ArcelorMittal SA (MT) 2010 Q1 法說會逐字稿

Dear analysts and investors, welcome to the Arcelor Mittal's first quarter results 2010. Please note that we will take a maximum of two questions per analyst and investor. If there is time left at the end of the call, we will be happy to take your additional questions. I will leave the floor now to Mr. Lakshmi Mittal, chairman and CEO of Arcelor. Please go ahead, sir.

Good morning and good afternoon to everyone and welcome to Arcelor Mittal's first quarter 2010 results. As usual, I'm joined by my GMB colleagues, Gonzalo Urquijo, Michel Wurth, Aditya Mittal, Christophe Cornier, Peter Kukielski, Davinder Chugh and so these naturally are on the telephone line.

Before I start today's presentation, let me give you a brief overview. Slowly but surely, economies are recovering. For the fourth consecutive quarter our shipments are progressing and we are anticipating a further increase in our volume for the second quarter. Yet we should remain cautious.

In the developed world, government deficits and unemployment are high, corporate investment is low, and the construction markets remain depressed. The Chinese economy once again has been stronger than anticipated due to strong fundamentals. But could slow down in second half due to government monetary tightening. Our order intake is growing, but overall we are still operating 20% below our nominal capacity.

At the same time, we are facing an unprecedented change in the raw material environment. As you know, new quarterly coal and iron ore contracts have been signed, which will lead to a significant increase in our cost, at least until the fourth quarter of this year. These increases will have to be passed on to our customers. With these more frequent pricing changes, we also need to review our long term contract pricing mechanism.

Now I move on to the agenda. On the -- during quarter one 2010, our health and safety frequency rate remained flat as compared to quarter four 2009. Our commitment to health and safety remains the top priority of the Group.

Our financial results for the first quarter 2010 included steel shipments of 21.5 million tons in Q1 2010, up 8% compared to fourth quarter 2009. Our average steel selling price is down 3% in 2010 compared to Q4 2009. And our EBITDA $1.9 billion in Q1 2010, in line with our guidance given. Net debt increased by $1.9 billion to US $20.7 billion in Q1 2010 due to increased investment in working capital market.

We increased our capacity utilization to 72%, up from 70% in Q4 '09. We achieved $2.9 billion of annualized sustainable cost reduction in Q1. And we have nearly met our 2010 target to achieve $3 billion of savings and are well on track to achieve $5 billion by 2012. Our CapEx plan remain focused on selective growth projects in the emerging markets. Our guidance for second quarter EBITDA is between $2.8 billion and $3.2 billion.

Giving more details on health and safety, total steel and mining [doing] health and safety performance based on our personal and contractors lost time and frequency rate remained flat at 1.9 for the first quarter 2010. Despite our focus on safety during the quarter, there are still improvements we can make. We are targeting a further reduction in the frequency rate for 2010.

In addition to health and safety, we have made progress with a number of other corporate responsibility initiatives, including support for the launch of the new initiative, Corporate Responsibility Forum in Liberia, for example. ArcelorMittal Ostrava to start construction of the new state-of-the-art sinter plant. Donation of $1 million for victims of Haiti earthquake.

We also -- ArcelorMittal also held its fourth annual Health and Safety Day yesterday. This coincides with international labor organizations World Day for Health and Safety at Work. Now I will discuss the performance and industry plan. We have been gradually increasing steel production for the last six quarters. The steel market has been recovering. During quarter one, our capacity utilization is 72% and we expect this to increase approximately 80% in Q2.

We will continue to monitor our production levels and adjust them as wanted by confirm orders from our customer. Improving steel demand and continued progressive restocking in the developed world are the main drivers of this production increase.

We are also gradually increase our iron ore production for the past several quarters. In Q1, iron ore production was approximately 10.6 million tons, up from 9.3 million ton in the first quarter of 2009. For 2010 we expect iron production from all our own mines to increase by 10 million ton due to both mine restarts and some mining expansion. Production of met coal has decreased slightly. We hope to catch it up in the second quarter and the subsequent quarters.

During the first quarter of 2010 on the sustainable costs, sustainable saving, as I said in my earlier comment, we achieved $2.9 billion and we are on the track to achieve $25 billion in 2012. We -- on the right side of this slide we also show progressing of our fixed cost over the last six quarters as compared to full year 2008.

As we continue to bring back production in many of our plants, fixed costs return as expected. However, this increase was more than offset by higher for-ex gains for the quarter. Before we discuss our Q1 results specifically, I would like to provide some background in the steel market in general. The overall steel market has continued to progressively improve during the first quarter 2010. Global apparent demand increased by 4% compared to fourth quarter '09 and by 29% year-on-year.

Recovery has continued in the developed world but apparent demand has also remained stronger than anticipated in China. For the full year 2010 our view continues to be that the global steel market should grow by at least 10%.

On the following slide you can see on the left side the steel production and demand have continued to very -- to strong in China and the emerging market. Despite monetary tightening, real demand in China has remained stronger than expected. Fixed assets investment in March increased by more than 26% year-on-year basis and industrial production grew by approximately 18%.

