ArcelorMittal NY Registered Shs (MT) Q3 2020 Earnings Call Transcript

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ArcelorMittal NY Registered Shs (NYSE:MT)
Q3 2020 Earnings Call
Nov 6, 2020, 9:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Okay. Daniel you can start now.

Daniel FaircloughGlobal Head, Investor Relations

Great, thank you. Good afternoon and good morning everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Firstly, thank you for joining this call today to discuss the results for the third quarter 2020. We published those results this morning alongside a detailed Q&A document and a presentation with detailed speaker notes. So as usual in order to be as efficient as possible the attention of this call today is not to go back through that presentation again, but to move directly to your questions. As far as the result, we should be able to complete this call in about 45 minutes. [Operator Instructions] As we’ve done in the past few quarters, we really would appreciate just taking one question at a time from each analysts and you can always rejoin the queue later, if you have a further follow-up question.

And with that brief opening, I will hand over to our Chairman and CEO, Mr. Mittal.

Lakshmi N. MittalChairman and Chief Executive Officer

Thank you, Daniel. Good day and welcome everyone. Thank you for joining today’s call. I hope you are all keeping safe and well. I’m joined today by Adit Mittal, President and CFO; Simon Wandke, Head of Mining; Genuino, Head of Finance; and Daniel.

Before we answer your questions, I would like to begin as usual with a few remarks. Despite the ongoing challenges, the third quarter was quite positive for ArcelorMittal. We prioritized the health, safety and well-being of our workforce with COVID prevention measures rigorously implemented across all our operations. Our agile response to the changing demand environment and our initiatives to manage fixed cost drove an improved financial performance. But as more important though, is the fact that we have reached several strategic milestones during the quarter.

I would like to highlight only three of them. Firstly, we completed our $2 billion assets portfolio optimization program ahead of schedule following the agreed sale of ArcelorMittal USA last month. Secondly, we achieved our $7 billion net debt target, which represents a significant milestone for ArcelorMittal and triggers a shift in capital allocation toward shareholders. This began with a $500 million buyback just completed, and we will announce a new policy with our full year results in February. And thirdly, we reinforce our commitment to de-carbonize by announcing 2050 net zero target and launched a new green steel offering for our customers. We have succeeded in doing this because of our people. We have always known as we have a great team of people around the world, but the last six months has really enforced that. I’ve been really struck by how our people have gone the extra mile, not just to support the business, but to support one another.

I speak for the Board, Adit and the whole management team, when I say thank you to the hundreds of thousands of people who work for us. They have been tremendous, a real testament to the spirit and values of ArcelorMittal, impressing new ways and enabling us to reach this point of the year with a lot of achievements to be proud of, despite the very difficult market conditions.

So with that brief opening, Adit and team and I will now — we happily take questions you may have. Thank you.

Questions and Answers:

Daniel FaircloughGlobal Head, Investor Relations

Thank you, Mr. Mittal. And so we have a queue of questions already. So we’ll move to the first question from Jason at Bank of America. Please go ahead, Jason.

Jason FaircloughBank of America — Analyst

Yes, good morning. Sorry, good afternoon to everybody, and thanks for the call. Just a question on the cash flow and the cash needs of the business. And I wanted to make sure I’m understanding your Slide 16 correctly. So you’ve ended off Q3 with net debt of $7 billion. You’ve since done a $500 million share buyback. And then you’re saying, I think it’s $1.4 billion cash needs of the business in Q4 plus a potential build in working capital. So I guess could we end up seeing net debt well above $7 billion by year-end, particularly if there’s a delay in completing the Cliffs transaction.

Lakshmi N. MittalChairman and Chief Executive Officer

Adit?

Aditya MittalPresident and Chief Financial Officer

Yes, thank you. Thank you for the question. So yes, the overall cash requirements for 2020 is a $3.7 billion. And as in nine months we have spent $2.3 billion. So that implies a $1.4 billion cash needs for the fourth quarter. In terms of the working capital, we have released already $600 million. So our guidance range is $600 million to $1 billion for the year. So theoretically you could have a zero cash from working capital in the fourth quarter or up to an additional $400 million release. So I hope I clarified your question, Jason. So this is not for the next three months. This is a full year guidance of $0.6 billion to $1 billion. Now originally, we had guided to $1 billion of working capital release. We have hit $600 million in the nine months. You may ask why not $1 billion for the full year, but as you know, shipments are better than we anticipated. We can see across the Board, but predominantly or specifically in automotive. Price levels are also stronger. And therefore, we’ve moderated our working capital range for the full year. And I think the midpoint is a good estimate.

Jason FaircloughBank of America — Analyst

Sorry, just to make sure, I’m going to just going to push a little bit here, just to make sure I understand.

Aditya MittalPresident and Chief Financial Officer

Yes, please.

Jason FaircloughBank of America — Analyst

So — but if we think about this then, so you’re saying $1.4 billion cash requirements in the fourth quarter, plus you’ve done the $500 million share buyback. And then we might get $400 million, we might get nothing. So you could potentially be starting with a $1.9 billion outflow already. Is that the right way to think about that?

Aditya MittalPresident and Chief Financial Officer

So two things, first, you have to — so just on the $500 million share buyback, clearly, we expect our transaction with Cliffs to close in the fourth quarter. And as you know, there’s a $500 million cash payment for that. There’s also an additional $900 million of equity, but there’s $500 million of cash. So I think the share buyback is offset by the AM USA transaction. So the cash outflow, you begin, if you assume, zero working capital is $1.4 billion and then obviously, it’s zero or plus i.e., reduction due to working capital either zero or some reduction, and then obviously EBITDA in the fourth quarter.

Jason FaircloughBank of America — Analyst

Okay. Thank you. Very clear, appreciate it.

