ArcelorMittal - Q2 2023

Transcript

Operator (participant)

Welcome, and thank you for joining the Q2 analyst call of ArcelorMittal. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press Star followed by one on your touchtone telephone. Please note that the operator will control and unmute your line for your question. Please press the Star key followed by zero for operator assistance. I would now like to turn the conference over to Daniel Fairclough, Vice President, Investor Relations. Please go ahead.

Daniel Fairclough (VP of Investor Relations)

Thank you, Moritz. Good afternoon, everyone. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you very much for joining us on this call today to discuss our performance for the first half 2023. I'm joined on this call today by our CEO, Aditya Mittal, our CFO, Genuino Christino, and by Stefan Buys, who is the CEO of our mining segment. Before we begin, I would like to mention a few housekeeping items. As usual, we will not be going through the results presentation that we published this morning on our website. I do want to draw your attention to the disclaimers on Slide 2 of that presentation.

We will be moving directly to the Q&A session, so if you would like to ask a question, then please do press Star one on your telephone keypad to join the queue. With that, I will hand over to Aditya for opening remarks.

Aditya Mittal (CEO)

Thank you, Daniel, and welcome everyone. There is much I could highlight, but I will keep my remarks brief and focused on three key messages. First, our results continue to reflect the structural improvements that we have made to our business. Second, we're making clear progress in our decarbonization agenda. Third, the investments we are making to grow and develop our business are positioning us very well for the future. Just to expand a little on these points. On structural improvement to the business, it is not just about the EBITDA improvement per ton we are making, but also the dramatically different capital cost of our balance sheet and the impact of the strong contribution from our equity investments that drives the structural improvement to our free cash and net income.

On decarb, as a truly global, multi-region steel producer, the scale and breadth of our business gives us many more options. I remain convinced that we can develop the right set of solutions that will allow us to decarbonize our footprint effectively and at a competitive cost. Our DRI-EF projects are progressing. We're currently in the process of moving these projects from the pre-FEED stage to FEED stage, which includes the ordering of long lead time equipment. Our Smart Carbon technologies are also progressing, and we're strengthening our vertical integration of lower carbon supply chains by securing and developing some of the resources that we will require to decarbonize. From a commercial standpoint, our products and solutions are creating traction in the marketplace. We were the first to market with our XCarb brand of low-emission steel solutions, and customer interest continues to be very encouraging.

This is reflected in the recent announcement that we will be supplying General Motors with our XCarb RRP product. On growth, our unique asset portfolio positions us very well to benefit from growth and demand for steel. This demand growth will be driven by mega trends, such as renewable energy transition, new mobility systems in developed economies, while in less mature markets, high demand for steel will be driven by population growth and the desire to improve living standards. We will continue to invest in the very best opportunities to capture and benefit from this growth. The investments we have made in recent periods are contributing over and above our expectations. Our hot strip mill in Mexico is delivering enhanced margins. Our newly acquired asset in Brazil is performing well, and the team there has identified synergies more than double the initial estimate.

Our HBI asset in Texas achieved record performance in the first half, producing 1 million tons of high-quality HBI in line with its nameplate capacity. We are progressing our strong pipeline of high-return strategic CapEx projects. This includes our iron ore project in Liberia, which has been redesigned to maximize the potential of our tier one resource. With a greater understanding of the ore body, we are now working on the feasibility of producing DRI-quality concentrate and the potential to take capacity to 30 million tons per annum. The CapEx for the 15 million ton concentrator has increased, reflecting the redesign of plant and associated equipment, but with our expectation that this will generate $350 million of EBITDA at conservative long-run prices, this remains a very strong project. In terms of the nearer term outlook, inventories in the system remain low. This provides support for demand.

Trends in automotive contrast with those of the construction markets. We expect apparent demand for flat steel in Europe and North America to be higher this year than in 2022. We're well-placed to generate good levels of free cash to continue progressing our decarbonization and growth agendas and our capital returns program. Now I'll ask Genuino to provide some more detail on our financial performance.

Genuino Christino (CFO)

Thank you, Aditya. There is much to be pleased about our performance in the first half of 2023. We generated $4.4 billion of EBITDA.

This is $155 of EBITDA per ton shipped, which is the highest it has been in any 6-month period over the past 11 years, bar the exceptional 18-month period from 2021 through to the midpoint of 2022. This highlights the inherent strength we have built into our business in recent years, the quality of our asset base, and the value we are deriving from our recent acquisitions and the strategic growth projects. We must look further down the P&L to really appreciate the full impact of all the actions we have taken. Net income in the first half was $3 billion. This is double the average of the last 11 years, 2012 to 2022. What are the key drivers of this change? It is our portfolio improvement.

