淡水河谷 (VALE) 2005 Q2 法說會逐字稿

Ladies and gentlemen, it's a pleasure to be here today with the third -- second quarter results, and also to comment on our views about the future. We have here present with us today Mr. Jose Carlos Martins. He's our Executive Director in charge of Ferrous Minerals and I believe that he can contribute a lot to the success of this conference call.

I will start with the presentation and then we'll have a Q&A session, and both of us, myself and Jose Carlos Martins, and also Roberto Castello Branco and Martins here will be available for any issues you may raise.

Now, starting with the result in the second quarter, we see that CVRD has actually delivered very, very good results, the best quarterly results of its history. Record in iron ore production, iron ore and pellet sales, gross revenues, adjusted EBIT, adjusted EBITDA and net earnings. And all of those out of this remarkable performances, and we are extremely happy with the result.

The second quarter we reached a new record in shipments of iron ore and pellets. We've managed to achieve 62.4m tons in total, higher than the all-time high of December '04, the third quarter of '04, 61.8m tons. Representing an impressive growth rate in volumes of 11.8%, considering all the consent we have to reduce the [indiscernible] due to scarcity of equipment and other [indiscernible] industrial plant.

Of course, we are, as everybody in this industry, facing some cost pressures. This is due to what we believe the long cycle in the life of the minerals that is taking place, and it's just part of the game. One should not expect, for instance, to have a strong demand for equipment and human resources related with the industry, and not having cost pressures and not having economically shown an appreciation of the major currencies of mining countries.

So, this is -- this all makes sense. The issue is to determine how temporary or how permanent or how long the cycle would be, in terms of our investment plans and growth plan.

As we see it today, the cost pressures are normal in this perspective. And we find, particularly, the price pressures related with the scarcity of what I've mentioned before - equipment, parts and components, and human resources. But there the relative contribution, as we show in the next chart there, is -- has been easing. And we believe that in terms of, for instance, the exchange rate, we should not expect much -- a lot of further appreciation of the real, for instance.

In terms of revenue growth, the major driver of the revenue growth was, of course, prices that are reflecting the increase in iron ore prices achieved in this year. And this makes possible the achievement of our all-time high EBITDA of $2.033b in the second quarter of '05. Price has contributed almost $1b, volumes $173m, dividends, the nice performance of our [inaudible].

[Break in audio]

[Inaudible] in the first -- in the second quarter of '05. Again, price is the main driver, volumes and dividends, with the very good performance of our affiliated companies, depreciation and amortization, reflecting the increase in our asset base.

And you see the large contribution of the real appreciation, $173m. And this is due to the restructuring of revenues in part of our Company. As we all know, about 83 to 85% of our revenue is denominated in U.S. dollars, and about 30% of our costs only denominated in U.S. dollars. So we lose certainly this part of it. We lose margins with the appreciation of the real and we gain margins with the depreciation of the real. And this has played a role in the second quarter, when the exchange -- the normal exchange rate reached -- are quite high in dollar [activities].

In terms of our EBITDA performance, the next chart shows you that for 13 consecutive quarters we showed growth in this indicator. And now, our last 12 months, EBITDA reached the mark of $5.034b. And in terms of EBITDA structure, we see the recovery of the relative share of ferrous minerals in our Company with the ferrous minerals responding for 83% of total EBITDA. Of course, we have the increase in production of 14% in iron ore, the increase in shipment that you saw of 11.8%. But the major aspect here is the price change, the relative price change that occurred, that made possible this recovery of the relative importance of ferrous minerals in total EBITDA.

As a result of this performance, CVRD showed the very impressive figure for its metal and it's $2.3b in the first half of 2005, the highest net earnings figure showed by any mining company so far. And this is very important considering the relative size of the companies that are involved here.

Another important asset I would like to comment is that we are, as we informed in July, we are now an investment grade company, although we are at just the first step in this new league. But we are already starting to see the benefits of this investment grade rating. And just this week we were rated BBB low by the DBRS rating agents, a Canadian rating agency authorized by SEC. We are very happy with this second recognition in just a few weeks about the quality of credit.