Aditya MittalPresident and Chief Financial Officer

Sure. Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Right. So we’ll move to next question from Alain at Morgan Stanley.

Alain GabrielMorgan Stanley — Analyst

Yes. Thank you for taking my question. Can you give some color on the price cost dynamic, but also the sequential progression of shipments going to Q4? And what are the different moving parts that we need to take into account while building our EBITDA forecast? Thanks.

Aditya MittalPresident and Chief Financial Officer

Sure. So I’ll talk about Q4 generally, I think you know what the price dynamics are and all of the markets in which you operate, but I’ll address how it impacts us as a company. So I think the first thing about Q4 clearly is an increase in shipments. So we see that trend continuing in spite of the lockdowns that have been announced in various markets in which we operate. We see low levels of inventory. We still see healthy order books. And so we see — and we’re forecasting pre-shipments in Q4, in virtually all of the markets in which we operate.

In terms of the impact of that that’s going to be a bit more muted than in the past, because as you know, we have variablized our fixed costs. So our shipments increased. We have the full — fixed cost impact of that shipment increase. So the operating leverage will not be as high, but it’s still positive. In terms of prices, I think, you know which direction prices are moving, we have some lag effects, obviously still continuing into Q4 from Q3. And then we have contracts, which have fixed pricing elements. And we see the full impact of elevated cost of raw materials in the fourth quarter. So those are some of the key drivers as we look into the fourth quarter. Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Right. Thanks, Alain. So we’ll take the next question from Christian [Phonetic] at Citibank.

KrishanCitibank — Analyst

Hi, this is Krishan from Citi. First question on the pricing part of it [Technical Issues] responded to that, given that you had $40 per ton of quarter-on-quarter expansion of the pricing, should we assume that the spread expansion into the fourth quarter should be better than what you had in the third quarter? Or should we assume some kind of cost headwinds coming through in the quarter?

Aditya MittalPresident and Chief Financial Officer

Sure. Thank you Krishan. I would not — I’m not going to comment specifically on the level of price or the level of spread increase, but I think it’s fair to assume that in the fourth quarter, we will have a spread increase relative to the third quarter.

KrishanCitibank — Analyst

Great, thanks.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Right. So we’ll move to the next question from Seth at Exane.

Seth RosenfeldExane — Analyst

Good afternoon. The question on deleveraging and shareholder returns. I understand with Jason’s question that Q4 might see something in the opposite direction, but with the $7 billion net debt target reached in Q3 on a go-forward basis, is there a further management interest in cutting net debt below $7 billion? Or can you confirm that for the end game for deleveraging? I recognize you’ll give us more color on these shareholder returns policy year-end results. But anything to give us an understanding of the range of free cash flow payout ratio would be much appreciated. Thank you.

Aditya MittalPresident and Chief Financial Officer

Sure, thank you. Thank you for the question. You’re absolutely right. I think we’re very excited about this quarter, because we have hit our net debt target. As you know, this was a multi-year target. And if you look at it on a 10 or 12 year basis, there has been tremendous progress that has been made. So we thank our shareholders and all of our employees on a global basis.

We have said deleveraging is complete. So there may be movements in net debt, not significant, but small moments in net debt up or down, but that does not — but regardless of those movements, the deleveraging chapter is behind us. So what — the second thing I would add is a side point, but also very important through the sale of AM USA to Cleveland-Cliffs. The balance sheet generally has become much stronger, because we have also reduced a significant pension and OPEB liabilities as you know and some other liabilities. So therefore, we clearly shift or pivot toward returning cash to shareholders. We demonstrated our serious intent by the share buyback program that we announced right after the sale. And that’s already been completed and that’s $500 million share buyback done in Q4. And as Jason asked, that’s directly coming from the proceeds from the AM USA transaction.

In terms of providing more color, I think clearly, we want to enter into a dialogue with our key shareholders and we will begin to feedback to our Board in December and then continue that dialogue with them and conclude and announce to all of you in our Feb 2021 results. But I think it is fair to assume that it has — it should be significant part of our free cash flow. And therefore, that is a type of dividend policy/distribution that you should see from us.

Seth RosenfeldExane — Analyst

Great, thank you.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Seth. So we’ll move to the next question from Alan at Jefferies.

Alan SpenceJefferies — Analyst

Thank you, and good afternoon. Regarding automotive plan, you clearly call that out as being beneficial to mix shift. If we focus just on Europe and North America, how are these trends persisted into October and early November? Where do you expect Q4 auto demand to be compared to either on year-on-year near level or normalized?

Aditya MittalPresident and Chief Financial Officer

Yes. Alan, thank you for your question. Yes, we are expecting the same in Q4. We’re not seeing any demanded deterioration in automotive either in Europe or in North America. On the contrary, I would expect Q4 volumes in automotive to be higher than Q3.

Alan SpenceJefferies — Analyst

Okay. Thank you.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Great, thanks. So we’ll take the next question from Carsten at Credit Suisse.

Carsten RiekCredit Suisse — Analyst

Thank you very much. One question on the expansion of the Liberian iron ore mine. Could you remind us about the cash costs in those operations and your assumptions about the iron ore prices behind the decision to actually put the concentrator in — until 2023, sorry.

Aditya MittalPresident and Chief Financial Officer

Simon?

Simon C. WandkeExecutive Vice President, Chief Executive Officer, ArcelorMittal Mining

Yes. Thanks, Carsten. Look, this is I mean, you’ve got to look at the long-term strategy is not changed. It’s always been to move to a concentrate. So nothing particularly new in terms of the long-term high value strategy, but this will be a low cost FOB and CFR cost position. It’s going to be in the low 20s for concentrate. And when we look at the impact on that intensive lifts China breakeven cost is going to be right up there with the majors. We believe this is a highly competitive completion of all the partly completed project is a brownfield project effectively.

