ArcelorMittal SA (MT) 2011 Q2 法說會逐字稿

Dear analysts and investors, welcome to the ArcelorMittal Second Quarter Results 2011. You are invited to register for questions at any time during the statement by pressing star-one on your touchtone telephone. 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 question. This conference call will be recorded. I'll leave the floor now for Mr. Lakshmi Mittal, Chairman and CEO of ArcelorMittal.

Thank you. Good day to everyone and welcome to ArcelorMittal's second quarter 2011 results. I am joined today by my full Management Group; Aditya Mittal, our CFO and Head of Flat Caron Europe; our new GMB member, Louis Schorsch, who is in charge of Flat Carbon Americas and the Strategy; Michel Wurth, who is responsible for our Long Steel business in Europe and the Americas; Peter Kukielski, who has responsibility for our Mining business; GonzaloUrquijo, who is now responsible for AACIS; DavinderChugh, who continues to lead Shared Services; and Sudhir Maheshwari, who runs Corporate Finance and M&A. We are also joined by Genreno Christiano from my -- from our finance team, and Daniel Fairclough from IR.

Before I begin through this presentation, I would like to offer some brief observations. Firstly, the Group's performance in second quarter '11 and, indeed, the first six months of 2011, has been very pleasing. We have showed continued improvement in our profitability. EBITDA for the first six months is over 30% higher than the same period of last year.

Secondly, economic momentum has slowed in recent months and there are uncertainties, but I do not expect a double-dip recession. Spot steel prices have been under pressure, but are now well supported by fundamentals. This gives me confidence to press on with our plans for growth. And we will talk more about later we have increased the 2011 CapEx target by approximately 10% from a planned $5 billion to $5.5 billion.

I will begin through this presentation with some overview of our results for the second quarter and update on our CapEx plans and recent developments. I will then spend some time (inaudible) before I hand over to Aditya to go through the results and guidance in more detail.

Starting with Corporate Responsibility, our number one priority, safety. Unfortunately, health and safety performance deteriorated marginally to a lost time injury frequency rate of 1.5 times in the second quarter of 2011 as compared to 1.4 times for the first quarter of 2011. However, our year-on-year trend remains clearly positive.

There were improvements achieved in the safety performance of Flat Carbon Europe, Asia Africa and CIS and Distribution Solutions, but offset by bigger performance in Mining, as long as the Long Carbon Americas and Europe and the Flat Carbon America segments.

Let me reiterate that I expect ArcelorMittal to make continued progress in safety performance as we strive to be the safest metal and mining company in the world.

Turning to our second quarter performance, this was a strong quarter, the best since the crisis, and with no nonrecurring elements. Our profitability continues to improve year-on-year and, in fact, our EBITDA in the first half of 2011 was nearly 33% higher than the first half last year.

EBITDA during second quarter was 22% higher than a year ago and at least over $150 per tonne. This is a level we hope to achieve in a normal operating environment. Considering where construction markets are, this is a very positive achievement.

Momentum in our Mining business continues to build. Year-to-date, our iron production is 24.9 million tonnes and we continue to target 10% production growth for the full year, which suggest a stronger second half.

As we expected, our net debt rose in the second quarter on account of investments in working capital. Net debt is now $25 billion, which compares favorably with the $22.5 billion level pre-crisis, but is slightly over our target levels of approximately $22 billion to $23 billion. I think we can accept this slightly high level of net debt for two to three quarters, but it is not our intention to maintain this level.

Like our results so far, our guidance points to continued year-on-year improvement in our volumes and our profitability. Our specific guidance for third quarter EBITDA is of 2.4 -- between $2.4 billion and $2.8 billion. This compares to less than $2.2 billion in third quarter 2010. Aditya is going to go into more detail on our guidance later in this presentation.

Now, to update you on our CapEx plans. With the progress of recovery in the global economy, we are continuing with our growth projects. In May, in the month of May, we announced the expansion of our iron ore operations in Canada that is formerly Quebec Cartier Mine. This is one of our flagship mining assets and is an important component of our strategy to grow our iron ore production to 100 million tonnes by 2015. We will be expanding our iron ore production from 16 million to 24 million tonnes by 2013. The CapEx for this project is $1.2 billion, so the CapEx intensity and operating cost portion is attractive.

