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Good day and welcome to the EVRAZ Q3 2019 Trading Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Irina Bakhturina. Please go ahead, ma'am.
Good afternoon, ladies and gentlemen. My name is Irina Bakhturina. I'm Director for Investor Relations in EVRAZ. We would like to welcome you to our management conference call, which is dedicated to production sales results that were announced this morning.I will take 1 minute of your time to introduce today's speakers. Ilya Shirokobrod, Vice President for Sales and Logistics, will start the presentation with a brief introduction that will cover market developments and the Steel segment. Then Alexander Erenburg, Head of Vanadium Division, will update you on vanadium business. After that Sergey Stepanov, Head of the Coal Division, will cover the Coal segment. And finally, Alexander Vasiliev, CFO of North America will speak about the North American segment. With this, I suggest to start the presentation. And after that, we will switch to Q&A. So passing towards Ilya.
Okay. Good afternoon, ladies and gentlemen. Let me start with the sort of recent production of the markets that I will explain our view on the Q4 market development as well as what is currently happening in Q4, and then I will try to share sort of brief outlook for 2020 that we have at the moment. And then we will switch to the sales results. And then the heads of the divisions will also present their corresponding topics.So starting with the markets. I would start with the global markets, as usual. And the global markets were in after the front and the first half of the year, the global fuel prices started to soften in Q3. And this has been on the background of the sort of overall negative sentiment in the steel markets, predominantly based on the ongoing trade tensions between U.S.A. and China as well as political turmoil in Turkey, which is a significant player in the global steel markets, as well as softening domestic demand in India. At the same time, the domestic demand in China has been really strong and the production volumes as well, which has given a support to the raw material prices. Then when you can -- when this is a price development during Q3, the base steel prices have been going down by, let me say, USD 60, USD 70, USD 80, depending on the product. And the iron ore prices were fluctuating in the range of USD 85, USD 95, and the hard coking coal prices were in the range of [ 130 -- 500 to 740 ] end of September this year. When it comes to the short -- when it comes to the fourth quarter, the prices started to stabilize. And we, again, based on the very strong Chinese domestic demand, what we could see in Q4 and partially Q3 that China started to import the semi-finished product, which we did not for a number of years already.And then looking into the fourth quarter, we see the prices being sort of flat or even a little rebalancing from the Q3 level, based again on the very healthy demand in China as well as the production, the normal winter production restrictions that they're going to introduce. And therefore, I think that the prices -- the steel prices for Q4 are going to be flat or even going to be slightly high in Q3. However, assuming no strengthening trade tensions between U.S.A. and China and other sort of turmoils.When it comes to 2020 outlook, I think that the Chinese domestic demand will continue to be strong, especially backed by the government efforts and stimulus. At the same time, when I see the Russian World Steel Association figures to their forecast for the steel consumption outside of China for the next year, they believe that the steel consumption will grow by 2.6%, which is the healthy growth -- healthy acceleration compared to the current expectation of 0.2%. And therefore, I think that the prices for next year are going to be slightly higher from the level of -- okay, hopefully, nothing happened to anybody on the call. So, therefore, for the next year, we expect the prices to be slightly higher than the level where they are now, again, based on the expectations of the healthy demand.Reaching to the domestic market, I would say that despite the really modest GDP growth this year in Russia, the steel market has been really good this year. And let me also give you a brief overview of different Steel segments in the domestic market. Starting with the infrastructure still first rebuild. And we expect that this year, the income in Russia will grow at the pace of around about 10%, which is twice higher than that the other construction section. And we believe that this is due to our continuous efforts promoting steel construction in general and construction out of steel beams in particular. Switching to rebars. Rebar market has been really good this year as well. So the consumption growth, we register will be at the level of around about 7%, 8% this year, and we expect the next year to be on the level of 5% -- around about 5%. The rails and wheels build the railway products were really good this year as well. And the rails on the back of the [ get ] maintenance and new railroad constructions on a strong program of the Russian railway, we are getting additional Russian railway water -- order this year on top of the long-term contract. And for the wheels. Wheels continue to be a very hot commodity in Russia [ these days ]. The demand is strong. They're fully utilized. The prices are very, let me put it that way, healthy. And for the next year, we're slightly debottlenecking our production and our wheel volume will grow like 5%, like the result of our debottlenecking activities. And for the rail demand, we also expect the next year to be very healthy.So that's basically a brief market overview. And then switching to the Q3 results, I would highlight that the consolidated crude steel output decreased by 3.4%, mainly due to the low production volumes at EVRAZ ZSMK as a result of the scheduled capital repairs. And same thing in the U.S.A., also the result of the scheduled maintenance, but also slower demand. The total steel product sales, however, remain flat between the quarters, and the semi-finished product sales has grown by 5.6% in Q3, predominantly as a result of higher sales to third parties instead of the company sales. Raw coking coal production fell by 9.7% quarter-to-quarter due to low production volumes as a result of the longwall move at Uskovskaya mine as well as decrease of production volumes at Razrez Raspadsky. And the raw coking coal concentrate output dropped by 4.8%, mainly due to the higher sales of growth from the Uskovskaya mine. And external sales volumes of coking coal products to remain flat. And external sales of iron ore, however small in our case, decreased by 31% as a result of the capital repairs at EVRAZ KGOK’s roasting machine #2. And the sales of final vanadium products rose by 9.8%, mainly due to increased demand in China. And that was a result of robust infrastructure sector development as well as the restocking around -- in other regions around the world. So on this note, I ask the word to Alexander Erenburg, who is the Head of our Vanadium Division, and he will talk about the vanadium business results.