It is the growing contribution from our JVs. It is the impact of our lower cost balance sheet. These impacts are being geared further by our consistent share buybacks. The value we are creating is clear. We are consistently delivering a solid return on our book value, which has grown to $66 per share. I believe our performance provides evidence that ArcelorMittal can deliver value through all aspects of the steel cycle. We are consistently generating good levels of cash flow. To echo Aditya's point, we are growing and developing our earnings potential by investing in the most attractive growth opportunities that exist in our business. We continue to provide attractive levels of returns to our shareholders through our share buyback programs. This is underpinned by a foundation of a strong investment-grade balance sheet. With that, we are ready to take your questions.

Daniel Fairclough (VP of Investor Relations)

Great. Thank you, Genuino. Thank you, Aditya. We have a queue of questions already. We will take the first question from Alain at Morgan Stanley. Please go ahead.

Alain Gabriel (Managing Director and Equity Research Analyst)

Moving parts that we need to think about with respect to Q3, but I guess some of your peers have been referring to a more pronounced seasonality in Europe during Q3. Do you share this view, and what does that mean for your shipments? That's the first question. Thanks.

Genuino Christino (CFO)

Thank you, Alain. Let me take your question. Look, I think for me, the best way to talk about this point is by referring to our order book. In Europe, when I look at the order book for quarter three, we are full. We are now taking orders really for October. Our base case is that not only Q3, but talk a little bit about the second half, given that we don't expect, of course, the repeat of the severe, this part that we face in the second half of 2022. Our base case is that we're gonna see a better second half in this year compared to 2022.

Alain Gabriel (Managing Director and Equity Research Analyst)

Thank you. Thank you. My second question is on CSP in Brazil. The asset has been generating an EBITDA run rate of more than double what you have guided for at acquisition. The spread environment in Brazil appears to be quite ordinary, I think Aditya's comments, the intro on synergies, suggest that your numbers were somewhat too conservative to start with. Where do you see the really EBITDA run rate going forward of this asset?

Aditya Mittal (CEO)

Look, it's a great question. I think it's safe to assume that it's been a great acquisition. We have inherited a great set of people with excellent assets. The synergies, as you mentioned, are double. I would, at this point in time, add that to the EBITDA level that we have guided to and use that as a base. The company is also helping us improve our overall performance in Brazil. The synergies are two ways, so some of the synergies are also in Tubarão. Another key part of this acquisition has also been some of the fiscal incentives. Therefore, overall, this has been a good strategy for us to enhance the leadership position that we have in Brazil and also invest in really high-quality assets and people.

Alain Gabriel (Managing Director and Equity Research Analyst)

Thank you.

Daniel Fairclough (VP of Investor Relations)

Great, thanks, Alain. We'll move now to the next question, which I believe is from Patrick at Bank of America.

Patrick Mann (VP and Equity Research Analyst)

Good afternoon. Thank you very much, Aditya, Genuino, for the time. Just on the decarbonization and the kind of approvals of the government subsidies or support, how should we think about the timing of these projects now? I know you said you were doing the FEED work and starting to order the long lead items, but when should we expect kind of ground to be broken and these projects to really kick off? Thanks.

Aditya Mittal (CEO)

Sure. Thank you, Patrick. It's been a busy quarter in terms of our decarb projects in Europe. I think, as all of you know, and as I mentioned in my remarks, we've got funding support from Spain, from Belgium, from France. We are in discussions with these governments on ensuring that the energy complex is competitive. What does that mean? That means the hydrogen supply available and at the right price, and the same for renewable energy. I expect that those discussions will be constructive, and we will arrive at the right conclusion, so we're going through the details of all of that. Simultaneously, we're not delaying, so we're moving from pre-FEED to FEED stage, which means that we would have 90% certainty on cost. We're doing detailed engineering and also ordering long lead items....

If you look at the overall timescale of these decarb projects, we had applied for approval 2 years late, so we're getting approval from these various governments 2 years after. It's safe to say that we're already 2 years delayed in terms of implementation of these projects. Clearly, in those 2 years, we've done some work. It's not like we've done nothing, i.e., we've moved from pre-FEED to FEED, but there is an implied delay. Normally, CapEx of this magnitude takes roughly 3-4 years, so you should factor that in as you, as you see us moving from pre-FEED to FEED, as these projects would be on the marketplace, fully commissioned, 3-4 years from now.

We will obviously keep you updated as we finalize the FEED work, the actual time schedule, as well as, where we ended up with these respective governments.

Patrick Mann (VP and Equity Research Analyst)

Thanks. If I could maybe have one follow-up, just, you spoke a little bit about how you have a global footprint and, I suppose access to different energy markets. If I think about, you know, the other partner in the HBI plant are intending to start their decarbonization journey by using HBI from Texas, and you obviously now have slabs in Brazil. We've seen interest in German production facilities, where, again, it looked as though the potential partner wanted to ship slabs there to be re-rolled.

