Logo of jester cap with thought bubble.

Image source: The Motley Fool.

ArcelorMittal NY Registered Shs (NYSE:MT)
Q1 2020 Earnings Call
May 9, 2020, 8:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thank you very much. Good afternoon everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. This morning, we published our results for the First Quarter 2020, alongside a Q&A document and a detailed presentation with speaker notes. So, the intention of today's call is not to go through that presentation again, but to move directly to your questions. As a result, we should be able to complete this call in about 45 minutes. [Operator Instructions]

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

Lakshmi N Mittal -- Chairman and Chief Executive Officer

Thank you, Daniel. Good day and welcome, everyone. I'm joined on today's call by Aditya 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 with a few remarks. It goes without saying that the recent focus for ArcelorMittal has been on addressing the impact of the COVID-19 crisis: first and foremost, addressing its impact on the health, safety and well-being of our people; then of course, mitigating its impact on our financial and operational performance.

Our response to the pandemic has been swift and has been built on four pillars. The first is ensuring our operations continue to be safe and healthy working environments. We're following government and World Health Organization recommendations and have implemented practical changes to our facilities, which fall into three distinct but equally important areas: enhanced cleaning and hygiene, social distancing and personal protective equipment.

The second pillar is to ensure our operations play a responsible and appropriate role in supporting their communities in response to COVID-19. I'm very proud of the actions our businesses have taken in this regard. Efforts have included a combination of financial and kind donations, including the donations of ventilators, test kits, face masks and shields, and steel for the construction of temporary healthcare facilities and offering the use of our facilities to support local healthcare authorities. Our global R&D teams have also put their skills to excellent use, designing and 3D printing ventilators and face shields, the latter of which we can produce 600,000 of a month.

The third pillar is aligning production with the reduced level of demand. This has meant idling asserts across all our operating segments.

And the fourth pillar is to reduce all our costs, including the temporary reduction of fixed costs and suspending all non-essential capital expenditures. I believe you can see from our results today and our updated guidance that we have made good progress in all these areas.

I should also highlight that we entered this period from a position of significant financial strength. Our net debt is close to its lowest ever level and our liquidity position is strong. The environment in which we're currently operating is unprecedented. But ArcelorMittal has faced several crises before. And we have all the management knowledge and experience required to navigate these exceptional economic conditions.

Thank you. We're now happy to take questions.

Questions and Answers:

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks Mr. Mittal. [Operator Instructions] So, we have a queue of question and we will take the first one from Seth at Exane, please.

Seth Rosenfeld -- Exane BNP Paribas -- Analyst

Good afternoon. Thank you for taking our questions today. If I can start off with regards to cost savings, can you please give us a bit more color with regards to what efforts are made to cut fixed costs across the major regions contributing to that guidance for 25%, 30% Q-on-Q reduction in fixed costs? And obviously, the Q2 guidance seems very positive. But can you then touch on whether there's a risk of fixed costs underabsorption reemerging into Q3, assuming some of these government support measures likely fade? Thank you very much.

Aditya Mittal -- President and Chief Financial Officer

Sure, thank you. So first of all, I just want to open my remarks by thanking all of our employees for all their efforts that they have done, not only in making sure that all our employees are safe, but also in terms of navigating this crisis. I think one of the areas that you see that very clearly is what we have done in terms of fixed cost. I'd broadly characterize it into four. The first is labor. We have used the government offered economic unemployment schemes, primarily in Europe, as well as in North America, which has supported us in reducing these costs. Secondly, we have also reduced our repairs and maintenance in line with the levels of production that we're now witnessing in the second quarter. Third, we have also benefited from depreciation in local currency. Clearly, this impacts full fixed costs. But you have seen weakness in currencies in CIS as well as in Brazil. And lastly, SG&A savings. Obviously, everyone is working from home. SG&A cost is reduced. And so those four factors have variabilized, we like to call it internally, variabilized our fixed costs to the level of production that we're now incurring.

In terms of region, it's actually quite similar across the region. So, I think everyone has done a similar effort in terms of variabilizing the fixed costs, and the difference by region is not significant. The more significant difference by region is actually the level of production volumes. So, clearly, in Europe and in NAFTA, the reduction in production compared to Q1 is higher than what we see, for example, in the CIS business.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks Aditya. We'll move to the next question, please, from Alain at Oddo.