Apparent demand also continues to increase with no signs of slowdown and the steel industry is producing at full capacity in China. Going forward, we are still anticipating some slowdown in demand due to governmental measures to cool its economy. But Chinese real demand is expected to remain firm as real growth remains driven by strong fundamentals.

Emerging markets have continued to perform well during the quarter. Middle East, Africa and India in particular demonstrated continuous increase in demand for steel. Prices in China have increased by [$160] over the last six months due to strong demand -- due to increase in demand but also exceptional rising raw material costs. Going forward there will be continued pressure for Chinese prices to trend upward as a result of tight raw material and demand growth.

In the developed markets the recovery and restocking continue to progress. In the US and Europe, real demand continues to recover slowly and progressively. In the US industrial production increased for the ninth consecutive month. In Europe, the automotive market remained strong in Q1 and grew by 7% quarter-on-quarter despite the progressive end of the [scrap] schemes.

Apparent demand in both regions also improved, which means US and Europe during Q1, albeit at a modest pace. Quarter-on-quarter, apparent demand improved further by 12% in US and 6% in Europe. Going forward, we are still anticipating that apparent demand will continue to increase progressively, but apparent demand will remain overall 20% to 25% lower in 2010 than pre-crisis, which is 2008.

Following global trend, prices in both the US and in Europe have increased significantly, driven by demand improvement and rising raw material cost. With this, I will pass it on to Aditya for the financial results and guidance.

Thank you. Good morning and good afternoon as well. I will quickly highlight our financial results. Turning to our EBITDA and the key drivers, I'm primarily going to walk through a comparison of Q1 2010 versus the fourth quarter of '09. A comparison to Q1 '09 clearly is not so relevant and obviously there has been dramatic improvement.

As you know, for the quarter shipments increased to 21.5 million tons compared to 20 million tons in the fourth quarter of 2009. Despite the 8% increase in volumes, our operating results declined in Q1, largely on account of the temporary fall in selling prices, which we saw the backend of the fourth quarter.

During the quarter. as a result, selling prices decreased by 3% compared to Q4 '09. As a result, EBITDA for Q1 is $1.9 billion compared to $2.1 billion at Q4 '09 and EBITDA per ton also declined by $19 to $88 per ton in Q1 versus $107 in Q4.

Operating results improved in all segments during Q1 as compared to Q4, with the exception of flat carbon Europe and AACIS divisions. Flat carbon America benefited in particular from our mining operations. And also lost some volume in Brazil and the United States due to operational issues.

Stainless benefited from improved market conditions following nickel price increases as the base price also increased. However, during the quarter our flat carbon Europe division suffered particularly from rising raw material costs. Also, on a quarter-to-quarter comparison, Q4 2009 included a onetime $108 million CO2 gain for [SCE], which was not repeated in Q1.

As I mentioned earlier, AACIS division suffered from severe weather conditions and also operational issues in our Kazakh operation. As a result of all of these factors, EBITDA declined as discussed. Turning to the P&L, I'm just going to walk through a brief overview of our income statement. EBITDA is $1.9 billion, which includes an $89 million non-cash dynamic delta hedge gain. Our depreciation expense declined primarily due to Forex. Interest expense also declined to $355 million due to lower cash balances as well as some for-ex effect.

During the quarter we also recorded non-cash gain of $141 million as compared to the non-cash loss of $430 million in fourth quarter as a result of our mark-to-market adjustments on our conversion options relating to our convertible bonds.

We also recorded income tax benefit of $0.3 billion. In the fourth quarter '09 the income tax benefit was much higher due to certain onetime items which we do not expect to repeat themselves, as we saw in our first quarter income tax benefit results. Overall, as a result of these factors, our net income was $0.7 billion for the first quarter of 2010.

Moving on to the cash flow, as you know, cash used in operations was $0.7 billion in Q1, primarily due to working capital. During the quarter we invested about $1.7 billion in working capital. Our rotation days increased from 63 to about 67 days in the quarter, which accounts for a significant portion of this impact. Nevertheless, we are still below our target range of 75 to 85 days and therefore we would expect investment of working capital to continue for the rest of the year.

Our CapEx was $0.5 billion for the quarter, which was lower than the fourth quarter. Nevertheless, we expect to spend $4 billion of CapEx in 2010, with a significant increase planned for the second quarter of this year. We also spent $0.5 billion on M&A activities, including the purchase of our minority -- including the purchase of a minority stake in ArcelorMittal Ostrava, as well as an investment (inaudible) India. These factors, i.e. the investment in working capital along with M&A, increase our net debt by $1.9 billion.

In terms of the balance sheet, as you know we have taken a number of steps in the last 12 months to enhance our liquidity position and debt profile. Today we have a strong liquidity position of cash and committed unused credit line of about $14.5 billion and we remain well within our stated leverage ratios.

