ArcelorMittal SA (MT) 2016 Q4 法說會逐字稿

Thank you. Good afternoon and good morning everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you very much for joining us today on our conference call to discuss the full-year 2016 results. First, I'd like to remind you that this is a call being recorded and we're going to have a brief presentation from Mr. Mittal and Aditya followed by a Q&A session. The idea is that the whole call should last about an hour. We've already provided the speaker notes alongside the presentation this morning. So hopefully everybody's had an opportunity to review that and I'd like to ask Mr. Mittal to start with some opening remarks. Thank you.

Thank you, Daniel. Good day to everyone and welcome to ArcelorMittal fourth quarter and full-year 2016 results call. I'm joined on this call today by Aditya Mittal, Group CFO and CEO of Europe as well as Simon Wandke, EVP Mining; Genuino Christino, who is our Head of Finance; and Daniel.

Before we move to full-year results, I would like to make some brief introductory remarks. As usual, I will start by commenting on our health and safety performance. Our lost time injury frequency rate for the year 2016 was 0.82 times, stable when compared to 2015 rate. This compares favorably with the average World Steel Association rate of 1.2 times, against ours 0.82 times. Nevertheless, we are focused on making it zero.

Turning to results, 2016 was a very important year for ArcelorMittal as we have made significant progress in our financial objectives. EBITDA increased by 20% to $6.3 billion. A key driver of this improvement is our Action 2020 plan which delivered a $900 million contribution. Importantly, all segments made positive contributions.

In the US, our footprint optimization is nearly complete and the ramp up of activity at Calvert is progressing well. In Europe, our transformation program is ongoing. We have centralized key functions to deliver efficiency improvements and boosting the reliability and productivity of our operations. There is similar progress in Brazil where our value plan is generating efficiency gains and structural cost improvement. In ACIS, our operational performance in terms of reliability is better and we achieved record quarterly production volumes in Kazakhstan and Ukraine during the year. And finally, our mining business has delivered on its target of reducing cash costs by 10%.

Ensuring we were free cash flow positive was a key priority for 2016. We achieved this in spite of a $1 billion investment in working capital. Ignoring the $400 million investment in premiums paid to repay debt early, our free cash flow would have been more like $700 million in 2016. Together with the actions taken at the start of the year, this free cash generation has enabled ArcelorMittal to reduce net debt to $11.1 billion. This represents a 1.8 times multiple of our EBITDA compared to three times a year ago.

Looking ahead, the trends in our business are positive. We are forecasting demand in our core markets to grow and I would expect our shipments to also grow. There are some good opportunities in front of us to grow EBITDA and returns by improving our high added value mix, improving processes, and investing to reduce cost. So we plan to increase our development CapEx in 2017. To conclude, ArcelorMittal made good progress in 2016 and we start 2017 with strong momentum in our business and the markets in which we operate. The entire organization is engaged and aligned with our Action 2020 plan and I expect to see further progress this year on cost optimization, mix improvement, and volume growth. With this, I give you back to Daniel for questions.

Thank you Mr. Mittal. So if you would like to ask a question, please press star one on your keypad and if I could ask everybody to limit themselves in the first instance to just two questions, that would be appreciated so that we can get through as many people as possible. So with that, we will take the first question from Mike Shillaker at Credit Suisse, please.

So first of all on guidance, I understand your reticence to give any formal guidance, but given the speed of movement in raw material prices, steel prices towards the end of last year and this year and into this year and also obviously lag effects and similar, can you give us some help in terms of the trajectory of earnings from Q4 to Q1 and into Q2 and given lead times, I suspect you at least have some feeling now for how Q2 is shaping up? And then my second question more on the US market, US steel [produces] I think we're talking about something [around $25 a tonne increase] in met coal contract this year, is that something that you recognize and could you also give us some degree of sense of how you got on in the auto and similar contract negotiations in the US market? Thanks a lot.