In terms of price — yes, in terms of price, obviously we don’t give a long-term trend. We’re watching a number of key variables at the moment, which is keeping the price up, but I think given the fact that this is obviously the margin is a consequence of price and cost. The cost position is the manageable piece, and then we believe in that. And therefore we believe this project is going to be quite attractive throughout the price cycles.

Carsten RiekCredit Suisse — Analyst

Just a very quick follow-up on this. How is the capex off about $800 million be split during the next three to five years?

Simon C. WandkeExecutive Vice President, Chief Executive Officer, ArcelorMittal Mining

Yes, so not much next year. It’s more skewed to the back end of that few years ahead of us. And first concentrate end of 2023 as we named in the release. And then that capex is back ended ’24 — 2022, ’23, ’24. So yes, very lightened next year, which I think is consistent without our needs for the group.

Carsten RiekCredit Suisse — Analyst

Perfect. Thank you very much.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Carsten. So we’ll move to the next question please from Luke at JP Morgan.

Luke NelsonJP Morgan — Analyst

Yes. Hi, good afternoon. Thanks for taking my question. Just a bit of a follow-up there, just in terms of capex at the group level. If you could give any sense for the moving parts for 2021 relative to 2020, obviously you touched on the Liberia capex being minimal next year. But of any indication on sustaining capex with likely high volumes across the group on any other capex year-on-year we should be expect — we should be keeping in mind? Thank you.

Aditya MittalPresident and Chief Financial Officer

Sure. Luke, thank you very much for your question. So some of the key drivers for 2021, I think clearly as you know, we expect the AM USA transaction to close in the fourth quarter. So there would be less capex from AM USA. That’s roughly $250 million plus minus on an annual basis. So that reduces the gross capex. Nevertheless, we expect volumes to increase and we expect some normalization of our maintenance capex. So in that sense, capex would be increasing. But I think the takeaway that I would suggest to all of you is that our capex will be more or less in line with our depreciation. So that that provides you with some sort of framework, and obviously our depreciation expense will also decrease next year with the sale of the AM USA deal.

Luke NelsonJP Morgan — Analyst

Great. Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Luke. So we’ll move to the next question from Phil at KeyBanc. Go ahead, Phil.

Phil GibbsKeyBanc Capital Markets — Analyst

Thank you. Adit, you had some pretty constructive comments on 4Q volumes and spreads, but then in your release, you seemingly were pretty cautious given the second COVID wave. Can you help us kind of balance the qualitative with the quantitative?

Aditya MittalPresident and Chief Financial Officer

Yes, absolutely. So Phil, the commentary is general in nature and not related to fourth quarter. So I would think of it as questions for 2021. And clearly, the question that we all have in our minds for 2021 is what is the trajectory of this virus? So what does this mean in terms of lockdowns continuing or not. And secondly, what is the size of the stimulus, right, because what we don’t want is beginning of 2021 consumer sentiment begins to turn negative, then obviously that would impact demand levels and what we see in our end markets. So, so far, there’s nothing negative into Q4. We don’t see that impact. But the trajectory of virus or policy is not conducive to consumer sentiment. Then we should remain cautious into 2021. Clearly, one of the biggest upsides or biggest hopes that everyone is focused on for 2021 is the vaccine. And so clearly that would be a big catalyst to offset any risks on consumer sentiment. Does that help answer your question the difference between quantitative and qualitative remarks Phil?

Phil GibbsKeyBanc Capital Markets — Analyst

It does. Thank you. And then if I could have a follow-up here. In terms of the AM USA-Cliffs transaction, what makes you guys confident that the deal is going to close here in due course in the next couple of months? And what do we need to see from a regulatory perspective? Thanks.

Aditya MittalPresident and Chief Financial Officer

So we are highly confident. The deal will close in the fourth quarter. We are awaiting antitrust approval. But as we remain a very strong automotive player in the US marketplace, I do not expect or foresee any issues in terms of antitrust approval.

Phil GibbsKeyBanc Capital Markets — Analyst

Thank you.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Phil. And so we’ll move to the next question please from Grant at Bloomberg.

Grant SporreBloomberg Intelligence — Analyst

Hi, good afternoon, everybody, and thanks for taking my question. Just to sort of circle back on EBITDA. I noticed that the sort of the balancing component to get to the EBITDA number was quite negative this quarter. Can you just give us some color on why that might be, and is this a one-off or is it structural? Thanks very much.

Aditya MittalPresident and Chief Financial Officer

Sure. It’s one-off, but I’ll let Genuino to provide you with more perspectives. Genuino?

Genuino M. ChristinoVice President and Group Head of Finance

Yes, sure, Aditya. So this is typically the case when we are revising iron ore prices. Iron ore prices went up quite significantly during the quarter and also the number. So this is basically inter company in-profit eliminations. So we have twin bags. One is of course the annual prices. So that means that we have more to the company profits switching outside of our mining division, particularly in Europe. And then some more volumes also iron ore volumes shipped from our mining division to our steel division, so that’s basically the reason why you see this higher intercompany eliminations in quarter three.

Grant SporreBloomberg Intelligence — Analyst

And so just so I’m clear, so if we have a sort of a steady or perhaps a slightly falling iron ore prices we currently have, that that impact should be a lot lower.

Genuino M. ChristinoVice President and Group Head of Finance

Yes. Then you should see a reversal of that going forward.

Grant SporreBloomberg Intelligence — Analyst

Great. Thank you very much.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Grant. So we’ll move to the next question please from Rochus at Kepler.

Rochus BrauneiserKepler — Analyst

Yes. Hi, thanks for taking the question. I want this on the Electric Arc Furnace protecting Calvert. When can we expect the final decision on this? And is there any chance that you’re considered this to undertake on your own after the stroll from your US assets? And can you also talk about the planned capex associated with it?

