ArcelorMittal SA (MT) 2009 Q2 法說會逐字稿

Forward-looking statements -- this document may contain forward-looking information and statements about ArcelorMittal and its subsidiaries. These statements include financial projections and estimates and their underlying assumptions, statements regarding plans, objectives and expectations with respect to future operation, products and services and statements regarding future performance. Forward-looking statements may be identified by the words believe, expect, anticipate, target or similar expressions.

Although ArcelorMittal's management believes that the expectations reflected in such forward-looking statements are reasonable, investors and holders of ArcelorMittal securities are cautioned that forward-looking information and statements are subject to numerous risks and uncertainties, many of which are difficult to predict and generally beyond the control of ArcelorMittal that could cause actual results and developments to differ materially and adversely from those expressed in or implied or projected by the forward-looking information and statements. These risks and uncertainties include those discussed or identified in the filings with the Luxembourg Stock Market Authority for the financial market, Commission de Surveillance, Le secteur Financier and the United States Securities and Exchange Commission, the SEC, made or to be made by ArcelorMittal, including ArcelorMittal's annual reports on Form 20-F for the year ended December 31, 2008, filed with the SEC. ArcelorMittal undertakes no obligation to publicly update its forward-looking statements, whether as a result of new information, future events or otherwise.

Good afternoon, ladies and gentlemen and welcome to the second quarter and first half 2009 results. My name is Liz, and I will be your coordinator for today's conference. For the duration of this call you will be on listen-only. However, at the end of the call you will have the opportunity to ask questions. (Operator instructions). I will now hand over to Mr. Mittal, CEO and Chairman of ArcelorMittal (inaudible). Please go ahead.

(technical difficulty) (Audio in Progress) -- being to replenish destocking. However, [it's to show] that real economic recovery always starts with an inventory replenishment combined with confidence improvement.

Moving on, first I would like to highlight the first point on the slide of introduction and overview, the fact that we have maintained a stable health and safety frequency rate during the period. Investment in health and safety has not been decreased in any way, and this remains the first priority of the group.

That said, as anticipated, the second quarter continued to be very challenging, operating at approximately only 50% of capacity, we shipped 70 million tonnes during the quarter and reported an EBITDA of $1.2 billion, which is in line with guidance. However, during the quarter we continued to take action to strengthen our financial position with excellent results. We have reduced further our net debt by $3.8 billion down to $32.9 billion, and following a series of successful market refinancings totaling $11.4 billion we have improved very significantly our liquidity. As a consequence, we have decided to voluntarily cancel $3.2 billion of credit facilities and prepay $3.4 billion of bank debt in order to have no significant debt reimbursement before the end of 2010.

Finally, we have also obtained a covenant waiver from our bank allowing us to have a net debt to EBITDA ratio of 4.5 times for December '09, four times for 2010 and revert to 3.5 times for December 2010.

Separately, we have managed to save more than $10 billion of analyzed fixed costs during the quarter due to industrial optimization and management gains. Of those savings, $1.7 billion are sustainable. We are also pleased to report that working capital days reduced from 115 days in Q1 '09 to 98 days in Q2 '09, and are progressing well to reach our working capital rotation days target of between 75 and 85 days by end of 2009.

Finally, as you know, we had voluntarily reduced capacity by about 50% in response to the weak demand. As anticipated, demand has now started to increase as our customer inventories have reached extreme levels. As a result, we have recently announced our intention to cautiously restart a number of blast furnaces. These initial recoveries support our guidance for the third quarter of approximately $1.4 billion to $1.8 billion, and we expect further progress of improvement in the fourth quarter.

Now let us look at health and safety results of the second quarter. I'm very pleased that health and safety performance has consistently improved over the last three years. Despite the crisis we maintain our focus on safety during the quarter. The frequency rate remained at 1.6 injuries per million work hours, consistent with the prior two quarters and much better than prior periods. The journey towards zero accidents remains our ultimate goal, and we will continue our focus here despite the current economic development.

Before we discuss our results specifically, I would like to provide some comment on the steel markets in general. World steel demand remained overall extremely weak during second quarter; however, the recovery is underway. In Europe and US, the real estate demand is not showing the real signs of improvement, but the inventory level is so low that the steel consumers have no other choice than to restart ordering. Demand is coming back progressively but surely.

This recovery is for the time being only technical but should continue for at least the next two to three quarters, and by then we should hope that the real [economies] start to improve. In emerging market, demand is also showing clear sign of improvement, not only those economies that have been overall more resilient to the crisis that have initiated a recovery earlier. Since the beginning of the year Brazil has increased its production by 20%, Russia by 25%, and India is running at full capacity.

Last but not least, China is benefiting from the massive governmental stimulus plan and record credit growth. Steel demand growth is accelerating and is expected now to increase by 10% this year.

In this context, prices are rising in most regions. That is encouraging. And as demand recovery continue, more price increase should materialize.

If you look at the following slide, I'd like to make two comments on China. (inaudible) investments increased over 30% in June, and industrial production was up almost 11%. The steel demand over the same period was up by 16% year-on-year month-to-date basis, which is impressive news, particularly when we recall at the beginning of the year China steel demand was expected to fall in 2009.

Capacity utilization is high at 96%.

Finally, second comment -- finally, prices have increased significantly, and we expect continued upward pressure on prices due to strong demand, high capacity utilization and rising raw material costs.

Similarly as in the US, I would like to make a few comments. As expected, considerable de-stocking continued in the second quarter. Although underlying demand in the US continues to be weak with industrial production down 13.6% year-on-year and auto sales down 22% year-on-year in June, we are starting to see a progressive increase in apparent demand. Apparent demand has improved by 10% in the last two months, and this should accelerate as a result of extremely low inventories.

Since the beginning of the crisis, steel service center inventories have been reduced by nearly 50% and are 15% lower than previous all-time lows in the early '80s. Currently, these inventory levels are between 2.1 to 2.4 months of consumptions, are really, really low and are at critical levels. Steel production remains slow at about 50% capital capitalization. However, capitalization rates have been increasing slightly over the last several weeks through (inaudible) apparent demand improvement. We have operated at 39% capacity utilization in our US business in last quarter. Finally, steel prices are on the rise in the US and have increased by approximately $100 per tonne.

In Europe, like in the US, have seen some demand improvement due to the end of the destocking but also automotive scrapping schemes. The automotive market, which was down 13.7% over the first month of the year, increased for the first time since the crisis by 2.4% in June. This growth is not sustainable but is sufficient to [drive] excess car inventory and force car manufacturers to restart some production.

Steel inventories are higher than in the US, but 25% down since the beginning of the crisis, and continuously inventory levels are falling now at a rate of 8% per month. The steel production continues to be low, down nearly 40% year-on-year in June, but has increased slightly on a month-on-month basis. Production is expected to recur in the second half, and in line with the other regions of the world, steel prices have started to rise and we have seen EUR30 price increase in last month.