Overall, net debt has increased to $20.7 billion, primarily due to the factors discussed earlier. We expect further investment in working capital in the second quarter of '10, which will further increase our net debt for the quarter.

Let me now turn to our guidance. As you know, for the second quarter we are expecting our volumes to increase. Our capacity utilization should be approximately 80% compared to 72% in the first quarter. This is an 11% increase and we should expect a comparable increase in the level of shipments.

Our average steel selling price are also expected to improve versus Q1 levels. Nevertheless, costs will increase somewhat due to improved activity levels as well as facility restarts. But primarily and most important due to higher raw material prices.

All of our segments will have improved results, with more pronounced improvements in flat carbon America as well as the long division. Overall, we expect our second quarter '10 EBITDA to be between $2.8 billion and $3.2 billion. With that brief overview, we'd like to answer your questions. Thank you.

Thank you.

(Operator Instructions)

Ladies and gentlemen, our first question today will be from Tony Rizzuto from Dahlman Rose. Please go ahead.

Thank you very much. Hi. Good morning. Good afternoon. I've just got a couple of questions here. The first one is how should we think about Europe? The results there were below our expectations and with all of the issues taking place, it seemed to be spiraling out of control to some extent. How should we think about that as it plays out for you over the next quarter and for the -- maybe the next year? And then I've got a question about your blast furnaces in the US.

Okay, so, Michel Wurth answering the question about Europe. First of all, I would like to stress that what Aditya has said that comparing Q4 2009 with first -- with Q1 2010 needs to take into account two phenomena. First one is the CO2 issue. The second one is the translation of the US dollar versus euro. And in fact, if we would compare on the euro versus euro basis, we would see that EBITDA is slightly improved on the real basis.

This being said, obviously the situation in Europe is suffering from the real situation of the market. You remember that we started with steel prices being just around EUR400 per ton for base price in [hot roll coils] at the situation where our utilization rate was roughly around 70%. In fact, we see today that we are making good progress in terms of cost. Fixed cost today, after the efforts which have been done, are now today very well under control.

And the fact is that with the new raw material situation we are facing today, variable -- the issue of variable cost becomes the key issue for Europe because variable cost will represent roughly 80% of total cost intents. If we want to go into the future, the big challenge for Europe will be to take -- to pass on the cost increase in variable cost over to the customers.

And then I think we have done some good progress that today, once again, the base price for hot roll coil has made roughly EUR200 more so we are now for the last transactions. For May and June we are close to EUR600. And that means that we are making progress and that is also concluding what Aditya said in his guidance is that Q2 should be ahead of Q1.

In terms of operations, we are today running at -- with 21 blast furnaces out of 24, which means that all the books remain at quite satisfactory. Spot market prices -- spot market products are quite on the good side. So last challenge we need to do is in terms of contracting pricing where we will be -- we will face price cost squeeze for the closed contracts with the automotive industry.

Thank you very much. Are you -- the second question, I'm sure you're going to get a lot of questions about that, but I want to talk also a little bit about the US in terms of the BFs that are not operating right now. Wanted first to get a status of how far along you are with the Indiana Harbor Works restart. And then also, under what circumstances would you bring back the other two BFs? A couple of your competitors in the integrated spaces are essentially operating full out. Do you think that we're getting close to equilibrium at the current time? Thank you.

Thank you, Tony. I just add a few micro-comments on Europe, just for the medium to long term perspective. Clearly, Greece is a big issue, which is playing up on everyone's mind. And to the extent that the only impact is a weakened euro, that improves the competitiveness of our European operations. The impact on growth is still to be seen and that could be an issue in the short term.

Also recognize that our SC division does not have any mining assets, unlike some of our other facilities. So it may look on a like-to-like basis with a lower margin, but fundamentally these facilities are competitive, they're world class, and we have an excellent franchise, both with our customer base as well as our capabilities in terms of R&D.

In terms of the United States, you're actually right. We are now focused on starting up both the furnaces in Indiana Harbor West Works. We have already started up number four. It was blown in on April 5th and we are now putting in motion a plan to start up our number three furnace at Indiana Harbor Works. Burns Harbor D remains idle and that depends on the outcome of negotiations we are conducting presently with the united Steelworkers Association.

Thank you, Aditya. Could you comment as to the -- where do you see the supply/demand right now? Are you concerned that maybe with this restart activity up to this point is there some danger that we could be at the tipping point from a supply/demand standpoint?

Sure. In terms of the overall picture in the United States, as you know, inventories still remain very low.

Yes.

And there is good real demand pickup in most segments of the United States. So from a demand side, signals are clearly very positive. The issue is overproduction or oversupply. There is a discrepancy between some of the producers in terms of capacity utilization and I would expect some of that to normalize as the quarters go by, primarily because the ones we're also operating at lower capacity utilization have a good low-cost cost base. They have some of their own iron ore, some linkages to coal, and therefore they're not impacted as much in this rising raw material environment.

