ArcelorMittal - Q2 2024
August 1, 2024
Transcript
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Good afternoon, everyone. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you for joining this call to discuss ArcelorMittal's performance and progress over the first half of 2024. Leading today's call will be our group CFO, Mr. Genuino Christino. Before we begin, I would like to mention a few housekeeping items. As usual, we will not be going through the results presentation, which was published this morning on our website. However, I do want to draw your attention to the disclaimers on slide number two of that presentation. As normal, Genuino will make some opening remarks before moving directly to the Q&A session. So if you would like to ask a question, then please do press star one one on your telephone keypad to join the queue, and if you want to exit the queue, just repeat that step star one one. Over to you, Genuino.
Genuino Christino (CFO)
Thanks, Daniel, and welcome, everyone. I will, as usual, keep my remarks brief and focus on the theme of the strategic progress. Beginning first with safety. Across ArcelorMittal, our people are galvanized to improve safety and achieve our goals of being a fatality-free organization as quickly as we can. The third-party safety audit, which started at the end of December, is on schedule to be finalized this quarter. All the groundwork has been completed and dss+ are now developing the actions and recommendations. Combined with the considerable efforts already underway, this will enable us to deliver the safe results we are striving for. Moving to our financial performance, we have faced our challenges, both macro and micro, during the first half of 2024.
Our results have shown good resilience and continue to reflect the positive actions we have taken to optimize our business and high grade our asset portfolio. EBITDA per ton of $140 in the first half of 2024 compares well with our long-term history. Our operating results for the second quarter were broadly stable with the first quarter, despite the challenges faced in certain segments. This really highlights the benefits of our diversified exposure. Free cash flow during the quarter was slightly positive but let me remind you that this is after investment in our strategic growth projects. Stripping that out, the annualized run rate investable cash flow was about $1.7 billion. Our resilient financial performance and strong balance sheet enable us to be fully focused on the strategic execution.
By strategic execution, I mean delivering on our growth projects, realizing the potential of acquired assets, and consistently returning capital to shareholders. Over the past 3.5 years, we have invested almost $3 billion in our strategic growth projects. We are developing our upstream resources, including metallics, renewables. We are adding capacity in high-growth markets, including India. And we are developing our capabilities to produce higher margin products and solutions. We recently completed the new cold complex at Vega in Brazil and begun commissioning our 1 GW renewables project in India. Our organic growth has good momentum, with many projects to be commissioned in the coming periods. The new assets we have acquired in recent periods continue to perform well. We expect to conclude the acquisition of our 28% stake in Vallourec very soon.
We have added Italpannelli to support the growth of our construction business within Sustainable Solutions. The fact that we have been able to maintain our growth strategy despite the challenging macro climate means that we will enjoy the benefits to EBITDA on top of any cyclical recovery. Finally, I want to highlight once again our consistent return to shareholders. Over the first half of 2024, we have returned $1.1 billion through buybacks and dividends. This is over 6% of our current market cap. We have now bought back 36% of our equity in less than four years. Given valuation disconnects, our shares remain the best opportunity in the market, so buybacks will continue. To conclude my opening remarks, we are delivering resilient results, and our performance continues to provide evidence that ArcelorMittal can deliver value through all aspects of the sales cycle.
We are maintaining a very strong balance sheet. Our strategic growth projects have good momentum and will provide significant structural upside to EBITDA and cash flows on top of any cyclical recovery. And the benefits to our shareholders have been compounded by our continued share buybacks. With that, Daniel, we are ready now to go to the Q&As.
Operator (participant)
Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thank you, Sharon. So, we do have a queue of questions already, Genuino. So we will take them in the order that they've been added into the system. So the first we will take from Alain at Morgan Stanley. Hi, Alain, how are you?
Alain Gabriel (Research Analyst of Metals, Mining, and Cement)
Hi, hi. Thank you for taking my question. Firstly, on the outlook, Daniel, or Genuino, some of your peers have been profit warning over the last two weeks, in Europe. In that context, how do you see the business developing for your Europe division over the next quarter? And in the U.S., I would say it's the inverse. Your competitors have been increasing prices. Do you see this as a genuine inflection, and what does that mean for your Q3? That's my first question. Thanks.
Genuino Christino (CFO)
Sure, Alain. Thank you and thank you for the question. So, let's start first with Europe. As we all know, the market backdrop in Europe is challenging. As we anticipated at the very beginning of the year, we are seeing declining real demand, but we are not changing even though we have revised downwards our apparent steel consumption forecast for Europe for 2024. We are still seeing apparent steel consumption to be at least flat or, if not, a small positive. Right? So when we look at our order books also for quarter three, we do see normal seasonality. We are not really seeing something that is more extraordinary than that.
I think it's also important to note that we don't expect the same level of destock that we saw in 2023. So we do believe that the apparent steel consumption in the second half, compared to second half of last year, should be slightly better this year. So. And then, of course, we, as we know, in the U.S., right now, prices have come down significantly. Prices below IPP, which is something unusual. We would expect that to rebalance, so we'll see how it develops.
Alain Gabriel (Research Analyst of Metals, Mining, and Cement)
Thank you. What does that mean for the moving part for your business in Europe and in the U.S. for Q3?
Genuino Christino (CFO)
I will ask Daniel, why don't you talk about the moving parts of all the segments, not only U.S. and Europe, so for the benefit of everyone.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Yeah, sure. Thanks, Genuino. So I think as Alain talked about, I think the main moving parts that we're gonna see in Q3 relative to Q2 will be the seasonally lower volumes in Europe and the lagged effect of lower spot prices in NAFTA. But to provide a little bit more detail and context, I will go through the various different segments, starting first with North America. So yes, we will see lower spot prices in Q3 relative to Q2. Volumes, they'll be stable to marginally lower quarter on quarter. And of course, the impact of Mexico in Q3 is expected to be the same as it was in Q2.