Now moving to stainless steel, driven by a destocking process in distribution, the stainless market continued to improve with both base and nickel price significantly up from lower levels earlier this year. Since end of February, base price recovered by more than $400 per tonne. However, real demand in Europe continued to decline by 15% year-on-year in the first half of the year, and we do not see any clear sign of recovery of the end market demand.

Having gone through the market review, now I will quickly go through industrial plan progress. Over the quarter we have continued to adapt our supply to demand by cutting production and maintaining a capacity utilization close to 50%. Yet, as demand improved in second quarter, we increased our production by 4% to 15.9 million tonnes but continued to reduce our inventories, you can see from our shipment number, which was 17 million tonnes.

Due to the confirmation of the demand recovery, we will continue to gradually increase production but intend to remain extremely cautious and restart facilities only when we have significant confirmed orders.

On the fixed cost reduction, we have further reduced our fixed cost through, in particular, the implementation of our industrial optimization plan. By maximizing our unique industrial network, stopping our high-cost plan and focusing production on our low-cost plan, we have been able to increase our annualized temporary fixed cost reduction from $6.3 billion to $6.6 billion at a constant dollar. This number was lower than our initial expectation, due to our increased volume; that is a good thing, but also some extra costs, specifically in our African and CIS region.

In Q3 we will continue our cost-cutting effort, but as production is expected to increase, some fixed costs should come back.

On management gains we have made good progress, and we -- our progress is as for the plan on sustainable SG&A and fixed cost. We have captured $1.7 billion, and we are on the track to achieve $2 billion of sustainable SG&A and fixed cost reduction in 2009.

With this, I hand it over to Adit to walk you through the financial plan and then to the various -- my colleagues for the various segment overviews.

Thank you. Good afternoon and good morning as well. I will highlight aspects of our income statement, cash flow balance sheet and review the financial progress we have made in the second quarter.

If we turn to the P&L, I will walk you through a comparison between our second-quarter 2009 performance compared to the first quarter of 2009. Our results improved slightly in the second quarter. However, they were still impacted by the exceptional market environment with decline in demand as well as steel prices, which was offset by our $10 billion cost reduction.

As you heard earlier, EBITDA increased by 38% in the second quarter, ending the quarter at $1.2 billion. In terms of EBITDA per tonne, it increased by $17 per tonne, ending at $72 a tonne.

During the quarter we also had pre-tax exceptional charges of $1.2 billion, which primarily related to the write-downs of inventory of $0.9 billion and provisions for workforce reductions of $0.3 billion. If you recall, we had booked exceptional charges of $1.2 billion in the first quarter of '09, which related only to a write-down of inventory and raw materials supply contracts.

Net interest expense increased to $401 million as compared to $304 million in Q1, primarily due to higher effective interest rates on the issuance of several bonds. Our internal estimates imply that our interest expense will increase by about $120 million per quarter as a result of the new bond issuances.

The Company also recorded a mark to market on convertible bonds of $357 million -- a $357 million loss in the quarter, basically as result of marking to market the convert option.

Foreign exchange and other net financing costs, which include bank fees, interest on pensions and others, amounted to $142 million as compared to a $265 million charge in Q1 '09. We also recorded an income tax benefit of $1.2 billion for the quarter, primarily due to operating losses.

In terms of cash flow, as you know, our cash flow from operating activities increased to $1.7 billion in the second quarter as compared to $0.3 billion in the first quarter. This cash inflow for the quarter included $2.4 billion generated by working capital changes, primarily due to lower inventories. Specifically, the operating activities also included the reversal of the non-cash charge of $357 million associated with the convertible bonds as well as a non-cash gain of $239 million relating to the hedges on raw material purchases. In addition, the Company made payments under its VSS schemes, or voluntary separations schemes, it's true sale receivable program and other payables.

In terms of capital expenditures, we spent $0.6 billion in the quarter as compared to $0.9 billion in the previous quarter and would expect a similar performance of $0.6 billion in the third quarter. During the second quarter we also distributed $234 million to the minority shareholders in our subsidiary in South Africa by way of a share buyback. This transaction did not change the Company's percentage ownership of the subsidiary, as it was a prorated return on capital.

Dividends paid during the quarter were $352 million, including $262 million to ArcelorMittal shareholders and $90 million to noncontrolling minority shareholders and (inaudible).

In terms of the balance sheet, during the quarter our net debt reduced by $3.8 billion to $22.9 billion, which is very close to our $10 billion net debt reduction from third quarter '08 levels. Apart from the $3.2 billion capital raise, there are a number of non-operational factors which affected the net debt.

There are three factors which I just want to highlight. The first was $324 million of cash outflow to minority shareholders. This is the South Africa and the $90 million dividend I discussed earlier. Secondly, our debt on the balance sheet increased by $452 million due to the depreciation of the dollar, as we still have about 26% of net debt in euros. So that's an increase of debt due to the euro/dollar movement. And we also reduced our net debt due to the convertible debt portion of the option is not considered as debt but as a liability, and that is $597 million, and this is due to IFRS.

In total, these discrete factors add about $200 million of debt, and we had free cash flow of $1.1 billion, dividends of $300 million. And as a result, were reduced our net debt due to all of these factors by $600 million plus the $3.2 billion capital raise.

This allowed us to reduce our gearing from 48% to 37% and our net debt/EBITDA ratio climbed in spite of the net debt decrease, due to lower EBITDA on a last-12-months basis.

Let me now talk about some of the capital-raising activities that we have done and the implications. In addition to the equity capital raised and our net debt reduction, we also took a number of proactive measures aimed at maintaining a favorable credit profile as well as an investment-grade rating through the cycle. This included managing the Company's debt through extensive debt and equity-linked capital markets, transactions totaling $8.2 billion plus, of course, the capital increase which we mentioned earlier.

Given the very strong liquidity position of the Company, we are in July voluntarily prepaying $3.4 billion of debt as well as canceling $3.2 billion of lines. The $3.4 billion of debt that we are prepaying consists of the November '09 and May 2010 term loan installment. This, of course, has no real impact on liquidity, given that this debt as well as lines mature in the next 18 months.

The end result of all of these actions is a significant reduction in our refinancing requirements in '09 and '010 and an improvement in the debt maturity profile of the Company to 3.8 years from 2.6 years in September 2008. We have also amended our covenant to 4.5 times net debt to EBITDA for December '09, four times for June '010 and reverting back to 3.5 times for December '010. This was important to do from a risk management perspective, as we still operate in a volatile environment.

In terms of liquidity, I just wanted to provide a few more details. The Company had liquidity of $22.7 billion at June 30, 2009. And after the cancellation of facilities and prepayment of debt, we have pro forma liquidity of $16.1 billion. Out of this $16.1 billion, $12.2 billion are bank lines and less than 15% of these bank lines mature before 2012, and none of them are drawn.

