ArcelorMittal SA (MT) 2011 Q3 法說會逐字稿

Welcome to the ArcelorMittal's third quarter results conference call. This is Daniel Fairclough from Investor Relations and I'm going to be coordinating today's call. Can I remind everybody about the slides accompanying today's presentation, as well as the live feed, are available on the website at arcelormittal.com and that this call will be recorded.

So with that, I will now hand over to our Chairman and CEO, Mr. Lakshmi Mittal.

Thank you, Daniel.

Good day to everyone and welcome to the ArcelorMittal third quarter 2011 results call. I am Lakshmi Mittal, Chairman and CEO of ArcelorMittal. I am joined today by my full Group Management Board.

I will start today's call by making some initial remarks, starting with the market backdrop. As we move through the third quarter operating conditions, they have clearly (technical difficulty). Concerns over the eurozone, the potential for a sovereign and banking prices significantly impacted customer confidence levels and led to a wait-and-see attitude.

Lower apparent demand has put negative pressure on pricing. In the last two weeks iron ore and other raw materials have shown signs of weakness from what were high levels. This again leads customers to hold back on purchases and will, of course, impact our own mining business. Raw material price stability is now required for steel buyers' confidence to return.

On the economic front, I am pleased to see that the US is not slipping into a recession, and the European solution looks like avoiding a crisis. Although there are still uncertainties, this makes me more comfortable on the picture for 2012, which I expect to be one of zero or low growth in developed world steel consumption rather than at 2009 collapse. I am watching the situation in China closely and I still believe that a soft landing is most likely, but the risks have increased.

Overall, I am pleased the good performance in third quarter '11; and indeed, the first nine months of 2011 shows continued year-on-year improvement. EBITDA for nine months is almost 26% higher than the same period of last year.

Our core business remains strong. Our core facilities are competitive. Our auto franchise is the best in the industry. Our mining business is a clear advantage and is source of (inaudible). We are already making progress in our asset optimization plans that we announced in September Investors Day.

So overall, I am confident in ArcelorMittal's ability to meet the challenges ahead.

Now, moving to agenda slide. I will begin today's presentation with an overview of our results for the third quarter and update you on other recent developments. I will then spend some time on the outlook for our markets before I hand over to Aditya to go through the results and our guidance in some more detail.

Starting with corporate responsibility and our number one priority, safety. Our improving safety record is highlighted by the chart on slide number three. In third quarter our healthy and safety performance remained constant, with the lost time injury frequency rate of 1.5 in the third quarter of 2011 as compared to the second quarter of 2011. However, our year-on-year trend remains clearly positive.

Improvements in the safety performance of mining and FC, Flat Carbon America, was offset by bigger performance in the (technical difficulty).

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

On the next slide, I want to now reiterate my message on the core strengths of ArcelorMittal. These are the qualities that place the Company in a strong position to respond to evolving market conditions.

Firstly, our core assets are very competitive in terms of cost. This was demonstrated in the third quarter this year when we generated Group EBITDA of $114 per tonne.

Our steel assets are very diversified. Our production facilities outside of North America and Europe generated approximately 40% of our steel EBITDA in the first nine months of the year.

Another strength is our market-leading automotive steel business. We have consistently funded R&D and work with our customers to stay ahead of the curve. We have 40% market share in our core markets and we are the leader in the fast-growing advanced high-strength steel segment.

We are developing a world-class mining business based on a combination of reserves and infrastructure strength. Our assets are competitive on cost and quality and we are growing rapidly. The EBITDA capability of our mining segment will double over the next few years.

The next key strength is our track record of consistent improvement. Since 2008 the Group has generated $3.8 billion of management gains and we are well on track to achieve our target of $4.8 billion by the end of next year.

Together with the new $1 billion asset optimization plan, we have a significant self-help action to support core EBITDA.

As a result of these core strengths, we remain committed to our plans for growth. Our core projects are not dependent on strong economic conditions to create value for our shareholders. Our strategy, therefore, transcends the near-term market uncertainties.

Turning to our third quarter performance on slide five. This was an acceptable quarter and, indeed, a solid first nine months performance for ArcelorMittal. Our profitability continues to improve year-on-year and, in fact, our EBITDA in the first nine months of 2011 was nearly 26% higher than the first nine months of 2010.

EBITDA per tonne during third quarter at over $114 per tonne was 8.5% higher than the level achieved in third quarter 2010. This is somewhat below the level we hope to achieve in a normal operating environment but, considering the operating environment in third quarter, this was a positive achievement.

The momentum in our mining business continues to build. Year to date iron ore production is 39 million tonnes, up 7% compared to the same period of 2010. And we continue to target 10% production growth for the full year, implying a strong final quarter.

Our net debt remained largely flat during the third quarter. Our net debt is now $24.9 billion, compared with the $25 billion level at second quarter '11. I'm also happy that we can today reiterate our guidance that we expect second half 2011 EBITDA to be higher than that in second half of 2010, implying Q4 EBITDA no lower than $1.6 billion

Moving to the subject of CapEx on slide six. I now expect our CapEx in 2011 to be less than the previously targeted $5.5 billion level. This reflects, first, to calibrate our steel investments to the evolving demand scenarios. As a result, we have stopped construction on the Monlevade and Vega Do Sul expansion projects in Brazil.

While growth in the steel demand in Brazil has been lower than expected, we continue to believe in medium-term prospects, so we have no intention to permanently cancel the projects. This is a temporary measure which will be reevaluated in due course.

Where we are maintaining our investment is in our mining business. These projects continue to offer attractive return profiles. In Liberia, we have completed phase 1. Iron ore production has begun and we expect 1 million tonne of production in 2011, ramping up to 4 million tonnes next year. We are close to approving the next phase of our Liberia project. This will require investment in a concentrator to take capacity up to 15 million tonnes annually by 2015.

In Canada, our expansion in Quebec Cartier mine to expand our iron ore capacity from 16 million to 24 million tonnes is underway.