In terms of the Brazil segment, look, there, we're not anticipating any major movements, so we would expect similar volume and overall pricing to be broadly stable in Q3 relative to Q2. In Europe, reiterating again, that volumes will be low, but following the normal seasonal pattern. So nothing more exaggerated than our normal seasonal volume pattern in Europe, and that applies to both flat and long products. And yes, we will see the lagged impact of lower prices, but of course, we will also see the impact of lower raw material costs coming through as well. On the India and JVs, I think you will see in Q3 an improvement in volumes.
So we had some maintenance in Q2, and so volumes should improve in Q3. And then because of those recent higher levels of imports, I think you- we should probably assume that prices will be slightly lower quarter on quarter. And then in mining, of course, it's difficult to say with accuracy at this point, what, what prices will be quarter on quarter. But in terms of volumes, I think we can confidently expect that they will improve relative to to the second quarter.
Alain Gabriel (Research Analyst of Metals, Mining, and Cement)
Thanks. Thanks, Daniel. My second question is on Vallourec. You expect the deal to close in Q3. When should we expect an update on the synergies, so that we better understand the value that this investment brings to you, in addition to the simple consolidation of the additional earning stream from Vallourec?
Genuino Christino (CFO)
Yeah, Alain, you're right. So our expectation is that the deal should close very soon, should close now in Q3. And then after that, from that point onwards, of course, we, we're gonna be present also at the board of Vallourec, so we're gonna be... Our main focus, of course, is to try and support that business. As we said before, we believe that management has been doing a great job, so we want to contribute to that. And I'm sure we will be in a position to talk more about potential synergies that, as we know, being a minority shareholder of this business, it will need to be a win-win for both companies, and that's what we're gonna, for sure, we will explore possibilities with them.
Alain Gabriel (Research Analyst of Metals, Mining, and Cement)
Thank you.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thanks very much, Alain. So we'll move now to the next question, which we will be taking from Tristan. Please go ahead, Tristan.
Tristan Gresser (Head of Steel Equity Research)
Yes, hi. Thank you for taking my questions. Just a few follow-ups on the Q3 guidance. In North America, can you confirm how much time it would take really to restart the blast furnace? And also, regarding the other division, which includes Ukraine and South Africa, and I think there were expectation of further improvement in second half. So how should we think about that business? Because I believe there's still a lot of tons associated with that EBITDA line. And lastly, to the guidance, sorry, on Europe. If real demand is down and you expect apparent consumption to be flat to up, does that mean that you expect some level of restocking already in September?
Genuino Christino (CFO)
Yeah. Tristan, so let me take the first part of your question. So, in Mexico, so you talk-- you specifically ask about the blast furnace. I think it's important, as you know, in Mexico, we have two business, most important one of course being the plant operations. And that part of the business is up and running, right? So we have after the end of the blockade, we have started operations already. Of course, we will see an impact as we highlighted in our earnings release in quarter three as well, but that business is up and running. Then we have the blast furnace, which is dedicated to the long business. That part of the business will take a little bit longer to restart.
We should be restarting it. It should take us about two months to be able to restart that part of the business. Then, so the other divisions, so specifically about Ukraine, I think Ukraine did well, given the circumstances in the second quarter. As we highlighted before, we brought back one additional furnace, so they run with two furnaces for most of the quarter. That was helpful. We saw a significant increase in terms of production shipments. As a result, they were a bit positive in quarter two, so that's reassuring. Of course, challenges remain. As we know, power, availability of power, logistics, so we continue to face a number of challenges, but in quarter two was a good performance.
And then in Europe, yes, our guidance, of course, assumes that we will see a bit of restocking overall for the year. I cannot predict if we're gonna start to see it already in September, but for the year, for sure, our expectation is that we will see some restocking after coming from years in which we were de-stocking. So that's, in a nutshell, the position.
Tristan Gresser (Head of Steel Equity Research)
Okay. Okay, that's, that's helpful. And, another question then on CBAM. I think you mentioned that you remain optimistic about the Commission strengthening the measures. Is there an ongoing dialogue at this stage or, given the election or changes there, is that being posed at the moment? And what specifically are you pushing for? And do you think there is a possibility to extend the 2034 deadline for free allocations? Thank you.
Genuino Christino (CFO)
Yeah. Well, Tristan, as we know, CBAM is extremely important for the industry in Europe, right? So at the moment, as we all know, the industry is paying for high costs of CO2 emissions that nobody else is paying. We still have high energy costs in Europe. So at this point in time, the competition is not very fair, right? So that's why CBAM is so, so critical. We have been advocating for it for quite some time. But we know that we need improvements in the way it is designed today. And the key points, first, is to make sure that Europe can be competitive in the export markets, so that we have a sort of rebate when we export.
Second, we need to make sure that we avoid the circumvention, that there is leakage, that producers outside of Europe pick and choose materials that they will send to Europe. Also, we need to make it broader, because, of course, there are products coming to Europe that today are not covered by CBAM or finished products. So, there are a number of points that we believe needs to be improved so that CBAM can be effective and then can support the industry and the development of the industry going forward. And then specifically in terms of emissions or certificates, reduction of the certificates, I think this is a dialogue that is ongoing, but at this point in time, we don't really have any specifics to share with you.