We are not happy yet. We should pursue further improvements in our balance sheet, further enhancements of our balance sheet. You know that we have a very large investment program and we would be working very hard to preserve the recognition we achieved so far in terms of credit ratings, and also to keep funding our investment program and paying nice dividends to our shareholders.

In terms of investment, as I commented just a minute ago, we have a very large investment program this year, $3.3b. Next year maybe even a slightly higher figure for our CapEx program. In the first half of 2005 we spent $1.4b, about 41% of the $3.3b we committed to for this year. Our expectation is that we are going to catch up and to reach the program level, or even slightly higher, a little bit.

And we would like to highlight the authorization by our Board of the implementation of the Vermelho project. It's a $1.2b CapEx program. It will start up in the fourth quarter of 2008. It's 46,000 tons per year of nickel and 2,800 tons of cobalt. We are estimating an OpEx cost around $1.67 per ton. This would be a very competitive price level, considering what is the average forecast for the long-term prices of nickel.

Next projects that are coming into line with are Aimores power plant. That will be fully operational by October 2005. Taquari-Vassouras, we concluded the expansion and the expanded plant is now in the ramp-up process. We should be producing 710,000 tons of potash this year.

And Alunorte alumina expansion stage four and five, it's 1.8m tons per year. With that on the margin, you have the total capacity of 5.3m tons, and -- 4.3m tons, sorry. And will be the largest alumina refinery in the world. So, it's not only the most efficient, but also the largest alumina refinery plant. And this plant comes in a very good timing, considering the price environment that is prevailing, where we see that the global alumina shortage is not expected to be corrected in 2006. So, it's the perfect timing for our expansion and it should yield very good results to the Group as a whole.

Iron ore capacity expansion, and Martins could comment further on that later on, will allow production to reach 275m tons by 2007, up from 211m tons in 2004. This is several projects; Carajas, 85m tons is already a reality but with the second shipload and a third car dumper already in operation. Brucutu, 24m tons but with room for more, and Martins will certainly comment on that; there's a new issue here in this project. Fabrica now with 15m tons, fully operational. Fazendao with 11m tons, now from 14m of run-of-mine. And 5m tons additional production in Fabrica and 3m tons in Itabira.

You have the depletion of several mines, Timbopeba, [indiscernible] and others. And by 2007, as I mentioned before, we'll reach 275m tons. The first half of '05 we produced 112m tons of iron ore.

The next chart shows the very nice return on invested capital, despite the strong appreciation of the real - 38.2% in 2005 on an annualized basis. The last 12 months ended in June 30, 2005. So, very good returns to our shareholders, but we are not sitting waiting for opportunities, we are going after them. We are trying to shape our future and CVRD is starting to develop what we see as a global portfolio of mineral exploration projects.

We have several of them going on right now in different stages, in conceptual studies like the Rio Colorado potash, some satellite deposits of bauxite in Para, copper as well, and nickel in Goias; San Juan do Piaui, nickel again. And some more advanced objects, like the Moatize coal project. That's already the feasibility study. We have the manganese in Franceville Gabon and we are just starting the feasibility study on the Belvedere coal project. So, we are becoming more global and at the same time more diversified in terms of industries in which we operate.

Turning now to the market fundamentals, [the word] summarizes our view. The market continues to show very strong fundamentals and they are strengthening over time. We see lead indicators signaling a synchronized acceleration of industrial production growth. You see in this chart the reversal of the trend that was prevailing until basically early July in 2005 and we see that this is a worldwide phenomenon.

The U.S. economy is showing strong performance, in Japan, even Euroland, although at a slower speed. But the fact is that the global economy, the indicators of the global economy, is showing a very strong performance, reversing what we could say was a quarter of short-term adjustment, to continue sustained growth over a longer period of time.

And behind that, there is not only the strong performance of the U.S. economy that grew 3.4% in the second quarter of '05 on an annualized basis, but also the continued good performance in Japan and other parts of the world. But particularly, the Chinese GDP growth rate, that reached 9.5% in the second quarter of '05.