In Liberia, iron ore production has begun and we expect 1 million tonnes of production in 2011, ramping up to 4 million tonnes next year. This project is our greenfield project, another integral part of our growth plan, which will increase to 15 million tonnes annually by 2015. The (inaudible) of the project, which will take annual production up to 15 million tonnes, will require investment in a concentrator, which is under the final stages of approval.

On the steel side, we have just approved the expansion at Vega Do Sul in Brazil to increase our cold rolling capacity by 700,000 tonnes to 2.1 million tonnes, and our hot dip galvanizing capacity by 600,000 tonnes, taking us to 1.4 million tonnes. The cost of this expansion will be around $350 million per tonne with -- $350 million, with the new capacity coming on in 2014.

We are well positioned strategically to continue increasing our [value/debt] capacity in Brazil as the domestic market evolves. Due to these essentially approved projects, we have increased our 2011 CapEx by 10% from $5 billion, going up to $5.5 billion.

If we move to the next slide, we are also interested in increasing our coal position. On 11th of July, along with Peabody Energy we announced that we made an indicative nonbinding and conditional proposal to purchase Macarthur Coal through a joint venture, 40% owned by ArcelorMittal and 60% owned by Peabody. As ArcelorMittal already owns a 16% stake in Macarthur, if we assume that we achieve a minimum participation of 50% plus 1 share, our cash outlay for this transaction would be around AUD200 million. This would then potentially be a small cash outlay to secure benefits for ArcelorMittal.

Next, I want to discuss the market outlook. It is clear that apparent demand has lost some momentum in second quarter after a strong first quarter this year. After raw metal prices peaked late February '11, demand in Japan and minor countries weakened sharply and, globally, production of light metals were reduced in the quarter due to Japanese supply chain effects.

Apparent demand has also been impacted by spot price weakness. So apparent steel consumption, excluding China, was up under 2% year-on-year in second quarter after over 9% growth in first quarter.

Regional PMI data has declined and this reflects some of the uncertainties that are overshadowing markets today. But, if we look at the [lag] in demand, it is not all bad news; far from it. In developed markets businesses have sufficient funds for investments. And so, one of the strongest sectors is machinery and equipment. This fell around 50% through the crisis, but is back to within 10% peak levels in Germany and USA.

Auto production is still growing year-on-year in both Europe and USA, but is still between 10% to 20% below 2007 levels. Of this, commercial vehicles are growing strongly this year as businesses begin to up-build fleets, but this was after much larger falls over 2008 and 2009. So, while we are conscious of the directing leading indicators, we are not seeing this in our business.

The construction market, which represents one part of the global steel demand, has not yet recovered, but we believe it is beginning to stabilize at a low level. US construction indicators, which you can see on this top left graph, while is still much lower than peak levels, have been stable in both the residential and nonresidential for some time. These are signs of slight improvement and we can see this in residential construction, with new home starts at a six-month high and forward-looking permits rising, particularly for multi-dwelling housing, which is more steel intensive than single-family housing.

Nonresidential construction leading indicators continue to disappoint us as the June ABI came in below 50 for the third consecutive month. As such, we do not expect a recovery in nonresidential construction until 2012.

In Europe we continued to see a two-speed recovery with construction demand in Northern Europe improving, and Southern Europe continued to be weak.

In the next slide about China, leading indicators for China, measuring floor space under construction and newly started construction continue to climb. Although government manages to curb output, specifically controls on private real estate, have began to (inaudible), any slowdown will likely be offset by increased public housing projects. The special housing facilities by central government, up three-fold in second quarter '11 over first quarter '11.

Exports, having peaked in March at 4.8 million tonnes, fell for the first third straight month in June and 4.3 million tonnes, down 23% year-on-year basis. This downtrend in exports is expected to continue as export prices have softened. For 2011 we are forecasting around 8.5% (inaudible) to steel growth in China. Globally, we now see demand growing at 7 -- between 7% and 7.5% this year, slightly higher than our forecast of 6% and 6.5% at the beginning of this year.

So, that is the demand picture. Now, we move on to inventory. The inventory picture in the various regions continues to be supportive, with the exception of Brazil. In the European unit, service center inventory levels continued to hover around two-month level, 2 million tonne level, with a month's supply of -- month supply steady at 2.1 months.

In the US, total steel inventory or the service centers declined slightly in June and currently represents 2.4 months of supply. So, slightly below 2.7 months. That would be considered normal.

In China, which is the chart on the bottom right, inventories have declined for 5 successive months and are now 10% below the levels 12 months ago, coupled with an increase in demand.