Thank you, Ilya. Hello, ladies and gentlemen. Just a few words about vanadium. Vanadium is not that hot topic anymore, which in a way helps us because not that many participants are willing to participate in that industry. Therefore, as already mentioned, the Q3 sales increased by almost 10%. Of course, mostly that's due to the fact that the Chinese sector is relatively robust, namely rebar sector in China. It also incorporates, of course, the necessity to restock for the producers and the consumers of vanadium. However, the rest of the world is -- the rest of the world's demand is relatively weak. That's mainly the result of the trade war between U.S. and China affecting the -- as it first affected the current market. The decrease in prices -- the prices have been decreased in Q3 to the level of $27 to $30 per kilo of vanadium. That helps a lot in substitution of niobium in most of the products. We see the Q3 in October, November, specifically, the lowest niobium imports into China. So we see the backward movement versus what we have seen about a year or half a year ago when niobium was substituting vanadium. So the demand is relatively strong.In China, and in Asia, in rest of the world, of course, we're following the steel plants, especially in the vanadium consumer sector such as rebar and construction in U.S. and car production in the U.S. and Europe. In the midterm, we are relatively -- we feel that the vanadium demand and supply will be relatively imbalanced, again due to the fact that we'll see the backward substitution of niobium by vanadium in the products which are prone to using technological advantage using vanadium like rebar. We also see the potential decrease of supply vanadium in some -- from some -- such suppliers have strong coal catalysts in China and some of the select producers in China, which increased from the -- which entered the market when the prices for vanadium skyrocketed to the level of 140 or similar. Therefore, we see our forecast on the mid- to long term, about our sales stable. In the short term, the market is relatively volatile. And there is a destocking movement in all the regions, including Asia, Europe and Americas. So we might see the bouncing of the price to a great extent in the fourth quarter 2019.That's probably it. That's all I would say at this point about vanadium. And I pass the word to my colleague, Sergey Stepanov, Head of Coal Business Unit. Sergey?
Thank you, Alexander. So in the Coal market, as Ilya mentioned, we have some decrease in prices. And in addition to that, we have some overproduction in the third quarter, meaning like industry or production and the growing volumes, especially our growth in volumes comparing to the last year, could not be completely sold, like it was the previous maybe 2 years, but starting from the quarter #3, we see some limitation. For example, we see some limitations in China, where China already actually took all the limits for import which they had for the whole year. So they basically imported all the cost they plan to import during 2019. The -- they have done this in -- during last 10 months. And we see due to this and some other reasons, we see some decrease in sales volumes. So we decided -- we decided to have a mixed policy in terms of production, meaning that we will decrease production of coal grades, which are in surplus on the market, at least for the next, maybe 3, 6 months and as Ilya mentioned, we already -- you can already see this in our third quarter results. And the second measure which we would like to undertake is to increase production of coal grades, which supplied internally or which are in high demand, and we have 2, 3 coal grades, which could be increased, all in current market conditions. So these are 2 things which we are doing. And maybe number 3, I think, number 3, that for the next year, it looks like prices will be more or less the same -- on the same level as they are now and some surplus in production comparing to global demand, could be an issue. So we -- what we are currently doing, we are reconsidering our production and cost targets. So the major goal for the next year would be to support all operations with lower costs and better grades, and try to [ compel ] as much as possible in the current market conditions. So this is probably all from my side. And as I understand now, it's a U.S. turn and Alexander will tell us what's going on in America.