Fixed asset investment continues to grow steadily. Now, it has reached, in the second quarter, 27%. And, as you know, this is a very good lead indicator of steel consumption in that country.

At the same time, iron ore spot prices continue to stay above the benchmark prices. And what happened, actually, is that the prices paid by some Chinese importers are now very near the prices, the C&F prices, before the price increase in the benchmark. So, we were talking about $55 or so before the price increase. Now, we are seeing a C&F price of around $58 per ton.

So, it's very good news for our client and it means that a major part of the price increase was reduced, or was offset by the reduction in freight costs. And freight costs, in our view, are not indicating any weakening of the market. It's a structural change, given the increase in supply of [case-sized] vessels that we are observing in the market.

You see in this chart there, showing what was the actual increase of fleet that was observed in 2004 and expected for 2005. But you see that is a growing trend, if the growth rate over time changes as well. So this, of course, has a major impact in the market of those vessels, affecting price formation on a structural basis. And this is not an indication of weakness of the market, in our view.

You should also consider that we are -- we ourselves and several other companies are investing in improvements in our port facility in order to speed up the loading of ships, and in order to avoid the moorage costs.

So, this is -- this has resulted in a relative reduction of the moorage expense in the second quarter. And it's an indication that -- it's also an indication that more ships or more effective capacity will be available to the market, given this increased efficiency in port facilities in general.

Chinese iron ore imports growing at a very fast pace and reached 131.2m tons in the first half. And we just got fresh numbers for the seven first months, the first seven months of the year; it's 152m tons of iron ore imports by China. And this figure is very much in line with the 260m tons total imports expected for 2005. And another important news is that China became, again, in July a net importer of steel. So, those are very good news and very much in line with what we think is the underlying strength of the global market as a whole, and particularly the Chinese economy.

And if you turn to the next chart, you'll see that on adjusted basis, if we adjust for the seasonality of the imports, you'll see that the performance of the Chinese imports in the first half of 2005 was extremely strong, well above the performance of 2004. Chinese iron ore inventories remain very low, in our view. They are about the same level since the end of 2003 and they now correspond to less than one month of consumption. So, this is a very low level of inventories. And another important aspect, they are not composed by good quality iron ore.

And if you look at the next page, you'll see why we are so confident that this is one of the reasons why we are so confident. This is not a bubble. This is not a short-term phenomenon. China has a long way to grow yet before peaking, in our view. Steel consumption is just an indicator, one indicator, of the many that we do have here.

So, China steel consumption, for a per-cap income of less than $5,000, was about 200 kilos. If you compare with the U.K. 1970, with a per-cap income slightly below $15,000, you have about 500,000 -- 500 kilos per cap, and France 1973 about the same; Germany 1974 about 620, and so on and so forth.

So, when we look at those figures, and we look at what China has in terms of a social infrastructure, of social demand, and we see on the other side of the balance sheet that China does not have any actual constraint to grow [indiscernible] macroeconomic constraint. What could happen is a shortage of raw materials in general. So, it's a supply type constraint. It's not a demand type constraint that's been helped by a very strong macroeconomic position.

You'll see that we do believe that China has come to stay. They have hiccups here and there, but the fact is that this is what we believe are long-term cycles. That will have permanent effects on the relative prices and consumption of -- particularly of raw materials.

Turning now to a brief comment on a specific market, the manganese alloys. The peak that happened just recently was reverted, with the excess capacity of that. And this capacity was mainly built in China. And this made us to decide to shut down temporarily one-third of our capacity, and that's we are doing. We announced that [indiscernible] in the press release.

On copper - copper prices are tracking higher, due to a strong Chinese demand, of course, concentrate bottlenecks and all-time low inventories. And it's a pity that our production was not what we expected, but this is fact of life. We have to deal with that. But I believe that for a copper project that started in July 2004, this is a very good performance. Maybe we overestimated or underestimated the difficulties that we would have in this first project. But for our first project in copper, to produce as we are indicating, 130,000 tons this year, I believe that is a very good performance of the division.