Now, the final slide for me on the raw materials. Raw material prices -- levels remain elevated and provide clear support for steel prices at or above current spot levels. Importantly, the differential between the steel prices in the US and Europe is now more competitive with those in China. The differential three months ago was around $200 per tonne; even wider in the US. The difference is now almost completely narrowed. So, the combination of positive floor inventories is still improving underlying demand and the narrow price differential are all very supportive of steel price levels.

With this, I had it over to Aditya, who will discuss the financial results and guidance in more details.

Great. Thank you. Good afternoon and good morning to all. I'll start with page 14, where I'll touch on the segment highlights, and then move into more detail on our second quarter results.

Looking at our EBITDA on a year-on-year basis, our second quarter performance is $3.4 billion versus $2.8 billion in the second quarter of 2010. The main drivers of the $600 million year-on-year improvement came in FCA, where EBITDA increased by over $250 million, and in mining, where EBITDA increased by over $190 million on account of increased production and higher market prices. We also saw improved performance in FCE and AACIS due to stronger margins.

Only long carbon and in AMDS did we see a deterioration in EBITDA on a year-on-year basis. For long carbon, the decline is largely accounted on higher price cost squeeze due to greater import pressure in our business in Brazil. The AMDS EBITDA is lower year-over-year basis due to a lower price cost benefit as compared to the second quarter of 2010.

Overall, this is a very strong quarter, the highest EBITDA we have achieved post-crisis and we are very pleased to see our EBITDA back above the $150 per tonne level.

Turning to page 15, EBITDA analysis. We have a bridge here to explain the 32% increase in EBITDA from first quarter EBITDA of $2.6 billion to second quarter EBITDA of $3.4 billion. Volumes and mix added $178 million to the quarter. Considering that steel volumes are only marginally higher than Q1, the majority of the impact is due to the 37% increase in shipments of iron ore following the weather-related impacts that we suffered in Q1. Furthermore, we had a favorable mix improvement, which was largely in FCE.

All steel segments, except for long carbon, during the quarter had double-digit selling price increases. These increases observed in Q1 translated into an increase in average selling prices for the quarter exceeding the impact of increased costs by about $839 million, which is approximately $40 a tonne.

There were no other nonrecurring elements in the quarter, other than adjustments of provisions for inventory valuation and litigation that we detailed in Q1. These adjustments comprised a bulk of the Others category, together with a difference in our dynamic delta hedge, or DDH income, which was $189 million in Q2 compared to $119 million in Q1.

Turning to page 16, this provides you with a perspective of our income statement or P&L. We will focus on the chart in the upper half of the slide, but you have the comparative figures for the previous quarter in the lower half.

Pointing out the key differences below the EBITDA line, income from equity investments increased by $141 million over Q1 to $289 million due to improved earnings at operating investees. These are companies like Dillinger Hutte, our German heavy plate producer, China Oriental, Eregli Demir, Gonvarri, Gestamp, Macarthur Coal, etc.

Fixed costs for -- sorry, not fixed costs. Finance costs for our second quarter was $904 million. Interest expense was more or less flat; however, Forex costs declined compared to Q1 due to less significant depreciation of the US dollar relative to Q1 '11.

Income tax expense was $61 million. It was compared to a $166 million benefit in Q1, which benefited -- in Q1. And Q1 benefited from a higher deferred tax element.

This quarter saw a significant change in our discontinued operations. This quarter there was no income or loss from discontinued operations, which is Aperam, as per -- instead of Q1, where we saw a $461 million impact from the final accounting impact for the Aperam demerger.

If we exclude discontinued operations, our net income increased by 150% from $608 million to $1.536 million (sic - see press release).

Let me quickly turn to the free cash flow page. Here, we basically take our EBITDA performance down to our free cash flow performance for the quarter. As you can see, we made a significant investment in working capital during the quarter. Of the $2.8 billion increase in working capital, $2.2 billion was due to increased inventories. Inventory days remained at 104 days, the same as Q1, so this investment was largely due to higher prices. CapEx for the quarter is very similar to the previous at $1.1 billion, taking free cash flow to a negative $1.6 billion for the quarter.

Turning to the next page, 18, the negative free cash flow was a key driver of the $2.4 billion net debt increase in the quarter, as you can see from the chart. And as we discussed earlier, the significant part of the free cash flow begin negative was the working capital investment.