In terms of debt maturities due in the third quarter, we have $2 billion of commercial paper which we expect to roll over and $0.8 billion of other short-term debt, of which a large portion represents overdraft accounts, and therefore we would expect to roll over as well. Overall, our liquidity exceeds the next three years debt repayment schedule of ArcelorMittal.

Clearly, the nearly $10 billion net debt reduction, significant extension of average maturity profile and dramatic increase in liquidity demonstrate the progress the Company has made in its financial strength since September 2008.

Lastly, we continued to maintain significant focus on working capital. As a result, we have succeeded to release $2.4 billion of working capital in the second quarter and have improved our rotation days to 98 days compared to significantly higher days in Q1. We are still focused on achieving our rotation days target between 75 to 85 days. However, as the business volume picks up, there may not be a significant release of cash working capital, even though the efficiency working capital may improve.

With that, that concludes the financial overview. With that, I will request Michelle to talk about Flat Carbon Europe.

Thank you, and it is good morning/good afternoon to everyone. So I'll start the segment review by reporting about what has happened in Flat Carbon Europe, and I start with safety. Safety had been quite satisfactory in the sense that our severity rate has remained unchanged at -- the frequency rate has been unchanged at 1.5, and the severity rate also has been stable at quite a low level. But that remains -- safety, as Mr. Mittal has recalled, it remains our top priority.

Moving onto operations, first of all, in terms of production we have reduced our production in the second quarter by 11% in order to reduce our inventory. But on the contrary, steel shipments have gone up slightly too, from 4.8 million to almost 5 million tonnes, which is an increase of 3%. This is mainly due to higher sales in the automotive segment compared to the first quarter, which was particularly low and which more than compensate a slight loss in industry sales.

The percentage of our long-term contracts in our mix remained stable at approximately 45% for the segment as a whole. And as I have stated already, crude steel production was significantly lower than shipments at 4.1 million tonnes, and from that we made considerable progress in our efforts of internal stocking, thus moving much closer where production will correspond to real demand.

The average steel selling price has come down from $838 per ton in Q1 to $797 in Q2. This is due to a significant drop in spot pricing of our current business, mainly hot-rolled coils, while average plate prices have actually increased as specialty plates become more predominant in our product mix and continue to generate good margins. Average contract pricing has dropped slightly due to the negotiations of contracts starting in April and anticipating some of the decrease of costs of our raw material bases. Spot prices have been particularly under pressures in regions sensitive to aggressive import offers from CIS countries until May, so I'm speaking particularly about Eastern Europe as well as export orders which have been taken at some low prices.

Looking now at profitability, our EBITDA in the second quarter was $517 million, which corresponds to a 12% increase compared to the first quarter of 2009. This increase was mainly driven by an improving cost situation as raw material inventory was replenished at lower prices and the returns of our -- the results of our ambitious fixed cost savings programs and the adaptation of our industrial footprint to demand continued to bear fruit. We were thus able to slightly improved profitability to $104 of EBITDA per tonne.

Following on from the efforts made in the first quarter, Flat Carbon Europe has continued to progress by reducing inventories and reducing over $1 billion of cash in the second quarter following, by the way, a similar movement in Q1. Also in Europe, sentiment prevails that there is no fundamental improvement in real demand. The end of destocking is expected to bring about a technical recovery in apparent demand for industry products. The automotive segment continues to benefit from scrapping incentives in several European countries. Pricing is improving throughout Europe as all players have now adapted supply to demand. Flat Carbon Europe will continue to increase profitability by improving its cost structure as fixed cost savings programs continue to yield further results and as the last remnants of high-cost raw materials [consume].

On the other hand, the reopening of the blast furnaces we have announced in Europe helps us to increase production, and thus will also continue, will be a contribution to reduce costs. And this is, in particular, now true as inventory situation has been released. And from that point of view we are moving, I would say, in the right direction despite the fact that in Europe Q3 is -- many of our customers are on holidays in Q3.

Turning now to steel solutions and services, I start again with safety, and I can tell you that I am not happy because our frequency rate has increased and has deteriorated. And on top of that, we had unfortunately to -- have fatality in a small entity in ArcelorMittal construction in Sweden in May. This means that we need to make further progress there and to move forward, because this deterioration is not acceptable.

Moving onto operations, I have reported that steel shipments in quarter two are 4.5 million tonnes, which is 670,000 tonnes or 17% above the first quarter of 2009. As was the case last quarter, this increase is mainly due to higher shipments of ArcelorMittal international, mainly on behalf of AACIS mills, but also from some European Mills, and -- as we continue to take opportunities in the export markets.

For domestic activities excluding ArcelorMittal international, steel shipments in quarter two increased by 200,000 tonnes or 8% versus previous quarter, impacted by a slight recovery in apparent demand, which is, I think, a positive signal. Steel selling prices decreased to reach $717 per tonne in the second quarter, corresponding to a reduction of $114 or 14% compared to the previous quarter. Expressed in euros, and excluding AMI -- that means the export business -- prices decreased to reach a EUR686 per tonne, in line with the overall reduction of 14% versus quarter one.

EBITDA unfortunately decreased from a loss of $19 million in quarter one to a loss of $116 million in the second quarter of the year, thus having disappointing results. This decrease is, nevertheless, due to the deterioration of gross margins impacted by windfall losses following the decrease in steel prices. In fact, due to our inventories, the decrease of our cost of goods sold according to weighted average valuation was lower than the decline in selling prices, leading to lower of, in this case, negative margins. And the destocking effect will have, for the future, more positive impact. Steel Solutions and Services continued to focus very shortly on cash flow in this past quarter, mainly by reducing inventory and limiting capital expenditure to the bare necessities.

In terms of guidance for the third quarter, recovery in the steel service activity for the automotive sector is expected to continue positively, whereas construction and general industry will remain slow with some increase in spot demands due to lack of stock. Flat prices are increasing due to the rising prices from suppliers, and long product prices are expected to stabilize. On top of that, we will have some seasonal slowness of activities as many customers of AMDS closed for holidays.

I hand now over to Gonzalo to report on Long and on Stainless segments.

Thank you very much, Michel. Good morning and good afternoon to all. As always, I will start with Long and with safety.

First, I have to report, sadly, a fatal accident in the mine of [Tevesa] in Algeria due to a collapse in a gallery. On the other hand, I have to tell you that in this journey to zero accidents, we are making progress.

For the second quarter, our frequency rate was 1.9 versus 3.6 one year ago, so that is an enormous progress.

On the other hand, on severity rate, we had 0.14 versus 0.17 one year ago. We continue to work very hard on safety by trainings, by action plans, plant by plant, by audit and involving absolutely all our employees.

