ArcelorMittal SA (MT) 2010 Q3 法說會逐字稿

Dear analysts and investors, welcome to the ArcelorMittal third-quarter results 2010. Please note that we will take maximum 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 leave the floor now to Mr. Mittal, Chairman and CEO of ArcelorMittal. Please go ahead.

Good morning and good afternoon to everyone, and welcome to ArcelorMittal's results conference call for the third quarter 2010. As usual, I'm joined by my GMB colleagues, Gonzalo Urquijo, Michel Wurth, Aditya Mittal, Christophe Cornier, Peter Kukielski, Davinder Chugh, and Sudhir Maheshwari.

Before I start today's presentation, let me give you a brief overview. Real underlying demand for steel continues to grow, but at a slow pace. What has increased over the recent months is the uncertainty over the 2011 economic picture. The developed world has grown more concerned over the risk of a double-dip recession, especially in Europe and U.S.. Unemployment remains high and consumer confidence weak.

The stimulus support continues to roll off, and some economies will now have to digest [all activity majors].

Within the developing world, some areas, such as Brazil and South Africa, are being increasingly constrained by appreciating currencies, while in China, the government has continued to effectively manage the deacceleration of its economy.

While we are confident that the underlying recovery is real and will continue, this uncertainty has meant that our current demand conditions are tough. While this is disappointing, I'm reassured that our balance sheet is strong. We have good liquidity, and so we can continue to -- continue with our strategy to grow our mining business, to develop our footprint in India, and expand in Brazil.

We are also making good progress with our projects to assess the spin-off of our stainless steel business. I'm convinced that the markets we serve will grow in 2011, and we are very well placed to supply that growth.

Moving on to the agenda for the call today, as usual I'll discuss corporate responsibility, our performance, and industrial plan, followed by an overview of the environment and the steel market. Then, Aditya will present our third-quarter 2010 results, followed by our guidance for fourth quarter. We will then conclude with the Q&A.

Our EBITDA for the third quarter is $2.3 billion, well in the middle of our guidance range. Related to this two -- second-quarter level of $3 billion, our EBITDA was lower due to the seasonal slowdown and weaker market conditions. As expected, our capacity utilization decreased to 71% in Q3 versus 78% in Q2.

Reported third-quarter EBITDA included $102 million on income from revaluation of forestry assets in our long carbon and stainless businesses. So in reality, our results came in towards the lower end of our expectations.

Net debt increased by $1.8 billion to $22.1 billion, primarily as a result of foreign exchange and increased investment in working capital.

This quarter, we did not see an increase in our sustainable management gains, which remained at the underlying $3 billion level. However, at our Investor Day in September, we outlined our detailed plan to raise $5 billion of management gains by end of 2012. This will contribute to our performance in 2011.

We are on track to reach approximately 50 million tons of our own iron ore production by the end of 2010.

Due to the price [cost squeeze], our EBITDA will decline slightly in the fourth quarter, and we are guiding to a range of $1.5 billion to $1.9 billion.

On our corporate responsibility chart, during Q3 our health and safety frequency rate was 1.9 times -- 1.9. We are pleased with the progress we have made in health and safety over the last several years. Although we are disappointed with our performance this quarter, we assure you that improving the Group's health and safety performance remains the top priority of the Group.

The duration in the safety performance of our mining operations, loan [covenant] in the Americas and Europe, and Asia, Africa, and CIS operations was only partially offset by improvement in the stainless steel, flat carbon Europe, flat carbon Americas, and distribution solution operations.

We have made progress with other corporate responsibility initiatives, including ArcelorMittal was recently added to the Dow Jones Sustainability World Index, which is a key milestone in the Company's journey towards delivering safe, sustainable steel.

We launched our human rights policy, strengthening our commitment to respecting human rights across the Group. This human rights policy supports the commitments that the Company has made to the United Nations' Universal Declaration of Human Rights, the core conventions of the International Labor Organization, ILO, and the United Nations Global Compact.

On the performance and industry plan progress, as I said, our capacity utilization was 71% due to seasonal slowdown, particularly in Europe. For fourth quarter, we expect capacity utilization to remain flat at approximately 70%, due to weaker market conditions and market uncertainty. We continue to monitor our production levels and adjust our output as wanted by the order flow from our customers.

On this chart, just speaking about iron ore, our internal iron ore production increased slightly to 13 million tons from 12.8 million tons in the second quarter. We are on track to achieve our goal to increase iron ore production from our own mines by more than 10 million tons compared to 2009, due to both mine restarts and some expansions, effectively to reach target 50 million tons in 2010.

We have made some progress in our Mt coal from 1.7 to 1.8 in third quarter.

On sustainable SG&A and fixed-cost reduction, our management gains remained flat during Q3 at $3 billion in cumulative management gains on an unrealized basis. As we just discussed at the recent capital markets day, we have plans in place to reach our $5 billion management gains target by 2012 end.

These plans are largely operational improvements, such as energy efficiency, yield improvement, et cetera. We are confident in the ability of our management groups to achieve these targets. Specific projects totaling $2 billion have been identified, and responsibility for their successful implementation has been assigned.

On the right-hand of the chart, we show the progression of our fixed costs over the last eight quarters as compared to full-year 2008. With lower production during Q3, fixed costs decreased temporarily by $600 million compared to Q2.

For ArcelorMittal, operational optimization is the key to our competitive advantage. Our global reach and scale allows the group to optimize costs in the following ways. Added production to fluctuating demand, for example, in Europe in blast furnaces; optimize our low-cost plants and idle our higher-cost plants in times of fluctuating demand; and variabilize our fixed costs and efficiently utilize capital.