Thanks, Sergey. Hello, everyone. Overall, in the third quarter, I would say we faced more challenging market conditions. In some segments more than in others, and I'll talk a little bit more about that. And so as a result, we had lower sales and production volumes across product segments. The sales of semi-finished products dropped by almost 40%. It is -- this is purely driven by the timing of [ celebrities] by one of our customers. This is a tolling program, a relatively large one that we have, and we produce the products in relatively consistent timing patterns, but recently slightly go up and down. So nothing fundamentally is changing there.Construction Products segment is represented mainly by road and bar product. Prices for this product line are declining following some release of that 232 tariff regime in the United States with the -- what's called new NAFTA's agreement and better availability of domestic products. And so the clients were more cautious with their buying in Q3, and we expect this trend will probably continue in Q4. Rail market in North America is relatively stable. And we have been successful in the last couple of years to increase our market share with a few long-term agreements that we signed with QuEST one railroads. So the decrease in sales that you see in Q3 was driven by annual planes plant outage that Ilya mentioned before. Plate market has been quite challenging in 2019. We saw the plate prices going down from close to $1,000 a tonne in Q1. If you look at where the plates indexed to currently flow north of 700, a pretty sharp decline. We don't right now see major decrease in fundamental demand. However, service centers in this market environments have been very cautious and buying at a minimal level, so they decreased their inventory quite a bit. So we drove demand from that segment down.If we talk about tubular products, sales were relatively flat, but we shipped some of the products from inventory. And you can see that production in Canada was down roughly by 10%, and that is mainly driven by soft OCTG markets in Canada, which is driven by the fact that there is a lack of pipeline takeaway capacity right now in that region. On the other side, we're pretty busy with our large diameter pipe business right now with a number of major pipelines being built in both Canada and the United States. And so for these, our large diameter pipe mills have been running at close to full utilization in the reported period, with the exception of Portland pipe mill, which is still ramping up because we've -- where we started, that's relatively restricted. And that's all I have.
Good. Then we always switch to Q&A. We can start the Q&A session.
[Operator Instructions] We will now take our first question from Andrew Jones of Wood & Company.
In the Capital Markets Day in 2018, you gave some forecast of the coal production. You've mentioned that you're focusing on the mines about with the best grades and the lowest cost currently. Which mines potentially would you want to reduce production at? And what impact will that have on more coal production for 2020 and also for concentrate output? And potentially also, what sort of change or reduction do you think that can give you in your cash costs in the coal division.
Thank you for the question. So the total effect is not so dramatic. We are talking about the first step. The first step which we are talking about is minus 2 million tonne of raw coking coal, 2 million coal out of approximately 26, 27 million which we planned initially for 2020. So it's like 8% decrease. The major part of -- the major site at which we would like to cut this is Raspadsky open pit. So why we have chosen Raspadsky open pit? Reason #1, because transaction costs are mostly variable at the open pit, and on the mindset kind of scale economy. So it's reason #1. And the reason #2 that we have number -- we have subcontractors on the open pit, which we can reduce in volumes without kind of direct impact to us. And secondly, we have the second field on Raspadsky open pit, which now produces, the first coking coal sort of the deficit trade. So we would like to distribute depot and machines between these 2 things between kind of another field, which is still in deficit. And your cut, let's call it, pure cut with subcontractors. So the major thing which we consider is this. And we can, if demand will come back, we can quite fast come back to the previously planned volumes. But so far, we believe that at least 2 million tonne of raw coking coal, meaning approximately 1.5 to 1.6 concentrate should be out of the market due to the conditions which we see. So is that covering your question, or I need something?
Yes. And just on the cash cost. I mean what sort of cash costs the -- are you currently doing at that mine at the open pit?
Yes. The open pit initial -- currently, we are working something like $40 a tonne, which is -- and with CapEx, I think it's more. With CapEx, I think it could be close to $50. So what we are doing, we're kind of reconsidering the whole program. If we cut volumes, we also cut CapEx and the maintenance program on the open pit. We also can, with cutting volumes, try to optimize, for example, distance of transportation and we also can try to increase volumes on the mines with the same grade. So if you cut, let's say, if you cut open pit, on the open pit, basically, we believe that it decrease -- it could help to decrease cost per tonne. And at the same time, it gives you space to increase, at least, let's say, a little bit like, I don't know, 3%, 5% to increase transaction on the mines. And it improves economics of the mines as well. So we like, the open pit itself is just part of the program for cost cutting. That's what I tried to say that volume-wise, it's, let's say, 80% of what we would like to cut. But cost-wise, it's like 30% maybe because we would like to reconsider the whole program and sort of to make it more efficient.