Aditya MittalPresident and Chief Financial Officer

Sure, thank you. So in terms of the EAF project in Calvert, as you know, this is a very good project. It reduces the cost of imported slabs and also allows us to be more responsive to the customer, and also enables us to achieve the buy America provisions on a lower cost basis. So this is a great project as far as we are concerned. We’re also providing Nippon Steel the opportunity to participate. And it is at their election. But — and so that’s on the EAF project. In terms of costs and timeline, I think we’re moving quickly. We hope to break ground in the near-term and we should have positive news to report to you in February 2021 results. And at that point in time, we can provide you with more detail of final cost estimates and time plan to get the project completed.

Rochus BrauneiserKepler — Analyst

And in terms of the strategic rational, why not doing it on your own because you have now significantly reduced the footprint in the US and one way to have a better cross position in the US is to put steel capacity behind this joint venture, which is significantly bigger than the EAF shop capacity?

Aditya MittalPresident and Chief Financial Officer

Sure. As you know that in Calvert, we retain the economic benefit of all the slab supply. And so I would think of this project substituting the slab supply. So fundamentally, roughly speaking, we retain all the economic benefit of the EAF project as well.

Rochus BrauneiserKepler — Analyst

Okay, got it.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Rochus. So we’ll take the next question please from Andreas [Phonetic] at UBS.

AndreasUBS — Analyst

Thank you very much. Just one question from me, given the flat steel price rally we’ve seen in the US in recent months, would you consider ramping up or restarting any idled capacity in the US or would you leave that decision to the management of Cleaveland-Cliffs following completion of the deal? That’s the question. Thank you very much.

Aditya MittalPresident and Chief Financial Officer

So we were still operating this business and we’ll be operating this business till the end of the fourth quarter, and depending on customer outlook and demand requirements, we will take the appropriate decisions.

AndreasUBS — Analyst

That is clear. Thank you very much.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Andreas. So we’ll move to next question from Bastian at Deutsche Bank.

Bastian SynagowitzDeutsche Bank — Analyst

Hi, yes, good afternoon. I’ve got one more question on the asset optimization you’re working on. I think you already announced the closure of the Krakow plant. That’s the first part of the action plan for structure cost improvement. Could you maybe share some early color on whether there are any further initiatives you’re working on the upstream side or where the rest of the program mostly focused more on the downstream side of your operation? Thank you.

Aditya MittalPresident and Chief Financial Officer

So, yes, thank you for the question. You’re absolutely right. We announced the closure of the blast furnace and steel shopping. Krakow, Poland and that enables us to have the same market capacity, but at a lower — from a lower cost position. So it’s like the other AOP programs we’d done in the past and clearly improves our structural cost position.

In terms of going forward, I think look, the whole company has learned a lot post-COVID. We have learned new ways of operating. We have dramatically reduced our costs, as you know, we’re quite huge and proud of the fact that we could variabilize our costs into the second quarter, that variabilization has been continuing into the third quarter. And we’re expecting to continue into the fourth quarter. So those were all temporary cost savings, designed to adapt to the lower productive capacity. The focus has been to turn as much as we can of that into structural savings. Krakow is the first example on that. But clearly, there’s a lot to be done on SG&A, on employee productivity, on how we reorganize some of our assets. Other than that, I cannot provide you with more color at this point in time, but we will provide you with a more detailed briefing when we report results — the full year results in February 2021.

Bastian SynagowitzDeutsche Bank — Analyst

Thanks for the detail. I’ve got one quick follow-up if I may, actually more on a separate topic, just to shift that in. I think you seem to have a slightly different approach in terms of your green steel production strategy and also the marketing approach with some of your peers, which are aiming to fully decarbonize the supply chain as a — on one product versus I think taking the group wide CO2 savings, and then taking it to one product. What is the initial feedback, which you have from your customers at this point? And are they able to fully capture the CO2 savings this way in terms of how they are being looked at by their various stakeholders? And maybe also as part of your measures, do you also have a track of production where you basically aim for full de-carbonization of the entire supply chain, out of this 1,000 ton plan?

Aditya MittalPresident and Chief Financial Officer

Yes, sure. So let’s just start from the basis, it’s not about the overall carbon that ArcelorMittal reduces. It’s about the carbon that is reduced at the facility, right. So pick a facility, call a facility a, that facility deploys new technologies. It could be carbonless for example, which we have deployed in our Gen facility where we have these microbes eating the CO2 converting to bioethanol. So the CO2 emissions of that facility reduces, and therefore it creates equivalent carbon free steel ton because the productive capacity is maintained.

And we would certify that by a third-party and therefore, that steel would be carbon free. To achieve complete decarbonization of a complete process, I think today if you look at the science, the technology, the capex and the cost, I still think is as many as a way. And I think the focus has to be for companies and producers of steel to work on already decarbonizing based on their existing processes and having market offerings, which are equivalent carbon-free steel tons, because if you wait for the full process, I think it’s going to be a multi-year journey and what about the progress that you can make today. In terms of customer attraction, look, there’s a lot of interest. We’re working with our customer base to understand how we appropriately develop this marketplace and how it can be a win-win for everybody.

Bastian SynagowitzDeutsche Bank — Analyst

Okay. Thank you. So basically, if I understand correctly, your approach is to really to take the measures where you get just most impact on the overall portfolio.

Aditya MittalPresident and Chief Financial Officer

No, I didn’t say that. I was referring to green steel and how as we made progress and we deploy new technologies, we reduced our carbon footprint and we create equivalent carbon-free steel tons. We have globally as you know, we announced a net zero carbon target for 2050, that’s a global target. And for European facilities, we’ll be down by 30% in 2030. We have two technology routes that we are following. One is Hydrogen-DRI EAF route. We’re the first steel company to try and experiment with Hydrogen and DRI. We’re the only company in the world which has a DRI facility actually in Europe and we’re in Germany, and we’re actually injecting Hydrogen and just seeing how that interacts with the DRI.