Before we discuss our Q3 results, specifically I would like to provide some background on the steel market in general. During the third quarter, global operating demand declined by 6% compared to the second quarter, but was still some 3% to 4% higher than the same period in 2009. Although there are significant uncertainties in the market, the global economic recovery continues slowly but surely, and real demand continues to improve progressively around the world.

We still believe that the global steel market should grow by at least 13% in 2010 and should grow again in 2011, but at a slower pace to reflect the higher pace levels.

After a -- on China, after a very strong start of the year, the Chinese economy has, as we were anticipating, continued to slow down, but in a managed way. We have seen a soft landing with industrial production growth settling in the 13% to 14% range for the past four months. Industrial production grew by 13.3% in September. This is clearly lower than the levels at the start of the year, but still represents a strong source of underlying steel demand, supported by infrastructure needs and increasing wealth.

This is the real demand picture. Apparent demand for steel has weakened much more significantly, and indeed fell by approximately 7% during the third quarter relative to second quarter, and was 6% below the same period of 2009. Clearly, this correction is not sustainable, and reflects a significant destocking along the value chain. We expect apparent demand to pick up in China during the fourth quarter partially due to seasonal factors.

The government's directive to reduce energy consumption have had an impact on steel output. September's crude steel production of 48 million tons was 7% lower than August and down 6% relative to September 2009. We estimate that for the full year, the impact is likely to be around 20 million tons, or 3%. The largest impact, we believe, has been on the long products, which have lower margin and more energy intensive than flat.

Outside of China, emerging markets continued to perform well. During the third quarter, apparent demand in emerging markets stabilized at high levels compared to the second quarter.

Talking about Europe and U.S., real underlying demand has continued to recover slowly and progressively in Europe and U.S.. However, confidence in outlook for these developed markets has continued to deteriorate in recent months, as we have seen from the regional PMI data. Importantly, however, those PMI remain comfortably above 50, and therefore in expansionary territory.

In the U.S., the economy is clearly slowing. September manufacturing output declined by 0.1%. However, output still remains positive, 6% year on year, and output in the third quarter was 1% higher than the second quarter.

So our underlying demand has been exacerbated by a change in stocking activity. The second quarter was boosted by destocking, while the third quarter saw an end to the restocking cycle. As a result, third-quarter apparent demand surprisingly fell 3% relative to the second quarter. September was down 3% on August, but still up 30% year-on-year basis.

For the fourth quarter, U.S. apparent demand is likely to be seasonally weaker, but 2010 should still be up over 35% versus 2009.

The good news is that there's no excess material in the U.S. market. Industry capacity utilization as reported by AISI was 68% on the week to October 9. Inventory is currently around 2.5 months of shipment, which is slightly below long-run average of 2.7 months.

In Europe, there remains a two-speed recovery. Real demand in Northern Europe is good, especially in Germany and those economies linked closely to it. Southern Europe, though, remains depressed.

Apparent steel consumption in Europe was impacted by seasonal factors in Q3 and declined 17% versus the Q2. The pace of year-on-year growth is slowing, too. Apparent steel consumption in September was the same level as September 2009.

For the fourth quarter, EU apparent demand should marginally increase due to seasonal effects, similar to the picture in the U.S.. While inventories have increased, they're not out of step with underlying demand levels. August months of rotation were in line with historical average of 2.1 months, which again suggests no excess material in the market.

With this, I hand it over to Aditya to walk us through the financial results and guidance for the fourth quarter.

Thank you. Good morning and good afternoon as well.

Turning to EBITDA highlights, as you heard earlier, EBITDA was $2.3 billion for the quarter. Per ton, EBITDA decreased by $24 during the quarter to $108 per ton.

As you can see on the chart, on the lower left of this slide, we had a decline in shipments of about 8%. This was only partially offset by higher selling prices of about 4%, resulting in lower EBITDA for the quarter.

In terms of an overall EBITDA bridge, the volume impact was approximately $450 million and the price cost squeeze was about $300 million.

Operating results deteriorated in all segments, as you can see on the right-hand side, but the most pronounced decreases were in flat carbon America and our Asia, Africa, & CIS segment.

At FCA, we had reductions in volume due to weakness in the market, which affected the steel results, but we also had weaker results at QCM compared to the second quarter, primarily due to our switch from quarterly to annual contracting. The prime reason for weakness in the Asia, Africa, & CIS division was due to the weakness that we're seeing in the South African domestic market.

Turning to our P&L highlights, you heard -- we heard earlier, in the third quarter we had a one-time income of $102 million. This has to do with the revaluation of our forestry assets in Brazil. This was across two segments as they are joint owners of these forestry assets. $35 million went to stainless and $67 million to long, and we are continuing with our dynamic delta hedge, a noncash raw material gain of $85 million in this quarter, which is a shade lower than what we recorded in the third quarter.

Our net interest expense increased to about $378 million, compared to $308 million in the previous quarter. Primarily two reasons, clearly exchange rates, so the cost of financing our euro bonds has gone up in dollars -- euro debt has gone up in dollars, and also, we had additional interest on account of our $2.5 billion of new bond issuance during the quarter.

We also recorded income tax benefit of $566 million in the quarter, compared to $75 million in the previous quarter. As a result, our net income decreased to $1.4 billion, compared to $1.7 billion in the second quarter of 2010.