Alain William -- Oddo BHF -- Analyst

Can you hear me?

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Yeah, we can. Please go ahead.

Alain William -- Oddo BHF -- Analyst

Okay, thank you. So, yeah, my question is really on, if you could come back on Ilva EBITDA performance in Q1? And could you also discuss the new industrial plan and the implication of the expected cash outflow versus previous plan?

Aditya Mittal -- President and Chief Financial Officer

Sure. So, in terms of Ilva Q1 performance, it's actually bettered the Q4. We have not provided you with a specific breakdown. But Q4 was much more difficult for us, driven by the removal of immunity, but Q1 has had better operating performance, and that has fed through in terms of results. Going forward for rest of the year, we have been able to achieve the same actions that we have done across the rest of our business in terms of variabilizing our fixed cost base. So, we have the same impacts in Ilva into the second quarter, as they have similar unemployment schemes.

In terms of the overall agreement that we have reached with the government, we announced this after our year-end results. But fundamentally, we have a net purchase liability, which is in excess of EUR1.1 billion. And the idea of the agreement is to convert that into equity. So, new shareholders would come in and convert that purchase liability into equity. The advantage of doing this is twofold. Number one, and I think most importantly, it's stakeholder alignment. I think, for this facility to succeed in the medium to long run, we have realized that we need deeper and more engaged stakeholders. And the second advantage is it provides us to lower our fixed cost base. So, we're working together with the government on a new industrial plan, a new business plan to make sure that the company is viable. If for whatever reason, we do not arrive at such an agreement by November, then ArcelorMittal has a withdrawal right from Ilva.

Alain William -- Oddo BHF -- Analyst

Thank you.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thank you, Aditya. We'll take the next question I have from Alain at Morgan Stanley.

Alain Gabriel -- Morgan Stanley -- Analyst

Yes. Thank you for taking my question. My question is a bit of a high-level question on the impact of the crisis on the European steel industry. Do you see any lasting implications on the industry structure? And I would say, more specifically on the capacity exit, are any of these idled mills going to stay shut forever? What's your assessment there? Thank you.

Aditya Mittal -- President and Chief Financial Officer

Sure. Thank you for your question. I think like everyone would be reluctant to predict how demand will shape up. I think there's limited visibility at this point in time. So, I do believe it's premature to talk about how demand will return and what impact it would have on facilities and operating utilization rates. As far as ArcelorMittal is concerned, I would point to a few things that we're trying to highlight. The first is, we have provided guidance to you for the second quarter, primarily because we thought this was an uncertain environment and we wanted to give you a sense of how much effort we have put into reduce our fixed cost base. There are some indications that this may be the low point in terms of volume and activity level, primarily because you can see that, especially in Europe, the easing of lockdowns has begun. We see the same trend in some parts of the United States. We also have automotive restocks occurring both in Europe as well as in North America. We have seen that in China, post easing of lockdown, demand levels have increased quite dramatically, production levels have increased quite dramatically. So, one could argue that second quarter would be the low point of the cycle. But clearly, this is a very uncertain and volatile environment. So, we all need to be prudent. Your question is more, how does demand look like post that environment. And as I said earlier, it's premature to speculate. But clearly to the extent that we need to make variable cost savings or structural cost savings, ArcelorMittal would do that to adjust to the new demand levels.

Alain Gabriel -- Morgan Stanley -- Analyst

Again, do you see any implication on capacity, long-term capacity in Europe specifically?

Aditya Mittal -- President and Chief Financial Officer

Well, I cannot comment on others. But to the extent that the demand level, I guess, your hypothesis is that the demand level does not normalize to levels that we have seen in the recent past. Then clearly, we would make structural fixed cost reductions to make sure that our businesses remain competitive.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks Alain. So, we'll move now to the next question, please, from Rochus at Kepler.

Rochus Brauneiser -- Kepler Cheuvreux -- Analyst

Yes, thanks for taking the question. Can you comment to what extent do you expect during the course of 2020 an appropriate step-up of trade protection measures in the EU? I guess you've commented earlier about potential anti-dumping investigation against Turkey? Maybe you can elaborate a bit on that. And how do you see generally your competitors or the market in Europe overall currently to adapt to the lower production levels, which you're seeing in the market? That's my question.