Great. Thank you, Michael. Yes, I can probably help provide some flavor around how this Company will perform over the next six months. When I look at Q4 versus Q1, clearly we will have volume increase. If you saw the level of volumes we had in Q4, they were quite low and so, there will be a positive pick-up in terms of volumes. When I look at price cost impacts, I think you're right, steel prices improved, so did the cost of raw materials. So I expect a neutral price cost impact going into Q1. And then when I look into Q2, we see a more favorable price cost impact. That means we should see margin expansion into Q2. In terms of coal in the US, I think our contracts are in line with the average of the industry. In terms of auto, we see that we have managed to maintain spreads in our contract business, i.e., the cost of raw materials has been passed through.

Jason, Bank of America.

One of your slides show you say that the investment grade credit rating is a key objective and deleveraging therefore is a near-term priority. Could you give us some color on your discussions with the rating agencies and the path from here to there? And I guess with that, to the extent that you achieve an investment grade rating, is that when we should start to think about the dividend turning back on Aditya?

Yes, I think basically you're right. In terms of discussions with the rating agencies, I can't get into specifics. As you can imagine, those discussions are confidential. The other thing I would just add is that if you look through our commentary, what we say is investment grade metrics, not necessarily achieving an investment grade credit. And therefore, what I'm suggesting to you is that to the extent that we achieve investment grade metrics, you would expect a resumption in dividends. What is investment grade metrics? I think fundamentally, we're not far. So to the extent that market conditions stay as they are, I would expect dividends to resume in 2018. Clearly, that's the decision of the Board. I'm not necessarily sitting here and saying that is a foregone conclusion, but based on what we see in the market, based on the trends that we're seeing in the business, I think that's a reasonable assumption to make.

Alain, Morgan Stanley.

Just could you mind giving us some insight into your iron ore strategy. If prices were just stay where they are at the moment, can you unlock some additional growth projects to bring them back to the markets? And the second question is on your latent steel capacity as well. Again, if the spreads were to be sustained, how should we think about you bringing back more capacity to the market? Thank you.

Thanks Alain, firstly on iron ore, we've actually given guidance around an approximate 10% increase in shipments volume in 2017 from 2016. That's driven by a number of factors. We've got Mexico Volcan, which you remember was suspended in Q4 2015. That's been revised. We've looked at the mine plan, we see there is an opportunity to bring it back on again at around 2 million tonne rate this year. Liberia, we are looking very final numbers around the potential to approve the Gangra project that would take us back up potentially to 5 million tonnes a year in [cal 2018]. So what I'm sort of describing is efforts around organic, their brownfield and I think it comes back to a potential around the 10% maybe you can do more, but it's not to us necessarily a volume issue here. It's not upstream base growth, it's more around brownfield growth. Price, nice to have, but more focused on our businesses around what the controllables are cost, quality, our asset utilization, asset reliability. These are the key focus points for 2017, maximize the tonnes from our existing investments.

Thank you, Simon. In terms of volumes, I think we do have some latent capacity but the way to think about how we will perform as a business is to look at the growth we expect in our core markets and that's the right proxy. Yes, there may be some shifts because of our higher exposure in auto, but fundamentally, I would expect positive growth in our core markets and that trend will continue. When I look at 2016, we did very well in terms of Action 2020, we reduced our cost, improved our mix, and increased our efficiency, but we [did not] really grow volume and as you know, Action 2020, a significant portion of the gains is coming from volume growth. So I would expect that to be an area of growth in 2017 and beyond.

Ioannis, RBC.

Two questions from my side. First on ACIS, shipments were relatively weaker quarter-over-quarter in Q4 and I think probably weaker than you previously guided and seasonality is normally in the range of down 4% to 6%. So could you give a bit of guidance, an indication of what were the main issues there and what you see for 2017. And secondly, on working capital, you haven't provided guidance I guess given the volatility in steel than raw material prices, but if we were to take as both scenario into the end of the year, what sort of working capital assumptions should we build into our numbers. Thank you.