Tristan Gresser (Head of Steel Equity Research)
Thank you very much.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thanks, Tristan. So we'll move now to the next question, which we'll take from Patrick at Bank of America. Hi, Patrick.
Patrick Mann (Equity Research Analyst)
Hello. Thank you very much for the call. Two questions I wanted to ask. The first one is just on the buyback. So, I mean, you're about three quarters of the way through the share buyback program, and, you know, that's running ahead of schedule, or it's, you know, I think you're about 60% of the time way through. So if it continues at the kind of the same pace, would you wait until May 2025, the next shareholder AGM, or, or is it reasonably easy to reload if you find yourself running up against that 10% authorization? And, and then maybe linked to that or second part of that question- How responsive are you to the share price levels?
I mean, do you see the stock at in the 20s, in the low 20s, and you think, okay, you know, this is a good opportunity to, to sort of accelerate the buyback? Or do you try and do it fairly mechanically, where you just say, "This is a free cash flow, this is allocation, and we, you know, we're just gonna spread it out." That's the first question. Thanks.
Genuino Christino (CFO)
Yeah, Patrick, so regarding the first part of the question, that's easy. So we do have more today authorization that we got from our last AGM, so we could potentially increase the size of the buyback. Right now, as you know, we still have... So at the end of second quarter, we still had about 24 million shares to be bought, so it's still a sizable chunk of shares that we need to buy. And we'll see, as and when we cross that, we will decide then the next steps. I think the message is the same, that what we have been discussing, that the policy is not changing, right?
So the moment we complete the program, we will, of course, based on our policy, make sure that minimum of 50% of the free cash is distributed to shareholders. Regarding the pace, we are not really trying to time the market. I think the objective, the main objective is to return cash to shareholders, and that's what we have been doing consistently. And regarding the valuation, it was low before, it's even lower today, right? So we feel that it is a good investment, even though now the share price is even lower. But we believe that when the market conditions improve, and it will eventually, we will look back and see that the share buybacks really create a lot of value to our shareholders.
Patrick Mann (Equity Research Analyst)
Okay, thank you very much. And then the second question I wanted to ask was just on the disciplined – you know, there's a section in there where you talk about disciplined capital investment and I suppose requiring returns on any decarbonization CapEx that you spend. I mean, I would think that potentially a quite likely outcome of that approach is that there are gonna be plants that are not gonna make the hurdle rates for decarbonization, unless you get substantial government support. So, I mean, is it not fair to say that you could end up in a situation where you're stuck in that you can't get a return to decarbonize them, you're not getting the funding? And so in that situation, what happens?
Do you, do you just run the plants with no reinvestment until the carbon costs are too high and it becomes uneconomic, and you close it? Or, you know, if you, if you stick to that completely, then, you know, surely that is quite a high likelihood that at least some plants, this is what the ultimate outcome is gonna be.
Genuino Christino (CFO)
Well, yeah, I think we can talk about that, Patrick. So, I think we have also been very clear that we will invest in, when it makes economic sense, right? So it's very important that we achieve our decent levels of economic return to justify the investment. I think that's something that we owe to our shareholders, right? So, and as I talked a little bit earlier, in Europe, we are in a kind of a transition phase where CBAM is not yet effective. Policies, I'm sure they will continue to evolve. We just heard from our President of the Commission, von der Leyen, also showing more support, of course, for the European industry.
Of course, we have to see that, supported by more actions, right? But I think we should see those moving parts before we can go ahead, commit all the investments, and we'll see. I mean, as we know in Europe today, some plants, not us, I think the company, the group is in good shape. We are doing well. But if you look around, you're gonna see plants struggling. And that's why in Europe, the industry needs more protection, needs support to develop, as we saw in the U.S., after Section 232, as an example.
Patrick Mann (Equity Research Analyst)
Okay. Thank you.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Thanks, Patrick. So we'll now move to the next question, which we will take from Cole at Jefferies. Go ahead, Cole, if you can hear us.
Cole Hathorn (Senior VP of Equity Research)
Good afternoon, thanks for taking the question. I'd just like to hear your thoughts on some of the new trade barriers that you're seeing in Brazil, and how that's impacting your business there or supporting it. And then you made a preamble on how you've improved the EBITDA per ton of the business. Would you mind just recapping, you know, what are the bigger moving parts of what businesses you've sold and the investments that have improved that EBITDA per ton, if this is the bottom of the cycle? Thank you.
Genuino Christino (CFO)
Yeah, sure, Cole. In Brazil, I mean, we had the new quotas, and the entry is above the quotas. Of course, it's an important development. So we have about 11 products, so most of the products are flat products. So it should provide some support. We will see in the second half. It's not visible really yet in the second quarter. In the second quarter, we have not seen, even though we saw a nice improvement in the apparent steel consumption in the second quarter. But import levels or market share from imports remain relatively stable and at high levels. So we'll have to see. But clearly, I think much more needs to be done.
So in this environment where you have China exporting so much, the regions are being impacted directly or indirectly, so that's why it's so important that we have this trade so that the local industry that is doing the right things, adjusting production whenever it needs to demand, they don't suffer because one player is not behaving economically, right? So and then in terms of the EBITDA per ton, and that's quite a lot, and thank you for the question because this is something that we try to convey this message that the group has changed. Over the last many years, we have exited a number of businesses that we felt either we were not the right owners or could not be competitive.