Let me now address our EBITDA bridge to free cash flow. Starting with EBITDA of $2.3 billion, as we heard earlier, we have invested $1.1 billion in working capital during the quarter. Rotation days increased by much more, by about 10 days. Part of the increase is due to the cash investment in working capital and the other part is due to the ForEx effect, i.e., the appreciation of the euro by 11% in the quarter. Also increased are days -- and caused high inventory days.

I would expect us to have an inflow of working capital in the fourth quarter as we reduce inventories. However, the days would still -- assuming the exchange rate does not change, the days would still remain higher than where we were in the end of second quarter.

Next, we show a use of cash for other items, which totaled about $391 million. This represents interest, non-cash gains such as the dynamic delta hedge, fair value of the force revaluation gain, as well as other financing costs.

Finally, CapEx expenditures increased to $0.8 billion in the third quarter, compared to $0.6 billion in 2Q. We expect to have a CapEx of about $3.7 billion in 2010, just below our previous forecast of $4 billion.

We also spent in the quarter $237 million on M&A activity, consisting of our $65 million participation in the capital increase at Macarthur. We also spent some cash on acquisition minority interests in Ostrava, as well as $130 million to buy out our minority interest in our coke battery operations in Poland.

Adding these M&A investments and the dividend takes us to a net debt change, excluding foreign exchange, of about $700 million. If we add the ForEx impact of $1.1 billion, it causes a net debt change of $1.8 billion for the quarter.

Turning to our balance sheet very quickly, as you know our liquidity position has improved to $14.9 billion. In terms of liquidity, cash was about $3.5 billion and the bank lines $11.4 billion. Our liquidity increased primarily due to the net new debt issuance that occurred during the quarter. Not only did the new debt issuance increase our liquidity, but it also extended our debt maturity profile to five years at this point in time.

Assuming that there is no change in ForEx rates, I would expect our net debt to decline in the fourth quarter compared to where we are today.

Let me now walk you through our guidance. In terms of fourth-quarter 2010 guidance, due to the factors you heard before, mainly weaker market conditions and higher input costs, we expect fourth-quarter EBITDA to be below the third quarter. We expect capacity utilization in Q4 to remain flat, compared to Q3, at approximately 70%.

Nevertheless, we anticipate that shipments will increase for the overall Group, reflecting seasonal factors.

We anticipate that average selling prices will decline, and due to the price cost squeeze our EBITDA per ton will be lower.

We also have certain region-specific impacts. We saw some of these impacts in the third quarter, which we talked about earlier, such as the switch to annual contracts at ArcelorMittal Mines Canada, as well as a weakness we saw in the domestic marketplace in South Africa, as well as appreciation of the ZAR.

These impacts are continuing into the fourth quarter, but we're also seeing weakness in Brazil, most pronounced in the flat segment of our operations in Brazil -- this is ArcelorMittal's Tubarao, and also some seasonal weakness in our long operations, as well as stainless operations in Brazil.

Due to these impacts, we expect our Brazilian results will be down by $200 million to $300 million just on a quarter-to-quarter comparison from 3Q to 4Q. Again, we believe these impacts are temporary, i.e., they are directly related to depreciation of the currency, significantly higher imports that occurred in the second and third quarter. At this point in time, the inventories are slowly reducing, but this should be a short-term phenomenon of a decline in the profitability of our Brazilian operations.

As a result of all of these factors which we have addressed, our expectation for the fourth quarter is of EBITDA of $1.5 billion to $1.9 billion.

With that, we'd like to answer your questions. Thank you.

(Operator Instructions). Andy Mohinta, Citigroup.

I've got two questions, please. Firstly, could you just give us some sense of what you are seeing or what your thoughts are with respect to capacity closures, both in the U.S. and in Europe, especially in the flat carbon market in the U.S.? All of your peers, yourselves included, have spoken about pretty weak order intake. It feels like Alabama and -- just in Alabama is making an impact on that market. Do you have a sense of how much capacity needs to be shut and perhaps what the willingness of the factory is to do that?

And just secondly, on just in regards to the dividend, if you look at your leverage today, and just look at the levels of profitability, even if you -- I know you don't give guidance two quarters out, but just looking at the levers you can pull for Q1, it seems hard that Q1 will be that dramatically different versus Q4. Just bearing that in mind, then how likely is it that the dividend actually stays stable or do you think it makes -- it's prudent to take the dividend off in relation to preserving cash and keeping debt under control? Thank you.

Let me try and address North America capacity closures, and then I'll get Michel maybe to talk about -- I don't know if you even asked Europe, but -- yes, you did.

In terms of the U.S., I don't really want to comment on the overall industrial landscape. However, I would note that there has been certain announcements of certain facilities, such as Sparrows Point and others, which were part of ArcelorMittal, which are now in an idle situation. Clearly, there is an adjustment which is taking on -- in the marketplace. To the extent that these facilities remain idle, I think the demand/supply situation is much more in balance.

We have -- in the medium- to long-term scenario, not necessarily in the short term, we have, as you know, taken down certain capacities in the U.S., primarily finishing facilities. We also have two furnaces which are down and don't have any short- to medium-term plans to revive them, which is five and six at Indiana Harbor, and we still have a seventh furnace which we will decide. The ninth furnace -- we have nine furnaces, six are operating today, two are down which we don't intend to revive, and the third of the ones which are down, we will take the medium-term decision.

It's also interesting to note that -- yes, those are my North American.

Yes, in Europe today, I think also that overall, supply and demand is balanced in the sense we see -- the kind of equipment we are running.