And finally, on the aluminum, we see that -- this general global industrial production growth acceleration. And power costs in the U.S. and Europe may help to sustain aluminum price levels very -- or relatively high levels that are being observed in the last few months.

So, I'll stop here and I'll again remember you that we have here with us Mr. Jose Carlos Martins, our Executive Director Ferrous Minerals, that is eager to comment on the latest developments of the market. Thank you very much.

[OPERATOR INSTRUCTIONS]. Our first question comes from Roberto Arias from Goldman Sachs.

Yes, hi. It's Alberto Arias from Goldman Sachs. Good morning gentlemen and congratulations on the strong results.

Fabio, you mentioned that the CapEx for 2006 apparently is going to be higher than $3.3b. This is the first time that we hear that. Could you tell us what has changed in the composition of your CapEx? And if I understand correctly from your comment, it seems that the approval of stages six and seven for Alunorte have already been given. Out of that CapEx, what is new? And are you considering any acquisitions as part of it? And what percentage is on steel projects?

Thank you, Alberto, for the several questions you pose.

No, the CapEx reflects some new projects that we have. For instance, the [North East] project that we had there before. A large disbursement of the major projects in 2006, compared to what we anticipated beforehand and, of course, the appreciation of the real, and the increase of certain equipment prices. So, I would say that we are just updating cash flow or disbursements of the project and the exchange rate effect on that.

There is no approval yet of the Alunorte stages six and seven. But I would say that it would make a lot of sense for us to proceed in this direction, as we are expecting the new expansion stages four and four -- four and five to be operational in the first quarter of '05. So, this and the feasibility study should be concluded very quickly, given the knowledge, the accumulated knowledge we have in this plant, and the quality of the reserves that we have in Paragominas, that there are no constraints for any expansion of our alumina refineries activity.

And no, we are not thinking of any acquisition in this CapEx whatever. Okay?

Yes, okay. Just so I understand correctly, so when you talk about $3.3b or excess of $3.3b in 2006, you -- we should assume that part of it is on the further expansion of alumina capacity in Alunorte?

No, no.

No, so if --

No, I didn't say that would be a much higher figure. But we are not seeing any sign of a reduction in the nominal level of CapEx in 2005. To the very contrary, we are seeing some cost pressures, some postponement of disbursements, and I should be -- it's very likely, we didn't conclude our budget process yet, but it's very likely that will be a higher figure for next year, 2006.

Okay. And my second question is on your press release you talk about this comment that caught my attention, it says the Company has increased the rate of waste removal which is carried out by outsource services. And this is apparently to prepare for more cost reductions in the future, but produce more at the high part of the cycle.

If you could please elaborate, is there a change in the stripping ratio of your iron ore mines? And if you could please elaborate, how are you accounting? Are we seeing that your costs are being inflated by just doing advanced pre-stripping and -- or is this being capitalized, and it's also part of your CapEx?

No, the expense we have in stripping is always put in the cost of goods sold. What we are doing, we are going ahead. We intend to uplift the 12 months of being ahead of -- and normally we are between six and eight. So, we are -- and some expenses, we are anticipating some expenses. And we are accounting it as cost of goods sold; we are not putting in the CapEx. We are being quite conservative in this aspect.

But something you started in the second quarter, so it's -- or should we expect that as we look, going forward third quarter and fourth quarter, we're going to see a further increase in cost?

Yes.

Because you are in -- yes?

Yes, we are accelerating this process.

And we -- you should expect also other price -- cost pressures, because they are transported in trucks. And most likely, fuel costs will increase in the third and fourth quarter of '05, together with the payroll expenses.

And the rationale of doing that, I don't understand, because in a period where you have a lot of mining equipment shortage and some limit in the bottleneck of capacity, it seems that you are at the peak of the cycle, doing things that other mining companies normally do at the bottom of the cycle. I just don't understand the strategy there.

No. In our case, the question is not composed of using this equipment for transportation, because our main bottlenecks are in the logistics system and in the port. So by doing that, we are not putting any kind of additional pressure in the production. But we are doing both together without any problem.