And just to give a couple of examples, we exited a lot of commodity business in Europe, so investments, so Ostrava, Galati. We divested also rebars in Europe, so we invested more in rails. Of course, we had the acquisitions of Votorantim in Brazil with very, very high levels of profitability. We invested in Pecém in Brazil, also Calvert. A number of added value projects that automotive, also done. So we have really been working very extensively on the footprint, right? And that's why it's visible now.
When you combine that with the balance sheet, with the low level of debt that we have today, that's why we feel so comfortable to even in this challenging macro, we can continue to push forward with our strategy, our investments, our return to shareholders.
Cole Hathorn (Senior VP of Equity Research)
Then just as a follow-up, there's been some obviously political commentary around Mexico and shipments coming across the border into the U.S. Would you just mind giving your thoughts on ArcelorMittal's Mexico business and kind of the melt and pour kind of caveat that they were talking about? Thank you.
Genuino Christino (CFO)
Yeah. Well, as a matter of principle, I mean, any agreement, as we had an agreement between the U.S. and the Mexican government, with the deal to prevent circumvention, we will support that, right? Coming to our business, Mexico is an important part of our business. We have invested heavily in the last couple of years. We have this, a new, brand new, hot strip mill that is performing well. And all of our steel in Mexico is melted and poured in Mexico, right? So we are not really part of this debate, because all of our steel is melted and poured in Mexico.
Cole Hathorn (Senior VP of Equity Research)
Very clear. Thank you.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thanks, Cole. We'll move to the next question, which we will be taking from Tom at Barclays. Please go ahead, Tom, if you can hear us.
Tom Zhang (Equity Research Analyst)
Yeah, good afternoon, thanks for taking our questions. Just two for me. The first one, you know, you talked a little bit about how unsustainable, steel spreads and steel prices are eating into the cost curve. Maybe you can just give us some thoughts on what needs to happen as a sort of catalyst to actually get that to change. You mentioned sort of swift and effective responses to unfair trade. Have the policies we've already seen, is that gonna be enough? Do you need more capacity being taken out? Do you need demand really just to improve? Just curious on, yeah, what, what stops it being unsustainable? Thanks.
Genuino Christino (CFO)
Do you want to start, Daniel? Provide your thoughts, and then I add.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Thank you, Genuino. So yeah, I think there are perhaps several potential triggers. But clearly the best trigger would be an improvement in apparent demand, and that would be triggered really by confidence. So once the market participants become more confident that the real demand recovery is something that they can look forward to, then they're gonna start thinking about replenishing their inventories and also the raw materials required to produce their inventories. So I think one important trigger could be that improvement in confidence, and really just a sense that things are brightening and that the outlook is increasingly positive.
Triggers for that could be the interest rate cutting cycle, as one obvious point. The second trigger can really also be just this sense that, look, things can't go any lower. So, often what we see is that, when steel prices have negative momentum where possible, market participants will be destocking, they'll be sitting on their hands, taking a wait and see attitude. But when they believe that the risk to the downside is extremely limited, then there can be that kind of sense that I wanna get a little bit more onto the front foot, and start thinking about building some inventory, before steel prices start to move in the opposite direction. And that in itself can act as a trigger.
And then the third trigger would be on the supply side. So either you see the high cost producers having to really cut production, or we see a better domestic market share, i.e., less import penetration. So those would be the three catalysts. And we'll see which of those is ultimately the trigger to start moving pricing higher from the current levels.
Tom Zhang (Equity Research Analyst)
Got it. Thank you. And then just some very quick clarification questions, please. So earlier you mentioned, Daniel, Mexico strike impact, you think it'll be the same in Q3. Could I just clarify if that was earnings, volumes, or both? And then also in the release, you guys talked about reversing $1.6 billion of net working capital build that you had in H1. Is that a sort of firm target? Is that like a minimum release that we're sort of expecting? But yeah, just any color there will be helpful. Thank you.
Genuino Christino (CFO)
So, I'll take the second one, and Daniel can comment on the impacts of the blockade in Mexico. Clearly, we believe that we will see a reversal of the investments that we made in the second half. As we know, we're still carrying a low inventory; it's because of the weighted average impact, still, high cost materials coming from Q4, Q1, of last year. So we will see that; we'll work through that. But I think the message to the business is that... and given everything that we have just discussed, that we remain hopeful that we will see a better 2025 in terms of real demand. I think it's very important that we are ready for that.
The instruction to the units is that we should just have the right level of working capital to what we believe we're gonna need, looking at the demand that we have in front of us. So I would not jump to conclusions that we can see even more. I think I will be happy to see that reversing as we have guided, and then we will see, of course, where we landed at the end of the year. As we all know also, it's challenging to predict so precisely the evolution of working capital, but the $1.6, we feel comfortable. Daniel?
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Yeah, sorry, Jimmy, no. So then on Mexico, Tom, I can... Yes, I can confirm that. So, in terms of the volume, we would expect a similar impact in Q3 and Q2 from the blockade to about 400,000 tons. And therefore, the same profitability impact of about $0.1 billion.
Tom Zhang (Equity Research Analyst)
Got it.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
So, no delta quarter-over-quarter.
Tom Zhang (Equity Research Analyst)
Okay, understood. So there's no sort of like catch up, with the sort of, bonus payments and back pay, that's not gonna have a sort of incremental impact since Q3? It's all sort of baked in.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
So, no, so yes-
Tom Zhang (Equity Research Analyst)
Okay.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
You should just assume, no, no delta from that specific effect, Q3 versus Q2.
Tom Zhang (Equity Research Analyst)
Got it. Thank you.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Perfect. Thanks, Tom. So we will take the next question from Ephrem at Citi. So please go ahead, Ephrem, if you can hear us.