How do you balance up kinda making green iron in Europe, where energy prices are very high, versus, I suppose, leveraging your global footprint, where perhaps you've got access to lower energy costs and maybe, you know, getting green iron and, and shipping either green iron or slabs to Europe and, and not doing the actual iron-making in Europe? How do you balance those two things? It must be quite difficult.

Aditya Mittal (CEO)

Sure, Patrick, first of all, thank you for the question because you're highlighting the strength of ArcelorMittal. That's exactly our strength. We can bring in slabs from Brazil. We can bring HBI from Texas. As I mentioned, it's hitting record production, so the plant is running normally now, doing really well. We have all of these opportunities. We also have a mini mill in Europe. It's not like we don't. We have a, it's not a large mini mill, but it's a 1.2 million ton EAF facility in Sestao, Spain. We have a lot of these capabilities, and that's why we can move quickly to the market, and we can commercialize our products, which we're doing both in Europe and in NAFTA.

In terms of how do we judge it, we're looking at it holistically. We are looking at, okay, what is the net capital cost included, the total cost of making these products in some of our facilities versus bringing in some of these products from outside. On that basis, which where we find competitive, which we find is the most competitive, those are the projects which will see the light of at the end of the day. That's how we're thinking about it. We're not looking at our advantages in isolation. It's absolutely part of the mix. It makes it more challenging. It makes it more difficult because it's not easy to predict markets. Markets are volatile.

Prices are volatile, but at least it provides us with certain boxes in which we operate to ensure that we have the most competitive CapEx and the most competitive OpEx to deliver low cost, low cost from a carbon perspective, but high-quality steel, to our customers.

Patrick Mann (VP and Equity Research Analyst)

Thank you.

Operator (participant)

Great. Thanks, Patrick. We'll move now to next question from Ephrem at Citi. Please go ahead, Ephrem.

Ephrem Ravi (Managing Director and Global Head of Metals & Mining Research)

Thanks. Two questions. Firstly, the CapEx guidance for both the Brazilian long products plant and Liberia has been increased. I understand there's some reshuffling of scope, but are you also seeing general kind of cost inflation in projects, you know, affecting the CapEx guidance? Also a sub-question on Liberia. You are always kinda mentioned an optionality to 30 million tons. What's changed in the scoping of the project this time around, to kind of enable that 30 million tons to happen?

The second question, in the Slide deck, it was good to see a Slide on direct electrolysis, you know, for the first time, I think, in terms of a date, of the first 80, 40 to 80 thousand tons of plates by 2027. You always talked about direct electrolysis as more like a 2040-ish type of decarbonization path. Does it mean that that is possibly going to be brought forward?

Aditya Mittal (CEO)

Okay, great. A lot of questions. I will go through them point by point. Look, Monlevade and Liberia are unique, so I would not use them as examples of what's happening in the rest of ArcelorMittal. Why are they unique? They're unique because both the projects were stopped for different reasons, but both projects were stopped and have restarted. As these projects have been restarted, I'll talk about them specifically now. For example, to your question in Liberia, we have had the chance to reexamine the grade, literally the ore body, as well as what we want to do in terms of the future. We've become very focused that we want more DR concentrate qualities.

Therefore, we have actually changed how we want to grind the ore, so that we can produce even higher quality steels, and that has required investment in the equipment. It's civil works as well, backup infrastructure, as well as a backup power plant, the cost has escalated. The majority of the cost increases in Liberia is because of that, and obviously, as the project has been delayed, there is an element of. In terms of Monlevade, again, the project was stopped in 20, we're thinking about this project almost 12 years ago. A long time ago, it was stopped. We had ordered equipment long time ago, and as we have restarted the project, we have spent more money on automation.

We have done a lot more engineering, civil works, and then, that explains half of the cost increase and the other half, obviously, is inflation. I would not use that as examples. Clearly, what has happened in terms of inflation and scope increases is not good news, and Liberia is still okay because, or relatively okay because we have an increasing level of EBITDA from the project. Overall, these are not good developments, and obviously, as a company, we've been very focused to minimize the cost and make sure that these projects remain cost competitive and meet our return thresholds. They do. In Monlevade, apart from the facility being franchised, using our own iron ore to expand, we also got an increased level of fiscal incentive.