In Q3 and we foresee normally the same in Q4, we are running at 18 blast furnaces, where we have seen that pre-crisis in beginning of 2008, at that time Europe was running with 25 blast furnaces.

So during the quarter, we have idled three blast furnaces in order precisely to adapt and to -- below that, we have adapted also our -- the running of our finishing lines in the sense that we have become much more flexible, and if you look at the overall FCA results in Q3, I think that, at least in the short term, we have been quite able to flexibilize our output and also our results.

Now, how will that go in the long run? It is absolutely clear that we will continue with the policy where we will not supply more than what the market is demanding, knowing that today in Europe, the situation is different, whether you are in northern Europe and even Poland is not going so bad, whereas southern Europe is quite in a difficult situation, and Southeast, if I speak about the situation of [galatea], the competitive environment is quite tough in the Black Sea area.

So in the long run, we will continue to adapt. If there is a need for idling, we will do that, and we will focus on our lowest-cost installations upstream and downstream, and what I expect also is that overall in the market, there has also been in Europe some adaptations. For example, in Belgium, there is still a [clabeck] furnace which is not running. [G site] probably has taken out from the European markets, and so, from that point of view, the situation is moving in the right direction.

In terms of your question on dividend, ultimately it is the Board's decision and then voted by the shareholders.

I would just offer you a few comments. Number one, this Company is still highly cash generative. During 2009, we invested about $5.1 billion in terms of working capital, and we expect to reduce our net debt third to fourth quarter. Clearly over the year, we have increased our net debt, but we still generate significant amounts of cash, even at these low levels of EBITDA.

Secondly, I think our dividend policy is not something which we would want to address because of short-term market weakness. I think it's -- it should reflect the medium- to long-term outlook of the Company, and we are comfortable with the medium- to long-term outlook of the organization, so at this point in time, I don't think there is a change in thinking in terms of our dividend policy.

Alessandro Abate, JPMorgan Chase & Co..

Alessandro Abate, JPMorgan. Two questions. The first one is related to your pricing power. With the new renegotiation of contracts we had in the [motive] industry for 2011, if you can just give a little more color on the perception you have in this market, whether basically in terms of assumption of quantities relatively strong and also in terms of upside of the price or relative stability of price versus 2010.

And the second question is more commercial driven. If you can give a little bit more color on the domestic demand in Ukraine and Russia, and your export to the Middle East and North African region. Thank you.

I think in terms of pricing power, you have clearly to distinguish between what we call normally commodities and what we call also high net value of niche products.

For commodities, we are in an international environment and we know all what is at stake. There is the cost push on one hand side from the raw materials. There is also currency variations. There is the overall environment.

But on the other hand, you have the second category of products where we have value-added products, and there, basically, we do not sell simply volumes but we sell value to our customers. And I give you one example that's automotive, where we have been quite successful in the course of the year.

We are currently moving and presenting to all of our automotive customers our new product catalog which is called S-in motion, and we offer, for example, for the body in weight, new steels which aim to reduce the body in weight by up to 20% in weight, and there, clearly, you do not sell pumps, but you sell steel solutions. You give an answer to CO2 and you have a different pricing power than in different -- than for commodities, and I think it is -- in between the both that in the developed markets that we have some possibility to move.

Last thing is also in relationship with our distribution, it is clear that linked to pricing point is also quality of service, just-in-time delivery possibility for our customers to reduce their own working capital and their own production cycle, and it is this kind of customer efforts where we are doing, where we have been quite successful in regaining some of the market share losses we have had in 2008, 2009, and it is there where we have a lot of good ideas also the future.

Yes, the CIS market is still below the precrisis level, but catching up very fast, and I think it will be close to precrisis 12 or 18 months from now. We tried to go ourselves in CIS, and I think next year, probably, our Kazakh unit, for instance, will be 50% CIS and 50% export.

Just a follow-up -- quick follow-up in terms of the (technical difficulty) towards basically Middle East, in particular United Arab Emirates. Can you just give an update of the level of inventory [long] produced there? Thank you.

What we are seeing that in Russia and Ukraine, in Russia it's basically because construction market is strong, is coming back to precrisis levels, and also the flat market is recovering.

Russian economy is -- Russian steel demand is coming to precrisis levels very soon.

Ukrainian domestic market has not recovered very well since precrisis, due to political reasons. Now we are seeing some improvement in the Ukrainian economy in last couple of months. So we hope that this market will also recover in the following year.

Economy may grow at the rate of 4% or 5% through next year; this year, maybe it is down by 7% to 8%.

Middle East market is not making millions -- is not having a major growth at this time. There is the -- basically, it is standing where it has been in the last two quarters. There are still some construction work, which has not -- which were halted during the crisis, has not begun in full speed, and there is a slow recovery in the Middle East.

For the Middle East, one of the basic products we sell there is beams from southern Europe, and as Mr. Mittal was saying, we have not seen big changes. We have not seen either that there is an overstocking. At the end, they are demanding what they are consuming, and as Mr. Mittal said, we have not seen an increase in consumption, neither in stocks, and it has -- our sales have remained very much flat, I would say, in the last quarters.

Nik Oliver, BofA Merrill Lynch.

Thanks for the questions. Just two on my side. Firstly, looking at the moving parts as they move into the first quarter, and I think on my math your raw material costs should be flat sequentially Q1 versus Q4, given your average cost accounting on raw materials. In terms of pricing, that will reflect the average of spot pricing between now and very early next year.

So, just as -- try to work through the moving parts, if we assumed that shipments were flat Q1 versus Q4, really your key moving part in terms of EBITDA would then be the movement in spot prices between now and early January. So that was the first question.

