, we have almost looked at all the prioritization opportunities. We have clearly announced our view on India. We have said that we are looking at China to strengthen our position. But specifically, we will not comment on any particular case.

Okay. Thank you.

And our final question comes from the line of Michael [Broker, Subing]. You may proceed.

Yes, this is Michael Broker from [Starby] in Frankfurt. I've got two minor questions. The first question concerns the development in Europe. Yesterday, we received the German order intake for steel was up 25% year-on-year. This was the highest ever we had for October, since the reunification. Do you think there is an upswing in the model? Or is it restocking?

Second question concerns Kryvorizh. May I have a number for productivity of the blast furnaces per cubic meter? Thank you.

What is your question on the blast furnace?

The productivity per cubic meter.

In where, KryvorizhStal?

Yes.

All the levels are good, and what you are saying, this compliments already optimism for Europe. But we have to remain cautious and responsible, real demand is not growing by 27%. It's important to avoid excess inventory building. The blast furnace productivity in KryvorizhStal, Malay?

Yes, the in KryvorizhStal the work on an FE to the blast furnace of about 57%. And also has higher ash than normal. So the productivity which they're operating on today is about 2 tons per cubic meter per day. And we expect that it should be possible to bring it up to 2.4, 2.5.

You said 2, right? Currently 2?

Currently 2, yes.

Thank you.

Thank you.

At this time, ladies and gentlemen, that does conclude our Q&A session. I would now like to turn it over to Mr. Lakshmi Mittal, Chairman and Chief Executive Officer, for closing remarks.

Aditya has one comment. The question earlier on raw material self-sufficiency. which some of us glossed over. The intention is to remain fully vertically integrated. We have made dramatic progress, in terms of our iron ore self-sufficiency. We have a ways to go, in terms of our [coke] strategy. Thank you for participating on this call, and look forward to talking to you next year. And since we will not be talking before the beginning of next year, we wish you very Happy Holidays in December. Thank you. Bye-bye.

Ladies and gentlemen, this does conclude your presentation. At this time, you all may disconnect, and have a wonderful day.