These two projects, plus the completion of our ramp-up at Andrade next year, are key components of our strategy to grow our iron ore production to 100 million tonnes, including strategic contracts, by 2015.

Now, I will talk about the market outlook. On slide eight you can see the chart showing that, globally, leading indicators declined throughout Q3 and into Q4. It is clear that the economic momentum is slowing down but, in our markets outside of Europe, the picture is not so bad. The channel is still growing. PMI readings are above 50 level. Higher interest rates and decelerating exports are clearly reducing downstream demand, but we still believe in a soft landing in China.

In the US, third quarter GDP surprise on the upside. PMI ratings are lower than earlier this year, but continue to suggest underlying expansion. In Europe, PMI contracted for the third straight month and now below 50, suggesting that we are heading for a period of zero growth.

In the north, falling unemployment and manageable debt levels have provided support for domestic demand, but conditions in southern Europe remain challenging as austerity measures aim to stay contingent to other countries. Overall, leading indicators globally imply that momentum is slowing into the first half of next year.

On slide nine we can see the picture of steel demand from construction markets remain unchanged. Construction represents one-third of developed world steel demand and has yet to show signs of recovery. The leading indicators are at best stable.

As we can see on the top-left graph, non-residential construction in the US has been virtually at the same level since early 2010. The ABI index in September was still below 50, which suggests that the recovery will not occur until the second half of 2012 at the earliest.

Residential construction in the US also remains stable at the low level as unemployment remains high and consumer confidence continues to lower. While US residential construction is low by historical standards, housing starts for September were up 10% year on year.

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

Now, moving to slide 10 on China. China GDP growth is clearly slowing as intended by the measures taken by the government to tighten credit availability and the cost of the credit. We still do not believe that it could slow down below 7% or so.

As you can see on the top left, leading indicators for China measuring floor space under construction continue to climb, whereas there has been a recent slowdown in nearly-started construction. Although the social housing program is providing support to construction, developers are caught between rising inventory, slowing sales and the lack of available credit; as such, steel demand from private real estate is slowing.

Exports having peaked in March at 4.8 million tonnes from China, as expected, exports have come down 14% from these levels to 4.2 metric tonnes -- million tonnes in September, yet are still at 45% year on year. Although full-year 2011 exports are expected to surpass 2010, they should decline to approximately 4 million tonnes per month in fourth quarter as weak (inaudible) conditions impact sentiment and prices. For 2011 we are forecasting greater than 8.5% steel production growth in China and growth of around 5% in 2012.

The next -- slide 11 is about the global inventory situation. While the general inventory picture remains supportive, particularly when we look at the whole supply chain, the regional picture has changed little over the last three months.

In Europe, the picture has deteriorated. Inventory levels have risen to 2.4 months of supply, which is I would is above normal levels. I view this as a temporary, though, and it is clear that there is currently a significant destock underway in Europe.

In the US the picture is more stable. August and September data indicate that restocking in the US has temporarily ended and we should see some mild destocking in the coming months, as is the normal seasonal pattern.

In Brazil the stocks are coming down meaningfully as the weaker real has made Brazil a far less attractive export destination. Service center inventories are now 2.7 months of shipments, close to what would be considered normal.

In China, there has been some buildup in inventories over the last two months but, overall, still stock levels are similar to this time last year.

Overall, the inventory picture today is far better than it was in the third quarter of 2008. And in 2012 I do expect (inaudible) demand to closely reflect underlying real demand.

I would like to finish this section with slide 12. Spot steel prices have been under some negative pressure over the past two quarters, as we can see from the chart on the right of slide 12. These spot prices have been impacted by macro uncertainties leading to consumers and customers adopting a wait-and-see approach. The movements in steel prices have led the movements in raw materials, which in recent weeks the raw material prices have fallen.

The spot iron prices are $50 per tonne lower than the levels seen in August. The declines are clearly driven by weaker demand, but also some increase in spot market supply as some contract tonnage is being diverted to the spot market.

We do believe that the current spot price of around $120 per tonne is well supported by industry costs. Instability or increases in raw material price is now a key requirement for steel buyers to return to the market.

Looking at seasonal price differentials, the differentials between China and the Western World remain slow, so there's little incentive for materials to move from China into Europe or the US. Indeed, import pressures in both markets are currently (inaudible).

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

Thank you. Good morning and good afternoon.

As you know, we reported EBITDA of $2.4 billion for the third quarter of 2011. This is at the bottom end of our guidance, reflecting the weaker than expected market conditions in September, as well as lower marketable tonnes shipped in our mining business, especially in iron ore.

Let me now walk you through the bridge from the third quarter to the second quarter. EBITDA fell by $333 million as the result of changes in volume and mix, reflecting lower shipment volumes, which were down 4.8% during the seasonally weak third quarter.

Q3 EBITDA was negatively impacted by a price cost squeeze of $576 million, with higher raw material costs, along with a 1.7% decrease in steel prices, primarily from Flat Carbon America due to our slab business in Brazil and Mexico in particular.

The Others category relates primarily to differences in our Dynamic Delta Hedge income, which was lower in Q3 at $129 million, compared to $189 million in the second quarter, and forex impact on EBITDA [conflation]. This led to an EBITDA of $2.4 billion for Q3.

Moving to slide 15 and our P&L bridge, we'll focus on the chart in the upper half of the slide which shows Q3 results. The comparative figures are there for the previous quarter in the lower half. Let me point out the key differences below the EBITDA line.

Impairment expense for the third quarter 2011 was $85 million relating to costs associated with the intended closure of two blast furnaces, sinter plant, steel shop, as well as continuous castors in Liege in Belgium. The restoration, site cleaning, social costs including VSF schemes, and other costs will be recorded when social dialogue has sufficiently progressed in Belgium.

Our income from equity method investments and other income for the third quarter was also lower at $6 million, primarily due to the impairment loss of $119 million with respect to our investment in Macarthur. On a cash basis, after dividends and hedge of foreign exchange effects, the transaction is essentially cash neutral. Excluding the impairment losses, income from equity method investments would have been, therefore, $125 million for the quarter.