And secondly, just on the phasing of the expansionary CapEx, I know you gave us quite explicit guidance on the absolute level of CapEx for the growth projects at the Investor Day in September. I was just wondering in terms of phasing, are there any plans to maybe backload some of that CapEx, just given the more cautious end demand environment, or should we think about more of a linear progression going forward? Thank you.

Thank you, Nik. I think in terms of your first question, your main assumption is correct that the biggest driver of results change Q4 to Q1 would be spot pricing, assuming that there is no significant change in the volume outlook.

In terms of CapEx, there is no thought or expectation at this point in time to backload our CapEx. I think we are moving forward in terms of the strategy that we have outlined. If you look at our CapEx from third quarter, it's increasing to almost $1.7 billion in the fourth quarter. Clearly, that run rate won't be maintained for 2011.

But the idea is to continue to grow in Brazil in our mining division, as well as in our India projects. So those aspirations remain, and at this point in time, there is no discussion or any focus to backload some of that CapEx. And that's about it.

Vincent Lepine, BNP Paribas.

I had three questions, if I may. You've described the relatively -- I'm not sure I should call it supportive, but let's say okay picture for real demand, yet [going through the pair in demand] is obviously tough in the short term. So in that context, do you think it, let's say, would be wise to consolidate distribution further in particular in the U.S. when obviously cash flows increase again? Is it something you wish you would've done more in, I guess, pre-crisis?

The second question is on flat product prices. We saw long product prices starting to rebound a bit in China and elsewhere over the first couple of -- over two or three months. But flat products have actually come down, or at least the commodity flat products. So I guess if we look at the Chinese markets, that must be that there is more of a capacity on the flat products side, and you did say that the recent volumes [growth] based on the energy savings initiatives mostly affected the long products, but I was wondering if you could give us a bit more of a color in terms of the estimated overcapacity on flat products in China and how long we could be in that situation, assuming demand is actually reasonably okay in China.

The nitty-gritty question on the U.S., and that's for the delta hedge impact, looking at next year because I think the latest estimates we had for that was in the 20-F, and clearly, for instance, the number for this year is lower than estimated at the time, presumably on lower volume. But I was wondering if you had any revised guidance because I think the latest one was $650 million for next year. That looks high, given the recent quarterly run rate. Thank you.

Vincent, you ask tough questions. I'm not sure whether we have a good read on overcapacity of flat in China. I don't know if Gonzalo or Sudhir have more information on that. If they do, they can jump in after I finish answering some of your questions.

I think your first question was on whether we want to invest further in distribution in the United States. Is that correct?

Well, whether you want (multiple speakers)

I don't think the consideration has been driven by lack of cash. It's primarily been on where we see the best opportunities for this organization. And in terms of where we see the best opportunities remain Brazil, India, and mining.

We have a large distribution organization, as you know, AMDS. It continues to do well, but it is not necessarily the highest ROIC performer in the organization, and therefore I think the considerations are more driven by that -- with those changes and the real or apparent demand outlook.

In terms of DDH, you're right. The run rate has been lower in 2010 compared to what we may have indicated at the beginning of the year. I would expect a slower run rate to also continue for 2011, so this is very preliminary. We haven't -- we have not run scenarios for next year, but I would expect it to be around $400 million. And (multiple speakers)

On China. When you talk to the Chinese companies, and China is [a station], they believe that they're more than 100 million tons of excess capacity.

But the important thing is to see that they are very flexible in their approach, and when they do not see return on their business, they shut it down. So it is very difficult to estimate what is the real capacity.

In what we have seen recently, first of all we see that their domestic prices are higher even than United States, which is a good sign because, historically, Chinese companies do not want to have a high return on their [steel]. So they have been a low profit earner, and now we see that their domestic price is higher, and when there is a surplus in the market and the prices start going down, one can clearly see the Chinese are more flexible and more adaptable to cut production.

So, what I'm trying to say here is that they do have surplus capacity, but that the same time, they have become much more flexible and adaptable following the market. Even their export numbers this year are showing that the net export from China will be about 27 million, 28 million tons, whereas there was some fear that China would be exporting more than 60 million tons or 70 million tons this year. So, there is a -- some kind of a balance between supply/demand and a balanced approach to our export.

Ephrem Ravi, Morgan Stanley.

Ephrem Ravi from Morgan Stanley. Two questions. Number one, can you give us a sense of the amount of tax loss carryforwards that you are carrying right now, and any sense as to when, on a P&L level, you would be expected to kind of pay tax in 2011 or 2012?

Second question, just on the outlook for the European long products business, there was some talk about a month ago that you were seeing some recovery in southern Europe, especially kind of in Spain as the import pressures declined. Are you seeing a reversal of that? And is your guidance reflective of this recent change in trend?

Should I go for the second one, then? For the second one, for long, I have to tell you when we were one month ago or 1.5 months ago probably, we were more optimistic than today.

Why? We think there's been various factors. We've seen demand, but we spoke before, we don't believe the stocks in Europe are high, but at the end, our end users are buying what they consume. There is no, I would say, need or willingness to do stock, so there is really very little apparent demand on one hand.

Second and very important, first I would say the most that we have had the scrap going down lately, not only in Europe but also in US. With this, the minute scrap goes down, U.S. and Europe [what it is]. We have lost between 10% and 15% of scrap in the last weeks, and clearly that grows back our customers, all the distribution, the customers of our customers. So people at the end have drawn back in terms of buying.