And the making process and simultaneously, we have various smart carbon technology, which basically looks at the integrated EAF route and reduce — how it can reduce the carbon footprint of that route. And there we have deployed four technologies, there’s a slide in the appendix Carbalyst, Torero, IGAR, etc, etc. And all of them are working toward reducing the carbon footprint of existing integrated operations. So absolutely now the focus is to lead the industry to decarbonize focused on best available technology, which is cost-effective and to accelerate that as much as possible.

Bastian SynagowitzDeutsche Bank — Analyst

Okay. Thank you.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks. So we’ll move to the next question, please from Jack at Goldman Sachs.

Jack O’BrienGoldman Sachs — Analyst

Hi, good afternoon. Thanks for taking the questions. Most of mine have actually already gone. But the question I have is just on actually the regulatory backdrop and how you consider that. From a business perspective and operations perspective, if we think about sort of various tariffs and import duties, where do you see the biggest risk and what causes you the sort of biggest headaches or considerations?

Aditya MittalPresident and Chief Financial Officer

Sure. Thank you. In terms of the regulatory risk to ArcelorMittal today, I think the focus is Europe and how we create a level playing field and appropriate finance mechanisms to support this decarbonization journey that I was just addressing. So for us, that is the biggest focus in our European business. And since the European business is quite a large segment within ArcelorMittal that becomes the area of focus for the whole company. I think, we’re making good progress, because there’s a good understanding of what is required. And Europe has a good record, especially in the power electricity sector, where they really supported the power sector to decarbonize supported renewables, supported a way to finance that transition. And we’re looking at similar concepts, how we can create a level playing field. So the pollution just does not move outside of Europe by this — followed with steel production, but rather steel production has maintained in Europe and we work to decarbonize it in a cost effective manner.

Jack O’BrienGoldman Sachs — Analyst

Okay. So from your perspective, you’re getting the right sort of signals from the powers that they will sort of support you sufficiently to achieve that.

Aditya MittalPresident and Chief Financial Officer

Yes, I think it’s work in progress, but everyone appreciates the key stakeholders i.e., governments that the steel industry is important for many, many reasons, not just employment. And number two, they do recognize that if they legislate and create costs, which is very high to produce steel in Europe. Then they will not benefit the climate because then steel will be produced elsewhere. Pollution will not be reduced and the steel would just be imported into Europe. So that’s a lose situation. And on top of it — and maybe just one last comment. And then top of it, I think they would be a tremendous opportunity lost, because a headquartered in Europe is ArcelorMittal, right? The world’s leading steel company. We have tremendous research capabilities. We have over 1,600 researchers just in Europe. And we are the leaders in terms of technology for automotive and other segments. So creating an appropriate environment for us to experiment on all of these technologies and really lead the way to decarbonize is an opportunity for European industry.

Jack O’BrienGoldman Sachs — Analyst

Great. Thanks.

Aditya MittalPresident and Chief Financial Officer

Sure.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Jack. So we’ll move to the next question, please from — actually, we’re going to go back to a follow-up from Alain at Morgan Stanley.

Alain GabrielMorgan Stanley — Analyst

Yes. Thank you. Thank you for taking my question. As a follow-up to a question. Question on the iron ore business. So clearly, with the DSO expansion, you would increase your output by a net of 10 million tons of right, 15 million gross, 10 million net. How do you think would be the size of your mining business five years out. And when you need to make any major investments to maintain or grow your outputs from current levels. Thank you.

Simon C. WandkeExecutive Vice President, Chief Executive Officer, ArcelorMittal Mining

Thanks, Alain. Yes. No, you’re right. Just to get the terminology, right. So 5 million today of DSO. So that’s a sort of a [Indecipherable] types producing from Liberia. And then we switched over to a concentrate will be 100%. So then you move to 15 million tons of premium product, it’s playing in the premium price segment through that process.

Alain GabrielMorgan Stanley — Analyst

[Speech Overlap]

Simon C. WandkeExecutive Vice President, Chief Executive Officer, ArcelorMittal Mining

Can you just repeat the rest of that question, please?

Alain GabrielMorgan Stanley — Analyst

Yes. So again, if we look at 2025, how do you see the iron — the size of the iron ore business? Would it be a net increase of 10 million tons or are other parts shrinking? And would you need to make any major investments to maintain or grow the current output?

Simon C. WandkeExecutive Vice President, Chief Executive Officer, ArcelorMittal Mining

Yes, so Alain, maybe the answer is for marketable, because clearly with AM USA, you’ve got the departure of [Indecipherable] through the production, which is captured today, not marketable. But in terms of marketable, this is marketable tons clearly from Liberia, and the balance is incremental. In other assets, we have a few DFS’ looking at for potential expansions, again, along this high value added strategy, but the real effort in the next few years, which your period is we’re looking at debottlenecking current systems and very smart sort of use of capital to increase yield in certain parts of the business, for example, AMMC. So that will be very much incremental growth rather than a step change growth.

Aditya MittalPresident and Chief Financial Officer

Just to underline what Simon said, in the next five years, we don’t see significant capital to maintain production in our mines. So that should be a steady state rather we see incremental growth in AMMC and other facilities. And clearly this is a net addition of 10 million tons coming from Liberia.

Alain GabrielMorgan Stanley — Analyst

Thank you. Very clear.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Great. So we’ll move back to Alan at Jefferies for a follow-up. Go ahead, Alan.