Finance costs for the third quarter was lower at $392 million, a decrease of $512 million compared to $904 million costs in the second quarter, primarily due to the forex benefit of $245 million resulting primarily from the depreciation of the euro in the third quarter. Non-controlling interest was also a gain of $31 million compared to a loss of $41 million, primarily due to the losses we incurred in South Africa in Q3.

Turning now to slide 16 to review the free cash flow. As you can see, we made a significant investment in working capital during the quarter of $1 billion. Overall, working capital rotation days increased to 73 days during the quarter from 71 days in the second quarter. The actual delta on a days' basis is greater, but gets masked for forex effects on the balance sheet due to the euro depreciation which occurred in Q3.

Further cash outflow in interest and finance costs, tax expense and other items was $625 million, bringing us to a cash flow from operations of $770 million. We increased our CapEx spend in the third quarter, resulting in a CapEx for the quarter of $1.3 billion, taking free cash flow to a negative of $0.5 billion for the quarter.

On slide 17 we show a bridge for the movement in our net debt. During the quarter net debt decreased by $0.1 billion to $24.9 billion, as compared to $25 billion for the second quarter. While the free cash flow loss of $0.5 billion, dividends of $309 million and net M&A spend of $98 million were the principal users of cash during the quarter, which increased the net debt, the forex gain of $762 million, as well as the $234 million received on the Mandatorily convertible bond, were the main reasons for offsetting this increase, resulting in a net decrease in net debt.

The forex gain of $762 million has to do with the fact that the euro depreciated by about 6.5% in the quarter and we have roughly $10 billion worth of euro debt outstanding. And therefore, we have a forex gain on the balance sheet when you translate our net debt back into US dollars.

Turning to our next slide, I'd like to discuss our recent announcement on Macarthur. As you know, we have announced that we are selling our 40% stake in the PEAMCoal JV to Peabody. Due to the high level of acceptances, the transaction would have required over $1 billion for what would have been a non-consolidated minority interest where ArcelorMittal would not have had control of cash flows.

When we had structured this agreement originally, we had factored in both options because, clearly, this was a risk factor back in June and July. And therefore, the risk has materialized due to the high level of acceptances, especially from one shareholder. And therefore, we would rather deploy the capital in our own mining business where our CapEx intensity remains very competitive, driving attractive ROIs on our new investments. As you heard earlier, we continue to maintain our mining CapEx, in Canada as well as in Liberia and other places.

Just in terms of cash effects, as you know there will be a cash outflow in Q4. If we have 100% acceptances, the cash outflow will be $1.2 billion. This would reverse in Q1, along with the associated financing costs, as well as we should receive an additional $0.8 billion for our 16% interest in Macarthur. So, a temporary increase in cash in Q4 and a release of that cash in Q1 of 2012.

Let me now turn to guidance. As we heard earlier, we can confirm that we expect second half 2011 EBITDA to be above the second half 2010 level. We are pleased that we are able to reiterate this guidance that we gave to the market back in July, especially because of the global uncertainties and more negative market backdrop that has developed since July.

As we heard earlier, our guidance implies a minimum EBITDA in the fourth quarter of $1.6 billion, and we also expect shipments to be lower than third quarter levels, third quarter 2011 levels, reflecting economic uncertainties and customers adopting a wait-to-see approach, which is leading to a destock environment primarily in the US and in Europe.

We also expect a negative price cost squeeze because, as volume dropped -- as volume drops, there is margin pressure, as well as with a backdrop of a weakening raw material price environment.

These two negative factors will somewhat be offset by the positive benefits in our mining business, particularly coming from higher volumes. As you know, we are on track for 2011 volume growth of 10% for iron ore and 20% for coking coal.

In terms of CapEx, as we mentioned earlier, we continue to focus on core growth CapEx, primarily in mining, with postponement of some steel investment CapEx. As a result, we expect that full-year 2011 CapEx will come in closer to $5 billion as compared to a previous target level of $5.5 billion for 2011.

Overall, we expect our net debt at the end of this year will be slightly higher than the level we have today of $24.9 billion due to the temporary investment in Macarthur Coal. This will reverse in Q1 next year. And we remain committed to our net debt target of $22.5 billion or less by the middle of 2012.

With that, we'd like to finish our -- I'd like to finish my remarks and hand over to Daniel so that we can take your questions. Thank you.

Thanks, Aditya. We're now ready to take your questions. And if you would like to ask a question, please do press star-one on your telephone. Can I please request that you do limit yourself to asking two questions initially. And then, if there's any time left at the end of the call, we'll be happy to take any additional questions then.

The first question we will take will be from Anindya Mohinta at Citigroup.

Thank you. Thanks, Dan. Just two questions, please. You gave us some color on the closure costs and, Aditya, you mentioned that, once you actually had finished your social dialogues, that's when you would expect to see the site cleanup costs and also the further separation costs. Can you give us any sense whatsoever what the quantum of the costs might be? And are we looking at -- what sort of timeframe are you looking at? Are we talking 2012 first half, second half? Any sort of -- any detail that you can give us would be quite useful.

Secondly, on the guidance for the second half. I know you don't normally go into a great deal of detail in terms of your price assumptions, but can you give us at least a sense of -- if you look at your assumptions behind the guidance for the second half, are you using prices wherever you are today? Are you using lower prices? Can you, again, give us a sense of -- just relative to where spot prices are today, are you using higher or lower or at where spot pricing is today? That's it for me. Thank you.

Sure. Anindya, in terms of Liege and generally our asset optimization plan, the way to think about it is we intend to achieve savings of $1 billion and sustainable EBITDA by the end of 2012. What we have indicated is that the payback is roughly two years. So, on a global basis, the cost of this asset optimization program will be roughly $2 billion. And so, the savings in Liege will correspond with a similar payback ratio. So, our expectation of VSS, cleaning costs, as well as other take-of-pay obligations that we may have in the primary end of Liege would be roughly two times the saving.