So at the end, I would say, there's a lack of confidence, as was said before by Mr. Mittal, for the moment. I would say from a macro perspective and from this more micro-perspective, we are not that optimistic on the long. Reconstruction market continues to be very low, and we have very little demand in all the construction side, not only for southern Europe but also for central, and Eastern Europe is a bit better.

Regarding your NOLs, we'll get you an updated number as of third quarter. I don't have it in front of me.

In terms of overall taxes for the quarter, deferred tax was 773 and cash -- and current tax was 207. We are paying cash taxes. We pay cash taxes 2009, 2010 similar to the current tax number that you have seen through the quarters for 2010.

We would expect to have slightly higher cash taxes in 2011, but still lower than the -- but still lower than an ETI rate of 15%, primarily due to increased taxes due to mining royalties and mining tax payments. So, I hope that answers your question.

Andrew Snowdowne, UBS.

I've got a quick question, first of all, on maybe just talk about the inventory build that's taken place in Q3. Previously, the guidance was shipments down 5%, followed by a 5% rise. If I look through the numbers now, it was actually down 8%, and if I look at production to shipments, it appears as if there was a fall in shipments, particularly in flat carbon Americas. So I was wondering whether you could give us more color in terms of where the disappointments have come in on shipments, if indeed flat carbon Americas, which is the most [it's pointed] there as previous guidance, and any sense now, going into Q4, where you're saying production capacity utilization will be flat and, hence, shipments up, suggesting that you're looking to draw down inventories. Maybe just give us some numbers in terms of whether you would expect inventories sitting at your producer level to have been -- have reached back to normal by the end of the quarter. Just some more color on all of that.

And then, the second question, maybe just more -- some more color on your Ukrainian assets and the news flow that we've had recently where there was a court case that was subsequently dropped. Maybe if you could just update us in terms of investment programs that are still needed there, whether there is any change in your previous thinking, given the noise that came out versus what you're presenting on your -- at your Investor Day, and also how this impacts your thinking in terms of other inadvertent [commerce], risky investments in northern Africa, et cetera, where again, ownership may become an issue going forward. Maybe some general thoughts on that, please.

I'll start with your first question, and then we'll pass it on to some of our colleagues.

Andrew, I think your first premise is right, that fundamentally the market is weaker than we had anticipated or discussed a quarter before. I think the most pronounced weakness what we're seeing is in North America. And we had volume losses in North America.

We saw manufacturing activity actually decline by 0.1% in the United States in September. And we have seen almost a destocking which has taken place in the U.S., so apparent demand has come down significantly.

In terms of just pure numbers, 2Q to Q3, capacity utilization is actually measuring what happened on production at STA. So, capacity utilization moved up from 71% to 72%, and ship -- and shipments, you're right, is down by 7%. And so, the shipments which are down are primarily in the U.S., and also slab exports in Brazil which reduced.

So that's what -- those are the effects that we are seeing in the third quarter, and some of those effects, especially at STA, continue into the fourth quarter, most pronounced in Brazil, for some of the factors we discussed.

Clearly, the reason for this, we feel, is a lack of confidence, and therefore the service centers are not maintaining inventories, but destocking. To the extent that confidence returns soon, there should be a restocking cycle which would imply significant increase in the level of shipments. And as a result, we are also bringing down some of our inventories as they increase in the third quarter by maintaining production, but increasing shipments into fourth quarter.

One was Ukrainian assets.

In terms of investments, I don't know if Christophe wants to answer or -- . In terms of Ukraine, you are right, we have -- we were taken to court by the government, which case was [with ron] because we have honored our investment obligations.

We will continue to offer honor our investment obligations and we are investing in our facilities in Ukraine, and there is no change in program or plan

Maybe I would comment one second. We have negotiated with [brevard mountain] last year, suspension of this CapEx program due to force majeure, and we are feeling this force majeure situation, but we have -- strictly it has [respected] our [shell] commitment, which was absolutely key for the government.

And we will -- following Mr. Mittal's visit last week, we already discussed with state property fund how to best implement this program.

Third question was on North African assets, basically you said the high risk. I don't see them as high risk. I think we have two good assets. One of them in Morocco, you know we have one-third. The other third is with a state-owned agent, and we control two-thirds. The rest is on the stock. It's a mini-mill with two rolling mills.

I have to tell you we are very happy with that investment. The market has been good until a couple of months ago where the market has become more difficult. Why? There's less demand on one hand, and due to the excess capacity there is in the south of Europe, which many people have been exporting to Morocco.

We are happy with that asset and we believe it's part of our portfolio and makes a lot of sense for us going forward, and it's becoming more efficient and it's on the minimill base.

Then we have another asset that is Annaba, where we have -- Algeria. That is where we have 70% and a state-owned agency has another 30%. Clearly, it's an asset where we do flat products and long products. It's an interesting and good challenge for us, but we have very good relations with the government. We do have a good plan for that mill, and we want to continue improving and performing in that mill, which is also a key asset for us going forward. Thank you.

Rochus Brauneiser, Landsbanki Kepler.

It's Rochus Brauneiser from Kepler. Just a few follow-up questions from my side, if I may. The first is related to your shipment and production performance in Q4.

You said that the utilization rate would be flat at around 70% while volumes are recovering somewhat on a seasonal basis. Can you give us some sense how much inventory you want to draw down during the fourth quarter? Are we talking about 1 million tons? Are we talking maybe about more? Could you give us a split in terms of utilization rates, rates by division? That would be my first question.