Ephrem Ravi (Managing Director)
Thank you. Can you hear me?
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Yes, we can. Thanks, Ephrem.
Ephrem Ravi (Managing Director)
Yeah. So three tiny clarification questions. Firstly, the doubling of the EBITDA in the Sustainable Solutions by 2028, is that just the impact from Italpannelli and India Renewables, correct? I mean, it does not include the impact of future acquisitions and things like Vallourec, which I assume will be put under Sustainable Solutions. The reason is maybe the roughly $100 million incremental from India Renewables and $150 million from Vallourec, plus some from Italpannelli, you're pretty much there for your 2028 target.
Genuino Christino (CFO)
So it's not. No, I think the Vallourec, as you know, will be part of our JVs, right? So it's an equity stake, 28%, so we will be reported as part of JVs. Italpannelli and the renewable project in India, yes, it will be part of Sustainable Solutions. But look, I mean, we have high ambitions for this part of the business. So the renewable project in India and Italpannelli will not take us to the targets, so we still have work to do, and we're excited to see that through. So we have a number of nice projects in front of us that we feel that we're gonna be able to add a lot of value.
Ephrem Ravi (Managing Director)
Thank you. Second, how much of the working capital build was due to Mexico, if you can quantify that, just to get comfort around the $1.6 billion release, because that's an easy win?
Genuino Christino (CFO)
Look, to be honest, it's because if you look at the shipments in our long business in Africa, you're gonna see that there is actually a bit of an increase, right? So we were able to mitigate some of the blockading impacts by, in case of longs, because we have different locations, we were able to continue to ship that materials, right? And there is, of course, some raw materials that could not be transformed. But we are not quantifying that, Ephrem. But, again, I think you can assume that we feel at this point, and seeing what we have in front of us, we feel good about the release in the second half.
Ephrem Ravi (Managing Director)
Thank you.
Genuino Christino (CFO)
More so, more so I would say, more so in Q4 than in Q3, right? As it is typical, the pattern that-
Ephrem Ravi (Managing Director)
Yeah, seasonality. Yeah. Thank you. And the third question. The DR pellet project, the 5 million tons from blast furnace to DR pellets. Can you give us a sense as to the CapEx that's involved in that? Because the DR pellet premium over blast furnace pellet has been, you know, $5-$6 per ton, on average. So just want a sense kind of how much incremental return, if the spot premiums hold. Obviously, if the premiums go up in the future, it goes up.
Genuino Christino (CFO)
Yeah. Daniel, do you wanna talk about that?
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Yeah, sure. So, we have announced $200 million with the CapEx on that project. In terms of the premium, I think this past quarter, it has been about $8 a ton. But of course, I think the important thing as we move forward is that we know we're gonna need more of this type of material as we look to expand our DRI capacity. We have the Texas project under consideration, and that, you know, that there's an appealing opportunity there to double our capacity of DRI in Texas. So, we're gonna need more feedstock for that type of project.
Ephrem Ravi (Managing Director)
So, would it be fair to say that most of that incremental 5 million tons would be going internally to other ArcelorMittal plants?
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Yeah, so.
Genuino Christino (CFO)
Sorry. Yeah, I think that's a fair assumption, Ephrem. And also, I would just add to what Daniel said, that we're gonna, we're gonna be able to keep the flexibility, right? So we're gonna be able to have either DRI pellets or DR Pellets, so we are not giving up that flexibility.
Ephrem Ravi (Managing Director)
Thank you. That's it from me.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Perfect. Thanks, Ephrem. So we will move to the next question, which we will take from Dominic at JPMorgan. Please go ahead, Dominic.
Dominic O'Kane (Executive Director and Mining Equity Research Analyst)
Hi, guys. Just two quick questions for me, just on... one on clarification. So again, looking into H2 and on CapEx. So there's a little bit of a step up to the top end of the guidance for CapEx in H2. Is there a risk of an underspend on CapEx? Or, you're very, very confident you'll come in sort of within that range? And then second question, we hear the commentary, we sort of see the numbers on inventories for U.S., Europe, but just wondering if we could push you a little bit further on kind of what you see and what you see in terms of lead times for U.S. and Europe, and the extent to which we could see those markets tightening quite rapidly as we move into an interest rate cutting cycle.
Genuino Christino (CFO)
Yeah. So the CapEx, yeah, I think we are not changing our guidance, so we still retaining our guidance of $4.5-$5. In the H1, I believe we were at about $2.2, so slightly, if you annualize that, a little bit lower than the bottom end of the range. But at this point, we feel comfortable that it's just timing, so we should be within our range. Then in terms of inventories, I think lead times are short, Dominic. I would say both in... And that's typically the case, right? When demand is relatively weak. So lead times remain at the low end of the range.
And the moment we see a rebound in terms of the demand, real demand, we see some pickup in inventories. That is typically when you see the lead times becoming longer, and that then tends to drive very quickly, can drive very quickly prices up.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thanks, Dominic. I'm not sure if you have a follow-up?
Dominic O'Kane (Executive Director and Mining Equity Research Analyst)
No, it's all good. Thanks.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thank you. So in that case, we will move to our next question, which we will take from Matt at Goldman Sachs. So please go ahead, Matt.
Matt Greene (Head of European Metals and Mining Equity Research)
Hi, good afternoon. Just a quick question on India. You and your peers have described these low-cost imports from China as a predatory pricing strategy. And I guess we've seen the rest of the world move quite quickly to protect domestic markets. So my question is, has the Indian government been receptive to your concerns? And to the extent you can, please comment on Mittal's stance and the level of protectionist measures you'd like to see introduced.