In terms of the timing of the cash and the EBITDA, the EBITDA is in 2012, a full achievement. And more or less, the cash will be more back-ended as well because, clearly, things like site restoration costs, some of the social costs that are paid out over time and not immediately, we're getting some of the EBITDA benefits as some of these assets are already idled, yet we actually close the social discussions maybe after six to nine months. So, the timing of cash is also a little bit back-ended and spread out, and so is the EBITDA benefit.

Liege is only one aspect of our asset optimization program. Our asset optimization program is global. It covers not only FCE, but also Long Carbon Europe, our distribution business, as well as Flat Carbon Americas, plus other areas. So, I would not be able to give you specific numbers, but that is the amount of the detail that we're prepared to share at this point in time.

I think in terms of guidance for the second half, we have just said that it's going to be greater than what we achieved in the second half of 2010. And in terms of your question on price, at this point in time our guidance is based on where spot prices are today. I don't know if you need any more color than that.

No, that's great. Thank you, Aditya.

The next question we'll take is from Alessandro at JPMorgan.

Good afternoon to everybody. Just a quick question. Relative to this kind of stalled situation in terms of ongoing negotiations, destocking in Europe, what is your commercial approach at the moment? Are you selling basically on a monthly basis? And going back to clearly negotiation into Q1 contracts, a basic month's contract, what is your approach -- the approach you are taking at the moment? I mean, relative to this kind of weakness, what is the feedback you're getting from your counterparty on the end use side? Like, why is there not a lot of business?

And the second question is related to the perception you have, the sort of demand and consumption, (inaudible) level of inventory in Europe relative to the US in relationship to the motor sector. Thank you.

So, in terms of your first question, if I understood correctly, I don't think we're seeing a change in the structure of the marketplace because of the environment we are in today. What I'm -- when I talk about structure of the marketplace, I'm talking about selling of steel. Clearly, there is some changes underway in the procurement of iron ore, especially in China; but in steel, we're not seeing a change in the structure. I do not anticipate a change in the structure. So roughly, our monthly contracts, quarterly contracts, automotive contracts, the way they are structured today should persist into Q4, Q1.

Clearly, when you have a spot price weakness in the end markets, that does flow through when you renegotiate a new contract for any of your contract customers because the spot price is an indicator as to what they want to achieve on a six-month or annual or three-month basis. So to that extent, there is an impact, but not in the overall structure of how we are dealing with or interacting with our customer base.

In terms of inventory situations, I'll get Lou to talk about the US and what we're seeing in the marketplace. Clearly, as we heard earlier, inventories are edging up in Europe. And what we're seeing from our customers, to repeat what we said earlier, is a wait-and-see approach, which basically is a destock, because we are not seeing the change in the real demand as significant as the change in the apparent demand, especially in the service center and distribution segments in which we operate.

Yes. I would comment that we have seen, I'd say, a modest slowing of orders, order intake in North America over the past let's say six weeks or so. As you know, we had an increase in spot prices earlier in the fall and now we've been falling back those last few weeks.

And I think as is normally the case in a falling price environment, and particularly the distribution sector that is totally spot oriented or overwhelmingly spot oriented, they're basically slow to rebuild the inventories. They tend to take that wait-and-see attitude because, again, the expectation is that I want to wait and -- if the prices are falling, until I think they're near or at a bottom. So, we've seen a little bit of a slowdown there. People definitely are adopting that wait-and-see attitude. But again, our view is that, what we can see, inventories are still on a relatively tight level. People are, if not quite hand-to-mouth, certainly not flush with inventories.

And the end-use demand we're still seeing to be relatively strong, except in those sectors that are linked to construction. So, the yellow goods, the heavy equipment, etc., continues to be very strong. That's an important sector for us in North America. And even if there's some economic uncertainly, those players typically have very extensive backlogs today, as our mining sector can attest as they're ordering that equipment. So, they've got that to work through.

And I think the automotive sector has been quite -- we've been surprised, if you will, even at the strength of that sector. It's largely a timing issue in terms of the supply disruptions that occurred due to the tsunami that have not been resolved. And those producers that were most affected have been now rebuilding their pipeline, if you will, in terms of production in North America, which has helped us on that front.

Thank you. Just a quick, quick follow-up question. What's the lead time in the US and Europe now? Thank you.

I think it -- again, it depends on the product, but we're looking probably four weeks or so on the hot roll side in the US now.

Thank you very much.

Okay, thanks. I think we will take the next question from Mike at Credit Suisse.

Yes. Thanks a lot. As far as my two questions, firstly, given you're talking about $2 billion of cash out on the restructuring that you've announced, we don't have the detail, but is it fair to say this would result in fairly material further plant closures? Because I mean, if I look back at when Corus, for example, close Llanwern in 2001, I think, the actual cash out was minimal compared to the $2 billion you're talking. So, it does suggest that you've got a fairly significant plan of, I guess, plant closures coming up.

And I suppose my other question -- I've got more, but I'll take this one. Can you just talk us through balance sheet progression? Because obviously, it suggests that, although you're cutting production, given your guidance on balance sheet you're not going to throw off a lot of free cash from working capital in the next quarter. So, can you give us your sense of balance sheet progression in terms of -- well, you've given numbers before in terms of volume and price what you can actually throw off of free cash from working capital. When are we likely to see the material element of that? Thanks very much.

Sure. Michael, regarding your --

I'll get -- I'll take that.

Michael, this asset optimization plan of $1 billion which we announced has a lot of components (inaudible). It means that there are various facilities where we would like to improve the utilization factor to a much normal level. We do not want that all the plants operated a suboptimal level of capacity. So, idea here is to look into the details. And our target at this time is $1 billion of savings and this is what we are trying. And we want that some of our core assets should be operating at a much higher capacity.

Okay. When -- as a follow-up, when will we actually get the detail in terms of the actual underlying plan?

Yes. As we make progress in our evaluation, we will keep on informing you. The first step, we have informed our intention on Liege and others will come as we have a firm view on some of the segments.

Okay, thank you. And the second question, please.