The second question is regarding your expectations for the fourth quarter now. If I remember correctly, you previously stated you need a $70 price increase on your spot business to get back to the second quarter margin level. If I -- if we take the new guidance now, what kind of price expectation is behind that one? Does this mean you're expecting no price increase at all or does this new guidance imply any decrease in prices? And did your previous comments on the margin include -- already include the forestry gains?

And the final question may be on your structural $150 margin you intend to achieve over the cycle. Is this assumption still applicable in an environment where Western countries are suffering from overcapacity, and this probably could persist over the next three to five years? Is there any adjustment to this figure we should keep in mind for the next one or two years or so?

Let me just try and also come back to what Andrew asked and what you're asking because they're very similar questions. I think at the second-quarter earnings release, we had said two things. Number one, that we are entering the summer slowdown and the outlook is negative, but we expect that when we come back and announce our third-quarter results, people will be buying. Ramadan will have been over, and there will be an increased demand from our customer base.

But what has happened is, after we have come back from the summer, we have not seen that change in the demand environment, i.e., the normalization of demand, rather. In the U.S., for example, we are seeing restocking. In the Middle East, we have not seen any movement, and similar sluggish signs are continuing in Europe. So, that's the first thing, just on the overall capacity utilization production.

As a result, we are expecting shipments to increase only marginally into the fourth quarter, roughly, let's say, 700,000 tons plus. So the level of drawdown of inventory would be around that level, not more than that, because capacity utilization is more or less flat or slightly down compared to the third quarter.

In terms of price, your next question, we had talked about a $70 increase in price to maintain second-quarter EBITDA. Second-quarter EBITDA was about $2.3 billion, and if you look at our guidance of fourth quarter, it's between $1.5 billion to $1.9 billion. The midpoint is $1.7 billion.

So let's take the $1.3 billion difference, and that basically explains almost $70 on a spot basis. Because we have 80% spot, which is about fifty -- that means $56 times the shipments we have of about 21 million tons provides you the $1.3 billion bridge.

So what we're seeing is from second quarter to the end of fourth quarter, we expect prices to remain the same, i.e., sideways movement in price, no change in the price environment, and as our costs continue to rise and volumes are less than 3Q, which also causes costs to rise, we have lower EBITDA guidance. That's on the macro side.

Clearly on the micro side, there are some particular impacts, such as ArcelorMittal Mines Canada, weakness in South Africa, domestic market weakness in Brazil, which is exacerbating the weakness that we see in the fourth quarter.

In terms of your forestry gain, that's a one-time item in the third quarter and that's not part of our guidance for the fourth quarter. In terms of $150 per ton, clearly that remains the long-term aspiration of the organization. And we were getting close to it in the third quarter, but clearly when you operate at 70% capacity utilization, it is difficult to earn $150 per ton EBITDA on the steel we sell.

Louis Sarkes, Chesapeake Partners.

I was wondering if you could sort of build a bridge in terms of if we look at where EBITDA was this quarter at $2.3 billion, if we take the midpoint going to $1.7 billion for Q4, the difference is $600 million. Of that $600 million, about how much do you think of that decrement will be attributable to price pressures and how much to cost pressures? Is there any way to sort of break that out, because I'm assuming that it's steady-state inasmuch as shipments will be about the same.

It's roughly half and half is the short answer. Clearly the costs are rising, and selling prices are coming down. But the reasons are slightly different, so maybe if I get into a bit more detail.

Pure selling prices are not down as much. They are more or less flat. There are some changes in the Brazilian market, but more or less flat. The change in selling prices is occurring also due to mix effects, such as that we have to export more from Brazil than sell into the domestic market, and the domestic market clearly provides a price premium. We have the same impact in South Africa. We have the same impact, much less, but in our Kazakh facilities, where we are no longer selling in the regional domestic markets but have to export that.

So clearly, that is causing the average selling prices to come down, third to fourth quarter, and there is some marginal increase in costs from third to fourth quarter that is occurring, primarily as the last impact of the raw material cost increases flow through our income statement. Our expectation is that costs will not rise into Q1 2011.

Okay, thank you. So costs basically are around $15 per ton, if it's really half and half on a global basis. The cost increase, the incremental cost.

Yes, roughly that's correct.

Charles Bradford, Affiliated Research Group, LLC.

I guess it's good afternoon for you. How about an interest expense figure for the fourth quarter? Can you give us some guidance?

I don't have the guidance in front of me for interest expense. I would expect the interest expense level to remain where we are in the third quarter.

We have some net debt reduction that is forecasted, so to that extent there would be a lower interest expense. To the extent that the euro depreciates, i.e., does not remain at the levels it is, there will be further positive impact.

Those are the two main drivers, but there could be a small decrease just because our net debt is increasing, but overall, very similar to what we have in the third quarter.

And an item on the raw materials side, you implied that the first quarter wouldn't have the further increase, in the answer to the last question -- questioner. What about coking coal? What are you looking at as far as next year as far as world coking coal prices?

This is Davinder Chugh. I think the coking coal market is largely in balance, but the only difference that we are passing through a period where there are some seasonal issues -- more rains. Some infrastructure problems, small, which are getting reflected on the spot price very currently. Otherwise, we don't expect very big changes in the coking coal prices.

Traditionally, quarter one is also a period when we have rains in the Southern Hemisphere, including Australia, that can cause some short-term influence on the spot market. Otherwise, we believe it's in balance.

Michael Shillaker, Credit Suisse.