Aditya Mittal -- President and Chief Financial Officer

Hi, thanks for the question. I don't want to comment specifically on our competitors. We never do that. I can talk a little bit more about trade. You're right, the European Commission has launched an anti-dumping litigation on Turkey. And as you know that they have to complete that study and then announce the findings. The other activity in the European Union is the review of the safeguard measures. So, the safeguard measures are a form of quota to ensure that there's a level playing field and we're not flooded with unfair imports. And that is being reviewed as to how the level of safeguard can be reduced to match the new demand environment in Europe. So, those discussions continue. And so, you could have, in Europe, a tightening of the safeguard measures as well as further anti-dumping actions on different countries.

Rochus Brauneiser -- Kepler Cheuvreux -- Analyst

Okay. Thank you.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks Rochus. So, we will take the next question, please, from Phil at KeyBanc.

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

Thanks very much. Question is just on the question that Seth asked for just a little bit more color on the fixed versus variabilizing costs. The labor component you mentioned, so you mentioned labor MRO, local depreciation. How much of that fixed versus variabilizing you think is that labor component specifically out of that -- out of the chunk and that you were able to successfully take out this quarter?

Aditya Mittal -- President and Chief Financial Officer

I would -- I feel it's a very good question, and we were trying to get a better sense of this. But fundamentally, I would say that labor is a large chunk of it, close to half of it, and the rest is R&M reduction that we have achieved due to SG&A savings as well as the benefit of local currency depreciation.

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

Thank you.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks Phil. So, we'll move to Bastian, please, at Deutsche.

Bastian Synagowitz -- Deutsche Bank -- Analyst

Good afternoon. I have got one question on ACIS business, which was pretty weak in the first quarter. Could you maybe give us a bit of a sense of how much of the contribution maybe came from the CIS operations in Ukraine and Kazakhstan and how South Africa has been performing against that? And then, I'm also maybe curious to get your view on what's currently going on in the Chinese market where production rates seem to have actually been rebounding, inventories are falling, yet the auto sector obviously is still running at a low utilization rate albeit recovering. So, how do you see steel demand there at the moment? Where's the material going? Because so far, it's not really clear to me what's been driving that rebound. Thank you.

Genuino M. Christino -- Vice President, Group Head of Finance

So Bastian, this is Genuino. I will address the first part of your question on ACIS. I think in Q1, some of the weakness that you see, two-folds. One of course, we highlighted in Q4 that we had some higher volumes coming from Ukraine which would not repeat again in quarter one. So that's one impact. And second, Temirtau was heavily impacted by the winter. So, we have seen very high levels of snow in January in particular. So, that has caused some production issues, and also as a result, we also lost some shipments there. And then, clearly, South Africa was also impacted already by the lockdowns. So, on top of what was already kind of a weak environment, we started to see already some impact of COVID-19.

Bastian Synagowitz -- Deutsche Bank -- Analyst

Just to follow up on that very briefly, is South Africa presumably losing money here on EBITDA level? And if so, maybe could you give us any sort of quantification?

Genuino M. Christino -- Vice President, Group Head of Finance

Well, as you know, South Africa is a listed company, and they don't disclose their results now in quarter one. So, I'm afraid I cannot be very specific on South Africa at this point, Bastian.

Bastian Synagowitz -- Deutsche Bank -- Analyst

Maybe you can answer the reverse and give us the numbers for the CIS business?

Genuino M. Christino -- Vice President, Group Head of Finance

But I did not understand your follow-up question, Bastian?

Bastian Synagowitz -- Deutsche Bank -- Analyst

Maybe you can give us the performance of the CIS business and how far they're maybe positive on a combined basis?

Genuino M. Christino -- Vice President, Group Head of Finance

Clearly, CIS is positive on a combined basis. I think it's fair to assume that most of the contribution that you see there is coming from CIS.

Bastian Synagowitz -- Deutsche Bank -- Analyst

Okay, thank you.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Hi, in terms of your question on auto, in China, we have seen demand levels rebound in China. And it's not just auto. Clearly, we have seen the same in terms of industrial production. For example, we have seen the coal sector also consume similar levels of power. We've also seen crude steel production and crude steel demand also move up to a much higher levels than what we saw in February and March and the month of April. Have I answered the question? Or was there something more that you wanted me to address?