In terms of working capital, we have released that as occurring in the fourth quarter of this year. And that release does not reduce our net debt in Q4 because our net debt is increasing due to the investment in Macarthur. So, we should see a net debt improvement in Q1, all things being equal.

Clearly, the progression on working capital -- I mean, we went through the Investor Day where we walked you through our sensitivities on price or volume. So again, we're into a discussion on what would you expect in the first half of 2012. We have illustrated that there could be a few scenarios, one being the base case where there is low apparent steel demand growth in Europe, in which we expect 5% growth in naphtha and 5% growth on a global basis. And then, we have the technical recession scenarios, as well as a full-blown sovereign debt crisis. And depending on those situations, you will either have working capital release and less EBITDA, or less working capital release and higher EBITDA. So, what we are focused on achieving as an organization is a net debt level of $22.5 billion by the end of second quarter.

Okay. And given everything you know at the moment, and no one has a crystal ball on the economy, but given what you're seeing at the moment, do you feel that this is a one/two-quarter production cut clear up? Because over the last 10, 15 years it can take one or two quarters to restore pricing power. If you go back to the early 2000s, it took almost three years. So, in terms of production cuts you're seeing globally, do you think it's going to be a fairly short (inaudible)?

What we saw last year, in fourth quarter we saw production cut. And similarly, we saw certain demand in the first quarter of this year. And we have seen this phenomena for the last two years. So, it is difficult to say that -- whether we will have the repeat of during the first quarter of this year in next quarter -- in the first quarter of next year. It will all depend on the consumer confidence and all this global economic environment.

Clearly, there is not enough -- supply chain is not long this time compared to 2008. The supply chain is short and there will not be much of this talking potential which I see here at this time. So, if the economic situation improves and the consumer confidence comes, I think it could be a short-term production cut. But, we will still continue to work on -- assess optimizations to operate some of our core assets at a higher capacity without losing the market share.

Okay. Very clear. Thanks very much.

We'll take the next question from [Carsten] at UBS.

Morning, gentlemen. My two questions -- first, do you expect the mining profitability to dip significantly in the fourth quarter given the recent iron ore and coking coal price deceases, yes or no? And what kind of magnitude?

The second question is, when do you believe the situation at ArcelorMittal South Africa will be solved? Because we have seen a quite significant earnings weakness in AACIS and it looks like most of it actually came from the South African plant. Thank you.

Okay. In terms of mining forecasts for Q4, I think there are two factors. The first is that we do have a volume increase which is quite substantial in terms of increasing EBITDA. And then, as you know, there is spot price weakness. Assuming that that's how the mining business evolves, our latest forecasts are that EBITDA should still be higher than Q3. However, as you are aware, we are undergoing -- there's some discussion on changes in the structure of selling iron ore and that impact is -- that impact could be negative which could perhaps take the EBITDA closer to what we have in Q3 or lower, depending on what the resolution of that on European basis is.

Regarding --

Gonzalo Urquijo, would you like to answer on South Africa?

Yes, Mr. Mittal. Good morning and good afternoon to all. In terms of South Africa, it is true the performance has not been good. Clearly, we've lost a lot of production. Versus Q2, we did practically 1.6 million tonnes, we've done 1.14 million tonnes. So, we have lost around 450,000 KT.

Where does it come from? In Newcastle -- we had three major incidents, I would say. In Newcastle we had a blast furnace that -- a dust-catcher failure, which we lost 287 KT. On the other hand, in Vanderbijlpark we also had a [BFD]. We lost liquid steel for 46 KT. It was -- now the furnace is going better. And in Saldanha we did have a [top hole] repair that was planned of 86 KT. So, we did have a very important loss of production, a bit less than 500,000 tonnes.

Additionally to that, the second element I would share with you, that is in terms of prices. Our average price was $876 versus -- in the second quarter, and the third quarter was $844. So, we have seen an important impact in $32. It's been a foreign exchange effect. It also has been some export volumes. So in total, that has led us to a performance which has been very poor, I would say, or much poorer than what it had been in the previous quarter. Because we were at 138, approximately, in second quarter and we have been $7 million loss in Q3. Basically, it's volume and mix. And also, we have had the cost effect. So, those have been the four main reasons.

Now, the performance. We will still be impacted by the Newcastle element in Q4, but things are going better now. But the fourth quarter is South Africa, we believe it will be clearly better than Q3, but it won't be what we saw in Q2. As for the other ones, that is Kryviy and Temirtau, we do expect that they will be running in line with what we've seen in Q3. Thank you.

Thank you. And so we can expect that from first quarter onwards we'd see a normal performance in South Africa again.

We should, although we also have to monitor very closely the foreign exchange because, as you have seen, we have had -- the rand is today at 8. It has been at 7.2. But yes, we do expect that for first quarter we should be at a normalized rate. That's correct. Thank you.

Thank you very much.

Could I just add one more point to the structure -- structural change and the spot. If such a change were to occur, I -- we do not believe that would impact our guidance. So, we have factored that in as a risk factor --

Okay.

When we look at our Q4 guidance and what we've indicated to you.

Okay. Thank you very much. Very clear.

Great. We will take the next question from Cedar at Bank of America Merrill Lynch.

Good afternoon, gentlemen. Just two quick questions. On your mining division, which obviously remains the largest division for ArcelorMittal, we saw sales disappoint versus production in iron ore in Q3. Could you just give us a bit of color on if you are seeing shipment deferrals from your customers, or where the weakness is being observed? And if there's been sort of any developments moving into Q4. We saw Walter Energy, for example, mentioning today that coking coal shipments to their customers were being deferred.

And then finally, in the US, the recent price increases appear not to have stuck. Severstal came out yesterday evening announcing another price increase. Do we need to see capacity cuts in the US market in order to get any real stability in pricing, which we obviously are seeing in Europe, but not seeing in the US? Thank you.

So, Cedar, happy to answer on the -- on shipments. Both iron ore production and shipments were impacted by operational interruptions in the first half and also in the third quarter, which has skewed both production and shipments from the first -- well, into the fourth quarter.