Genuino Christino (CFO)
Well, I think the whole industry in India is, of course, concerned about the level of imports coming from China, as any other region in the world, Matt. There is, of course, dialogue. I think the government understands the challenge, and I think there is a lot of focus from the Indian government to make sure that the Indian industry can continue to develop, right? I mean, when you look at our materials, look the forecasts that we have for apparent steel consumption in India, it will grow so much in the next 10, 12 years, that it's absolutely critical that the industry can develop, right? And, of course, the Indian government doesn't want to be dependent on materials coming from China.
I think it's a matter of time. So if China doesn't correct course, then I think it's just a matter of time to see more protection, as we saw back in 2015, 2016. So that's when a lot of trade actions started. And we are again starting to see that, Mexico, Brazil, South Africa, different, different parts of the world also starting to respond to that. And, and for sure, that should also happen there against China.
Matt Greene (Head of European Metals and Mining Equity Research)
That, that's helpful. Thank you. And I guess just following on from that, with the JV, you, you've long said that you expect it to remain self-funded. But I guess if we see EBITDA per ton at current levels continuing, you know, can this JV continue to self-fund the Phase 1A growth plans?
Genuino Christino (CFO)
Yeah, we feel very, very comfortable about that. As a matter of fact, if you look at even in this challenging market conditions, and we had maintenance in our JV in the second quarter, and if you look at the profitability there, still recently we have very low cash needs. So the normal business in terms of maintenance, CapEx, interest costs, extremely low. So this business generates good level of free cash. But more importantly, of course, we have already signed credit lines that will allow us to complete this first expansion to 15 million tons. And that's transformational, right?
So when you do that, and you achieve this 15 million tons, and you start to deliver on the EBITDA, and then the free cash follows, it makes it much easier then to continue the process, the expansion. I think the challenge that we have in India is to make sure that we can keep pace with the market and make sure that we can not only retain, but increase our market share in that market.
Matt Greene (Head of European Metals and Mining Equity Research)
That's great. Thanks, Genuino. If I could just ask a quick clarification question. At a group level, you're expecting about a 10 million ton increase in iron ore in 2025. Can you please give a breakdown on the components coming from Liberia and Serra Azul, just given that both are finishing in the second half and will be ramping up next year? Thanks.
Genuino Christino (CFO)
Okay. Daniel, you, you wanna provide that?
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Yeah. Thank you, Genuino. So I think, when we look at our bridge from first half 2024 to that 50 million ton number in 2025, first of all, I think we would be expecting a better volume performance in the second half. Obviously the Q2 numbers were held back by maintenance in Canada and also the impact of those wildfires. So, second half volumes should already be better than the first half run rate. And then the key deltas in 2025 versus 2024, it really will be Liberia. So, we're on course to have the first concentrate available at the end of the year.
And then that will continue to ramp up as we move through 2024. So, at this stage, we would be expecting at least a 10-million-ton volume performance from Liberia in 2025. So a significant step up from the 2024 level. And then, yes, you mentioned the Serra Azul. So that will... That's really the other main delta when we look at 2025 versus 2024. Hopefully, that works for you, Matt?
Matt Greene (Head of European Metals and Mining Equity Research)
Yeah. Yeah. Thanks, Daniel. Cheers.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thank you. So we will move to the next question, which we will take from Andrew at UBS. So please go ahead, Andrew, if you can hear us.
Andrew Jones (Executive Director and Head of Steel Research and EMEA Paper and Packaging)
Okay. Can you hear me?
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Yes, we can. Thank you.
Andrew Jones (Executive Director and Head of Steel Research and EMEA Paper and Packaging)
Excellent. Cool. So just on the follow-up to one of your previous questions, about, you know, what turns market in Europe, I mean, you obviously talked about potential for restocking, demand picking up, interest rates falling, et cetera, you know, on the demand, all that was on the demand side, then you just mentioned some of the potential high cost blast furnace closures. In your shipment levels at the moment are, you know, running pretty high, and in the past, you've been one of the leaders in taking out capacity on those down cycles. So I'm curious to see, you know, in the coming months, what planned, you know, normal maintenance is for over the summer, which blast furnaces potentially will be down? And then, how much worse do things have to get for you to start actually closing blast furnace capacity?
You know, or, you know, is it just a case of you're very confident that demand will turn and therefore you don't feel this time around, you need to do much?
Genuino Christino (CFO)
Yeah, Andrew. Well, so you're right. So we are running today all of our furnaces, with the exception of one furnace in pause, as we talked about before. And I think as I said at the beginning also, so when we look at our order books, we feel okay, so we will have the normal seasonality. We will, we are not—we don't really have, in the second half, any major maintenance foreseen, for the furnaces. As you know, we have, we did a lot of work on that last year. And we will produce what we can sell, Andrew. So to the extent, and that's the beauty of the ArcelorMittal footprint, right?
So if we feel that we don't have enough demand in front of us, we have the options to reduce capacity, to bring down one furnace, or we can adjust the capacity of different furnaces. And we will -- and if we get to that point, we will, as we did in the past, we will take that call. But right now, we don't see the need, so we continue to move forward.
Andrew Jones (Executive Director and Head of Steel Research and EMEA Paper and Packaging)
Mm-hmm. Okay. Now, that's clear. Okay, thank you.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thanks, Andrew. We will now move to our next question, which we're gonna take from Max at Oddo. So go ahead, Max, if you can hear us.