It compensates some of these cost increases, but again, I don't want to provide any excuses for that. In terms of the CapEx overrun, it's therefore restricted to this. Overall, the other projects are proceeding well. For example, there's a nice Slide in our deck where we have 3 other projects in Brazil. One is in Vega, the other in Barra Mansa, the third in Serra Azul. All of them are on schedule, all of them are on track. I would encourage you to think of these as isolated issues. In terms of direct electrolysis, look, we are starting the pilot cell now. We, if we pass through all the stages, then obviously we would have the ability to produce 40,000-50,000 tons of plate, direct electrolysis plate steel.

I think I would still suggest that this is on the experimental stages, but clearly we're making progress. When we think of Decarb as an organization, we have three avenues. One, obviously, is the DRI-EF stage. We spoke about that. We're also focused on our developing capability on the Smart Carbon route. The Smart Carbon route is basically capturing the carbon or reducing the carbon from the integrated route and storing it, or sequestering it, or converting it into something else. We're also making progress on the Smart Carbon route, and the third is what you highlighted, which is the direct electrolysis route. I hope I've tried to answer all of your questions. Let me know if you need any further clarifications.

Ephrem Ravi (Managing Director and Global Head of Metals & Mining Research)

Thank you.

Daniel Fairclough (VP of Investor Relations)

Thanks, Ephrem. We'll now move to next question from Tristan at BNP Paribas.

Tristan Gresser (Equity Research Analyst)

Yes. Hi, thank you for taking my questions. First one is on volumes. In the past quarter, you guided for steel shipments to increase by 5% this year, ex-CSP and Ukraine, and you've cut now your demand outlook for the years, and you've seen also some operational disruption in Europe. Do you expect to be able to grow group volumes organically this year? If you could give us maybe some color by division, and more, let's say, near term into Q3, more specific to ACIS, Europe, maybe mining volumes. Do you expect a sequential pickup there? That's my first question. Thank you.

Aditya Mittal (CEO)

Yeah, Tristan, let me take this one. Yeah, Tristan, we are not retaining the previous guidance of increasing shipments by 5% organically. The reason being that we did face some delays in bringing back the two furnaces in Europe. As you know, our initial expectation was to be able to do that by the, you know, mid to end June, we have delays there. The furnaces are back now, but we only recently restarted them. Of course, we are also trimming our guidance to consumption forecasts for the years as we highlight in our presentation. Nevertheless, we still expect to be at least flat on an organic basis.

Once you add, you have CSP percent, then I think it's fair to say that we would still expect to be at least 5% above. Looking at the trends for quarter three by region, I think the trends that we are seeing are quite similar. We do expect to see shipments to be relatively stable across the divisions. We will see, of course, the normal seasonality in Europe. I would just caution that, of course, our shipments into Q2 were lower because we were at a constraint in terms of capacity, you have to take that into account. Our volumes are relatively stable. I think we have a chance to do a little bit better in CIS. We will see.

In mining, we should be doing better in terms of volumes. We did face some unplanned maintenance in Mines Canada and also a strike in Liberia that I would not expect to repeat. We should be doing better there. That's in a nutshell, how we are seeing shipments, Tristan.

Tristan Gresser (Equity Research Analyst)

That's very clear and helpful. My second question is on public funding. I mean, you managed to unlock significant public funding over recent months, and it is really positive, but it seems those grants have some clawbacks attached to it if the project generates extra net revenues. Can you please explain how it would work? Also, when you here in Germany, managed to unlock some OPEX subsidy as well.... which I believe is the conditional payment mechanism. Are you also looking into this type of support? And do you believe there are good chances also to get this kind of OPEX subsidy outside Germany? Thank you.

Aditya Mittal (CEO)

Yeah, look, thank you for the question. I think it's very important. I think the headline from our side is that the approvals that we have received from both Spain, France, and Belgium are comparable. What are we asking? We're asking for half CapEx support, 50% of the investment, capital investment to be supported by these governments, in terms of grants, and that's really what we have seen. The headline number I know in Belgium is not the same, but there are other things that make the project equally attractive. In terms of OPEX support, we're not asking for OPEX support. What we have seen, perhaps, others do, is different than what we're asking. We are focused on CapEx support. We think that makes the most sense for us.

That has been the dialogue. Simultaneously, we are in discussions with these governments, as I mentioned in my previous answer, to ensure that there is a competitive, reliable energy source. That includes both hydrogen as well as renewable energy. You know, we went through an energy crisis in Europe. Prices were high, prices were volatile, and we need to get some stability and some visibility on that. I also added to say that I'd already mentioned that these discussions are going well, and I expect, maybe not in all jurisdictions, but at least in some of these jurisdictions, that we will come to the right conclusion and move forward.

Tristan Gresser (Equity Research Analyst)

Very clear. Thank you.

Daniel Fairclough (VP of Investor Relations)

Great. Thanks, Tristan. We'll move now to the next question from Andrew at UBS.