Specifically, for example, at QCM we had some infrastructure interruptions, which resulted in additional material being up at the mine rather than down at the port ready for shipment. So, shipments are simply skewed into Q4. It's not the consequence of any cancelations or anything like that. And we are not seeing a substantial impact or a material impact in terms of any cancelations. In fact, we anticipate that our shipments in Q4 will be much higher than in Q3.

In terms of the US, I think we have seen the very recent price announcements. What -- how they will play out and to what extent they'll stick we'll have to see. But, I think we have seen a slight uptick in order intake as we've reached the kind of $600 a tonne spot level, which I think you can read that to say that maybe we're near a bottom on that. So, I think time will tell in terms of where the prices head. We did have the slight uptick or the slower uptick and we've had then the decline back again. So, we'll have to see in terms of how that plays out in the near term.

In terms of the capacity cut issue, we are operating seven of our nine blast furnaces in North America. We -- or in the US, I should say. And we would continue to operate on that basis. We are going to continue to meet the customer demand that we see. In terms of what other companies would do, that's totally up to them.

Our current view for next year would be a growth of about 5%. Again, we're still climbing back out of the sharp downturn in the late 2008. And as we read the numbers of what capacity has been added as people ramp up and so on, that's pretty close to what that additional capacity increment is.

So, if in fact that 5% increase in consumption shows up and we continue to have, let's say healthy, stable, low levels of inventory, it may be that the demand growth itself takes care of the additional capacity that we've seen come online. But again, this is all to be determined and I think we're very comfortable with the operating footprint that we have currently.

Okay, great. Thank you very much.

And the next question we'll take is from Michelle Applebaum.

Hi, it's Michelle Applebaum with Steel Market Intelligence. I have two questions.

So the first question is, what's happened in terms of the sudden reversal of fortune in the iron ore business? Are there opportunities for you to go to some of your vendors and see if you can go back to the old system of being on an annual contract, or are there other potential opportunistic purchasing arrangements you might be able to do? Because historically, you've been quite good at being nimble in environments like that. That actually I think has been your strength. So, is there -- are there opportunities for you here?

Michelle, this sudden reversal is due to a slow down in China. China is the largest market and we have seen Chinese policy to curb inflation, arrested credit through a disbursement trying to slow down the private (inaudible) housing market. So, all of this has led to some slow down in the Chinese demand and -- which has led to a reversal in the iron ore pricing. Correctly, that has changed a lot in the last six weeks by $50, $60, but we think that this is a bottoming out price at about $120.

As far as a portrait is concerned, we are focusing on continuing to grow our own mining business, which we see that we have created a strong base to continue to grow our mining business and that will continue.

On looking at the different arrangements, whether it should be spot or whether we can -- we go back to quarterly and annual pricing, first time we have seen, due to China's pressures, Vale has agreed to consider these changes in the pricing structure as spot prices, quarterly pricing.

We are in the middle of evaluation of these things and we will look at -- we will have to understand our customer comments, our market. Our markets are different, our contracts with our customers are different in the Chinese steel industry. So, we'll have to keep all of this in mind and we will decide the best course of action in next weeks and months based on what creates the most value for ArcelorMittal.

Okay. So, you're saying your needs are different than the Chinese, so I can read that.

Then my second question is, now that you actually mentioned the -- what's going on in China, Mr. Mittal, you've actually been the one guy out there saying you didn't expect to see a lot of exports out of China, and I think the rest of us kind of did. And now we're seeing them cut production rather than ramping up their kind of export situation.

I'm just wondering what's going on and why that's changed. You clearly anticipated that, so I'm impressed. And can you talk about what the implications are? Do you think they're going to continue to cut production or do you think that the West is at risk? Because I think that the -- most of the West right now is sort of waiting for Chinese prices to settle, assuming we're going to see some of their steel. And so, there's some profound implications for what happens to pricing here.

I think what we have seen is a new development in China, that Chinese companies have resorted to cut production and slow down the volume. This is good news because it means that some of the Chinese companies are moving towards making -- deciding based on the profits they make. And today, this slowdown is clearly a reflection of the low steel prices. The prices are low enough in China to make any sense to continue to produce. And that also means that, if they cut production, they are not resorting to increase their exports because the prices are so low for them that it doesn't make any sense. And that is one reason we do not expect Chinese exports to ramp up fast.

That's great. Okay, great. Listen, I think that you're making some very tough moves and good moves and I have tremendous respect for your organization and the long-term view you take. So, thanks.

Thank you, Michelle.

Great. We'll take the next question from Bastian at Deutsche Bank.

Yes. Good afternoon, gentlemen. Two questions left from my side. Firstly, on the balance sheet. The fact that you stepped out of the Macarthur bit (inaudible) at what I would sort of say is a fairly decent price. It will give you, of course, the nice liquidity in flow in the first quarter. Could you share with us whether there are any other non-core assets where you consider a possible divestment?

And then secondly, on the CapEx we should cut for this year, what is the number we can get or we can expect for next year? And what is actually the minimum level you could go to given the projects you have? I know that your maintenance level is actually around $3 billion, but some of your projects probably limit the flexibility to cut back there. Thank you.

As we indicated in our Investor Day, we have about $10 billion of investments on our balance sheet, which are equity investments which are not consolidated. A significant portion of those investments are core, but there are certain opportunities that we have to optimize our portfolio. And we're working on those opportunities to make sure we achieve the right value in our overall objectives to reduce our net debt by June of 2012. So, that exercise and that work is ongoing. And clearly, Macarthur was one of the options we had. And based on the acceptances we received to exercise the option to monetize that stake.

In terms of CapEx, again, it depends to a certain degree on the scenarios that evolve into the first half of 2012. On a base case basis, what we have suggested is that our CapEx number in 2012 will probably be similar or lower than what we will end up with in 2011, with basically two focus areas. One is to continue all maintenance activities which, as you said, is $3 billion. Number two, continue to focus on our core mining projects, Liberia and Canada, which have very high return orientations and are on a long-term basis very attractive because the cost profile of both of these facilities is tier one or tier two. And as a result, we have slowed down some of our steel investments in -- for example, in Monlevade in Brazil.