So because of those factors, I would expect the market to normalize. But clearly the risk remains in terms of oversupply.

Thank you, Aditya.

Ladies and gentlemen, our next question is from Nik Oliver from Bank of America Merrill Lynch. Please go ahead.

Hi, there. Two question, please. Firstly, on the long carbon business, you mentioned there that you're expecting an improvement in profitability in the next quarter. Looking at EBITDA in the previous quarter, basically flat despite the big rise in scrap costs. It looks like you have had some good success there passing through scrap. When do you plan to bring the scrap surcharge back in? I know you are waiting for an increase in actual underlying long product prices, but given the recent moves we've seen, when do you plan to do that?

And secondly, just on the P&L and the tax rate, still a tax credit in the quarter, I know there's a lot of moving parts here. But just roughly of when you expect to move back into a net tax charge and state across the quarters would be helpful. Thanks.

Thank you, Nik. It's Gonzalo Urquijo. On the long product, what can I tell you? You've seen our result versus the previous quarter that were flat. But to be honest, if you see the back page and you see where they're coming from, you'll see that North America doesn't contribute very much. And it is South America who's contributing the majority, and Europe, which is contributing a small part of that result.

Now, it is true we've seen an increase, an important increase in raw materials. And we have been able to pass it. But we have been hit especially in Europe, I would tell you, in the first quarter by three important things. One is the construction. And the construction is lagging behind. So that applies for Europe but also for US

Second, a very hard winter. We've had -- demand has also already also been impacted by that. Third, this increase in scrap, even in the last days, it has weakened a bit. We've been hit by this increase in scarp. So we have been pushing that to our customers.

Coming back, when do we plan in putting the scrap surcharge? Not now because with this level of margins, we don't think is the adequate moment. So we have to continue working on that. And when we recuperate an adequate margin, then we will be able to bring back the scrap surcharge.

Okay, thank you.

Our next question will be from Vincent Lepine from Exane BNP Paribas. Please go ahead.

Good afternoon, gentlemen. I had two questions, please. Could you tell us to what extent the Group will see the impact of the recently agreed to prices for RN1 and coking coal in Q2? Is that going to be from June or should we not see it so much in Q2? I'm just wondering what's included in your guidance.

And in terms of the recovery in real demand, could you give us a little more color by customer segments and I assume also by key geographic markets in terms of where are you seeing the strongest improvements and which are not really moving yet? Thank you.

Thank you, Vincent. I'll also answer the previous question regarding taxes. You're right. we have a tax credit in Q1. I would expect a tax credit in Q2. And beyond that, it's difficult right now to provide any visibility. Clearly, we have a broad geographic dispersion of earnings and it depends on how we continue to perform on a going forward basis.

In terms of raw materials, Vincent, we'll get into specifics on how the whole contracts work. There is a significant impact in Q2. But also recognize that there is a delayed impact and there will be price increases -- cost increases, excuse me, in the third quarter as well as into the fourth quarter. So this is not a one-quarter phenomena. Just based on what we're seeing in the marketplace today, we would have cost increases up to Q4 2010. Clearly, our focus is to work with our customer base to pass on those cost increases.

(inaudible - microphone inaccessible) we can see that automotive has been, let's say, a good surprise in the sense that despite the slowing down of the scrapping programs production in automotive is strong. It is up to 10% in Europe. It is also much stronger in US and it is, as you know, booming in China.

Also, second, construction is weak and was extremely weak, I would say, for two reasons. First of all, it's overall economic situation which does not give a big incentive to -- for big construction works in the stimulus plans did not really bring big activities in construction.

And then on top of that, there was very strong and cold winter which blocks the construction industry in very large parts in the developed world for the whole first quarter. And there I think it's reasonable to think that at least there should be some seasonal activity starting now again. In terms of appliances, the market was quite stable. We see in some extent and also in the US consumer coming slowly back. So at least outlook is stable, as it is also stable in packaging.

Last but not least, I think we need to be -- to be very -- to look very carefully what is going on for customers producing industrial goods, which are very mainly done of steel. In particular the situation in Germany I think is worthwhile, with the fact that the overall economy in developing country is booming. I think that will be a good element for the German industry to ask for higher steel. And I think if there could be a positive surprise, it could come from this -- from this part of the customers.

The comment on --

Yes, there is a seasonal improvement because winter is finished. But nevertheless, the real demand remain much lower than pre-crisis. South Africa is very similar to Europe. That is the real demand is slightly below pre-crisis level. But there is strong restocking movement.

Black Africa (inaudible) I think is quite good. Middle East is not so bad, with very good market like Saudi Arabia, for instance, is quite good, Iraq is quite good, Iran is quite good. India is a booming market (inaudible) award and China you know, of course.

Yes, now, all big differences. I would say there's a general idea that we could say that performing better in long related to manufacturing than to construction. As I said before, construction is lagging behind. So that's the case of Europe and it's the case of America, North America.