Andrew Jones (Executive Director and Head of Steel Research)

Hi, gents. Thanks for the opportunity. Just wanted to follow up on a couple of things. First of all, just on the CapEx, in light of the strategic CapEx hike, I guess we've seen decent-sized inflation on some of your rival, peers in Europe on their sort of greenness, green steel projects. I'm wondering how you sort of still feel about that $10 billion, you know, original gross CapEx number, is there a risk on that? You know, over the next few years, what's the likely trend, given obviously you're still doing some, you know, some engineering studies and so forth. I mean, how do we see the CapEx overall for group being phased in 2024, 2025 and beyond? Just to follow up on Alain's question earlier, he was asking about, like, the third quarter dynamics, I think, I guess, by division.

Alain Gabriel (Managing Director and Equity Research Analyst)

Can you just give us a bit more of a steer on, you know, where you're likely to see the most earnings pressure? You know, relative sort of movements in pricing and costs. You've given us some details on volumes already, but can you just spell that out by division, if that's okay? Thanks.

Aditya Mittal (CEO)

Yeah, sure. I'll take the first part of your question and then get Genuino to answer the second part. In terms of overall CapEx, let me just start with the strategic CapEx, just to underline that, so that we're all on the same page. As you heard earlier, we talked about Monlevade and the Liberia project, which due to scope changes and other improvements and inflation has increased, but both these projects are also delayed. The overall impact on an annual basis is not changing. The guidance we provide on strategic CapEx per year continues. There is no increase in 2024, 2025 due to Brazil or due to Monlevade or due to Liberia.

In terms of the decarb envelope, the $10 billion that you referred to, the target of that capital investment is to reduce our global carbon emissions by 25%. That remains the focus. Yes, I agree with you, there has been inflation, and we see some of that inflation as well, but we are very focused on a few things as we think about our plan to reduce our carbon footprint by 25%. Can we repurpose or rescope, right, some of this? I think there was an earlier question very kindly talking about our instrumental strengths in terms of decarb, right? Energy, slabs, HBI in Texas. Can we use some of our assets that we already have to achieve the same goals? Obviously, we're very focused on value engineering.

What can we do knowing that all of these things are costing more? How can we value engineer to make sure that the cost increases is not that significant? We talked about technology development earlier on. Are there new technologies or capabilities that we can develop? The focus remains to achieve the 25% reduction in carbon emissions with the $10 billion of capital. That is what we are working towards.

Andrew Jones (Executive Director and Head of Steel Research)

That's good. Genuino?

Daniel Fairclough (VP of Investor Relations)

Genuino, just on the third quarter, dynamics.

Genuino Christino (CFO)

Yeah. So, on that, Andrew, so we talked about volumes, right? By region. Again, here, in terms of spreads, prices, we see the same dynamics across our business as well. As we know, prices, and spreads have moderated during the second quarter, so that will impact our results in Q3. Prices have declined, so that will have an impact, but at the same time, costs have come down. I mean, we saw a nice reduction in terms of coking coal prices. I don't know, also moderating to some extent, so that will provide some relief. Overall, as we know, the spreads have moderated.

In Europe, because of the production limitations that we face, and as we bring back this furnace, I would expect our fixed cost position to be slightly better also in the second quarter.

Okay.

Third quarter, sorry.

Andrew Jones (Executive Director and Head of Steel Research)

Yeah. Okay, thank you very much.

Daniel Fairclough (VP of Investor Relations)

Great. Excellent. Thanks, Andrew. We'll move now to the next question from Phil at KeyBanc. Go ahead, Phil.

Phil Gibbs (Director and Equity Research Analyst)

Hey, good afternoon. How are you?

Genuino Christino (CFO)

Good, Phil. All well, how are you?

Phil Gibbs (Director and Equity Research Analyst)

Good, thank you. First question is just on the Mexico hot strip mill project and how that's progressed and whether or not you've reached critical mass in terms of your output?

Aditya Mittal (CEO)

It's a great question, Phil. The Mexico hot strip mill has surpassed our expectations in terms of its overall profitability and how it's catering into the marketplace. In terms of critical mass, the equipment is capable, but at this point in time, some of the slabs, we are increasing the level of production of slabs that we can make in Mexico so that we can cater to that hot strip mill. The bottleneck has shifted from the hot strip mill to actual slab production, which is where it should be. As we make further progress on the upstream in Mexico, we will be increasing the production in the hot strip mill.

Some of the slabs, as you know, are also going into Calvert. Not all of the capacity is available for this hot strip mill. We were positively surprised by its ramp-up, by its market acceptance, and that's why the bottleneck has shifted to the EAF facility there. Yeah, it's all good news in terms of the Mexican hot strip mill.