Our bottleneck into producing more is really not in the mines. It's mainly in the railway system and in the port system. So, for this reason, what we are doing is only anticipating these expenses and preparing the mines to be in better condition for the future.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from Andrea Weinberg from Merrill Lynch.

Hi, Fabio. Congratulations on the extraordinary results.

So, let me go with a first quick question, just to understand. Your costs increased 20% quarter over quarter, and I understood that this was [de-cost] cost. But you just said with Martins that you probably expect costs to be higher on your third and fourth quarter. I just want to understand the trend here.

Yes, the -- thank you Andrea. The issue is that what we are observing is that we have oil prices, important oil prices change in the international markets. It's $64 or $65 per barrel today. And, again, we are starting to see some exchange rate pressures as well. And it's very hard for Petrobras to hold it for a much longer period of time, because what we read about this issue is that Petrobras was trying to find out how temporary would be this oil shock.

And it seems that this price level for oil may have a more structural nature that's precisely related with the fact that China is a major oil importer. And as we do believe that China has come to stay, maybe this oil shock may have a more permanent nature unless Petrobras may be forced to react to that soon.

And also in the third quarter we are discussing right now with our employees a salary adjustment. And with the appreciated exchange rate, you will also have an effect on our regular costs that is there.

And lastly, the major depreciation of the exchange rate, energy costs should be -- should increase further as well, given the peculiarities of the contracts signed by [indiscernible] with Petrobras.

And then we have some [transportation], additional cost pressures there. Of course, we'll try to offset them as we can. But the general environment of investment and the pressures of the exchange rate depreciation, and others that I just commented, would not allow us to be optimistic regarding costs in the next two quarters.

Okay. One very quick question to Martins is more, if you put on one side of the equation all of the long-term contracts that you have today, plus the demand that you have for future long-term contracts. And if you put on the other side all of the supply from CVRD that is coming on line over, let's say, the next three or four years. What will be the supply/demand balance for CVRD? Meaning, are you going to be able to sign your long-term contracts and fulfill all these contracts? Or you are still avoiding new contracts because you don't have the supply?

No, we are trying to manage, to balance both things. To tell the truth, for the time being we are less aggressive in getting new contracts. Not only because of the balance between supply and demand, but because of the prices. So we needed to keep some space to [indiscernible] and to see if we can get better prices for our products. So we have now at least 80 to 85% of our sales covered by the contracts and we are keeping some space to analyze in the future if you can get a better price.

This is a very sensitive matter, because you -- we are increasing capacity at a fast pace. And we needed to be assured that we have the customers to get it. But as far as we are analyzing now, we are having much more customers asking for signing new contracts with us; more and more, mainly from China. And although China is now growing in a lower pace, the pressure for more high quality iron ore is increasing. So we are benefiting from this point. And we are very, very conservative in analyzing long-term contracts nowadays.

Thank you.

Thank you for your question, Miss Weinberg. Our next question comes from Jorge Beristain from Deutsche IXE.

Hi Fabio. Jorge Beristain with Deutsche Ixe. I will keep it to two questions. The first one is how much revenue is still left to collect, retroactive to the first quarter, that you should be booking in the third quarter, if you could quantify that in hundreds of millions of dollars?

$30m.

$30m. My second question is relating to demurrage. You did touch on the fact that recent quarter improvements were leading to a, as we saw, quarter-over-quarter reduction in this historic cost line. Could you give us some guidance as to how much lower or how much more savings you expect on demurrage in the second half?

We are working in our ports at full capacity. So by staying in this position, we have to be very much conservative in the way we ask the ships to arrive. But at the same time, we are working very hard to reduce these expenses with demurrage, and we have a plan to end this year with less than, as average, [4%] per ton of shipped products. And we are now below the ceiling, so we intend to keep below [4%].

I'm sorry, could you just quantify what that would be? I think you spent, roughly it was $80m last year on demurrage, and [inaudible]?

Yes. If you read our figures, we are going to be down $20m from last year.

About $60m, Jorge.

Okay. Thank you.

Thank you very much, Jorge.

Thank you very much for your question, Mr. Beristain. Our next question comes from [Justin Bergner] from [Gabelli & Company].