In terms of production, we've produced 4.9 million tonnes, in round figures, in Q2, which is approximately 23% more than the previous quarter. Now, in terms of capacity utilization, we have produced at 60%. The previous quarter, if you remember, was 50%. But I have to tell you, there's a big difference between Europe and the Americas. In the Americas, it was 73%, and in Europe it was 52% of our capacity utilization.

Now, as we can see here in terms of shipments, we are 19% up. Why? Clearly, we have seen, as was said before by Mr. Mittal and the rest of my colleagues, destocking effect. Reduced [either] apparent demand and real demand are leveling out, and additionally we have sold more billets in South America.

In terms of prices, you see a very important decrease or deterioration of our prices. Why? On the one hand, as I said before, it's a question of mix. We've sold 400,000 billets instead of 200,000 in the previous quarter. But additionally to that, and especially in Europe, we've had a deterioration in prices. Why? Because in the first quarter we will still have the rents of the dividends of prices that had been closed in the fourth quarter, so we've seen the full impact of decrease in prices. We've seen it in Q2, and that is around EUR80 lower than the first quarter.

Now just a word on raw materials, especially as far as scrap. Scrap has continued to decrease. In the Americas it reached a low level of $170 even though, as you know, it has increased by the end of the quarter and now we've seen prices between $250 and even, in some qualities, close to $300. And the same for Europe; we saw a decline to between $150 and $164 for beginning of the quarter, and it has increased by the end of the quarter, and now it's approximately -- depends geographically where -- but around $180; that's approximately the price of scrap.

And in terms of EBITDA, it's plus 22%. Why? Because you've seen just before that we've had an important decrease on prices, but we have been able to offset this due a twofold reason. On the one hand was the increase in production and shipments, and the other hand the slight decrease of raw materials.

Now we've remained very focused, as always, on cash by controlling our CapEx and also our working capital.

Last, in terms of guidance, we do foresee a technical recovery. Why? Inventories are lower, on one hand. We do think we'll see volumes that will be maintained, if not improved, even though in Europe and partly North America we'll see the seasonal effect of the month of August, and in terms of prices, we'll see increase in prices basically due to a twofold reason. On one hand, we believe that the scrap has increased, and many of our prices are based on scrap. We'll have to -- those prices will be increased. And on the other hand, we will do our best effort to improve and recuperate part of the margin over scrap that we have lost.

Next is stainless steel. I have the pleasure to report, as Mr. Mittal said, a good or a very good safety result. In our [known] personnel, the frequency rate was 0.4, and one year ago it was 2.28. And in terms of subcontractors, we've had no lost time incident in Q2, and we believe that is an excellent result, especially in these difficult times of stop-and-go mode.

Now, in terms of production, we have produced 387,000 tonnes, which is 22% more. Where is that coming? One third in Brazil, in round figures; two thirds in Europe. Now, [mineshaft] capacity utilization -- it has been 57% in Q2 versus 47% in Q1. Once more, we have to do the difference here between Europe and Brazil. In Europe it was 50%, and in Brazil we were at 75%.

Now, shipments plus 15%, but it's better in Q2. But if we compare it to last year, we are still 37% lower than what it was last year.

Now, in terms of prices, I do want to say that we do see a decrease in the average selling price. But as you know, we have the two components; it's the base price and the alloy surcharge. So on one hand, in the alloy surcharge we have seen a decrease. Even though nickel has increased, chromium did decrease. So that had a negative impact. But what's important in terms of base price, as Mr. Mittal said, we have seen this base price increase around EUR250, which has been very important.

Now, how do we see the European market? Clearly, we see that there has been a lot of destocking taking place. Imports are not very high, around 10% to 11%. And clearly, these increases of nickel, we have just seen yesterday practically closed at $17,000. We'll also push our customers to buy.

In terms of Brazil, the domestic market was something weaker, and we have been exporting.

I already spoke of nickel and the increase we've seen in Q1, Q2 and, as I said, as of yesterday. EBITDA at $17 million, and Europe with a negative result and has been compensated by Brazil. We continue high focus on cost reduction and cash generation; that is, variablizing as well on our fixed cost and in terms of cash generation, controlling our investments and our working capital.

In terms of guidance, we do believe that there will be some reconstitution of stock. Because of the distribution and service center levels, the stock is low. This, clearly, will increase demand and improve our capacity utilization, we believe. And also, we still believe there's some room to improve our base price.

Thank you very much. And, Christophe, floor is yours.

Thank you very much, Gonzalo. I'll start by (technical difficulty) safety. We continued to put a lot of our effort and attention to safety in that segment, with, overall, a quite good result. Our [occupancy] rate was 0.7, so better than group average, compared to 1.1, one year ago.

And just to give you an example, our Italian plant, which is quite a big operation with more than 40,000 people, reached one year without any fatality, which is quite good.

Nevertheless, I regret to report that we had three fatalities in our coal mine end of June, due to a gas outburst. This is both a negative and positive incident -- of course, negative because it's three fatalities. And it shows that we do not master completely the gas issue in this coal mine. But nevertheless, there was no exposure, and all the safety device like (inaudible) supply, ordering a [revocation] of people, more worked very well. So I think we are on good track for safety now in Kazakhstan, and we continue to spend quite a lot of money in this safety program, which remains a priority.

Moving to performance, we have shipped 5% more in Q2 than Q1, but we have to remember that Q4 '08 was just slightly above 2 million, which means that we are ramping up production in line with market demand. So we had much better market demand in CIS. Our Kazakh unit had very good demand from China. This unit is close to the west part of China, where you have [Urumqui tone] very well known since some weeks. Nevertheless, in spite of this Urumqui troubles, the steel markets there remain quiet stable.

If I stay on commercial (inaudible) advantage of a quite good demand in Middle Eastern, markets like Egypt, Saudi Arabia, Iraq, etc. In South Africa, the domestic demand was a bit lower because South Africa is more a mature economy. But we see now a lot of sign of a recovery and of destocking of [optimism] and we think that the domestic market will be much better in Q3.

We continued to cut cost as much as possible, but we have launched a (inaudible) separation scheme program in Ukraine and Kazakhstan that has been quite successful and that will be continued until the end of the year. We try also in CIS to be self-sufficient; that is, to use completely our own ore and our coal, which had been or a very good policy from a cost point of view. Probably, we are going to put some adaptation to that policy because this policy is quite effective from a cost point of view, but does not allow us to run the maximum production of unit. And now we are going to start to buy some ore and coal outside, to follow market demand.

In terms of forecast, we think that Q3 will continue to increase productions. We have restarted our very big blast furnace, [BF-9] in (inaudible) end of June. We will start the last unused blast furnace in South Africa beginning of September. In the interim, (inaudible) we'll ramp up (inaudible).

We expect, in terms of guidance an EBITDA similar in Q3 to the one of Q2, which was quite above Q1 with $273 million.

So I give the floor to Aditya.