I've got three very quick questions. First question for Michel, I guess. Given that some of your peers in Germany and Austria are still running at what appears to be flat out, and therefore given that you appear to be taking an unfair burden and, I guess, an unsustainable burden of discipline in the European market, do you have any, A, more targets to actually take more share in some of the stronger markets such as Germany, Austria, et cetera?

Second question, very, very simple, can you just remind us what your percentage of long-term contracts are renewable, if you have any renewables still on January 1 that are more of a quarter of duration?

And the third question, more hypothetical, have you looked -- and I know I think Andy asked the question a little, but have you looked at downsizing the business at least partially to meet what could be a very challenging environment for the next three to four years? And if you did that, have you got a sense of the additional chunk of fixed costs that you could take out, and therefore what your sort of hypothetical EBITDA would be if you did actually downscale the business and take out what could be a reasonably significant chunk of fixed costs? Thanks very much.

Okay, so that's a big program for the three questions. First of all, I think in Germany, we are running full. So we have four blast furnaces in Germany, and the four are running at good capacity. And I think that we have our market share, we keep our market share, and definitively we want to have our precrisis market share in the German environment, and I think that we have done good progress.

Also, we see automotive producers, so from that point of view if we are suffering more than the others that is set in thousand Europe markets much -- consumption is much lower. We see that in Spain, we see also in Italy imports. We have seen some imports and we have seen new capacity in southern Europe coming onstream, in particular in Italy with already having its new line coming and in a market which is declining.

Last region is Eastern Europe. Eastern Europe has suffered from the crisis, but is bouncing back, and I think that for the future, especially starting from our Polish operations, there is a good prospect to come back and probably even also to have some good mix for German -- all German customers also localizing in Poland or in Eastern Europe, where I see quite a good chance to develop.

Then in terms of long-term contracts, I think in the case of flat carbon Europe, there's a little bit less than 40% which is contracts in terms of volumes. There is some renegotiation starting on -- in the fourth -- in January and other ones in the second -- in the first half of next year. The absolute number, I do not have it in mind. The number is significant, but it is less than 50%.

And then, in terms of improvement, so I think fixed costs is a question of -- I think they have two ways to look at fixed costs. First of all is to try to reduce fixed costs when you do not produce, and I think we have learned something during the crisis when we were idling some of our blast furnaces also in the way how we organize our maintenance, and I think that if you look at the overall performance of fixed costs and management gains which have been shown in the presentation, European part is a very significant one in that, so we have done quite good drop, and it is clear that if we need to continue to idle our capacity, we will continue to do it.

Where we are working today also in the next period of management gains is obviously looking at our fixed costs, but also looking at our variable costs. And what we have done is in each of our sites, we have the so-called site improvement plan, which is done in the, let's say, in the flat carbon Europe way, very systematic way, with very good cost improvements on one hand side.

And the other initiative we are taking with our colleagues from mining and from purchasing is in the optimizing of our raw material utilization and from group, so we will be billed at market price, but in terms of total cost of use, I think there is a lot of optimizations we can do in there. I think there is also a major improvement potential for flat carbon Europe.

Just very quick follow-up, when you look at market share in Europe, do you look at Europe as an entire market or do you look at it as country by country? Because you say you're working flat out in Germany, but obviously you're not working flat out elsewhere. Are you content with that situation?

We use both, but it is not very realistic, let's say, also in overall balance to say, okay, the Spanish market is down by 30%. We have a 50% market share in Spain, so we go now and we take a very aggressive approach in Germany. This is not how things are working.

So in Europe, there is a global market share. There is market share versus the overall European market, and also versus the Euro fair producers, but on the other hand, we have -- we've taken a market-by-market approach where you know since one year's time we have reorganized flat carbon Europe in four business divisions. Southwest, that is Liberia, Italy, southern France. There is the north. There is Northeast and there is the Balkan region, and in each of these regions, this is what -- where we have the bulk of the market share and where we want to have our own share, so that is the way how we are looking at it.

Just to add to what Michel is saying, Michael, recognize that we are the second largest steel producer within Germany. So we do have a vested interest, especially when you look at prices. Prices in northern European are higher than prices in southern Europe. So it's not just simply transferring tonnages because we would lose on our existing strong position in Germany as well.

And just to add to what Michel said on the overall management gains, I think clearly the focus for 2011 remains how we accelerate the savings that we have, the $2 billion in 2012, how we can bring that forward. We are asking all those questions, having discussions, analyzing, thinking out of the box as to what we can do in terms of the 2011 planning cycle.

We'll now take our final question from John Klein, Berenberg Bank.

My first question would be, what do you think the analysts or the consensus, if you saw one, got wrong in terms of Q4 because estimates were clearly too high? Do you think that the community got it wrong on the cost side or that rather that pricing was seen too positive?

And the second question would be, you say in your report that there was a lower income from your mining operations in the FCA division. Maybe you can give us some more color on that. Thank you very much.

I think the main change which has occurred is basically prices, and the spillover effect it has had on volume. I think the reason why prices have not been able to increase is primarily because of a lack of confidence.

And instead of customers maintaining inventory levels, customers have begun to destock, and it's very difficult to drive a price rise environment. I think the industry tried that. If you noticed in the United States, when there were two price hikes that were announced, they failed. And so, clearly, I think that has been the biggest negative moving from the second quarter into the fourth quarter.

And as you know, costs have continued to rise. So there has been a margin compression because of the inability to pass on prices.

In terms of the other effects, they were just to provide some color and commentary to segment results. But overall, if you look at the organization, that has been the single biggest impact or change in terms of guidance for the fourth quarter.

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