Now, where are we performing better? We are performing better in north Africa, on one hand, and basically in South America, especially in the south [coast], where we are performing well at 2007 levels. And that's where we see the consumption for the moment. As I said, we do expect the second quarter will be clearly better than the first quarter.

Sure. In terms of the United States, apart from the construction segment, we continue to see strength. We heard earlier from Michel regarding automotive. The same experiences there in the US. We have increased our current view for 2010 automotive sales to 12.2 million units from 11.8. We have a surge of orders from appliance as well, partially driven by the Energy Star program of the administration.

We also are seeing demand from heavy equipment manufacturers, as well as energy projects both requiring pipe and plates. So generally, all segments are improving their demand outlook. The good news remains that service center inventory levels remain low, which create a favorable outlook.

Ladies and gentlemen, our next question will be from Deutsche Bank and Mr. David Martin will pose it. Thank you. Mr. Martin, your line is open to pose the question. As it seems Mr. Martin has stepped away from his mobile, we're now moving to Jeff Largey from JPMorgan. Please go ahead.

Hi. Good afternoon. The guidance for the second quarter shows a sequential improvement. I guess just looking beyond that, I know it's hard to comment on the second half of the year, but the pricing momentum seems very strong heading towards the end of the second quarter, and I think that probably should have a positive effect on 3Q, given the lag you usually see in pricing. I'm just curious if it's reasonable to assume that with pricing moving higher and being sustained into the third quarter, even though you might have seasonal slowness, particularly in Europe, and incremental cost pressure, is it reasonable to assume that you can maintain margins in what is typically a slower seasonal quarter?

Sure. Thank you, Jeff. I think our assessment is more or less in line with what we are seeing in our business in the sense that there is strength in the underlying steel market up to the third quarter. And therefore we should be able to maintain margins in 3Q, even if it is a weaker quarter from a seasonal perspective.

Clearly, the discussion is centered really on fourth quarter because there will also be cost increases that will occur then. And there are various factors associated with fourth quarter which one should keep in mind. Obviously we need to make sure that the global economy is still on its path to recovery and real growth, that we do not create an oversupply situation by overproducing steel. And lastly, the whole Greece question, which we addressed earlier, does not create significant issues in Europe. But fundamentally, the headwinds remain quite strong into the third quarter of 2010.

Okay, great. And a second question on the stainless front. I think it was impressive performance in the first quarter. I'm just curious if this is a reflection of, say, the European stainless business improving while, say, [Osacita] in Brazil remains kind of a strength. If you could maybe just give some color on how that division's breaking out.

Just two comment. You saw that first, to do the breakdown from Brazil and Europe, we've done 149, with 76 coming from Europe and 73 coming from Brazil. So we are very happy with our European operations and our results because normally it can be up to one-third Europe, two-thirds Brazil. This time in EBITDA it's 50/50

Second, we do see Brazil continues to be strong in terms of demand and in terms of prices. And we have seen change, an improvement, as Aditya said before, in the European, in terms of demand and in terms of base price. So we have been -- our capacity utilization has increased and we have seen a stronger market.

There has also been some stocking. We also have seen the nickel prices at some stage where this increase has also favored the increase in demand. So we have seen a better situation for Europe in this first quarter versus the previous quarters. And going forward, we also see in a good way the second quarter still remains strong.

Great. Thank you.

Ladies and gentlemen, our next question will be posed by Rochus Brauneiser from Kepler. Please go ahead.

Yes, hi. Good afternoon and good morning. Just maybe could we come back briefly on the raw material supply structure? Could you give us an update where you currently stand in terms of iron ore, coke and coal, how much you supply from on the spot side and on the contract side to get an idea how much of your raw material cost increases have been already absorbed.

And maybe in terms of your utilization, I think a quarter ago you said about -- you spoke about some 85% utilization you're targeting for the fourth quarter. Is this still -- is this still valid and have you already planned for the ramp-ups in terms of blast furnaces over the next three months?

Yes this is the particular question with regard to the raw materials. Most of our purchasing of iron ore as well as coal is on contract business. Is a very small purchasing on spot for coal only.

But important point to see is they are the basic corrector of the contract and the pricing regime is changing towards quarterly pricing. It has already been pointed out. And this change is happening all around us and is applicable to us also that the pricing going forward will be on quarterly basis. But by contractual terms, we re mostly on long term contracts. Aditya, you want to take the question with regard to the how will the costs show up in accounts?

Sure. In terms of the main agreement that we have, it's quarterly contract, as everyone is aware. But it's a look back in terms of pricing. And therefore there is a lag. There's roughly a six-month lag. And clearly, as we look at the price level, the spot price level in 2Q, some of that impact -- or most of that impact will come between third quarter and fourth quarter of 2010. So that's really the pricing lag and how it impacts our business performance.

In terms of capacity utilization, I think it's a bit premature to speculate what Q4 will be. What we can see is that we are increasing capacity utilization at flat carbon Americas. We're starting up number two furnace in Brazil, as everyone is aware. And that will be positive in the second half. We just heard we restarted number four at Indiana Harbor and are focused on starting number three furnace.