Thank you. Turning to Flat Carbon America, I wanted to, first of all, comment on our safety performance, which improved in the quarter. Our frequency rate dropped from 1.9 to 1.46, and in our Canadian operations at Dofasco we had no LTI for 135 days, no injury for 135 days, which is a record. However, in the third quarter, at the beginning of the quarter, actually last weekend, we had a fatality in our Indiana Harbor East operation, which is very tragic. And we are all focused on understanding the exact causes, and we are extremely diligent in trying to ensure that such an incident doesn't happen again. So that is an extremely bad start for the year, actually, because we've had no fatalities. And clearly, the whole management team is focused on that issue.

In terms of the overall environment, the overall environment in North America, as you heard earlier, is improving. Restocking has begun. There have been price increases. Inventory days in Flat Rolled is at 2.1 months. Overall in North America it's at 2.4 months, [as long as higher]. In Brazil we've had -- we are seeing a dramatic increase in levels of shipments. Q1 to Q2 we have a 25% increase in domestic shipments.

In the third quarter we are now operating -- we have two furnaces available at 100% capacity. The third one is going in for repair work and won't be ready in the first quarter of '010. We're also ramping up our new expansion to our hot strip mill, which was completed on July 11, and we should have a full ramp-up by 2010.

So we're seeing a real demand pickup and then, clearly, very strong prospects in Brazil. Our slab business is also looking very strong, especially in the fourth quarter. And I believe it's pointing to a global stability in the global steel industry because that's a very strong and important lead indicator.

In terms of our operating results, as you can see, our shipments are down by 4%. This was primarily due to North America, offset by improved shipments in Brazil. Prices are down 11%, yet we had good cost performance, primarily in fixed costs as well as raw materials. So, our EBITDA increased to $176 million.

In terms of our guidance, clearly the third quarter we will have improved results. But average prices -- as volumes will be higher, but average prices will be lower at [STA], primarily due to index contracts, automotive contracts and the lag effects generally on spot price increases.

With that we conclude our segment performance. I just want to provide some color on ArcelorMittal guidance. In terms of guidance, for the third quarter, on slide [22], in terms of guidance for the third quarter, despite our seasonal effect, we are expecting our volumes to increase. However, our average steel prices should be stable to slightly down, and this is primarily as a result of what I mentioned earlier at FCA, that spot prices are rising but in some products it's still lagging. Contract prices have been revised down, as they were linked to the benchmark of iron ore and coal. And as iron ore and coal have come down, so have automotive spot contracts.

I think we're still on the wrong slide. Can we move to slide 31? Sorry; I said 22, so that's the confusion.

And also, we have quarterly indexed contracts which have a quarter lag. And therefore, we would expect full price recovery to be seen in the fourth quarter. Our own material costs are expected to be lower, and we should benefit from further management gains, but some fixed costs are expected to come back as we restart some steel facilities.

Overall, we expect our third-quarter EBITDA to see an improvement from Q2 to approximately $1.4 billion to $1.8 billion.

To conclude the key highlights of the quarter, we have reduced costs by about $10.1 billion and adjusted our capacity accordingly. We have raised $11.4 billion of capital, and we are now seeing a slow and progressive recovery in the global steel industry. Thank you.

We would now like to open the floor to your questions. Thank you.

(Operator instructions) Andrew Snowdowne, UBS.

A couple of questions to clarify some of the numbers, if I may. First one, in the cash flow statement one line is saying other operating activities. I wonder if you could give us more of a feel, that $809 million charge, how it's made up?

Maybe I'll just ask a series of questions, and then we can go through this. Another one -- I wonder if you could give us some more color in terms of net debt targets by the end of this year as well as net working capital. You did suggest that you're not likely to see a significant further reduction in net working capital in terms of cash delivered. Maybe some more color on that?

And then also Flat Carbon Europe -- am I right in understanding that the $239 million currency hedge benefits, or raw material currency hedge benefits, is attributed primarily to that division, or is it split among some of the other divisions?

And then maybe also a bit more color in terms of the covenant renegotiations or new covenant terms, in terms of the fees involved and also the borrowing charge increase, should you reach the 3.5 times net debt to EBITDA.

And then a very final question -- sorry; it's a long list -- I wondered if you could give us some more color in terms of the news that's been in the press recently regarding plans with Stainless and also may be splitting up the mining division with the new corporate structure.

So let's try and go through the list, and then perhaps other members of the GMB can answer the other questions that you've raised.

In terms of your first question, in terms of cash from other operating activities, there's a good disclosure in the liquidity and capital resources, but there are two aspects which cancel each other out. We have here the reversal of the gains on the raw material hedge, which is 239, and we have the add-back of the non-cash charge of the convertible option of 357.

Apart from that, there are three key factors. The first is payments under our voluntary severance agreement. We paid out VSS charges, which we had accounted for in the fourth quarter. We reduced our true sale receivable program, and we also had paid out 2008 bonuses [or] salaries to our employees. And we had higher payments of interest rates. We accrued interest payments in Q1, and we paid out higher interest in Q2, as we have made payment.

So these amounts are, respectively, to 221 for VSS, 211 for TSR, 277 for employee salaries and bonuses and interest payments of 177.

In terms of your second question on net debt to year end and net working capital, it's difficult to predict. I think, clearly, net working capital should reduce, i.e., release cash in the third quarter. It depends quite a lot on how the recovery shapes up and our expectations of Q1 2010 and Q2 2010 shipment expectations. So, you are right that there is a distinct possibility that we will be investing in net working capital, so it may actually create a cash drain. And therefore, there may not be a significant reduction in net debt to the levels that we have today.

In terms of EBITDA, it's (inaudible) the 239 million (inaudible) dynamic delta hedge is in the Flat Carbon Europe EBITDA for the second quarter. And as a result, even though the operating performance improves you would have lower EBITDA or potentially the same EBITDA in the third quarter, depending on how that segment does.

In terms of the borrowing charge on covenants, I would call -- first of all, the added interest rate is only payable for the duration. We have crossed the 3.5 times net debt to EBITDA threshold. So it's not a permanent change to the facilities. We have about $5 billion of bank debt that applies to $5 billion of debt, roughly. And I think these are relationship interest rates in the sense that they are not onerous on the Company and they are based on our ratings, primarily. So it depends on the ratings that we will have at that point in time and are based on that.

I don't know if --

On the mining, that is, mining business continued to be integral part of our steel business. There has been some misunderstanding on the new organization. There is no new structure being planned for the mining business. They continue to operate as they are. Now we have -- we believe that mining business is important, strategically important, for the Company. We have always believed it. We have strengthened the management, we've gotten the new management team headed by Peter Kukielski. So we have only strengthened our mining team, and they will continue to play important roles. There is no discussion or question on the separate corporate structure.

Just one quick one on Stainless Steel, if possible?