Alan SpenceJefferies — Analyst

Thanks. Another question on the capex related to Liberia. Can you just comment on the completion of the equipment that’s been sitting there for the last five or six years, but that wasn’t completely constructed. Have you already included some buffer in that $800 million capex figure potentially to need to replace some equipment or are you happy with its condition and that’s not a concern?

Simon C. WandkeExecutive Vice President, Chief Executive Officer, ArcelorMittal Mining

Thanks, Alan. It’s good question. So everything that said, since 2014, when we had forced [Indecipherable] the contractors has been under care and maintenance. The third part of the program next year will be to go back and have a look at some of the concrete foundations. But at this point, everything that’s looked at is in good shape, particularly an ambient kit like the ship loader sitting at the port, stack reclaim is sitting at the port, some constructed but not connected. And then rest of it is really my control, those items are ready, which means as a pre-engineered solution and already, as you saw in the notes, 85% of procurement’s done, 60% of the civil done. So in fact, we have allowed a small contingency, which you’d expect just a small contingency for a project at this phase. And so relatively low risk completion for the project.

Alan SpenceJefferies — Analyst

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Perfect. So we’ll take the next question please from Ephrem of Citi. Go ahead Ephrem.

Ephrem RaviCiti — Analyst

Thank you. So the inventory is on the balance sheet at $12.3 billion was the lowest in many years. I know prices are high as steel prices at the end of the third quarter were not particularly low, so this indicates that you are keeping your volumes very low at your sites. Have you changed your view on the safety stock that you are planning to keep and is this part of a new strategy going forward? And as a corollary to that, we are also hearing lead times at — for HRC in the US and Europe at multi-year highs. So are you also sort of in this way contributing to those lead times remaining high?

Aditya MittalPresident and Chief Financial Officer

Sure. Thank you for the question. I think in terms of inventories at 12.327 that we had at the end of September. You also have to add in the AM US inventory, which is an assets held for sale. So it is low, I accept that, but perhaps not as low as it looks in terms of balance sheet presentation. In terms of efficiency and others, I think clearly there is some level of efficiency that is under way in terms of how we manage our inventories. But fundamentally, there’s nothing we’re doing to extend lead times or anything like that. I think clearly, we are trying to satisfy our customer requirements as best as we can. And so as we produced, we were satisfying these orders. So we’ll not read any more into that.

Ephrem RaviCiti — Analyst

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Great. Thanks Ephrem. We’ll take a question from an investor next, so from [Indecipherable].

Unidentified Participant

Hello, gentlemen. Thank you for taking my question. I have a general question about the capital allocation and more precisely about the way that you plan on the long-term to harmonize your target for return to shareholder. And your commitment about sustainability and the capitalization given the very big capex necessary for that, even if it’s not come in the very short-term. So, in fact, I have — I may arrive to think that shareholder return come first and the commitment about sustainability comes much later in your mind.

Aditya MittalPresident and Chief Financial Officer

Sure. Thank you for the question. So we are pivoting to a shareholder returns and as you heard, we will be announcing our full policy in February. Clearly, we have flagged this in the past that we want to be on a path to delever and then return cash to shareholders. If you look at Aperam, a sister company, we have a good record in terms of demonstrating how we are returning cash to shareholders. I think in terms of capex to achieve de-carbonization aims, I think perhaps that’s what you meant by sustainability. Clearly, we have to manage that, but we have to manage that in a competitive environment. And I think that’s why, I talked a lot of detail about how we need to level play in-field. We need the regulators to also step in and support the financing of how we decarbonize the steel industry, otherwise, you end up with a much smaller steel industry in Europe.

I would look at the capex required to sustain our operations to maintain our business within roughly the capex envelopes that we have indicated. I am not expecting those numbers to shoot up in anyway or in the next three, five, 10 years. And therefore, I do believe we have room and we will have free cash flow to return a significant part of that free cash flow to shareholders.

Unidentified Participant

Okay. Thank you very much.

Aditya MittalPresident and Chief Financial Officer

Great. Thank you.

Unidentified Participant

Sorry, if I may — it means also that your commitment for 2030 is subject to a lot of consideration?

Aditya MittalPresident and Chief Financial Officer

That is true. I think, clearly, we have flagged — yes, go ahead.

Unidentified Participant

Sorry. Which is also going from more and more shareholder selecting stock depending on their carbon footprint. So don’t you think you have — you take the risk to be on exclusion released [Phonetic] because of that?

Aditya MittalPresident and Chief Financial Officer

Sure. So in terms of our 2030 target for Europe, we have the plans in place, how to achieve our minus 30% target in our European footprint. I think those plans are well-developed. We have costed that out. We have not highlighted how much capex there is, but if you look at what the EU has indicated, they are providing financing for this capex. We have a pilot project for Carbalyst in our Gen facility, which has also received this type of financing. So we have a very good idea of how much support the EU provides. And we have a clear roadmap on how to achieve our minus 30% by 2030, which we believe that we can finance and still maintain overall goals for shareholder value creation and have sustainable capex levels. We can provide you with more details on that. At this point in time, we have not detailed the full capex amounts, but as we develop our projects and conclude financing with the appropriate authorities. We can update you regularly on that.

Unidentified Participant

Great. Thank you very much. I’m going to be very happy to get that.

Aditya MittalPresident and Chief Financial Officer

Absolutely. Thank you very much.

Daniel FaircloughGlobal Head, Investor Relations

We’ll move to next question from Myles at UBS.

Myles AllsopUBS — Analyst

All right, great. Thank you. Just a couple of things, one on Ilva, could you just give us the latest update and from your perspective, is it still EBITDA negative and what needs to happen for you to retain the interest in the business going forward? What are you looking to achieve with the agreement?