So let me just start with working capital. As you saw in 2016, we invested a $1 billion in terms of working capital. To the extent that market trends continue, I would expect a similar number for 2017. So what do I mean by market trends, I mean increased level of shipments, improvement in steel pricing, and clearly that implies an investment both in inventories as well as receivables. In terms of ACIS, you're right, fundamentally shipments were slightly weaker Q4 versus Q3. I would not read much into that as you know, year-on-year ACIS is about or CIS business is up about 700,000 tonnes. So we set record production quarters both in Ukraine as well as in Kazakhstan. Kazakhstan is up about 450,000 tonnes, Ukraine is up about 250,000 tonnes. So these are very strong numbers year-on-year. I think our turnaround plan, Action 2020 plan in the CIS region is proceeding well. Secondly, in terms of 2017, we are forecasting a return to neutral levels of growth in the CIS region compared to negative in 2016. So that should also be supportive of our shipment performance in the CIS division.

Seth, Jefferies.

The question on the Brazilian business, you're pointing to I think a 3% to 4% demand recovery this year. Can you speak to the confidence in that and any initial signs of a pick-up in your order book to date? Also, do you expect pricing and also profitability to also then increase in tandem with sales volumes or would we see a lag for pricing as perhaps inventories are drawn down or excess capacity is consumed. Thank you.

Sure, in terms of Brazil, the good news is that we are forecasting a mild recovery. This is basically because of improved confidence. We expect construction to remain stable, but recovery in auto. The bad news is that we don't see it in our business today, but that doesn't detract away from our confidence. What we do see in our business is improved pricing. So I think coming back to the end of your question, I do expect pricing to improve as volumes improve in our Brazilian business.

Thank you. Just a follow-up, is there any structural reason to think that margins in Brazil could not return roughly towards where they were in recent years even past the financial crisis. Thank you.

In terms of structural reasons, I think it really depends on our outlook on China. China is depressing global steel markets and what we need to see is a reduction of Chinese global overcapacity i.e., their steel capacity utilization [should be in excess of 80% to 85%]. Today, they're running at 73%. China has made some progress in 2016. They've announced officially, they've [reduced 65 million tons of steel, their plan is 150 million tons]. We still think they need to do more and they need to do it more faster, but clearly if you see a normalized steel industry in China, then you could expect to see structurally much higher profitability in our global businesses, but also in Brazil.

Alessandro, Berenberg.

The first question is related to the impact that the energy price is having on the Russian market, which clearly is an important market in terms of competitiveness for your ACIS division. The ruble has appreciated significantly [while] you're selling quite a significant amount of steel from Kazakhstan? Then you have Ukraine that is competing with Russia and then indirectly also South Africa I guess. What basically is your outlook in terms of pricing, utilization rates, recovery demand in Russia in the mid-term?

The second one is related to Ilva, I mean there has been an update that the final bids for Ilva should be submitted by the end of February and I was wondering, if we take a look a snapshot of the currency price environment, how basically your interest is (technical difficulty) whether the strategic potential of the company has increased relative to last year when we started to [speak slightly] after the capital increase? Thank you very much.

Yes, I'll talk about Ilva and I'm going to get Genuino to answer the first question. So in terms of Ilva, I think our strategic interest is the same as it was last year. We are the preferred bidder from our perspective obviously because we have the technology, we have the capability, we have done very well in terms of improving our global health and safety standards, we have very strong records in terms of our environmental record and same on corporate social development. And therefore, we bring a lot to the table. As all of you know, we have been very successful in turning around facilities. So for those reasons, our technology capability, turnaround expertise, our socio-environmental credentials, we believe we are the best bidder.

At this point in time, I think bids are expected in the next few weeks, perhaps March 1 or end of February. While conscious of our strategic interest, we're also cognizant that we want to keep on strengthening our balance sheet and improving our credit metrics. So any such strategic action we make for our ArcelorMittal will have all of those considerations. Maybe in terms of ACIS, just very quickly, we are still seeing neutral growth in the CIS region from negative growth of 3.5% to 4%. So that's actually positive when you look at the CIS market. So that should have a positive impact on our business in 2017. Going forward, the other thing that is happening in our CIS business is that we continue to make operational improvements. So that would result in shipment increase and also recognize that the CIS business has a lot of export exposure. So to the extent that our end markets are weak, we have the ability to export some of that product. So in 2016 for example, we increased shipment by 700,000 tonnes even though the CIS market was negative 3.5% to 4%.