So clearly, SCA capacity utilization should go up, as well as minor capacity improvements globally. However, all of this capacity utilization depends on the end markets and end demand and therefore will be predicated on how the end demand markets are shaping up.

All right, thank you.

Our next question will be posed by Charles Bradford of Affiliated Research Group. Please go ahead.

Good morning, or I guess maybe it's morning here and not there. Could you talk a little bit more specifically about the iron ore pricing environment? I know you're 60% covered, including the Cliffs contract. But how are those contracts being done at this point? Because they are, to some extent, based on the international pellet price and very few people are talking about pellet prices these days. What are you being asked from your outside suppliers as far as a specific price and a price increase for pellets.

Chuck, can you explain what you mean by our -- you mean what are our suppliers demanding in terms of just Cliffs or just generally?

No, more generally. Because that does impact on the Cliffs contract.

Okay, the -- we -- I would just say a few words on Cliff and then Davinder can talk about the pellet pricing on a global basis.

The Cliffs contract basically has -- is two legacy contracts. One is the -- one is the International Steel Group contract and the other is the Inland contract. The International Steel Group contract is one-third PPI, one-third hot band pricing and a third is some other escalation measures, which is linked to the international pricing of iron ore. And the Inland contract is primarily related to the international pricing -- is linked to the international pricing of pellets. And there's some discount mechanisms in how that is actually accounted for is under discussion.

Speaking in general, how is the iron ore contracting business developing on pricing side. It's a quarterly pricing mechanism, which looks back to the average of spot prices as observed in China for a period of three months. And then they are adjusted for the freight differential to take them back to the source. Could be Brazil, for example. And also adjusted for quality. So that determines the price for the quarter coming forth. And this process goes on. So essentially --

Pellet price.

Yes, pellets. Of course, this description I've given is with regard to the fines. And like always, pellets have a separate premium, which is also negotiated year on year and is a function of the demand and supply balance of the pellets. And this year the pellet premium has substantially gone up to reflect the demand for the pellets.

We're hearing from some people that the increase could be as much as 130%. Does that sound right or are you seeing something totally different? For pellet.

Currently the increases on the fines for the quarter, second quarter, are in the range of 75%. I don't think we want to get into specific pricing of some of these -- some of these materials at this point in time. So I would urge you to refer to the public commentary on that.

Thank you.

Our next question will be from Ephrem Ravi from Morgan Stanley. Please go ahead.

Hello. Ephrem Ravi from Morgan Stanley. Two questions. One is on the stainless business. Your production of crude stainless was 546 in the shipments and 436. So even adjusting for some conversion losses, that still means that you are stocking up for stronger demand in Q3 and Q4. Can you just confirm that the demand from the service centers are due to the legal prices strong enough for what I read to be almost a 20% stock buildup in Q2? And do you believe that to be sustainable?

And secondly, just a more general high level question, given the raw material contracts moving to a quarterly basis, there's been some talk about index pricing, like an iron ore or coking coal surcharge similar to that of the stainless steel system and carbon steel. Are you, as the industry leader, kind of driving that process globally or what are your thoughts on that? Thank you.

Yes, in terms of the stainless steel, I believe was the first question, is to -- in terms of crude steel, there's been a higher production than what has been the shipments. And it is true we see a demand of the steel service centers. That is clear and that has been growing. And we see that demand has been improving. It was slower, that's in January, February, and going towards March, April, that has increased. So that's why we've had that difference between the production and the stock. And I confirm that for the moment the steel service centers have -- demand has improved.

On the raw material increase, we have seen that this is very recent announcement that prices have increased, very steep price increase in the price as well as the mechanism has changed. Which means that the segment like [FCE], our European segments, will dependent on imported iron ore and imported coal and raw materials. They will have an immediate impact on the cost.

And clearly, the discussion is going on with the customer. For them also some -- for some of our customer this is also very unusual situation, sort of annual price. They will have to now adjust their business model to quarterly price.

Today what our approach is that we know the cost increase, which is the real cost increase to pass on to the customer and discuss with the customer how this mechanism in the future will work with them on quarterly price changes on the raw material. So this is at this time on the discussions with the customer we have to explain them to understand and they have to adapt to this new scenario. But the fact remain that there is a real increase and it has to be passed on to the customers.

A follow-up on that. Would an index or a surcharge system be (inaudible) method to pass on the cost or would you still kind of prefer to renegotiate on a quarterly basis? Because quarterly may not be the end of (inaudible) increasingly spot price system.

Difficult to say at this time whether it will be indexed every quarter or every quarter the prices will change. I think that it is still in the discussion stage. But surely the customer do understand this sharp increase on the raw material, and we are having a discussion on them. The discussion is open to them whether it should be kind of indexed links every three months or it has to be quarterly negotiation. I think there will be -- some kind of a solution will be found, which should give a kind of a stability to our customers.

Thank you.