Hi Fabio. This is Justin from Gabelli & Company.

Hi Justin, how are you?

Good, how are you?

Good.

My question is, the revenue that was collected in the second quarter retroactive to the first quarter, can you remind us how large that was in the second quarter?

$306m.

Thank you. I was also curious, can you give us a sense as to what sort of price differential you are seeing between your high-grade iron ore and perhaps more lower-grade iron ore that some other providers might be selling?

I will turn this question to Martins.

We calculated that nowadays, for instance, delivered in Asia, our price is almost the same level as Australian price delivered to the customer. We are now almost at the same price, considering that we are farther from Asia than the Australians. Delivered price is almost the same nowadays.

C&F.

C&F price to the customer is almost the same.

So there is an embedded premium for our ore there.

Okay.

It's about $12. That's the size of the cost of trade differential.

Wouldn't the customers -- would the customers want to pay more, even on a delivered basis, for your iron ore than they would for Australian iron ore?

If I consider the pressure that we are having from Chinese customers to sign longer-term contracts with us, I would say yes. We are now making some sales in Europe and we are making some sales in China, that's European prices. So that shows you that the customers are willing to pay a little bit more for our iron ore.

Okay?

Thank you.

Thank you.

Our next question comes from Mr. Ivan Fadel with CSFB.

Hi. Good afternoon, gentlemen. Just regarding the pellet volumes that were sold in this quarter, it was a decline quarter-on-quarter. I understand that a very large part of it could be explained by the maintenance shutdown at Sao Luis plant. I was wondering if Sao Luis is now at full steam and that we should assume the normalized levels for pellets in the second half. And also, if there were any non-recurring costs from this maintenance shutdown? Thank you.

Thank you Ivan. Well, Sao Luis, we had a programmed interruption for the production that affected the figures for the second quarter. But we also had a problem with the conveyor belt there. And that would be the non-recurrent cost, but it's not a meaningful level. We expect to reach -- to catch up during the year with this production. And by next year, we should be producing 7m tons of pellets in Sao Luis. Okay?

Okay. And just a follow-up question, regarding the CapEx for '06. I understood there is part of a possible revision in this figure from your budget, could be on the back of the low U.S. dollar or the appreciation of the real. I was wondering if, in terms of the update, total updates that you possibly have made in this figure from a previous budget, what kind of a stake would that appreciation of the currency represent on that?

We are just starting our budgeting process, so the first indication that we have is that -- is in this direction, that we are going to spend more than we have spent more in this year in our CapEx program. But it is too early to say because we don't have the final figures yet. It's too early to say, to comment on the indicators or what would be our final figure.

But again, there are cost pressures; there is this very important cost pressure of the appreciation of the currency. And we are trying to warn the market that it is very likely that we will have a higher figure for CapEx next year, but we don't know yet what will be the final one.

Alright. And you said - and I don't know, correct me if I'm wrong - but you said there could be some postponement?

No, it's just the disbursements of, for instance, the Vermelho. When, last year, we imagined that we would be starting the Vermelho in January, then when we announced the Vermelho CapEx program for 2005 of $3.3b, we realized that this year we are going to spend only $34m in the Vermelho project. And we will spend a lot more in 2006. So $34m is included in our $3.3b, but a lot more in 2006 was not previously anticipated as a spend in 2006. That's what I meant. But we are revising the figures right now, and we will, as we do every year, we will make a public announcement of our CapEx program early in January 2006.

Right. So we can work with the $3.3b and some acceleration, which is usual in the second half, of your expenses?

2005, $3.3b is the figure, yes.

Okay. Thank you very much.

Thank you Ivan.

And once again, we would like to remind everyone to please limit yourselves to one question and one follow up. Our next question comes from [Stahl Arman] from TCI.

Hi. I had two quick questions. One, can you just - and sorry if these have already been asked - can you comment on the Cade ruling, in particular whether you are going to appeal as pertains to the [Sao Sands] iron ore mine?

And the second question is what is your expectation for pricing for next year for iron ore?