Thanks Aditya, just a follow-up on Ilva, I mean the timing for the Italian authorities to decide about the winning bid is about 30 days after the final bid, right?

So Alessandro, we have a confidentiality agreement. So I would not want to be categorical on that, but I think they have flexibility to decide when they have decided the process is closed. So I don't think it is that black or white.

Luc Pez, Exane.

Could you help us maybe understand whether your projection in terms of working capital requirement dynamics given the volatility the industry is facing in terms of cost price et cetera first looking at Q1 and what would be your best expectations for build-up for the full-year. Thank you. That would be my first question.

So as you know in Q1 -- we invest quite a lot in working capital, I would not expect Q1 of 2017 to be any different. What I did say earlier on in the call was that if market conditions remain as they are I would expect a $1 billion build in working capital and this is primarily inventory and receivables because shipment volumes are higher and steel prices are higher. So overall, maybe marginally higher in Q1 2017 compared to Q1 2016 would be the bill for working capital, but for the whole year I think in line with what we saw in 2016.

Thank you and follow-up question would be related to CapEx. As you are starting to put some development CapEx back in 2017, could you maybe elaborate a bit more as to what are your plans when it comes to steel operations and what could be project you would activate in iron ore looking Liberia in particular but maybe you have other ideas. Thank you.

So a few comments. So fundamentally, we are increasing developmental CapEx by [about $500 million, $400 million year-on-year], out of that $400 million, $100 million is in mining, $300 million in steel, and there's $100 million more in maintenance CapEx. So where is this money going? So $300 million in steel is quite easy to explain. You can look at our earnings release and some of the projects we are commissioning in 2017. So it's about 400,000 tonnes of advanced high strength steels which we are increasing our capability to produce. We also have, if you go through the slides on page 23, a phenomenal presentation on JVD technology. This technology is world-first, no other steel company in the world has this. It's a culmination of years of scientific research and it's literally a new way to galvanize steel. So it's a new vapor coating technology for galvanized product.

The other area where this is going is also in growth in our Eastern business in Europe. So we are growing HRC and hot dip capacity in Poland as those markets continue to grow. So that is some of where the additional $300 million developmental CapEx is going. All of this is EBITDA accretive. In terms of mining, I think Simon talked about it or maybe Simon why don't you go ahead and describe it.

Yes, sure Aditya. Look, I mean you mentioned Liberia specifically. The plan this year is to grow tonnage subject to the final approval of the Gangra project. Gangra might seem like a new word to you, but it's always been in the long run plans to develop that in Liberia. You recall we had Phase 2, which was put on ice with Ebola and further price decreases back two or three years ago. We're now into a staged approach of judicial spending of capital where we think it's going to provide the highest returns, the quickest returns.

Gangra is an interesting ore body, it gives us a DSO product potential extension. It would see us at strength go back to a 5 million tonne rate at plan in 2018 and if it's approved as I mentioned, we would see an additional 1 million tonnes in 2017. It's a lower strip ratio, it's a higher quality FA product and hence higher value in the market and we see that as a positive and look forward to that potentially being approved. Is that your question Luc? Did that get to the point?

Yes, thank you.

Rochus, Kepler.

Maybe a few follow-ups on mining. First, Simon can you talk a bit about your ideas how to reduce the cash cost further in 2017 or was it largely where we ended up last year? Then, apparently there have been some issues in terms of operations in mining in Q4 and also in previous quarters. What are the key measures to get that under control. I think in Canada there was also some shipping problems and in terms of the multi-year outlook for mining, I guess you guided for 2017, what are other areas where you might add volumes beyond what you talked about Liberia. I think in the past you had ideas to get Canada up to 28 million tonnes or higher. Any update would be appreciated and maybe one question on the $5 billion of cash requirements. What is the visibility that this can be a sustainable figure beyond 2017 as markets continue to get better and you might want to harvest some of that opportunities. That's it.