So, that's how we're thinking about CapEx, assuming base case. Clearly, we do have flexibility as an organization, as the economic conditions either improves or worsens, to adjust how much we do spend on CapEx.

Okay, thank you. And to follow-up again on the first question, I think it's actually quite interesting because, really, I guess many people think that you don't get the full credit for the amount of equity investments you actually have. What's the timeframe until we could expect any further announcement?

I think we should not -- I mean, out of the $10 billion, as I said earlier, a majority is core. And so, maybe some of that we could move into EBITDA because it becomes a core investment and we actively manage some of these joint ventures. And the others, which would be a smaller component of this, would be non-core. And clearly, we would focus on optimizing that portfolio, but we can't clearly optimize all of that in a distressed environment. So, that will be more a medium to long-term with a focus on trying to achieve the best possible result in the next nine months.

Okay, perfect. Thank you.

Great. We'll take the next question from Jeff Largey at Macquarie.

Hi. Good afternoon. If we could return to iron ore, given that, as you mentioned, Vale for one is looking at changing the pricing structure here in the near-term. Is one of the considerations as far as accepting spot pricing versus the quarterly benchmark that, if you move to spot, you basically have to stay there? Or would you have the option in the future to actually return back to, say, a quarter benchmark, if that for whatever reason benefited you?

And the second question is just, outside of Vale, I'm just curious if you're seeing other potential suppliers make iron ore volumes, or other commodities for that matter, available given the weakness we've started to see out of Chinese steel demand?

This is a very recent couple of weeks' news and I don't think that any company would like to be flip-flop, changing arrangements every quarter. In next couple of weeks I think we will see a more clear picture of what transpires into these discussions and (inaudible). I do not think that at ArcelorMittal will like to have a changing contract conditions every quarter. We would like a stable supply with our contract business, a stable pricing environment. So, this is very different than Chinese structure of the steel industry.

Okay. And just on the second question as to whether there's --

Other commodities. Already BHP is already on the monthly price for the coal, but other suppliers are still on the quarterly price. We have not seen more -- any indication of other suppliers changing to monthly pricing.

And if I could just follow up on -- should I assume that, in terms of your steel business and how you're purchasing iron ore is -- would translate apples for apples into how you're selling and marketing iron ore out of the mining business?

What?

So, if -- for example, if you were to move to spot purchases in the steel -- from the steel side, would you have to actually then switch to spot purchase -- sorry, sales -- from your mining division?

No, it is not necessary. Our profit targets or the value creation targets are independent of the steel business or the mining business. They have -- we have to decide what creates the most value. We will definitely like some of the customers on a longer-term basis. We like to support the customers who are more sustainable in longer-term business rather than going to the spot market.

Okay. Thank you.

Okay. We'll take the next question from Alexander at Cheuvreux.

Good afternoon. This is Alex from Cheuvreux in Frankfurt. I have two questions. The first question is, when I look at your guidance and what you said in terms of mining contributions into the fourth quarter, it implies that the steel profitability is probably some $40 per tonne, which would be well below the trough in the fourth quarter 2010. Is it just a temporary issue that the steel margin will be hit that much, because also in 2009 it was at some $70? And is then your statement that the potential 2009 type of recession would be better this time still valid?

And the second question is, with the asset optimization in Europe, can we expect that you regain market share that you can run at lower costs? Thank you.

I missed the second half of -- sorry.

Yes. The second part of the question was if asset optimization as we move to a lower cost structure could lead to market share gains.

Sure. We will come back on Q1 affects versus what we're seeing in the fourth quarter of this year. But, just on the asset optimization program, I think fundamentally your thrust is accurate, that if you do have a lower cost footprint you are more competitive, which does imply that you should have a larger share of the market. However, the intent of the footprint program is not to have a larger share of the market, but the intent is to create a lower cost basis to improve earnings. And our focus remains to maintain our market share as we execute the footprint.

In terms of Q1 versus fourth quarter, I don't remember the specifics of what were the effects in the steel market in general. But, if I vaguely recall it, we were in a recovery mode. And right now in the fourth quarter, we are in a destock mode where there is price pressure. And perhaps that's why the margin is weaker than what we saw in Q1 of '10.

No, I'm talking about the fourth quarter 2010 and your drop of margin in 2009. Because over the last two-and-a-half years, the steel contributed at least $60 per tonne. And given your statement for the fourth quarter, if I take the lower end, this $1.6 billion, this would imply just $40. So, my question is, at the capital markets, that you indicated that even a 2009 type of recession would have higher EBITDA, if this is still valid, so that we can expect the steel EBITDA to going back to $60, $70 per tonne.

Okay. I misunderstood your question. I think at this point in time it's premature to get into what our results are for fourth quarter '11. I mean, we have given indication of how we will perform in the second half. And I think post the results, we can do a review of how we have performed compared to the previous year and what that meant, to provide an indication and -- as to how the market is evolving. But, to get draw into margins per tonne and the difference is perhaps a bit premature.

Okay. Thank you.

Great. We'll take the next question from Rochus at Kepler.

Yes, hi. Good afternoon. Maybe could we come back to the Q4 guidance? Is there any magnitude you can provide us what the shipment situation will be in the fourth quarter relative to third quarter? Or at least what part of your portfolio are facing the most severe -- or facing the declining volumes in the final quarter?

And maybe could you also talk a little bit about where you see (inaudible) utilization in the fourth quarter? Obviously, at least the European business has produced more than it could ship. So, are we seeing the Q4 utilization rather at the -- at a mid or at a higher (inaudible) the 60s?

And maybe finally on the guidance. I think you have reiterated the guidance since the summer. How much of buffer is still on this guidance and how comfortable are you feeling with this? And are you closer or more further away from this floor you've given implicitly with this guidance? Thank you.