Net M&A spend was a relatively modest $0.2 billion. This is largely on the Prosper coke asset, which is a 1.8 million tonne coke factory that we bought in Germany for about $200 million, an acquisition of Cognor distribution assets in Poland for $76 million, offset by some small asset sales during the quarter. Dividends were the same at $0.3 billion. And the other element of this bridge is largely on account of capital ease impacts.

These factors result in a net debt of $25 billion for the quarter. As we heard earlier, we feel that the right amount of net debt for this organization is lower, but it may be a few quarters before we achieve a lower net debt level.

Liquidity remains strong at $12.3 billion, composed of $3.2 billion of cash and $9.1 billion of available lines.

With that, let me turn to guidance and the last slide of our presentation this afternoon. That's on page 20.

In terms of the guidance, I'm going to first address our second half 2011 expectations compared to second half 2010. And then, we'll address the guidance for the third quarter specifically.

Overall, we can see improvement in our steel business as the underlying recovery continues on a year-on-year basis. In mining, we continue to target iron ore production to increase by 10% this year, and for coking coal, a production increase of about 20%. Compared to the same period of 2010, mining will also benefit from higher prices while costs should remain broadly stable. So overall, for the second half of 2011, we expect Group EBITDA per tonne to be comfortably above the second half 2010 level.

Specifically for the third quarter, raw material accounting costs are expected to increase from this quarter and, as a result, we expect EBITDA to be approximately between $2.4 billion to $2.8 billion.

As we mentioned earlier, we expect our working capital requirements and net debt to remain stable as compared to the second quarter of this year.

I would like to finish my remarks here and hand over to the operator so that we can take your questions. Thank you.

Thank you very much. We will now begin the question and answer session. (Operator instructions.) Anindya Mohinta, Citigroup.

Sure, thank you. Thanks for taking my questions. My first question is on the mining division. If I look at the margin in mining in Q2, it was slightly lower than Q1. Could you give us a sense of what we should expect for unit costs in iron ore and coal going forward for perhaps the second half, if you can, for Q3 and Q4 in terms of what you see at the moment?

The second question is perhaps for Lou, but maybe also for Aditya. Just your thoughts on what you're thinking on the outlook for sheet prices in the US given the service style assets are being ramped up by RJ Steel. Also Thyssen (inaudible) ramp up more. How do -- what do you think about this excess supply and if this excess supply will be easily absorbed by the market? Thank you.

Sure. The (inaudible) in operating costs is largely a function of foreign exchange in Canada and in Brazil, input prices and a bit of maintenance. We expect the cost base to remain constant through the next quarter.

On the pricing environment in North America, I think we still are experiencing some downward pressure on prices. Nevertheless, we look and expect that we're near a bottom on that front. I think you can look at some indicators. The inventory levels, for example, are still relatively low. Imports, we think, are coming down. The price differential between US and Rest of the World has come down quite a bit recently.

And finally -- well, we'll see what happens to scrap pricing. The margin between scrap and the sales price is now at a relatively low level. So, I think there are some indicators that say we should be prime for some at least stabilization and potentially recovery in price in the second half.

Alessandro Abate, JP Morgan.

Good afternoon and good morning to everyone. Just one question on the long products. How do you explain that basically scrap is (inaudible) in Q3, which is in theory the quarter with the highest weakness of scrap price, and long products actually absolutely doing extremely well, let's say in the Asian market, (inaudible) serious market? Do you see going forward, especially by the end of Q3 heading into Q4, a potential positive impact on your long steel division following probably some (inaudible) uptick in demand in Middle East and North Africa (inaudible) and the China '12 five-year plan? Thank you.

Okay. I had some problems to -- okay. I had some -- I think that I got most of your questions and based mainly on the evolution of long products in relation to the scrap prices. What we can say is that, first of all, I think that we have to differentiate a little bit between the regions in the sense that in Q2 there was a positive price cost -- or margin opening in Europe with stronger results.

We have seen now in the scrap, also, if I remain in Europe, in mid-June we have had higher scrap price. Prices have gone up a little bit, which means that there will be probably in the next month a negative price cost squeeze on top of that in Europe. Also in long, you have to see that in construction market is quite -- or construction business is quite closed in July and August so that consumption goes down and that volumes -- consumption volumes will be lower intense overall as the evolution should be negative in terms of results.

In the Americas, I would say the situation is a little bit different in the sense that there we have stronger economic activity and we could probably foresee that the situation is improving in this period, with Brazil going up.