Phil Gibbs (Director and Equity Research Analyst)

Thank you. Just as a follow-up, as we look at Europe, do you have any annual or semiannual contracts resetting in the second half of 2023, or any resets largely isolated to the beginning of 2024? Thank you.

Genuino Christino (CFO)

In Europe, the majority of our contracts, they reset at beginning of the year. We had some contracts also resetting at the beginning of the second quarter, and that's the large majority of our contracts in Europe. Not much really to be to reset now in the second half.

Andrew Jones (Executive Director and Head of Steel Research)

Thank you.

Daniel Fairclough (VP of Investor Relations)

Great, thanks, Phil. We'll move to the next question from Bastian at Deutsche Bank. Please go ahead.

Bastian Synagowitz (Managing Director and Head of European Steel & Mining Equity Research)

Yes, good afternoon all, and thanks for taking my questions. I've got two left, and the first one is on AMNS India. You did EBITDA ton of more than $330, which is pretty impressive, to say at least, given the current price environment, and I guess when considering that the large exports have been coming over from your neighbor then, in China. I was wondering whether you could tell me, you could just give us a quick update on the key trends which you're seeing in the third quarter here and also the second half, and whether you expect to keep these run rates here in the short term. That is my first question.

Aditya Mittal (CEO)

Yeah, great. Thank you for highlighting that. Look, AMNS is a success story. We have been able to ramp up production, we've been able to improve the quality. We have great customer acceptance of the value that we're bringing to the Indian marketplace, we've been frantically growing the business as well. This quarter, we'll be inaugurating CGL4, which the continuous galvanizing line, which will allow us to produce Magnelis product. Next year, we'll be doing automotive, as you know, we are in the midst of doubling that facility, both upstream and downstream, to produce 14 million tons of high-quality steel on a coastal site in the country. Overall, the company does really well.

In terms of its results, I would expect the results to remain elevated, most of this year. We have benefits of really low gas pricing, I think contracts we'd entered in 2020. Clearly, relative to the rest of the energy complex, these contracts are quite favorable to AMNS, and that has been supporting its profitability in the second quarter and will continue to support its profitability into the third quarter. Into the second half. I don't know if Gianrino would like to provide any more specifics on that.

Genuino Christino (CFO)

No, I think you touched on all the key points, Aditya. See if there is any follow-up from Bastian.

Bastian Synagowitz (Managing Director and Head of European Steel & Mining Equity Research)

Yeah, just a quick follow-up on that one. Maybe, Aditya, you highlighted gas. I guess gas was always, one of the key factors, when you basically bought the asset. I guess one of the key points was you wanted to renegotiate the gas contract. How does this work now? Is this like an annual price mechanism? Is it a floating price? Is it a fixed price? How does it work for you?

Aditya Mittal (CEO)

Yeah. It's a combination of the above, but fundamentally it's buying market price gas. There's no, it's not a deal with the government or anything like that. We are out there in the market, in 2020, we signed roughly 3-5-year contracts. Those contracts were in place, and so AM/NS has avoided the spike in energy, which has impacted, obviously, other gas-based producers around the world. AM/NS has avoided it. That's how I think about it. Clearly, some of this is a rolling hedge, as prices normalize, we will be extending the hedge. The company is fundamentally still exposed to international gas markets. That has not changed.

Clearly, we have longer duration and more fixed prices and more stable prices, which allows the business to develop and grow.

Bastian Synagowitz (Managing Director and Head of European Steel & Mining Equity Research)

Okay, that's very helpful. My second question is on Calvert and the EF project, please. I remember that it was supposed to be on track in March, and now it is being delayed on reasonably short notice because I guess startup was planned for the second half of this year. What's behind this, and does the CSP acquisition tie into it? Because it gives you a bit more flexibility on your slab supply in the short term. That is one point, secondly, with the larger slab capacity, once that is finished, is there any plan to also extend Calvert's product capability as well?

Aditya Mittal (CEO)

So, just overall, in terms of Calvert and its supplies, you're right, the EF project is delayed. This is primarily just delay in construction work and finding the right skill set, i.e., people, to do the critical jobs. I would not read anything more into it than just that. So as time went by, we realized that this project is gonna get delayed, and we took the opportunity today to inform you of that. In terms of overall product capability at Calvert, we are still focused on a second EF. This will continue to enhance our ability to approach the U.S. marketplace and continue to produce value at product.

The first EF, obviously, as you know, is automotive capable. We plan to produce automotive grades through the EF stream. We have the right asset base, the right equipment that we've invested in to ensure that we're capable of doing that. In terms of overall slabs, yes, through CSP, we now have more slabs as a group. If you look at what we're trying to achieve, and my answer is in Mexico, we feel very comfortable with this exposure. We're very happy with the CSP acquisition, very happy with our Tubarão slab capability, same with the Mexican slab capability. We're very happy with the overall mix that we have as we develop our business.