Two simple questions. Let us start with the first one. I will comment a little bit and Martins could add on these issues, both issues. On Cade, we are still analyzing the decision because we have here in Brazil, we have -- the final decision has to be published, in order to know all the details of the session in the council.

The council was split; it was a three to three vote. And with the -- and was untied by the vote of the Chairman of the council. And what we understood about the decision was that, in terms of the iron ore mine Casa de Pedra, we should lose all our right of first refusal on the asset. And then, the railroad, we could keep our holdings there but with an equalized voting power, compared to the other shareholders of the controlling group. That's what we understood. And the issue of Vitoria Minas was addressed a few months ago by the [indiscernible].

What -- we believe that this was a balanced decision. I think it was not what we wanted but was a balanced decision. If we understood correctly what Cade decided, we must try to -- we must decide if we are going to keep the right of first refusal or we are going to sell Ferteco. We are not going to sell Ferteco definitely; it is something that we do not consider. So we should focus on addressing the issue of Casa de Pedra mine. And as our CEO commented yesterday, this, in our view, is an asset. And we do believe that there are some economics that should be contemplated in these discussions, and that's something that we have a very firm conviction in this regard.

Let's wait and see what are the final outcomes of the discussions.

On the -- I don't know if Martins wants to --

No, it's okay.

On the second question left, about the iron ore prices, I would say that what we tried to show here is that we continue to see very strong market fundamentals. You may have a poorer performance in the U.S. and European steel industries, but Asian steel industries, particularly China, are performing extremely well.

You saw Chinese steel production increase by 28%, India's steel production by 12% in the first six months of the year. China again became a net importer of steel. We had our imports reaching the record level of 152m tons per year. Pig iron ore prices are increasing, scrap prices are increasing. We show -- we see no sign of deceleration in the demand for our targets. So we are in a very comfortable position to discuss prices for the next year but Martins will comment further on that.

Yes. In spite of a weaker market in Europe, Asian market was able to keep growing the sea-borne trade market for iron ore. So we really don't see too many changes from the situation we are facing last year. So I think the conditions for negotiations of the new prices seems to be good for us. We seem to be in a good position to negotiate the price for next year.

Okay. Thanks.

Thank you.

Our next question comes from Craig Shaw from HLM.

Hi. I just want to get your thoughts on dividend potential increase. Assuming your non-iron ore prices remain fairly firm and ForEx rates stay fairly stable, you guys are going to make a ton of cash this year. You could probably even double the dividend, if you wanted to. I'm not sure you want to though. So I wanted to get your thoughts on what you want to do with the dividends, and whether or not that would be contingent upon whether or not iron ore prices stay flat, go up or down next year? Thank you.

It's a fair question. Well, this is an issue that we -- so far, the Company's decision to pay a total of $1b in dividends this year, out of which $500m were already paid during the first half. Of course, we are doing very well, as you'll see by the results we are presenting. Although we have a very strong CapEx program, and we are spending this year at least $3.3b and next year will be much -- it's very likely that will be a higher figure.

And at the same time, we still believe that we have some improvements to implement in our balance sheet. So we are trying to conciliate all these variables. You saw that in the first half of the year. We bought back some $240m in debt. It was not clear in our second quarter figures, due to some short-term borrowing that will be redeemed in the second half of the year. So, we are trying to conciliate debt and, of course, if we change anything we will let the market know in due time. Okay?

Okay. So this would probably be something that might take place after 2005, some time in early '06?

Sorry, could you repeat the question please?

So would it be fair to say that this would be something that wouldn't be decided upon until early 2006?

No, I would say that we have a lot of variables to consider and you know our dividend policy that established two dividend payments per year. So we are in August and we haven't changed anything. We haven't proposed anything to our Board or to our shareholders in this regard as yet. But I would not comment on timing. You know that, according to our policy, we are supposed to announce our regular dividend payment, minimum dividend payment, every January. So that's it. Okay. Thank you.

Okay. Well, great performance and thank you.

Thank you very much for your support, thank you.

And that does conclude today's CVRD conference call. We thank you very much for your participation. You may now disconnect your lines.