And last but not least, I would like to highlight also that, in Brazil, a little bit on what people have told for mining. We have had a negative effect on -- due to the exchange rate, which means that the cost in -- expressed in US dollars have indeed increased and tends on a year-to-year basis margins have decreased despite a positive evolution of (inaudible).

Then last but not least, maybe Canada or North America. Canada is doing quite well also in the long products.

For the long products in the other areas of the world, maybe AACIS, we do see a positive behavior. Now, we have seen the Middle East and Far East and Africa that construction is -- we've had consumption and demand from the construction side. And we've seen a good behavior in the last two months and somewhat going forward for the future in these areas for long products. Thank you.

Just one question -- just a quick follow-up question. I mean, (inaudible) seems to be heading towards -- let's say a bounce back from the trough. Don't you think you might be having a positive impact on the level of demand from your Central and Eastern European facility on the long products side? Thank you.

Yes. I think what I was saying, so in Q3 you have to -- also in Central and Eastern Europe you have see the seasonal decrease, which is also happening there. But (inaudible), you're absolutely right. This is a good growth area, as well as for Germany and let's say the countries around Germany. In long production in general, Southern Europe is still very bad with very, very low consumption in spring in particular, but also in Italy due to a lack of construction activity and very significant over-capacities from supply side.

Thank you very much for the answer. Thank you.

Michael Shillaker, Credit Suisse.

Yes. The first question, actually, is that can you talk a little bit about how market shares are developing in your various markets, because there seems quite a discrepancy between the directional sense of shipments. And I know you talked about Europe as a destock in Q2. I think most of the world was going through a destock in Q2, and yet the US shipments were clearly up, or were more strong relative to Europe. So, are you losing market share in Europe, gaining in the US?

Hi, Michael. I'll -- let me try and answer that -- your question. I don't think we have dissimilar trends in the US and in Europe. Perhaps we're looking at different data. But in North America, Q1 to Q2, shipments were marginally down and, in Europe, we have slightly lower shipments in Q1 to Q2.

But in Europe, we have to understand that we have four divisions and the biggest loss of shipment that occurred was in Romania, because we had a blast furnace there, number three. We were running two furnaces there, which you take down the second furnace there for a technical maintenance and we lost about 20,000 tonnes in the quarter coming out of just Romania. So, if you strip that out and you look at the numbers, I think we have very similar performance in North America and in Europe. And I think it's safe to say that we're making gradual improvement in market share gains in both those areas.

That's great. A follow-up question, therefore, would be can you talk a little bit about how comfortable you are with the margin progression? Obviously, the US flat Americas was very strong, and if that's not a market share gain, then that's pure operational. Europe seems a little bit stuck in the mud in terms of margins at the moment.

So, can you confirm that the US or flat Americas was just pure, pure operational, not market share gain? And Europe, what is the plan because, clearly, on the EBITDA front Europe isn't in particularly good shape at the moment.

Yes, Lou can talk a little bit more about the US, but I think your assessment is primarily operational gains. I think we had a good quarter in the US in 2Q. We have performed well in [Burns] Harbor where we achieved good production levels. We also brought up a new furnace, which has lower-cost iron ore. So, all of those factors contributed and we shipped a good amount of steel as a result.

In terms of Europe, I agree with you, it's -- there are areas to improve, but we should focus on how the European competition is doing versus comparing FCA necessarily with FCE. But, there are areas and clearly we need -- we are going to start up some furnaces in the second half on the lower cost side and bring down furnaces which have a higher cost base. So, there is a footprint underway which should rebalance the production capacities that we have to a more lower cost orientation. I think that will provide some gains. And plus, there are other areas that we're looking at to try and improve the overall profitability of our European business.

So, Europe is going to be a key focus going forward, because I don't think that anyone's going to be happy with a 7.4% EBITA margin.

I heard the first half of your sentence. What was the second half?

Yes, so Europe will be a key focus for improving the performance. Because I think you look at the group and you look at what you've got, and I think the margin in Europe sort of almost sticks out as the weakest link at the moment.

I think that Europe is clearly going to be the key focus area if you look out for the next 6 to 12 months of ArcelorMittal's steel business.

Okay, very good. Alright, well done. Thanks a lot.

Lux Pez, Exane.

Hi, everyone. Two questions, if I may. First of all, on the US, Nucor was recently blaming for the negative impact on the US market on the start of new facilities. Not mentioning it, but I guess talking about Thyssen. So, I was wondering if we could have (inaudible) around that. Is it just (inaudible) or did you see natural impact from these extra volumes?