Aditya MittalPresident and Chief Financial Officer

Sure.Thank you for the question. I think we have two scenarios in front of us. The first is to stay, the second is to withdraw. In case we stay, I think that’s what your question is, what do we intend to achieve. We intend to achieve a sustainable and viable Ilva. I think then clearly the equity portion that we would retain would have value. And if it makes sense for all the stakeholders associated with the company. So that remains the focus. So if we have confidence, the company in a new framework would be viable and sustainable then we would like to stay if we have doubts on the sustainability, viability based on the new conditions. And obviously, we would be withdrawing. As the negotiations conclude, we will update you on what we finally decide.

Myles AllsopUBS — Analyst

Is it still EBITDA negative at the moment in Q3?

Aditya MittalPresident and Chief Financial Officer

So the company has made tremendous progress relative to Q2 and yes, EBITDA is much more neutral rather than negative or close to being zero in the second half relative to what we saw in the first half.

Myles AllsopUBS — Analyst

Maybe one quick follow-up question from the floor, with Liberia, what’s the capacity of the rail. I mean, obviously there’s a load of neighbors who would like to sort of share the rail. Is 15 million tons the maximum or could it go up to 20 million, 25 million tons with modest investment?

Aditya MittalPresident and Chief Financial Officer

Sure. So as we complete the project, the 15 million tons, we will be utilizing the full capacity of the rail line or the rail in Liberia recognize that as a single track, a rail line at this point in time, and at 15 million tons, it would be fully utilized.

Myles AllsopUBS — Analyst

Okay. Thank you.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Myles. So we will take a follow-up from Phil at KeyBanc.

Phil GibbsKeyBanc Capital Markets — Analyst

Thank you. Our model suggests that the third quarter saw a pretty big hit from intercompany profit eliminations much higher than normal. Was there a true-up in the quarter? And should we expect these third quarter levels to persist?

Genuino M. ChristinoVice President and Group Head of Finance

Hi, Phil. No, that is not really any true-up. It’s just, I mean, as I was explaining earlier on, it’s really a function of the higher iron ore price. As you know, the price has moved up quite a lot within the quarter. So as a result, we have more intercompany eliminations this quarter. And then going forward it is really dependent on how prices evolve to the extent that we see some declining iron ore price, then you’ll see a reversal of that. To the extent that it stays at the same level, then we are back to the normal charge that we have in segment orders, which should be much smaller.

Phil GibbsKeyBanc Capital Markets — Analyst

Thank you. And then just a follow-up for me here too, on electricity rebates or credits, we saw a few of your smaller peers report, some one time, in terms of the year, some one-time benefits from some electricity rebates they received in calendar 3Q. Are you also receiving those in a full stat in the third quarter? Are those spread out over the course of the year? Thanks.

Genuino M. ChristinoVice President and Group Head of Finance

There is nothing really significant to report in terms of rebates, nothing unusual. Are these in the US steel or…

Phil GibbsKeyBanc Capital Markets — Analyst

US steel saw some benefits in their Central European operations. And then so did commercial metals in their rebar side in Poland.

Genuino M. ChristinoVice President and Group Head of Finance

We had not seen the same, we can follow-up with you and try and explain the differences.

Phil GibbsKeyBanc Capital Markets — Analyst

Thank you.

Genuino M. ChristinoVice President and Group Head of Finance

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks. So we’ll take another follow-up from Grant at Bloomberg Intelligence.

Grant SporreBloomberg Intelligence — Analyst

Yes, thanks for taking a follow-up question. I just wanted to understand your plans for your Indian JV. Have you developed any further thoughts as to capacity and how that evolve over time. Or is it pretty much as you previously indicated? Thanks very much.

Aditya MittalPresident and Chief Financial Officer

Thank you, Grant. So just a few words on, maybe the Indian joint venture for everyone’s benefit, and then I’ll move to your specific question. So India, AMNS India has performed well. We have reported nine months EBITDA for $23 million. And as you know, the cash requirements of the business on an annualized basis is 250, nine months is about $175 million. So the company perform well. It’s I think for the full year, we’ll have a record production in spite of COVID. And in spite of the lockdown in India, it managed to export a lot of its products. So I think the whole — the acquisition, the management team did a very good job in 2020.

In terms of moving forward, we’re focused on, expanding our downstream footprint, which is basically, core world and galvanize capability, catering to automotive and higher demanding segments in the marketplace. And we’re also looking at upstream expansion. We’re looking at the possibility of taking the facility from 8 million to 14 million tons. As I mentioned earlier the business is cash generative is doing well. We believe that business will finance, this grows on its own and will not be requiring further cash injection from shareholders.

Grant SporreBloomberg Intelligence — Analyst

Thanks very much.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Grant. So we’ll take a follow-up from Seth at Exane. Go ahead Seth.

Seth RosenfeldExane — Analyst

Thank you very much. Just one follow-up on Ilva, please. Can you please confirm the scale of any lease payments, outstanding, my memory that maybe they were paused earlier this year, due to the COVID situation and negotiations as to any potential catch-up and lease payment. And then also we can confirm the break fee, where you to walk away, I’ll leave the figure that you’ve quoted versus the government and the press has deferred recently. Thank you.

Aditya MittalPresident and Chief Financial Officer

Genuino?

Genuino M. ChristinoVice President and Group Head of Finance

So the number — it’s in the range of $1.15 billion outstanding.

Aditya MittalPresident and Chief Financial Officer

Yes, I think Seth was trying to understand what is outstanding in Q4. So there has been a reduction of the lease payments into Q4 and as you know, roughly these used to be $180 million a year. And then we managed to reduce it by 50%, divided by full. And those are the lease payments that have been accruing and being paid on a quarterly basis. There was some delay due to COVID, but there has been some catch-up of that lease payment in the second half of this year. In terms of the break fee or withdrawal fee, at this point — I mean, we have indicated that it’s a EUR350 million withdrawal fee. There’s also an additional amount, which is offset by a receivable, and that’s why we talk about a EUR350 million break fee versus a different number, both numbers are correct. It’s the difference between gross and net. Thank you.