Max Kogge (Equity Analyst of Metals and Mining)
Yeah, good afternoon. Yeah, just following on, on mining, I mean, one of your competitors had to, I mean, one of the other producers of iron ore in the region had to shut down operations because of the wildfire. Is that something that you rule out on, on your side, given that this wildfire are still raging at the moment? And in Liberia, you had some difficulties with the railway, or, or they now solved, we're hearing some, some people wanting to access this line and, and yeah, which could perhaps reduce your, your own shipments. So can you, can you comment on that too?
Genuino Christino (CFO)
Yeah. So first, on Canada, the fires, you're absolutely right. So we also suffered the impacts of the fire for a couple of weeks. And if you look at the production now, what we publish, you can see that there is a lower production, part of it because of maintenance, but also because of the impacts of the fire. Slightly resolved now. That's why we feel that, absent the repeat of the maintenance work, we will see nevertheless an improvement in shipments, in production and shipments in Mines Canada in quarter three. In Liberia, we have basically resolved now the issues with the rail.
Q2 was still impacted, and that's why then I was also saying that we expect higher, higher numbers in the second half. We will see the capacity in Liberia coming back to normal levels in quarter three. And look, we have an agreement with the government that is signed, that we, that is, that is valid. So we have, of course, dialogue with the government, with different parties, but we are the operators of the rail. We have the concession. And, and as we have been discussing, we have very ambitious plans for Liberia. We see the potential of the mine. We have plans to take it to 30 million tons, and that's what we intend to do.
Max Kogge (Equity Analyst of Metals and Mining)
Okay. Okay, that's clear. And just the last one, it's on Argentina. This is a country that has been dragging down the Brazil segment over the last two or three quarters, but now it seems that it's turning the corner, that the economic climate is a lot more constructive. So do you think it will now be quite neutral, and could it even become a big earning driver for ArcelorMittal, given that you're by far the largest producer in the country?
Genuino Christino (CFO)
Well, it's not yet the case in quarter two, and you're right. So in quarter two, it was very challenging first half for Argentina, right? Of course, Argentina is going through a major transformation, call it. The new government taking very hard measures to try to fix the economy, to reduce the inflation. But as a result, a number of projects were cut. So the demand in Argentina in the first half was extremely weak.
But to the extent that the government can succeed in bringing stability, reducing the level of inflation, then that should be temporary, and we should start to see again, Argentina contributing more to our results. So I think we are optimistic, but we have, of course, to wait and see 30 days. But, this year so far, we are going through these challenges.
Max Kogge (Equity Analyst of Metals and Mining)
Okay. No, no, that's clear. Thank you.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thanks, Max. So we will move to our next question, which we will take from Bastian at Deutsche Bank. Hi, Bastian, please go ahead.
Bastian Synagowitz (Equity Research Analyst)
Yeah. Hi, Daniel. Hey, good afternoon, all, and thanks for taking my question. I actually only have a quick one left on decarbonization. I think you've been moving a bit more mindful here, which clearly has been proving the right approach so far, just given the very slow momentum in terms of the European infrastructure for things like hydrogen and I guess also the other components on the policy side, which you mentioned earlier. I guess yet we are getting to the point where the project pace will have to speed up, and I think most of your peers have seen a significant step up on decarbonization CapEx already or will see that next year. By now, we should have a pretty good visibility on what is coming, at least in 2025.
So could you please give us maybe some early gauge on what to assume for CapEx on decarbonization for 2025? i.e., will it be more like a $500 million-$1 billion ballpark number, or will it be possibly above $1 billion? Maybe just any view on that front, that would be great.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
You want to talk about it then? And I can add. Yeah. So, thanks, Genuino. So I think, look, the focus of our work on decarb at the moment is, as we've been consistently talking about, is engineering. So completing the engineering of the various different projects and studies that we have underway to... On top of that, we've been making progress with the various different governments to make sure that they're obviously supporting these projects. And that's not just on the CapEx side, but very importantly, to make sure that we have the right input factors, to make sure that at the end of the day, these projects can be sustainable and cost competitive.
So then, looking into 2025, relative to this year, I don't think we will see a material step up in CapEx related to our decarb projects. So, that would be my expectation rather than the numbers that you were talking about in your question.
Bastian Synagowitz (Equity Research Analyst)
Okay, thanks then. And just, as a quick follow-up, so, this year, so I think you are aiming to spend $300 million-$400 million. Next year is gonna be the same level. Is that a gross number, or is that already net of any government, basically share of the CapEx wallet, basically, which you're budgeting for?
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Yeah, so most of that is, as I say, it's supporting the engineering studies, et cetera. So, that's, we've not yet been able to offset the benefits of the government support.
Bastian Synagowitz (Equity Research Analyst)
Understood.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
So that will help to reduce the sort of the impact as we move forward, as certain projects start to accelerate.
Bastian Synagowitz (Equity Research Analyst)
Understood. Okay, perfect. Thank you.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Super. Thanks, Bastian. So we have a couple of questions left. So, one of them is a follow-up, but we'll take the next question from Alon at Bloomberg Intelligence. So please go ahead, Alon, if you can hear us.