And the second question would be related to Brazil, which has shown quite a dramatic improvement in terms of profitability, especially in the flat business. How far are we in the steel destocking process there and would you expect for more improvement? Thank you.

So, then I think -- Lou would like you to repeat your question.

Yes. It just -- what I understood was to talk a bit about the new entrants and capacity issues in North America, at least as the first question. Clearly, we do have some additional capacity coming back on in the -- or coming on in the US. The TK facility is ramping up. Severstal has expanded its Columbus facility in Mississippi and RJ has restarted Sparrows Point. So, clearly that has created a bit of additional supply in the market, maybe more than a bit.

On the other hand, we still see the market climbing out of the downturn. We still expect apparent consumption to be up about 12% this year in the US and North America. There was a previous question about market shares. I think you have to be a bit careful to look month to month or even quarter to quarter on market share but, if I look at the first half, we are marginally up in terms of our market share in North America.

So again, hopefully the underlying increase in consumption will be sufficient to absorb the additional capacity that's come on stream. As Aditya mentioned, I think we had a strong operational performance in North America in the first half of this year and we'll rely on that to make sure that we're competitive in this marketplace.

The second question about Brazil was -- yes, well, could you repeat that --

Yes, sure. The second question was regarding Brazil, would show also quite a dramatic improvement in profitability. I was wondering if you could provide a bit of color, especially on the destocking progress happening there and when you would expect that to come to an end and perhaps see further increment in the profitability and prices.

Well, I think we have both flat and long businesses in Brazil, so let me talk about the flat side. First, we have to look at our flat roll Brazilian operations as really being two very distinct businesses. We have the slab business and we have the domestic sales in Brazil. The domestic sales have been relatively stable and that continues to be a very strong market for us. So, what's really driving the improved performance on the flat side in Brazil for us is that the slab market was much stronger in the second quarter than had been the case previously. So, that's the major driver behind the improved performance there.

I think we see still a strong result in the Brazilian flat roll market. We did have a bit of an inventory bubble and some import pressure in the third quarter of last year. The imports are down in the second quarter of this year to about a third of the level that they were at in the fourth quarter of 2010. So, that's a significant improvement.

We're actually increasing marginally the shipments that we're doing there. And as Mr. Mittal mentioned, we're investing substantially to increase our value-added capacity at Vega do Sul. So, we're -- I think we continue to do well in that market. What moves the results up and down for our flat carbon business in Brazil is much more the world's slab market in terms of the results than it is developments in Brazil itself.

Maybe one word also about long in Brazil. So, on the quarter-to-quarter basis, we can see that Q2 had been better than Q1 in terms of margins and also in terms of volumes. If we compare Q2 this year with comparison with Q2 last year, the result was lower, but I would say mainly due to the foreign exchange effect. Because, what happened was, due to the appreciation of Brazil, that gave a pressure, or that was limiting the price increases in local currencies in Brazil and, hence, prices were in fact falling, which had a negative effect on margins.

But, from an operational point of view, I would say our Brazilian operations are doing well. We are shipping at least in trend with market demand and we foresee this year in Brazil also an increasing consumption in excess to 7%. And that's the reason also why the second half of this year should remain strong in terms of volume results; depend a little bit on the currency situation, as I explained before.

Rochus Brauneiser, Kepler Capital.

Yes, hi. Thanks. Good afternoon. Thanks for taking the question. Can we -- can -- briefly on the guidance here as given previously, obviously the shipments in the third quarter are expected to decline less than what we have seen last year, which was probably not a good comparison with the 10% decline. So, does this imply that we should rather expect something in the magnitude of the usual 5% to 6% you have seen as a seasonal drop in previous years?

And can you confirm that you are planning with a 75% capacity in the third quarter, as shown on Bloomberg? If that's the case, that would even imply that the seasonal decline could be less than what I said in terms of the usual magnitude.

And can you also comment a bit on the maintenance shutdowns you are planning for the third quarter in flat carbon Europe and flat carbon Americas?

And as a reminder, how much of the second quarter contract price increases, how much of that has been already fully discounted as of the end of the third quarter -- as of the end of the second quarter?

And finally, based on the apparent steel consumption forecast of some 7% for the -- for global consumption, your comments are probably pointing to less than that in terms of shipment costs. Maybe can you elaborate a bit where you're deferring compared to sort of global growth trends?

Okay, I think we got a few of your questions. And let us try and move down the list and then we'll try and come back to some of your other themes.