I'll have a go at the mining ones first. I guess in terms of cash costs, we've not provided any guidance this year, I think consistent with the fact and I'll use percentages. At our bigger operations like AMMC in Canada we've seen around 50% cost reduction since 2013. You're now moving into the tougher to get stuff and that's no rocket science. So our efforts now lie in cost reduction around productivity, asset reliability, asset utilization, R&D. We're starting investing this year in autonomous drills, so driverless drills program in Canada, it's those kind of things which touch on the Action 2020 program which will see the main efforts in mining going forward from today.

Of course, there is still wholesale cost reduction to be done in a number of mines. Not everybody is at the same maturity as AMMC, but we got to get a lot smarter to how we're going to take the money out and we really are spending a lot of time on the R&D side to work out what we can do differently. In Action 2020, we have around 25 projects in our pipeline in mining and the vast majority of those are sort of step outs, they're structural, they're sustainable as we've described before and they will lead to some volume, hopefully, but also they give us better competitive position. Some of those are around product design, many of those are around cost as well.

In terms of volume, we have talked in the past about Canada. I think people talk publicly about going to 30 million tonnes. It's a magic number. It's nothing specific, but an end-to-end debottlenecking project is under way. That's become one of our Action 2020 projects in mining. It starts right up at the ore bodies. This year, you'll see we're investing bit of money in Fire Lake, which is about smoothing our waste strip FE and inputs to the concentrator across the mining complex in Canada in Quebec and that is the starting point to potentially an overhaul of the AMMC asset, which would give you hopefully lower cost and higher volumes. It's organic, but it's being smart with what we're doing with regard to spending money.

Other areas, I mean I mentioned Mexico earlier turning on Volcan again after being suspended in 2015, plan this year to have a couple of the million tonnes extra. Life of that question don't know, we'll be doing mine evaluation as we start up Volcan again this year motivated by higher prices and a change in the mine plan. Liberia, I've just talked about that on an earlier question. That is a potential source of additional tonnes from last year but effectively going back to what we were producing three years ago with a target of around five million tonnes of DSO. So I would describe it as not a massive volume story, it's an organic volume story potentially, but about being repositioning our products even lower on the cost curve. It's a steady progress job.

Rochus your last question was around I think AMMC, Q4, and tonnages et cetera. We had weather-related issues, we had quite severe storms. I mean, it's winter, that's quite obvious. Everybody says we have winter every year, but this was more than that, we had very high tides, we have ingress of water over the berths area into the grounds of the property on the port. So we actually lost about six days in Q4, the back-end of Q4. They are one-off events and those days unfortunately were lost, so we saw a reduction -- commensurate reduction in shipments in Q4. I think elsewhere, there is a big theme on asset reliability, asset utilization. You'll see in the org charts in our organizations today that wasn't there two years ago, asset reliability managers and staff sitting under maintenance, maintenance reporting into a very high level in the organization to the CEO. That is a big change that we're undergoing right now to make sure that we [sweat] those assets to maximum shareholder value.

Great, thank you very much Simon. So in terms of your question on cash requirements going forward, I think $5 billion is a good ballpark number. The reason why I get comfortable with it is because I expect our interest expense to also decline over the medium-term and I think we can use some of those funds as it creates value to redeploy in terms of CapEx. So I'm not forecasting when I look out dramatic increases in CapEx from these approximate levels.

Brett, Loop Capital.

Two questions, first off, I've referred a variety of different sources in terms of outlooks for iron ore, do you guys see a forthcoming supply surplus, a balance kind of what's your take on the global outlook for the iron ore supply and demand dynamic? And then also, it just it seems globally like the 30% CAGR that folks had forecast a couple of years ago in aluminum usage in exposed automotive doesn't seem to be materializing as you guys sort of talked to the platforms around the world that you guys serve from an automotive standpoint. Is that realistic or is that probably something that's being over-trumpeted by the aluminum folks? So, two questions.

So, thanks Brett. So just on the iron ore one. I mean, we are a buyer and a seller, we don't give price forecasts very obviously, but as I said a little earlier, I think personally three things I watch very closely is Chinese profitability, the Chinese mills domestic production and align that with the CFR price. There is a reasonable correlation over time amongst those three things. So I think that a big unknown is going to be what's going to happen with regards to 2017 domestic production of iron ore in China. That will be important.