[Operator Instructions].
Currently, we see that there are no further questions, hopefully because it's Friday. I want to know, I think we have one question.
We will now take a follow-up question from Andrew Jones of Wood & Company.
I mean if no one else is asking questions I might as well, but I will. Just on Steel. You were talking about potentially debottlenecking the rail facilities and increasing production there by about 5% next year. Could you give us an idea of how you expect your product mix to evolve in 2020 based upon the terms that you have now. There in the main Steel division, what sort of numbers are you expecting for semi-finished compared to construction steel, railway products, flat-rolled? And what's -- how do you see that product mix evolving next year?
Thank you very much for the question. I think roughly, you might note that when it comes to the Russian Steel division, we're producing around about half of our volume in semifinished and the other half in finished products. And then the next it's very stable. However, what we are trying to do, we're trying to increase the share of high value-add products. And therefore, as you can see in our portfolio, the products like beams, rails and mills are growing faster than the others. And therefore, we're slowly shifting in the direction of having a high share of the high value-add products first, and then the high share of the finished products to cut.
And just share any particular figures at the moment. And just on the railway products. I mean you have long-term contracts with Russian railways and others. Do you have an agreement for 2020 in place yet on your rail volumes? And how does that differ from 2019? And as a sort of follow-on from that, I mean based upon what we're reading about these national projects, and obviously, a lot of that is railway and infrastructure related. How much are you -- are you starting to see coming through your order book so far? Has there been much impact from that? And are you expecting that to material -- any material increases anywhere in 2020 as a result of those projects.
I think when it comes to the railway products, the growth of the Russian railway demand is actually explained by 2 things. At the same time, one of those is that they're enhancing their maintenance program for better existing ground facts because of the sort of higher cargo volumes and some of the overdue repairs that they need to do. And secondly, as they are also -- they also have their investment programs and some of them are still not clear, like this high-speed Moscow-Kazan, St. Petersburg [ and whatever ], but some of them are very well defined like [ drop-deep and bomb ] enhancements and these kind of things, and they are going through. And therefore, as I said, this year, we have like 10% higher volume than in our long-term agreement. And for the next year, we expect the volume with the Russian railway to be like 10%, 15% or maybe even 20% higher in the most of country. So therefore, basically, the demand is growing. For the wheel part of the whole thing we have to utilize, therefore, we did grow our production volume because of the first wave of debottlenecking that we did last year. And now we're doing another wave for debottlenecking and will grow our production volumes by 5% next year. So that's what I can call about the reality?
Yes. So your volumes are capped effectively about 1.45 million tonnes or so of total rail products. Is that fair to say?
The -- well, what was the region? Are you referring to the Russian region only? Or you're referring to the...
Yes, yes, yes. Just for Russian region, sorry.
I think for the Russian region, it should be slightly lower than that, but in the ballpark side.
We will now take our next question from Anna Antonova of JPMorgan.
Just a couple of questions from our side. First, on steel volumes, your third quarter saw a big decline in intersegment steel sales and you quoted that was due to lower sales of [ clasps ] to North America. Are you completely helping the sales from Russia to your North American division because of the adverse market conditions? And where do you see the trends in Q4 and into next year. Do -- shall we expect these volumes, although they are not very big, but still, would you expect them to rebounce going into next year? That's my first question.
Okay. So I'll take this one. It is -- we -- so as you know, we were challenged with 232 tariffs on slow supply from Russia to the United States. And so in response to this, we've been consistently trying to diversify supply. It is -- we reduced it to roughly 70% right now, but it is -- there are no plans to discontinue supplies at all. At the same time, there are other options. There was no tariffs like from Brazil and Mexico, and there is some domestic markets, but it's very, very, very limited. And we're still working on those, but due to quotas and general concerns that have been part of tariff, it is -- the supply is limited. So that's, it's by and large -- and as far as the next year is concerned, we'll be doing the same thing. So we're exploring the market options all the time. And it's based on the total delivered price basis we make the trade. So it is -- I can give you, take that guidance.
I think the other thing that I would add to what Alexander told you is that basically, what we are trying to do, we're trying to optimize our North American situation. At the same time, the slabs that we are not supplying to our North American assets, where easily -- very easily finding the new home for them in the other markets as well. So it's -- the whole thing is to optimize the North American situation, I think.