I mean, in terms of guidance, I think we have said a lot already, but what we have said is that we expect to do better in the second half of '11 compared to the second half of '10.

In terms of your shipment question, I think the shipments are, at this point in time, marginally lower than what we're seeing in the third quarter, with some downside risk as we enter the year end. And customers are producing orders, but they're not picking up the steel. That's one of the perhaps downside risks that we have.

However, I would also like to add that the picture is not uniform. So, there are certain segments which are not exposed to the developed world, which should have higher shipments. So, the areas where we are seeing the decrease in shipments is back to the US and Europe, impacting long, flat -- more the flat division than our long division, as well as distribution.

Okay. Fair enough. Maybe just as an add-on question, can you maybe comment a bit again on the price structure in the US market. Obviously, prices have fallen now closer to the $600 baton. Are you seeing more risks on the pricing side since the iron ore price has dropped, and probably the recent drop in iron ore and scrap has not fully -- maybe fully reflected on the spot market side?

Yes. This is Lou Schorsch. Obviously, it's very speculative here, but I think we feel we're close to a bottom on the pricing front here now. And I think the indicator we'd use for that really is the amount of inquiries we're getting from customers was just -- in the very recent past I think has gone up, suggesting that people see this as a time to buy.

I'd also mention that while there's a lot of uncertainty globally on the iron ore pricing front, as you probably know, the North American market is much more directly driven by scrap, which people do expect to come down in November, but actually down less than the price of the finished product of steel has come down recently.

So over time, obviously, an iron unit is an iron unit and the iron ore pricing affects the scrap market. But, that's -- there's legs involved in that. And again, the North American market is somewhat insulated from that broader development.

So, you're not seeing (inaudible) arising from the usual destocking you see at the year end. And as we have not seen a troughing in raw material prices, so normally would expect clients to stay away from the market. And so, this could still create an environment of nervousness for the next six months.

I think everybody's nervous. But on the other hand, the inventories are very low. As we said, the supply lines are tight. The end use demand is there. And as I think some previous questioners indicated, there's actual announcements of people trying to realize higher prices. And again, I think we're starting to see that in terms of the order inquiries that we're getting. Time will tell, but I certainly think there's more upside potential or stability potential than there would be downside risk.

Alright. Fair enough.

The next question from John Klein at RBS.

Yes, hi. Good afternoon, gentlemen. Thanks for taking the questions. I have two questions, the first one being on Brazil. You scrapped your plans to expound on finished product capacity there. Is that a function of that you're anticipating that Brazil might become an oversupplied market? And at the same time, we're seeing that slab exports from Brazil have become increasingly more difficult as a function of the exchange rate and domestic cost increases. Where are you heading in Brazil strategically? That was my first question.

And the second question being you said earlier that you see iron ore prices bottoming out at $120 a tonne. Is that a function of the Chinese cost curve for iron ore? If we look at the cost curve of Chinese production, we're seeing that at about like $120, $130 a tonne. The domestic production actually gets loss making. So, is that the reason behind your $120 function? Thank you.

Brazil continues to be most important business for us. And the -- our suspension of Monlevade project we believe is temporary. We have seen the Brazilian growth throwing down. The monies on infrastructure is not being spent as much as what expected. And if we would have finished this project now, we would have to resort to higher exports, which was not create value for us. So, we have suspended these projects and we are waiting for Brazilian economy to accelerate once again and we will review our projects.

Brazilian assets are still one of our best assets in the business and we have the best management, best assets, really good product mix and very good market discussion. So, we will continue to be investing in Brazil as and when we see that the market is growing. And that is not that we are taking away -- going away from Brazil.

And second on your iron ore?

The -- our belief is that $120 is the price at which, below this, it will be difficult to go because that is the cost base for Chinese. I don't know. Some of the producers have a much higher cost than $120 and a poor quality, inferior quality, and they will continue to import.

What do you think, Peter?

I fully agree with you, Mr. Mittal. And I also think that the fundamentals of the steel industry in China remain strong. And they need good quality iron ore in order to drive production efficiencies and production. So in general, I think that -- I'm fairly optimistic that we are at the bottom point of the price curve.

Okay, thank you. Excellent. Thank you.

Good. And we'll take the next question from Neil Sampat at Nomura.

Good afternoon. The only question I've got left is, you mentioned that your mining expansion would be still value creative, regardless of the near-term cycle. Do you have -- in the context of your balance sheet -- and it looks like an increasing caution that the rating agencies have towards the sector, do you have a scenario which would make you reassess your expansion plans next year?

Yes. I mean, that's a very open-ended question. Of course we have scenarios. We have said that our rating is a strategic priority and I think that it is very significant at this organization.

I think we have a lot of tools which are available to this organization. We talked about the non-core assets that we have. And we have other opportunities to find ways of financing this iron ore CapEx if it's not cash on the balance sheet of ArcelorMittal. We could increase leasing, we could do some more take-of-pay arrangements for some of the infrastructure that we're developing. So, there are ways around it.

So, I would just emphasizes that we do believe that we have done enough work on the various scenarios on trying to achieve our net debt target, and are conscious of what we need to achieve or maintain so that we can maintain our rating categories that we are in today.

Thanks.

Okay. We have time for one last question, which we'll take from Vincent Lepine at Barclays Capital.

Hi, gentlemen. So, if I can only ask you one question, just a quick one on the extension of your $4 billion credit facility to May 2015. I just -- I was just wondering if there was any change in the cost of that facility? Have you renegotiated it? And if you could just remind us when it was opened in the first place. Thank you.

So, Vincent, we extended our liquidity lines from 2013 to 2015. We did this in the month of September. It was a two-and-a-half week process. All of our banks came in. And there was no increase in the cost base to ArcelorMittal. I think it reflects the good relationships we have with our core banks and the support that they have for this organization and our short to medium to long-term plans.

And can you -- sorry, can you just remind us when --

Thank you, everyone, and thank you for participating. There will be no more questions. Thank you, everyone. Have a good day and looking forward to talking to you in the next quarter.

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