On the seaborne side, I think over the next 2.5, three years, we see 100 million tonnes, 120 million tonnes, potentially coming on to the market. So then it always comes back to the China question, what's China going to do in terms of capacity utilization and consumption price, but for our way thinking at the moment, we're in some sort of equilibrium as such at this very point, nice big price today, but that's an observation, it's not a factual statement that it's going to stay there.

And then the aluminum question?

Yes, sure. So, in terms of aluminum, I think, I don't know if you heard my prior statements on the new technology that we have deployed, JVD, so we are [Jetgal, Jetzinc]. (multiple speakers) also announced two new products, Usibor 2000 and Ductibor 1000 this year. All of this just demonstrates the leadership that we have in creating new technologies and new solutions for the automotive universe and I think you're right, I don't see aluminum having that CAGR. I think yes, it did make progress with one or two vehicle platforms, but we are catching up and we are demonstrating that we can provide the automotive industry with new steel solutions, which achieves their lightweighting targets. The other macro thing on this whole auto business and aluminum versus steel, I think is the fact that we may see in the US actually some of the standards relaxed, so the pressure to lightweight may also decline.

Carsten, UBS.

Just one question left from my side. How do you actually see the global supply and demand balance playing out this year because so far over the last three months, we have seen quite a bit of volume response to the margin expansion in the steel industry way more than you suggest that the consumption will be actually in 2017. Is there a threat in your opinion or is there a concern that the [industries] over do it again and the margin expansion, which we have seen so far might disappear later in the year?

So in terms of our core markets, let's look at Europe and NAFTA, we have not really seen new supply come on stream. I've not seen any significant announcements of new blast furnaces being re-lit. I think in NAFTA the exception obviously is Big River and that will have an impact, but I think we can almost see that impact already in the marketplace. In Brazil, there has been one blast furnace re-light of a competitor of ours, but from what I understand that some of those tonnages will be absorbed by the growth in the Brazilian market and some of it will be exported.

Globally though this problem still persists. We still have significant overcapacity which is best demonstrated by China and therefore even though they have cut 65 million tonnes of capacity in 2016, they need to do more and that's why we're very focused on finding a comprehensive trade solution. What does that mean? That means in the US, we need to enforce the trade actions that have been decided upon and in Europe, there are a few more critical trade cases, which should be decided upon this year and going forward on the medium-term basis both in the US and in Europe, we need a comprehensive solution, which means a better understanding of the subsidies and overcapacity in the Chinese steel industry and how that can be rectified and fixed in the medium-term.

So you are also not concerned about the higher utilization you see across the board because even in Europe, we see right now that everybody is talking about volume increases out of the existing capacity.

I'm not saying I'm not concerned. I guess clearly the visibility that we have is till the first half, which looks favorable. We don't have that much visibility into the second half. Yes, clearly there's a lot of volume and that would put pressure on spreads, but spreads are quite strong right now. The other thing I guess a point I was making is that maybe utilization rates increase, but we don't see that much of capacity being re-lit.

Chuck, Bradford Research.

Given the tax changes that seem like they're coming in the US, how much of your Canadian produced steel ends up in the US which could be subject to this border tax?

So quite a lot, more than 1 million tonnes, but I think it's very premature to talk about this border tax. I think there's not even an actual draft in front of Congress. Right now, it's an idea and I think it will take about one to two years to get actually enacted. Fundamentally though, we are well positioned because we don't supply to the US market from an import basis, right. We fundamentally produce steel in the US and that is what we are about as a Company and so to the extent that we favor American producers, that's good news for ArcelorMittal.

Can you make DR grade pellets at your Quebec mine?

Yes, Chuck we do. We have about 2.5 million to 3 million tonnes, little higher capacity potential and we do make that. It is a core product today for ourselves.

That being the case, does it make any sense for Cliffs to [ship] DR pellets from their Northshore mine in Minnesota to service your Quebec DR plant?