I think in terms of guidance for the third quarter, we are not forecasting a significant decline. If memory serves me correct, I believe we had a 14% decline second quarter 2010 to third quarter 2010, but we're going to double check that number and that may change. Usually, our thumb rule is about 10%. The reason why we are expecting the third quarter to be less than the 10% number is simply because we had in June a relatively low level of shipments, both in US and in Europe, as customers began to reduce their buy in anticipation of the change in prices that were occurring.

So, actually -- I actually do stand corrected. Second quarter to third quarter is an 8% decline on a quarterly basis. And we expect that decline to be less pronounced into the third quarter because of the reasons I talked about. I think the 75% capacity utilization number reflects that we may be building some more tonnes of steel, so I will not use that percentage to come to an accurate -- to come to a forecast of what our level of shipments would be.

And then, you had some questions on prices. And if you could repeat your question on prices and FCE and FCA. And in terms of automotive, most of the automotive contracts have been renegotiated in a sense that we do not have any legacy pricing in our order book now, especially in Europe. And Lou can comment a bit about the US automotive, which has a slightly different pricing environment.

So in Europe, most of our -- half of our contracts are index based, the others are six month type deals. And these are negotiations that are occurring based on what we believe is the fair value of the price of our automotive high-quality steels.

And just to comment on the structure in the US market, our contracts are typically annual and we do also have a mix of fixed and indexed contracts there.

Okay. And can you also comment on the maintenance shutdowns which might be planned for the third quarter? And your shipment -- and your growth outlook for the second half compared to the apparent steel consumption forecast you have given for the world -- for global?

Yes, we don't really comment on our maintenance shutdowns, not because it's secret, I just don't think you can gain anything from that information.

In terms of our apparent steel consumption forecast, I think our increase in shipments will be very similar to the apparent steel consumption increase that is occurring in the markets in which we operate.

Okay. That's very helpful.

Bastian Synagowitz, Deutsche Bank.

Yes. Good afternoon, gentlemen. Two questions from my side. Exactly has been driving the significant margin expansion in the AACIS business? You quote volumes and prices as the reason; however, we haven't seen levels of steel price increases in the Americas, as in the Americas, where your margin is almost up in the same magnitude, i.e., roughly $60 a tonne. And hence, I was wondering whether there was anything else which had been supporting the profitability, maybe (inaudible), which returned to a higher productivity again.

And then, secondly, in your first quarter presentation you had a chart on your raw material cost index and I was wondering here whether you could give us an update on that and how you expect the cost to develop in the third and fourth quarter? Should we expect the effective cost in the fourth quarter to be actually down versus Q3 given the slightly lower settlement of coking coal recently? Thanks.

Yes. I think we're just having a little bit of audio problems here. So, I think we understood your second question, which was raw material accounting costs. And you're right, raw material accounting costs are increasing from second quarter into Q3 and Q4. We had the same effect last year. As the raw material prices, especially of coal, have risen in the first half and, as a result, accounting costs arising.

In terms of your first -- the first question, can you perhaps repeat it or Gonzalo thinks it was --

Yes. AACIS, the improvement in the EBITDA of AACIS. And as you've said, it's basically due to two things, it's shipments that have increased on one side and probably 5 -- a bit above 5% and steel prices were up 11%. And that are the two basic reasons of our big improvement in EBITDA one quarter versus the other. Thank you.

Thanks. And maybe to follow-up on that, how busy -- how sustainable do you expect that margin to be, because it was really by far the best margin you had in the business and -- after the most significant margin step-up, also relative to the other businesses. So, could we expect this margin to be more sustainable given that costs in Asia have not come down -- prices in Asia have not risen as much and also not come down as much as, for example, India has?

I think in terms of margin and sustainability, for this area at least of AACIS, I think at the level of Kazakhstan and [Ukraine], it could be. And for South Africa, we're going to be impacted by an important strike. That has been factored in, of course, in our guidance. So, I do believe we will be maintaining two of the areas and not in South Africa due to that reason. Thank you.

Okay, perfect. Thanks for answering my questions.

Neil Sampat, Nomura.

Good afternoon. I was just wondering if you can give a bit more color around the Q3 guidance, and to what extent high raw material costs and lower steel prices are reflected in that Q3 guidance. And will there be any incremental headwinds into the fourth quarter?