We're now moving to Alessandro Abate from Credit Suisse for our next question. Please go ahead.

Good afternoon, everybody. Just a couple of question. The first one is related to the lag between announcement and realization of price increase during the quarter. Just out of curiosity, I mean if we are expecting price increase in Q2, how much this average price increase in Q2 versus Q1 will be factoring into P&L.

And just going back, like follow-up for the prior question by my colleague, what's actually the perception that your counterpart in your long term contracts, like the automotive industry, are keen to evaluate a possibility to renegotiate cost long term on quarterly basis rather than annual basis. Thank you.

Go ahead.

I'm not sure if I will be able to answer your question. But let me try. Generally, orders that we agree in the previous quarter we fulfill in the next quarter. So let's say we take an order in February, we end up shipping it probably in April. And so February, March prices and some of April prices are what you see in 2Q. This is basically on the spot business. And so, therefore, clearly, June and July orders that we're taking in at higher price levels will be reflected in our third quarter results.

And I had mentioned earlier that from what we can see today, we do expect to maintain margins into 3Q. So clearly, some of the cost increase that is anticipated is -- we expect to recover from the marketplace at least into the third quarter.

I think on your annual contracts or the long term contracts customer, we will have an agreement on the volume because the volume can be committed by us to the customer. And the price question, as I said, we are in the middle of discussions with them for those contracts which are still open because some of the contracts have already been finalized during the first quarter and the second quarter, and some of the contracts have been finalized last year based on the conditions prevailing at that time.

And since this new price mechanism is a very different phenomena since development, now we will have to -- we have started discussions with those customers on a new situation. So volume will be -- will be fixed and the discussions will be on the quarterly price, how to adjust, these questions are still open and we'll have the answers as we move forward in the discussion.

Thank you very much.

Our next question will be posed by Andrew Snowdowne from UBS. Please go ahead.

Thank you very much. Just a couple of quick questions. The first one, and it's really in line with what you've just said, Mr. Mittal. In terms of the contracts that have already been settled as of 1 January and those of 1 July. Wonder if you could give us an idea in terms of the percentage that have been resettled, i.e. those which have been resettled at -- when certainly the outlook for iron ore price increases was a lot less than what's finally been settled and how much a lift you'd be resettled.

The second question would be really looking at your steel solutions and services division, maybe some indication in terms of expected windfalls, with your strong price increases coming through in Q2, and also the [slow]into Q3. Is that already been factored into your guidance, maybe an indication of what sort of level of windfall we can expect there.

And then a final one is just your net working capital split. Maybe you could give us a target in terms of rotation days. The sense I get is that certainly payables and you are delaying in terms of payments over there. But maybe you could just give us a split on net working capital in terms of receivables, inventories and payables and what your target is for the next quarter. Thank you very much.

On our contracts, to our knowledge, about 50% of the contracts are already closed and 50% of the contracts are still open, which are under discussions or which are being negotiated. Aditya?

Sure. I'm not -- Michel can maybe comment on [AM3S] specifically, but from the internal projections that we have seen there is unfortunately no windfall expected in AM3S. Clearly it does improve on a quarter to quarter basis and maybe our perspectives on windfall are different.

In terms of the operating working capital rotation days, from Q4 to Q1 there has been a lengthening of trade payables. If you want specific numbers, I can just help you out. Inventories were 96 days at Q4 and now they're about 100 days in Q1. Trade receivables were 287 and now 33. And trade payables 61 has become 66. I would expect inventory and the overall volume to continue to increase and therefore we are projecting increased working capital investments during the year.

Maybe one word about distribution solutions. So at least in Q1 you have seen in the results since there has been an improvement. And I would say the distribution solution after the very difficult year last year where a lot of inventory and windfall losses have been done will come into much more normal situation. And what is clear also is that the improvement in results in Q2 will also apply to distribution solutions, I would say, eventually even little bit higher proportions than in other segments.

Also, just to clarify another question of yours, we have factored in the improved results of AM3S in our second quarter guidance.

Thank you very much.

Ladies and gentlemen, our next question will be from [Rishaad Daibek] from [Daiba]. Please go ahead.

Yes, thanks for taking the question. Just wanted to understand what is the progress on your greenfield projects in India and how do you plan to take your investments (inaudible)? Especially, do you have any plans for another joint venture with them in India on greenfield plant?

Subsequently, since we met last quarter, there has been some progress in our projects in India in the sense that we have got some more approvals, and more work is done on the ground in the sense that we have -- we are looking at the new sites in [Jakarta], that is the Bokaro side near Bokaro, and we have also made some progress in Karnataka, where the Karnataka government has been very proactive.

And we are discussing some -- we are discussing on the boat, we are discussing on the land, iron ore, et cetera, and all the infrastructure. I think the -- I'm happy with the progress what we have made in the last three months in our Indian projects.

[Otam Gelwa], Otam Gelwa is the joint venture where we have -- we have completed our transactions very recently. And at this time there's nothing significant to report to you or tell you about any greenfield project. But there are various opportunities being discussed. But there's nothing significant at this time to inform.