Yes, I think there's enough capacity but also I'm sure it's commercial interest as well. There are different commercial terms available and also shipping rates will apply. There would be quite differences in the reasons why not rather than just [bolt-ons].

Phil, KeyBanc.

The 8% decline in after sheet shipments in the fourth quarter was somewhat below your larger peers. Was this related to anything in particular in terms of automotive adjustments or any production complications and then also what type a snap back should we expect in the first quarter?

This was basically operational reliability issues that we faced. We are in the process of addressing that and I expect a stronger Q1. This is what when you look at NAFTA, it was basically our AM USA operations. So (multiple speakers) perform quite well.

And in terms of the comments you made on maintenance of contract spreads in 2017. Is that a comment on your annual and semiannual contracts in NAFTA, Europe or both?

Generally both. I think that comment applies to both.

Roger, JPMorgan.

I just wanted to clarify your comment on the net working capital. You said that net working capital would be at a similar, if current conditions are sustained, they will be at similar level to 2016. Did you mean a similar investment in net working capital or that net working capital would be flat and if you mean a similar $1 billion investment in net working capital, how much of that is already baked into the $5 billion of breakeven guidance?

And then, the other question I have is just on the maintenance of the contract spreads that you just talked about in the last question. In theory could that mean because you got a certain amount of spot coking coal exposure in Europe, could that mean that you have locked in good prices for the first half for the whole of 2017 in Europe and if coking coal falls from here, you get the benefit of that in your profitability. Is that essentially how you'd see it playing out or does the contract level sort of already reflect an assumption that coking coal is going to fall a little bit further from here?

In terms of your first question, this is an investment in working capital of $1 billion, just like what we did in 2016, so the number in 2017, our working capital would be higher at the end of the year than 2016. In terms of cash requirements, in cash requirements we exclude working capital. So cash requirements is basically CapEx, interest, tax, pensions and all the cash required for the business. Normally, if we are investing in working capital that implies that spreads are improving, prices are improving, volumes are improving, so normally EBITDA easily covers the working capital investment.

In terms of the contract business, I think the statement that I made is accurate. More or less, margins are maintained. I think clearly when you enter into a semi-annual or annual contract, your customer is not going to accept a [$300] price for coking coal as an example. They're going to agree or negotiate a price for the full year, which would be lower than that. And so, that's what these contracts reflect. To the extent that coking coal ends up significantly lower than that expectation, yes, there may be some pick up, but broadly speaking, I expect these contracts to be neutral.

Bastian, Deutsche Bank.

I just have one very quick follow-up and that is on Ilva. Given the strong dynamic which we've had in steel markets, I would be surprised if this had not any impact on the appetite for (inaudible) than has increased I guess the willingness to pay maybe a higher price. Could you please give us some sense whether you have your lifted your value assessment for the asset versus just nine months to 12 months ago. I understand the strategic value is exactly the same, but obviously the market conditions have changed to some extent. Thank you.

Yes, I think at this point in time, it's difficult to be very prescriptive on that. We clearly are in a competitive bidding process. Bids are due in the next few weeks. I can just reiterate the statements I made that we believe we are the best bidder for Ilva for a number of reasons and number two, we remain conscious of ensuring that we continue to delever and strengthen our balance sheet.

Sergey, Societe Generale.

A very quick question, if you could give some color on what sort of [helped to] demand in North America you expect this year from stronger activity in the oil and gas industry.

We do see some pickup in the oil and gas industry this year versus 2016 since the prices have recovered and we are seeing some pick-up, [the patches have] strengthened and we hope that this particular product continues to grow in demand.

Is it possible to put any number on it?

Number on this would be -- I would guess between 4% to 5%, we are seeing, [automotive, machinery, construction, double-digits, this is what our guess, 10% to 12%].

Thank you very much.

Thank you. So now there being no other question, I like thank everyone for participating in this call and it's clear that we have made good progress in 2016 and we are starting 2017 with a much better situation than we began 2016, the trends are positive and we are delivering. I look forward to reviewing the first half performance with you in July. All the best. Thank you.