Seth RosenfeldExane — Analyst

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Perfect. So we’ll let take a further follow-up from Rochus at Kepler.

Rochus BrauneiserKepler — Analyst

Thanks for taking the follow-up. Yes, just a high level question left, concerning your view on the individual businesses and probably also including this in the end. I think when you did the sale of or announced the sale of your US business to Cliffs, you made clear that there is a bit of a change in focus, that you have a great emphasis on value creation rather than on [Indecipherable]. What should we think about how you look at your portfolio overall in terms of the strictness that appears to you and to make sure that you can create a maximum value from your business footprint?

Aditya MittalPresident and Chief Financial Officer

Sure. I think the actions that we did in terms of AM USA kind of answers all your points, right. Because through the transaction, we are still present in the NAFTA market. We are present through really high quality and lower cost assets. This is the FastCo Calvert and our Mexican business. Global reach has maintained. We are retaining the R&D in the US. We talked a lot about in this investor presentation, the new products that we have launched for the automotive sector and this transaction creates value while not standing or changing our global strategy.

So moving forward, what is our focus? Our focus is clearly, post the deleveraging to return cash to shareholders. Number two, it’s incremental growth where we — when I say incremental growth, I’m really talking about opportunities we have in Brazil as that’s a growing market, completion of the Hot Strip Mill in Mexico and opportunities like Liberia, but the focus in the other markets is really how do we continue to improve our product range. I think green steel was a very good example. And how do we deploy our capability to decarbonize. Clearly, that is the single biggest opportunity and also the single biggest challenge. But, I think we’re well positioned as a company. We have the right resources, the right capability and the right motivation to succeed on that. I don’t know if I fully answered your question or if you were looking for something else, but that just gives you a flavor.

Rochus BrauneiserKepler — Analyst

I think, it mostly answers it. Maybe let me rephrase, so when you have steel business, you’re looking at from a performance point of view and you consider strategic options. How crucial is it for you that you have an alternative to maintain the ability to service those markets through other parts of your portfolio?

Aditya MittalPresident and Chief Financial Officer

Yes. So look we’re not going to stand in the way of shareholder value creation, right. So at the end of the day, it has to create value for ArcelorMittal and value for ArcelorMittal shareholder. So that’s how I would address it.

Rochus BrauneiserKepler — Analyst

Okay. That’s very clear. Thank you very much.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

So we actually have one final question and I think it’s a follow-up from Myles at UBS.

Myles AllsopUBS — Analyst

Great. Thank you. One thing I was just a bit worried about is the lockdown and we could clearly see a deterioration in demand. If you go back to sort of March, April, how much visibility did you have? What can you say to reassure us that this lockdown was going to be different and demand is going to be more resilient, and we can continue to see margins stay elevated like they are today? Thank you.

Aditya MittalPresident and Chief Financial Officer

So the only visibility we can provide is what we see in terms of our business. So the visibility in the business is still very good. We see demand coming back in various sectors. And some sectors like in Brazil, we see a full year demand, actually higher in 2020 than 2019. And for example, the construction segment in Brazil. If you look at China, China is a parent steel consumption and 2020 is actually higher than 2019. At the end of the day, all of these are closely linked to stimulus measures as well as consumer sentiment, which is directly affected by virus trajectory. So no one has — none of us have a crystal ball, but what we see in our business is reassuring. I think the other thing that we also have to appreciate that governments have recognized that the manufacturing sector, including ArcelorMittal did a very good job in protecting its workforce, its employees from COVID, because we all have very strict health and safety practices. You have distancing and in manufacturing operations, you have a culture of PP&E to — so to add masks and things like that. It’s quite routine for the manufacturing sector.

On top of it, offices and workplaces are work from home. And so the risk of maintaining the manufacturing sector going from a supply chain or otherwise from just an infection point of view is rather limited compared to let’s say the service sector. Not that that answers the question, because clearly the biggest driver remains consumer sentiment. But as I mentioned earlier, that’s really dependent on trajectory, the vaccine and obviously the stimulus.

Myles AllsopUBS — Analyst

Thank you.

Aditya MittalPresident and Chief Financial Officer

Thank you.

Daniel FaircloughGlobal Head, Investor Relations

Thanks, Myles. So Mr. Mittal, that was our last question. So I’ll hand back to you for any closing comments or remarks.

Lakshmi N. MittalChairman and Chief Executive Officer

Thank you, Daniel. And thank you everyone for your questions and continuing interest. I wish you and your families the best of health. Stay safe, and we will speak soon. Good day.

Duration: 61 minutes

Call participants:

Daniel FaircloughGlobal Head, Investor Relations

Lakshmi N. MittalChairman and Chief Executive Officer

Aditya MittalPresident and Chief Financial Officer

Simon C. WandkeExecutive Vice President, Chief Executive Officer, ArcelorMittal Mining

Genuino M. ChristinoVice President and Group Head of Finance

Jason FaircloughBank of America — Analyst

Alain GabrielMorgan Stanley — Analyst

KrishanCitibank — Analyst

Seth RosenfeldExane — Analyst

Alan SpenceJefferies — Analyst

Carsten RiekCredit Suisse — Analyst

Luke NelsonJP Morgan — Analyst

Phil GibbsKeyBanc Capital Markets — Analyst

Grant SporreBloomberg Intelligence — Analyst

Rochus BrauneiserKepler — Analyst

AndreasUBS — Analyst

Bastian SynagowitzDeutsche Bank — Analyst

Jack O’BrienGoldman Sachs — Analyst

Ephrem RaviCiti — Analyst

Unidentified Participant

Myles AllsopUBS — Analyst

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