Bastian Synagowitz (Managing Director and Head of European Steel & Mining Equity Research)

Okay, thank you.

Daniel Fairclough (VP of Investor Relations)

Thanks, Bastian. We'll move now to a question from Max at Oddo.

Max Kogge (Equity Analyst in Metals & Mining)

Good afternoon. I noticed that you increased your EBITDA guidance for the Liberian project from $250 million to $350 million. I did not understand why it was the case, since the scope is unchanged, and I assume the assumptions for iron ore prices are also unchanged. Perhaps can you elaborate a little bit on this one?

Aditya Mittal (CEO)

Yeah, let me take it up. Look, fundamentally, it's all the three that you talked about. With the changes, we can produce a higher grade product, and clearly, with the higher grade product, we generate more premia. We do believe that the pricing of that premia and the overall price deck has changed as well. We updated our assumptions, and the EBITDA has now moved from $250 million to $350 million. If you look at our assumptions within the model, it's still much lower than where iron ore pricing is today, right? Iron ore pricing today is much more elevated than these long-term assumptions. The asset is a Tier One asset. It's a well-invested mine. It's a well-invested resource body, will be a well-invested mine. It's low cost.

We own the railway, we have port access, and therefore, you should expect higher levels of profitability. Even in terms of our estimate, the overall iron ore pricing in our estimate of $350 million of EBITDA, it's lower than consensus assumptions. We've also made other improvements, like we've changed how we do the transshipment and all of that on the logistical side. That also adds to the EBITDA and lowers the FOB cost of the product. I hope I provided you with enough color.

Alain Gabriel (Managing Director and Equity Research Analyst)

That's clear, yeah. Second question is on the Texas HBI unit. You seem to be very satisfied with it, but a few weeks ago, I was telling that they actually took an impairment on this asset. I was wondering why you could have such different views on the same asset?

Genuino Christino (CFO)

Well, Max, it's very difficult to comment on that. I mean, clearly, we don't see any reason for us to take an impairment there. I mean, the asset is performing very well. We had a record production. Profitability is quite strong, as we highlighted in our earnings. You know, I mean, I cannot really comment on the reasons why our partner there decided to take an impairment.

Max Kogge (Equity Analyst in Metals & Mining)

No, of course, that's fair. Perhaps the last one, on Force Majeure, there was a lot of fuss, at least in France, regarding the unit, because there was a fear that it might close for an undetermined time at some point in time. Do you think that's fully behind you now and that the risk of a shutdown is completely ruled out?

Aditya Mittal (CEO)

Yeah, thank you for the question. Let me just explain the situation. Fundamentally, there was an inspection that occurred which identified that the dust levels were too high. We obviously do not agree. We have a lot of remedial actions on that already underway, and it went to the court, and the court obviously sided with us. The onus is on us to implement all the actions. We are busy doing, busy implementing all of these directives. It's also important to recognize that the dust requirements have been a moving goalpost. So it's not that this has been in non-compliance for a long period of time.

They changed the regulations. With the new regulations, we're still implementing the actions, and the court has sided with us. As long as we implement those actions, which we absolutely intend to do, I do not see further risk. Overall, the facility has reduced its level of dust emissions quite dramatically. If you look at what has happened over the last few years, there's been a 70% reduction, for example, overall in terms of the coke facilities and other areas. The company's on the right track, but clearly, it remains work in progress.

Max Kogge (Equity Analyst in Metals & Mining)

Okay, thank you.

Daniel Fairclough (VP of Investor Relations)

Thank you, Max. I think, Aditya, we've got time for a couple of follow-up questions, the first of which we'll take from Tom at Barclays.

Tom Zhang (Equity Research Analyst for Basic Materials)

Hi, guys. Thanks very much for the opportunity. Just 2 left from my side. The first one, just on China exports. You attributed the increase to international price differentials. Well, it's obviously closed a little bit, but I guess FX is working against you. You still see European HRC prices quite a bit above China. Do you think that gap is closed, or do you still see sort of risks of China exports through Q3 and Q4? That's the first one.

Genuino Christino (CFO)

Well, Tom, let me take this one. Yeah, we have seen, of course, the level of exports from China rising. That is, of course, a concern. More recently, we have seen the government clearly taking action to control the level of production, which is, of course, very good news. You have seen also our forecast for demand in China, it's basically unchanged. To the extent that we see a correction in production now in the second half, our expectation then would be that the level of exports come down accordingly. Of course, there is also discussions about new stimulus, which is also always good news in the Chinese for the Chinese market and for the overall industry overall.