Our strategy has not changed, is what we've been saying in the previous quarters. That is, we believe that in Europe, Stainless needs consolidation, and we would like to be part of that consolidation. So that's on one hand. On the second hand, we continue to improve our cost in Stainless, our performance and also pushing our prices up, as I said before. Thank you.

Michael Shillaker, Credit Suisse.

I guess a lot of my questions actually have already been answered, but just going back to the issue on debt into year end, I'm just trying to understand how much headroom you have for your renegotiated covenants. If you didn't throw off working capital last quarter, you would have actually been in cash drain. So assuming that, into the year end, and assuming that demand is somewhat better, in 2010 you will be building net working capital between now and year end. But there will be a lag in A, the numbers; but, B, the cash realization in that coming through, given receivable days and similar.

What is the chance that net debt is significantly higher at the year end than it is as of today?

I think the key word in your question is significantly higher. I do not expect it to be significantly higher. It could be higher because there will also be cash earnings in the second half. And we have run some simulation analysis as to how quickly the demand can pick up and how much we would have to invest in working capital. And there could be a change to the net debt level; it could be higher, but not significantly higher.

And as we go forward in 2010, we could have an environment in the first half where there would be some drain on the free cash flow as we build up working capital. But when we look at our internal estimates, we would expect in the second quarter we would recover most of that. So on a free cash flow basis, we should still remain positive, so therefore, net debt reduction would continue in 2010. We, at this point in time, have not outlined plans for CapEx. But I do not expect that CapEx would fundamentally increase in 2010. So, therefore, not a deleveraging story, but the ability to apply cash to reduce net debt continues and is valid for the next few quarters.

One other quick follow-up question on another subject. Q3, your guidance -- obviously, it must be quite difficult to give volume guidance, given that we're heading into the summer period. Although your volumes are higher, which is unusual for Q3, what extent have you built in a cushion on those volumes, to the extent that you are expecting a holiday disruption July and August?

I guess the question is, to what extent do you think that guidance actually could be relatively cautious?

I think our advantage is based on -- the information is what we have from our sales and marketing team. We seem to be -- I think this is a more realistic forecast for our volume for the third quarter. We have kept in mind seasonal factor also, and we are also seeing the increase in the demand in the last few weeks.

(technical difficulty) (Operator instructions) Ephrem Ravi.

Ephrem Ravi from Morgan Stanley. Sorry; I think there was a breakup in the line. Just one question, maybe I've missed the last part of it. In terms of the volume guidance, it apparently kind of looks conservative. And I think you said that it's a more realistic number. But in terms of capacity utilization, that would still leave you probably well below what the market is expecting, which is probably closer to 65% to 70% capacity utilization in the West by the end of Q3.

So do you have a targeted capacity utilization exit rate by Q4? And related to that, when would you start bringing back your temporary fixed cost reduction numbers and, i.e., not [hot idle], you know, the blast furnaces, and then bring that back? And how would that impact your cost base?

I think you're right in some sense, that our capacity utilization will not be that high in Q2; we are not seeing that in Europe and in North America at this point in time. We are seeing higher capacity utilization in places like Brazil and in AACIS, where available capacity that we have is -- or low-cost capacity is relatively at very high levels of utilization, and increases in those capacities would take a few months to actually transpire.

For example, in Brazil I talked about how we need to complete a repair on a blast furnace that we have and that will be available only in the first quarter of '010. In developed markets, in Europe and in the United States, we continue to restart furnaces. We have announced three restarts in Europe, and we have announced two restarts in America. We continue to watch how the demand environment picks up. I think it is clear in Europe that the destocking has ended, so the real demand is matching apparent demand. But we have not seen [enough] evidence of a restocking or a real demand picking up.

In America, in the US, I would argue that the restocking has started, and therefore the price increases in America have also been more significant.

So clearly, our main point or message in this call is that from what we are seeing today, the recovery is underway, but we would expect it to be slow and progressive. And therefore, that reflects our third-quarter guidance on volumes. That reflects that our capacity utilization in the third quarter moves from 50% to more like 55% to 60% versus the higher numbers that you are predicting.

I'm not saying that that may not be the case in the fourth quarter. If there's a very strong recovery, clearly, we will be responsive as a Company. But at this point in time, that's the visibility that we have.

Thank you; just one follow-up question. In terms of the stainless steel market, are you seeing a stronger restocking-led demand pull compared to the carbon steel market? Or, is it all focused on the lower order of magnitude?

Well, I think we should divide it. In Stainless Steel, we are seeing strong -- I think inventories were and stocks were low in the distribution and steel service centers, so we have seen a stronger, let's say, reconstitution of stock. Stronger, I would say, it started earlier. But also, the crisis started earlier; the decreases also started earlier. And in carbon steel I would divide between Long and Flat, and I do think the destocking in Long has gone further than what has gone in Flat.

Vincent Lepine, Exane BNP Paribas.

I had quite a few questions on cost, please. The first one is, how much of the drop in raw material costs have you already captured in H1 [just including] Q2 after you had written down some inventories earlier this year, and also in Q4 last year?

Second question is, on this temporary fixed cost cutting that you've done, if we were to assume that shipments or cold steel production was to be stable in Q3 versus Q2 -- and again, this is all theoretical -- would there be any additional potential for additional fixed cost cutting, i.e., the $10 billion annualized that you had in Q2 -- could that move higher in Q3 if production was to be kept stable?

Out of that so-called temporary fixed cost-cutting, you had mentioned that some of it could be, or could become permanent. And I was wondering whether you could reiterate how much could, indeed, become permanent.

And also, the so-called management gains of $5 billion, now $2 billion of that is SG&A. The remaining $3 billion -- would that be coming on top of the share of temporary cost-cutting that would be permanent? So I hope the question is clear. So $3 billion on top of the SG&A of $2 billion, which I think is the case, but also on top of the temporary/permanent fixed cost cutting.

And lastly, on these impacts of this delta hedge on raw materials, I think earlier this year you had guided for full year impacts of just under $800 million. A big part of that has already been realized in the first half, as you didn't have many volumes. So are you sticking to the earlier guidance of the full year, or is this being revised?

In terms of the dynamic delta hedge, we are sticking to our earlier guidance. We will not expect significant changes in the third quarter; there may be some in the fourth quarter.

In terms of the cost reductions, just on a macro basis so that we are all on the same page, the sustainable cost reduction that we have achieved is part of the $5 billion. And we have achieved $1.7 billion, and our expectation is to achieve $2 billion, up to $2 billion of that, in 2009. And the rest we will achieve over time. The idea was to do that over four to five years. And originally, in '09, we wanted to achieve $1 billion, and we accelerated that to $2 billion dollars.

So that plan is ongoing. That's a sustainable cost saving, and over the next few years, ArcelorMittal will take out $5 billion of sustainable costs.