All right. The other question was on pricing. And apologies if you have already answered this question. I've joined a bit late on the call, but so, yes, I think you were saying that you expect prices in Q4 and next year to stabilize and then rebound. Is that -- we're talking about the general global steel benchmarks or we're talking about the situation in Russia? And if in Russia, what's basically -- could you please provide your price outlook for Q4 and going into next year, especially as we have already seen a decrease in average realized price in Q3 and Q4, I guess, should be seasonally weaker in terms of [ local ] demand, but how we -- can we expect prices to go and hear what -- at least, could you please, do you have some guidance on what the current premiums in construction products on the domestic market are currently over in the end of September or beginning of October.
Right. Okay. I think, first of all, when I said that the prices have stabilized and we're expecting them to grow in the next year. I definitely refer to the global steel indexes that we expect to behave that way. Based on the broad array of the bank research and different other indicators that we used to budget next year. When it comes to the domestic markets, yes, as you know, the domestic markets actually have certain premiums over the export markets and that there isn't the domestic market that decreased from the Russian steelmakers. And I think premiums are very different from one part to another. And for example, if you're -- if you think of the rebar, the current domestic premiums are on the rate of the level of USD 100, USD 120 basically. And for the next year, the rebar is the only construction program that we expect the premiums to slightly shrink, and the reason for that is the new players entering market and to terminate studying massively produce the rebar next year. So basically, the only segment where we see the domestic premiums shrink a little bit, and the reason for that is that supply is growing faster than demand. And for the other construction or railway products, markets, we believe that the premiums will stay the same growth.
[Operator Instructions] We now move to our next question from Anton Fedotov of Bank of America.
My question is regarding your vanadium segment. Your vanadium sales volumes went up quite significantly by about 10% on the back of the stronger demand. Would you expect the same dynamics to continue in the fourth quarter? And what's your guidance for vanadium sales for the full year?
Thank you, Anton, for your questions. And in general, I feel like we don't feel that lonely anymore. It's in the beginning. We only...
Ladies and gentlemen, please stand by as we are experiencing a momentary interruption in today's conference. [Technical Difficulty]
Hello? We will continue with the vanadium question that was asked by Anton Fedotov. And I guess, we will start with saying that the full year will be affected by...
We'll start with the fact that the vanadium market behaves more or less like our connection lines, so we've thrown it off. The third quarter was positive. The fourth quarter will be in between the second quarter and the fourth. I guess on a yearly basis, we're better than the first half, again, because the prices experienced all the -- most of the decrease and it affects positively the demand. Firstly, the demand is on one side, firstly by substitution of the ABM, another thing is by the fact that the ones who wanted to delay their consumption, they already start consuming. That's on one side. On the supply side, probably we'll see it in the fourth quarter or in 2020, I guess, the people who wanted to enjoy the high prices environment and launched the production, namely stone coal producer for high-priced catalyst producer. They will leave the market, not being able to sustain the current market price. So that being said, I believe that the second half of 2019 in terms of the sales, a little bit better than the first half. Fourth quarter will be slightly worse than the third quarter for ERS as well as the market overall. 2020, I believe, will be relatively healthy from -- in terms of demand and the volumes, probably healthier than 2019. However, that -- that's only conditional to the fact that we won't see any turbulence in the steel market. Of course, for us, the rebar market in China as well as the construction markets in the U.S. and Russia or the car markets in Europe is pushed. However, I believe that we saw most of the decrease already happening, and we expect some stabilization.
We will now take another follow-up question from Andrew Jones of Wood & Company.
I just wanted to ask like, just back on the railway topic. I remember you saying a while ago that your contracts, how they sort of -- because of the sort of monopolous -- because of the fact that there's one buyer and one major seller in, although 2 major sellers in Russia, you tend to have a sort of cost-plus, almost fixed margin type model in terms of your pricing. Could you explain how the pricing of your contracts work? I mean would we expect prices to be kind of fixed for a period of time? Or should they be falling with the indices that we see on other steel products next year?
I think the only thing that I can tell you is that the price formula is linked to the different cost factors and will fluctuate on cost factors over a certain time line.
So with cost factors. So it should be a sort of cost-plus model. So if iron ore and coal go down, your price goes down, but broadly speaking, it's sort of keeping a relatively fixed margin on that -- on railway products. Is that fair to say?
Sort of, but not immediately, with the lag.
With the lag? How does that work?
I think I'm afraid I cannot give any more precise indication.
There are no further questions?
Yes. Now we really see that there are no questions. We would like everybody -- we'd like to thank everybody for joining, and thanks for questions and have a good Friday, yes, and have a great weekend. We'll finish the call. Thanks.
This concludes today's call. Thank you for your participation. You may now disconnect.