As we know, I mean, from the moment this stimulus are really announced effective, it's gonna take some time for us to see action on the ground. Our base case this year remains that the appearance to consumption in China is gonna be relatively flat. If that happens, really gonna support us in 2024, maybe in the beginning of the year or more in the second quarter of 2024.

Tom Zhang (Equity Research Analyst for Basic Materials)

That makes sense. Thank you. The other question was just maybe a little bit more on the guidance. On Slide seven, you give us some very good chart, I suppose, of EBITDA per ton. H1 has been at 155, so well above that long-term average line that you put there at 120. Given the sort of commentary on spread compression, given the ArcelorMittal PMI, I see is the lowest basically ever since, you know, apart from COVID and GFC. Is it fair to say the H2 EBITDA per ton should be trending below the 120 average, or do you think this is a new sort of floor level for you, despite sort of, you know, macro headwinds? Thanks.

Genuino Christino (CFO)

This is not something that. I mean, we're not gonna be specific on that. I mean, I, I think it's clear, and what we are trying to highlight is all the improvements that we have made over the last couple of years. I think that's very, very clear, and we can really see that in our results, and we're very pleased with that. I'm not gonna be specific in terms of EBITDA per ton guidance in the second half.

Aditya Mittal (CEO)

I would just add that you paint a very negative picture. All the data that you pointed to is accurate, so I'm not arguing with the data. I think the positive also is that inventories in the system remain low, right? Maybe we have those PMI readings and all of that, but fundamentally, what we don't have, when real demand is going sideways, is the inventory de-stock. That we went through in the fourth quarter of last year. Apparent demand is relatively flat. We expect second half 2023, as Genuino said earlier, volumes to be better than second half 2022. Auto is strong relatively in this marketplace. Auto is doing well. It's offsetting some of the weakness that we're seeing in the construction segments.

Tom Zhang (Equity Research Analyst for Basic Materials)

That's very clear. Thank you. Sorry, I didn't mean to paint too negative a picture. I was just sort of referencing your Slides, but yeah. Thank you. That's helpful.

Aditya Mittal (CEO)

Thank you.

Daniel Fairclough (VP of Investor Relations)

Thanks, Tom. I think we'll move now to our last question, a follow-up from Alain at Morgan Stanley. Go ahead, Alain, again.

Alain Gabriel (Managing Director and Equity Research Analyst)

Thanks. one question from me, it's on gearing. You have had a net debt target of around $7 billion in the past, we've been consistently below that level for the last while. Of course, the business remains cyclical, all else being equal, where would you like your net debt to be at the end of next year, in the next 12 months, in the context of your growth projects, the buyback program, and decarbonization? That's my question.

Genuino Christino (CFO)

No, thank you, Alain. Well, as you know, Alain, we don't really have a target for our net debt. All we have been saying is that we don't want to cross our self-imposed limit of $7 billion. Right? We're gonna be within that range. Having said that, as, and we said that in the past, we don't have the intention to structurally also be a positive net debt balance sheet. That's not really the objective, but I think we feel very comfortable with the levels that we have right now. They are low, they allow the company to focus on executing its strategy.

We feel relaxed, and we have, we are seeing what is happening in the marketplace, and we remain, you know, able to continue the execution of our strategy, which is very good.

Alain Gabriel (Managing Director and Equity Research Analyst)

Thank you.

Daniel Fairclough (VP of Investor Relations)

Excellent. Thank you. That's the last of our questions, Aditya. Handing back to you to close the call.

Aditya Mittal (CEO)

Okay, great. Look, first of all, thank you very much for all your questions and interest in the company. As I said in the opening, my opening remarks, we wanted to highlight three things. I hope we did that. Structural improvement to our earnings profile, the fact that we are making progress on decarb, we're very focused on reducing our carbon emissions, but maintaining the overall CapEx envelope. We have unique strengths in making that possible, which we also talked about, and also how well we're doing on our growth agenda. I know this quarter, we went through Liberia and Mondragon, but if you just look at what we have achieved, Pecém is doing really well in Brazil. Texas had record shipments. It had positive EBITDA contribution. We talked about the Mexico hot strip mill.

We talked about AMNS, how well that is doing. There's real tangible progress on our growth agenda. All these growth projects are outperforming our expectations and EBITDA guidance, you would have thought of or we would have provided. It's all very good news. From my standpoint, and I said it in the last, second to last question, I think, that, look, the second half of 2023 is not like the second half of 2022. Overall, markets are also constructive.

Clearly, most critical to us is the progress we've made in our business to ensure that we can cater to that market, we have safe, high-quality steel products in the marketplace, and that we have made structural improvements to our business. With that, I just wanna thank everyone again and wish everyone safe holidays in case you guys are taking some time off. Thank you.