In terms of our temporary fixed costs, as we ramp up capacity, I would expect each million tonne of capacity creates roughly 250 million to 300 million tonnes; $200 million-[$250 million] of additional fixed costs, roughly. And on that basis you can make an estimate on how much is sustainable. The non-sustainable fixed costs, the temporary fixed cost reduction, would reduce in the second half. There's another element in there, which is the foreign exchange, which can swing wildly. It was about $1.8 billion in Q2. That can change quite dramatically. But the 6.6, which is on a constant dollar basis, would change based on the increase in production capacity by around that magnitude. It could be slightly less, maybe the $200 million or $250 million is a high number. But I would guess that that's what it is.

In terms of raw material cost reduction, in Q2 to Q3, we expect further raw material cost reduction. In the first half, our raw material costs have been written down based on IFRS rules to our selling prices, which remain higher than what we have negotiated in our benchmark. So we should see positive impact of that in our Flat Carbon Europe results in 3Q.

Jeff Largey, JP Morgan.

It seems like the recent sheet and strip price hikes were accepted pretty easily by your customers, particularly in the States. And as this restocking is expected to last, say, two to three quarters, I'm just curious as to what the scope is for additional price hikes, maybe particularly in Europe after the summer slowdown. And to the extent that we see hikes later this year, should we expect that there will be a lag effect as well so that any further hikes really are more beneficial for, say, the beginning of 2010?

And then the second question I have is, I think your Company is showing some real discipline in terms of ramping up capacity. And I think there's a lot of concern in the industry about -- or, say, among investors about this being a volume-led recovery as opposed to a price-led recovery. And I think it seems like you are focused on this being more of a price-led recovery.

Would you say that the industry in general, particularly in Europe and the US, is also following that mantra, or do you have concerns about some competitors maybe running at higher utilization rates while you take the burden for the industry and run at more reduced rates?

I think these -- I do not know what competition's behavior is, but ArcelorMittal is very clear that we are in (technical difficulty) [liberal] dialogue with our customers and clients, and we see the demand between the inventory levels, and we look at the potential to increase price. And these prices which we have announced recently, based on our own intelligence, market intelligence, market information, cost from the customers and customers' off-take to the end market. And we think that these prices which we have announced, if we are able to achieve it, but we think that we need to automate the list to increase prices more in the future to generate enough --more EBITDA for the Company and the shareholders.

And second question, on this -- what was the second question? (multiple speakers)

It was a ramp-up of capacities priced (multiple speakers)

In our case, it is clearly -- we are [falling] for a price versus volume, and ArcelorMittal will continue to pursue that strategy.

So just in terms of the first answer there, it sounds like it's more likely than not that we'll start to see additional price hikes, say, in the next few months.

I think you're absolutely right, because what we observe on the markets, first of all we see, is that price is firming up everywhere in the world. Export prices have gone up. We see also that price differences which existed, for example, in Europe between southern Europe and northern Europe, or eastern Europe, was shrinking, and you see -- on top of that, you have seen this increased demand, which was, indeed, as you have stated it, that the price increase we announced was really, clearly, easily achievable because for the customer this was a necessity, and the market very well saw what is going on.

So now we are, today, and base prices in which is at this certain level. My personal opinion is that this trend will continue as market demand continues to be strong. And, I definitely believe that the next step for hard-rolled cold prices would be around $600, but on converging in different regions in the world, including in Europe, which would make [need indeed] to have another price rise for September, where we have not opened yet the sales, and then for Q4.

Alexander Weinberg, Petercam.

Maybe regarding, assuming in 2010 that the recovery momentum continues and that -- well, cash flow, including working capital, start to turn more positive, could we assume some increase in gross CapEx, or -- as I understood? Or rather, as I understood, CapEx would remain at the relatively low level, which means you would rather like to reduce the net debt?

Secondly, maybe -- well, just that there were a few announcements in recent months of projects cancellation, like Russia or Senegal, for instance, could you maybe, again, emphasize what you consider as medium-term strategic projects?

And maybe thirdly, could you update us on the financing conditions, like regarding working capital in the industry currently?

Okay, I didn't really understand your last question. But, is the question regarding whether our customers can finance increased payables and stuff like that?

Yes -- well, also looking at regarding production. You pointed out a few months ago, in fact, that the working capital financing difficulties were making it difficult to increase production. So I was wondering if, will some of the re-launch we are seeing are made easier also by some improvement in the financing of working capital conditions.

Okay. Yes, no, I didn't mean for you to understand that. All I was suggesting is that we may end up investing more money in working capital in the fourth quarter, and as a result our net debt would potentially go up. And that -- there is no difficulty in financing the working capital.

The other comment I made was that I would expect that trend, if it begins strongly, to continue in the first half of 2010. But in the second half of '010, we would then generate earnings. I mean, we'll generate earnings the whole of '010, but then they need to (inaudible) the other way and we would still be cash positive for the year.

So that was just on working capital, that there is a temporary cash drain. But, clearly, we get an excellent return on it.

In terms of the growth CapEx and net debt, I think we are having a detailed investor day in September and we can talk about a strategy and go through all of these projects. But fundamentally, we still want to grow in the emerging markets, and we want to grow our mining business. And we will talk about that when we meet in September.

The second point I would like to make is, even if we decide to start growing now, by the time we actually sign the contracts and incur the CapEx, you won't have that much of a significant increase in CapEx for '010. So there is always a delay as to when you spend the money.

And, thirdly, as 60% of our business is still in the developed world and we are not intending to spend much CapEx dollars, our overall CapEx would be smaller. So we could still do growth CapEx and still reduce net debt in 2010, is my view, without knowing enough about how '010 will shape up. But I would expect us to be able to achieve both those objectives.

Okay, thank you.

In Senegal, we have only put the Russian project on hold, and our Senegal project is not canceled; it is making progress. Very recently, we had meetings with the government officials, and we are discussing what is the progress. We have discussed the progress, so we will continue to work on Senegal project. Mining is very important to ArcelorMittal.

Luc Pez, Oddo Securities.

Quick questions, actually, on your contract business. I'm not sure I particularly got your outlook statement there. And basically it was just wanting perhaps to have a bit of color with regards to what is the actual share of your contract mix, which has been (inaudible) a raw material surcharge last year, either in the US and Europe.

I can start with Europe. So in Europe, we have today roughly 45% of our shipments which represent contracts. Contract pricing is different from one situation to the other. Some, as you mentioned very well, is indexed to raw material prices, and then there is a decrease in prices, some of them starting at the end of Q1, so beginning of Q2; and other ones where indexation starts in July 1. And from other type of contracts, we have changed the duration from year end to end of first quarter or second quarter, and there we have had some negotiations precisely taking into account the new forward-looking cost situation, the mills we are encountering in. From -- technically this then has, as a consequence, set average price for contract is going down, despite the fact that margins remain very satisfactory.