Just last year, on a follow-up, do you have any timeframe when you would like to open the coalmines that have been recently allocated?

We do not have the time plan at this time because I think we are on the what we call exploration, what we call -- Peter, exploration. Why don't you explain where are we on the coalmine?

We still need to complete an exploration program before we can have any idea of the development timeframe. These things normally take a fair amount of time in order to do and you can expect that we wouldn't have any realistic answers on project implementation timeframe for a good year.

Thank you, ladies and gentlemen. Our next question will be from [Shu Gradas] from Credit Suisse. Please go ahead.

Hi. Good afternoon, gentlemen. Thanks for taking my questions. I have two questions, if I may. One is related to your Latin profitability. I have seen that in last -- in Q1 that profitability has decreased compared to Q4 in both flat carbon and long carbon. If you can provide some explanation regarding that fall. And you said that your utilization, that would be around 80% in Q2. Could you please provide some regional breakdown of the utilization rates? Thank you.

Sure. I'll just comment on South Brazil and then Gonzalo can on long. As we mentioned earlier, we had some production shortfall in (inaudible) about 61,000 tons in the first quarter compared to what we expected to make. And that has some impact. Also, as you know, our Brazilian operations are very focused on the spot slab market. And we had a decline in selling prices in the fourth quarter, which impacted Q1 results on a sequential basis. So those were the two factors.

As the profitability for Q4 and Q1, the difference is not that large, if you see. But what have been the main issues have been, on one hand we've been divided in Argentina. We've been hit by some issues of increases in raw materials and our sales have not been that high in limitations to increase prices.

In terms of Brazil, which is working well, always Q1 is difficult because we do have the beginning of January. As there's the summer, we have holidays periods, then we have a carnival, so it is a shorter month. And then for the rest we've had in Mexico that we have not had the results we've had in the past. And as you see, I wouldn't say the differences -- I mean it's more seasonality effect than anything else.

On your capacity utilization question, I'm not going to provide you specific numbers. But predominantly we are seeing the largest increase in AACIS long carbon and flat carbon Europe, followed by flat carbon Americas and the smallest improvement is in our stainless division. So generally it's across all main markets, i.e. an increase in capacity utilization.

Okay. Thank you so much.

Our final question for today will be by Dave Martin of Deutsche Bank. Please go ahead.

Yes, thank you. I had a remaining question on mining and FCA. I noticed in your press release you added a comment about improved mining performance in FCA. I wonder if you could just comment and give me a little more color. Looking at your production stats in the back of the press release, it doesn't look like there was any large deltas in your iron ore and coal production.

And then my second question is you're pointing to iron ore output growth of 10 million tons this year and I'm just curious if you can do better and what the bottlenecks may be to grow production given the incentives.

I'll get Peter to talk generally about mining and what we're doing at FCA mining operations. But just to explain how it impacts EBITDA, most of our other mining operations are a cost pass-through. And therefore, the price increase that occurred in Q1 is not reflected separately. At FCA we have QCM and QCM sells all of its iron ore at world market prices customer base, whether that is existing FCA units like [Japasko] or other units within the group. And so there we have seen an increase in its margins, which is improving the results in Q1.

In general at -- in the Canadian mining operations, or the North American mining operations we've been focusing on production improvements and quality improvements. And we expect that in this year we will increase production at QCM year-on-year by 1 million tons, through operational efficiencies largely, as well as through opening of Fire Lake again this year, which we didn't open last year.

We would also add additional coal production at our Princeton coal mines of the order of about 0.5 million tons. And all of this is being achieved, really, through production efficiencies and through minimal CapEx. But the first quarter was a very, very strong quarter at QCM. We had an outage for -- a power outage for about ten days, but we managed to catch up with production by postponing a little bit of pre-stripping into the next -- into the second half of the year. So the results were very, very strong in terms of metal units delivered. And then also remember that now we're operating on [Anorca] mine again.

Okay. And then just broadly on your -- the global mining operations and your target to do about an incremental 10 million tons this year?

Yes, we are targeting an incremental 10 million tons. And that will come from across the iron ore operations, quite a large amount of growth in Ukraine, also a fair amount of growth in Mexico because we are now ramping up our Vulcan mine in Mexico. As I said, in Canada we'll increase production by a million tons. Anorca will increase production by over a million tons because that was shut last year.

In South America we will increase our production by another million tons as well. And in Kazakhstan we will be increasing, too. So it's in general increases right across the board through operational efficiencies and restarts, as well as through some capital growth.

Okay. Thank you much.

As we have no further questions in today's question and answer session, I'm going to hand the call back over to you, gentlemen, for additional or closing remarks.

Thank you very much for participating. I'm looking forward to talk to you in the next quarter's call. Thank you very much. Have a good day.

The conference is now over. For any further questions, please contact the Investor Relations department on the number indicated on the conference call invitation. Thank you.