Alon Olsha (Senior Analyst of Metals and Mining)
Yeah. Hi. Thanks. Thanks for taking my question. Most of them have been answered. I just had a clarification question on your strategic projects. You have 3 which are being commissioned this year, in the second half, which have the capability of adding $285 million EBITDA. Could you just remind us what the profile of that looks like, when that will start coming through? I think you already alluded to Serra Azul, mainly coming through in 2025, but the other two, that would be helpful. Thanks.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Yeah, so, hopefully I get the gist of your question here, Alon, but I think, we do have a very useful slide in our presentation deck to show the cadence of the EBITDA that we anticipate on an annual basis from the organic investment. So, if you do get a chance to look at slide nine within the presentation deck, it's pretty neatly laid out. But just for everybody's benefit, we would expect some positive impact in the second half from the two projects that we've commissioned and begun commissioning over the end of Q2. So the Vega project in Brazil and the India Renewables commissioning. But that will significantly accelerate in 2025.
So for the full year of 2025, we're expecting a $500 million benefit from the incremental benefit from the strategic projects. And then of course, on top of that, we should be seeing the EBITDA benefit from VAMA, from Vega finally. So year-on-year, next year's delta is $0.7 billion. Then into 2026, there would be another $0.5 billion step up, as more of the projects bed down. And then the remaining amounts would be post 2026. And so in total, it's a $2 billion uplift, including the $0.3 billion we already have been benefiting from in Mexico.
But this is going to be a very sort of significant but also unique driver of ArcelorMittal's profitability relative to our peers as we go through the next two or three years. And would, of course, come on top of any cyclical recovery that we can anticipate.
Alon Olsha (Senior Analyst of Metals and Mining)
Great, thanks. Thanks for that. If I can, just one additional question on net debt and how that evolves over 3Q and 4Q. It looks like the Vallourec payment in 3Q, so net debt climbs plus CapEx is obviously somewhat second half weighted, but then working capital release in Q4, which will bring net debt back down. Are there any other kind of major moving parts, and is that profile broadly correct?
Genuino Christino (CFO)
Well, I think you got it right. Yeah, those are the moving parts. I would just say that we do expect the company to be free cash flow positive, right? And on top of plus, we will have the reversal of the working capital investments. You're right, so in quarter three, we will see an increase because of Vallourec, but then we would expect net debt to come down again by the end of the year. And we should, of course, retain a very strong balance sheet, low absolute levels of net debt.
Alon Olsha (Senior Analyst of Metals and Mining)
Great. Thank you.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Perfect. Thanks. So we will now move to our last question, actually. So it's a follow-up from Tristan at BNP Exane. So go ahead, Tristan, if you can hear us.
Tristan Gresser (Head of Steel Equity Research)
Yes, thank you for the follow-up. Just on XCarb, you mentioned that your European flat footprint has the capability to produce 80% of all grades and dimensions. So what is that percentage relative to your current product mix? So in other words, with XCarb, which is scrap-based, how much of your flat mix can you replicate? And if it is a good chunk of your portfolio already, which it could be, does that mean that you don't necessarily need the 5, 6 DRI plants you have announced to build across Europe?
Genuino Christino (CFO)
Yeah. So, as you know, we have the-- in Europe, I think we are, when we talk about the CBAM, and that is a lot, but we have-- we are the only one that has today an electric arc furnace already producing flat steels, right? That's our Sestao plant, which we are again ramping up. So, and on top of that, of course, we have our facilities in Asturias. We have about 50% of our long capacity or 60% is also electric arc-based. And we continue to dedicate a lot of resources into R&D. I mean, today we announced a new line of products under the XCarb umbrella for the development of the hydrogen network in Europe. So we continue to make good progress there.
But in terms of absolute volumes, as we know, we are doubling the volumes this, this year. We are expecting to complete this year with more than 400 KT. But of course, we have to decarbonize the footprint, right? So, you should not read that because of that, we don't need to progress with our decarbonization plans.
Tristan Gresser (Head of Steel Equity Research)
All right. That's helpful. But of your current flat roll product mix, is that 50% you could replicate with XCarb and scrap-based process, or is it-
Genuino Christino (CFO)
Well-
Tristan Gresser (Head of Steel Equity Research)
closer to 80%?
Genuino Christino (CFO)
It's 80%. We are saying 80% for our industry, customers, right? So,
Tristan Gresser (Head of Steel Equity Research)
Industry customers.
Genuino Christino (CFO)
Industry customers.
Tristan Gresser (Head of Steel Equity Research)
All right. That's clear, so it's much lower. Okay, thank you. And maybe just a quick follow-up. Could you remind us the volume exposure you have of volumes coming from Europe to the U.S., in case we see tariffs returning on U.S. borders? I do believe you had some special rail and other types of product, but I don't remember the volume figure.
Genuino Christino (CFO)
It's not a big number, Tristan. It's not a big number. But you're right, we do have exports, some specialty steels, that in any case, even when Europe was still paying Section 232, we never stopped them. So, these are products that are not available there in the U.S., so I would not expect any implications. And second, the volume is not so significant.
Tristan Gresser (Head of Steel Equity Research)
Okay. Thank you very much.
Daniel Fairclough (VP of Corporate Finance and Head of Investor Relations)
Great. Thanks, Tristan. So that was our last question, Genuino, so I'll hand back to you to conclude the call.
Genuino Christino (CFO)
So thank you, everyone. And before we close, I want to reiterate my message from the beginning of the call. Firstly, the whole ArcelorMittal organization is galvanized to improve safety performance. Secondly, our resilient results in the face of challenging market continue to demonstrate a structural improvement. This resilience means that we have been able to focus on our growth agenda. The investments we have been making will provide significant structural upside to EBITDA and cash flows on top of any cyclical recovery. Our ongoing buybacks are compounding value, creating benefits to our shareholders. And if you need anything further, please do reach out to Daniel and his team. I wish you all a good summer. Stay safe and keep those around you safe as well. Thank you very much.