In the US, the answer is quite simple. We don't really have any automotive contract which is connected to raw materials. We negotiate them as they expire. In the United States we have automotive contracts which keep on expiring every quarter, so it's a continuous negotiation, and we have a smoothing effect. The only contracts in the United States which had price reopeners were tin, which also existed in Europe, I understand. And there, there was some price down, and that's reflected in the third quarter. Plus, we had a few contracts of large customers which expired in June '09 which were negotiated in June '08. So they were at significantly higher prices, and those obviously had a price down into the third quarter and beyond.

Now, in terms of the overall average prices for ArcelorMittal, I know there is some confusion here. But fundamentally, it's just a lag effect, apart from the contract business. Contract business is not that significant for ArcelorMittal. The lag effect is that, when we announce price increases, by the time the orders are put in and shipped out, it's to the latter half of the quarter. And when we started the second quarter, we still had higher prices in March-April. And then, by the time you had May-June, you had lower prices.

So it's literally just the bottom of the cycle which we straddle between the second and the third quarter, in some aspects. And our average spot prices, as well as we have index contracts in which we fix a price at the beginning of the quarter, based on the previous quarter's prices. And so there's a quarterly lag.

So those are the impacts that you see on an income statement level, and that is why average prices are down in Q3 over Q2, or should be stable, I would (technical difficulty) average to down.

Q4 -- obviously, the prices would come back and we would have the lag effect reduced, and that would continue onto first quarter '010.

So that's really what's going on. So it's an income statement, order booking and type of contract issue versus the fundamental steel industry. Fundamental steel industry prices have improved, and if we don't see that in the third quarter we will see it in the fourth quarter of our results.

David Martin, Deutsche Bank.

First, could you qualify any sales or profits from emission allowances in the second quarter?

We have not done any.

None? Okay. And then, secondly, could you give us a little color on the inventory charge in the second quarter, in the context of rising input or raw material costs later in the quarter? And, are we at the point now where it's pretty unlikely we'll see any more of these inventory charges?

Yes. In terms of the inventory write-down, it's not driven, really, by the input prices. It's driven by the selling prices, which were lower into third quarter, when we ended the second quarter, when we closed our books in the second quarter. Those prices still are, even after the write-down, remain higher than the benchmarks we have agreed. So we should see positive impact in the third quarter of reduced raw material charges. And, as we are in a price-up environment, I would expect zero charges on inventory in the third quarter.

Rochus Brauneiser, Kepler Capital Markets.

Maybe could you, again clarify the number of blast furnaces which are being brought back in the third quarter? I've seen some different numbers on that. So how many blast furnaces are being brought back in Europe during Q3, and how many in the US, and what is the number of running blast furnaces, then, at the end of the third quarter? That's the first question.

And the second question -- can you give us some sense where you see the utilization rates in the later part of the year, in Q4? And, do you have already any sense on the volume level that you might see in the fourth quarter, knowing that the seasonality effects are gone and there should be a significant improvement? Can you give us any sense on that?

Okay, maybe first the question on blast furnaces in Europe. So in Europe, we have 25 blast furnaces. Out of these 25 blast furnaces, 11 were in operation in Q2, and we have announced three additional blast furnaces, one in Ghent, one in Asturias and the third one in France; that's right.

And technically, you have to understand that this has been announced now very recently, and it takes approximately one month's time before these blast furnaces produce pig iron. So that means that the earliest increase in production in Q3 will come mid of August, and (inaudible) these blast furnaces will produce from in the second half of August.

Now we are discussing whether we should reopen another blast furnace, and we will take a decision very soon. That could be in a medium-sized blast furnace. So we would, at that moment, produce with 15 blast furnaces out of 25 which exist in Europe.

In terms of North America, there are actually two blast furnaces which we'll be restarting at, Indiana Harbor. This is two small furnaces, number five and number six. But more importantly, we are increasing the production capacity of our largest furnace, which is number seven. So after these restarts of five and six, we will have three out of nine blast furnaces operating. We had an operating rate in North America, including Canada, of roughly 38%-39%, which is increasing quite dramatically to 50%, maybe even 55%, in the third quarter.

In terms of capacity utilization for fourth quarter, I think it's a bit premature to talk about it. Clearly, volume levels we expect to go up. However, fourth-quarter also is not the longest quarter in the year, and by the middle of December we feel that we'll lose a bit in terms of shipments. So really, the strongest quarters in the year are first and second. And then it's -- clearly, third is the lowest, but even fourth is not the strongest quarter, normally. So that's what I would just comment on seasonal factors.

Maybe on the CapEx again, so far it was reconfirmed that the CapEx for this year and for the next year will be around $3 billion. When I look at current run rates, you are somewhere between $2.6 billion and $2.8 billion. Is this indicating that you might fall below that level?

I think those are good questions. I think perhaps my comments are misunderstood in terms of '010. I should re-characterize them. I do not mean that CapEx will be similar to '09, but I do not expect a significant change. There was a time when ArcelorMittal was spending between $5 billion to $8 billion in CapEx annually. So I do not expect us to hit those levels.

In terms of 2009, you are right; our run rate is lower. It's 2.6 to 2.8. But we are examining where we can use our capital prudently now and try and see if we can accelerate some projects that we had -- not significant amounts, but maybe that gets us to the $3 billion compared to the run rate where we are today.

So that's what I would guide to, $3 billion, still, for '09. We are looking at some quick return projects of a couple hundred million dollars, etc., etc.

In 2010 it's premature to talk, but I would not expect a significant increase in the amount. Clearly, there will be some increase because of the reasons we had mentioned earlier.

Okay, great. Maybe finally, on your raw materials, could you elaborate a little bit in which parts of the world you are still working down high-cost inventory? And are there still significant amounts where you have not done the full write-down to current market prices?

We have -- as market prices are increasing in the third quarter, I do not expect us to have any further write-downs. However, we still have some inventory in the system which will continue in our business for the next six to -- maybe not six months, but for some time, which is higher price than the benchmark. So that impact will still exist. Some of it is contract-related, etc., and so that impact will continue. But I would not expect any write-downs as prices are improving.

And on the hedging gains, you recorded this EUR200 million in the second quarter. How much is now left for the third and the fourth quarter from this hedging -- reversal of hedging transactions?

From my quick math, not much. We don't expect much in the third quarter. I don't want to speculate too much on the fourth quarter. What I had highlighted is that we are not revising our guidance for the year. It depends a lot on how we are producing, how we bring back capacity, how we expect our raw material to be pooled. And based on that, we run a calculation. So right now, in the third quarter, we don't expect any more reversals on the raw material hedging.

That was the final question, so I will now hand the call back to your host to conclude today's conference.

Thank you for participating in our second quarter's conference call and looking forward to talk to you for the third quarter conference call. In the meantime, happy holidays. Thank you.

Thank you for attending today's conference. You may now replace your handsets.