So, I think clearly the main reason why our profitability is down Q2 to Q3 is the higher raw material costs. And those raw material costs will continue into Q4 as we're not expecting prices of raw material to decline; rather, prices of raw material are stable and that's what we see when we look at the second half of '11. I mean, we can come back to why we think that's a good factor because, fundamentally, it stabilizes the steel price environment. So, that's going to be a phenomena of the second half of 2011, higher raw material costs. And the reason why we would expect -- yes, and that is true in the second half of '11.

And the impact of lower steel prices over the last quarter, is that baked into your -- is that fully baked into the third quarter guidance, or is there any incremental negative margin impact in the fourth quarter?

I think a lot of it is in the third quarter. However, we do have some index deals, which are quarter-like and some of that you will see in the fourth quarter. I would also add that in second quarter a slight positive on the price front is automotive, especially in Europe where, as I just mentioned earlier on, we don't have any more legacy contracts. It's not a significant amount, but there is some price -- net price improve in that area compared to what we have in the first half of 2011.

Charles Bradford, Bradford Research.

Yes. I'd like to address the situation in India and what the status is of your various plans, please.

We have already announced our intention in three states; Karnataka, Jharkhand and Orissa. We are making slow progress in all the three states and -- but, I would say that Karnataka is making better progress in terms of land acquisitions, but there is still a lot of work to be done on the mining and environmental approvals. And a lot of approvals are still pending.

Progress is slow and we are very disappointed with the progress. And I think it's very difficult at this time to predict what stage they will begin the construction and we'll have to continue to work towards achieving our objective in India. But, it is disappointing and progress is slow.

Okay. Could you also address the situation in South Africa in regard to the Kumba situation on the iron ore and what the legal issues -- what the status is at the moment?

We have interim agreement with Kumba last year and that interim agreement has been extended for another one year, beginning of June -- July this year until next year on the same terms. And the rest of the matter is under arbitration, so we'll have to just wait and see.

Dave Martin, Deutsche Bank.

Mr. Martin, your line is open for questions.

Sorry about that. Thank you. I had a few remaining questions. I wanted to start with coal, if you would. You mentioned the Macarthur transaction and I understand that due diligence is going on. I'm wondering if you can just comment on how this process will proceed. And assuming the maximum cash outlay will be -- would be required from the company, will you debt finance that transaction?

And then, secondly, just more broadly on coal, I also understand that you're now not party to any of the development that potentially could take place in Mongolia. I'm just wondering if you can comment broadly on what your coal strategy is over the next couple years to possibly grow your production internally.

Okay, I'll talk about Macarthur and then I'll get Peter to talk about our whole strategy and what the talks are there.

In terms of Macarthur, you're right, we are in the midst of due diligence and post-due diligence completion. Assuming the findings are good, we would like to move forward with our offer and have a discussion with the Board for them to support our offer. So, I think at this point in time, that's where the process is. So, there's no new development from what has been previously announced publicly.

In terms of cash out, I think there are various ways of looking at it. So, it depends on what you believe various other shareholders will do. So, if we were to achieve the minimum threshold, which is 50.1%, based on our offer in Aussie dollars, the outflow is about AUD184 million, which is roughly $220 million. And assuming that Citic does not tender, which is -- today is the largest shareholder of Macarthur, then the outflow would be $660 million. And if Citic does tender, then the outflow, in Aussies again, for our ArcelorMittal would be [AUD1120 million].

And in terms of Mongolia, I mean, clearly we participate in a lot of areas of the world and in some we are more successful than others.

Peter?

Yes. The -- on the growth side for color on our plan really is to focus on improving operational efficiency at all of our coal mines in the United States, Russia and Kazakhstan, as well as through brownfield expansion. So, we're -- our target, of course, as we've stated is 12 million tonnes. And then, we've identified a substantial portion of where that will come from, but all of it is operational efficiency in brownfield expansions. In the US it requires that we open up additional areas for mining, which, of course, is subject to permitting. And in Kazakhstan it's all a question of simply opening up additional work phases. I expect that production in Russia will remain roughly stable in the near-term.

Okay. And then just had one quick remaining one. Could you update us on the delta hedging gains expected in the second half of the year? And I apologize if you mentioned that earlier.

In terms of DDH, roughly what's remaining is about $325 million for the second half.

The conference call is now over. For any further questions, please contact the Investor Relations Department on the number indicated on your -- on this conference call invitation. We want to thank all participants of this conference. Good-bye.

Well, thank you very much for participating in this call and looking forward to talk to you for the third quarter call. Have a good day. Thank you.