Bastian Synagowitz -- Deutsche Bank -- Analyst

Yes. So, maybe you could give us your view -- I mean the reported inventory numbers seem to be coming down. I think around February, it was pretty clear that there was quite a bit of inventory build. Probably in the numbers, we're maybe not directly seeing. So, I'm wondering, are you concerned that there is any sort of larger inventory overhang in the system in China?

Aditya Mittal -- President and Chief Financial Officer

So, you're right that there was a lot of inventory in the beginning of this year, driven by COVID. But the takedown of that inventory has been quite impressive. And I don't have a crystal ball in front of me. I think these are all things which are difficult to predict. But I think that the fact that not only steel but other sectors normalizing levels of demand and production should suggest that inventory levels should normalize.

Bastian Synagowitz -- Deutsche Bank -- Analyst

Okay. Thanks Aditya.

Aditya Mittal -- President and Chief Financial Officer

Sure.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks Bastian. So, we will move to the next question, please, from Alan at Jefferies.

Alan Spence -- Jefferies International Ltd -- Analyst

Hi, thanks. The indication for the steel shipments for Q2 were very helpful. Can you give us a bit of a sense within the quarter, what you're seeing in the order book and how April versus June is trending effectively? Do you think the Q2 exit rate will be at a stronger figure than the beginning of the quarter?

Aditya Mittal -- President and Chief Financial Officer

That's a very good question. Yeah, to some degree, that is true. But I would not suggest that's true necessarily globally because also that would provide too much of guidance into the second half. What happened? So, basically, European lockdown started in the second half of March and then the US followed a bit later and then Brazil followed a bit later and then the CIS obviously does not have the same level of impact. So that is how it flowed through in terms of our business.

When I look at the shipment level of second quarter, clearly, the flat business of both Europe as well as NAFTA is more impacted. So if I look at the average of the two, shipments are down more or less at the mid-point, including long at the mid-point of our guidance, which is down 30%. But if I were to look just at flat, that's down lower. And obviously, that is amplified by the automotive shutdown. Brazil levels are similar. but then CIS levels are muted compared to that average.

And yes, there is a bit of that inflection because you see European economies entering into slowly easing the lockdowns. And so, clearly that is supporting demand. And I think the biggest driver of that, which still has to be determined, is how strong or -- yeah, how strong is the automotive restart. So, obviously, still early days. We have provided a range of guidance. And I think that that provides different scenarios. But generally, it's safe to assume that the end point is slightly stronger than the depths of the quarter.

Alan Spence -- Jefferies International Ltd -- Analyst

It's very helpful. Thanks.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Great, thanks Alan. So, we'll move to the next question, please, from Luke at J.P. Morgan.

Luke Nelson -- J.P. Morgan -- Analyst

Afternoon, and thanks for the call. My question is on working capital. Clearly, better than expected performance in Q1. Can you just give us a sense of how we should be thinking about the $1 billion as it relates to this year, just in the context of this being given -- or first articulated pre-COVID. So clearly, there will be additional upside based on low volumes. And then also maybe just any granularity you could give on the levers that can be pulled just because the inventories look like they dropped fairly significantly already in Q1 and receivables are already at a low level? Thank you.

Aditya Mittal -- President and Chief Financial Officer

Sure. Yeah, in terms of working capital, you're right, we have not updated our guidance. Our guidance at the beginning of the year is driven on -- is based basically on the efficiency of our working capital. So, that still holds true. We believe that we can be more efficient users of working capital and then therefore we expect $1 billion release.

In terms of the market effects, I think clearly, it's very early days to predict volume and price levels. And as you know, the last 90 days, i.e. the fourth quarter is the prime determinant of how working capital will shape up.

Specifically in terms of Q1, I think you're right. I think the organization did a tremendous job in ensuring that we did not -- as COVID began, we were not producing extra, and we actually had the ability to manage our inventories. And as a result, you don't see the working capital build into Q1, which is seasonal norm.

In terms of the second quarter, we're not providing quarterly guidance. But we've also reduced our purchases quite a lot. So, there's also the decrease of payroll, which one must keep in mind as well. So, working capital, the story is that we still expect Q2 efficiency to release cash in 2020, but difficult at this stage to provide you with specific guidance.

Luke Nelson -- J.P. Morgan -- Analyst

Thank you.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Great, thank you. So, we'll move to the next question, please, from Carsten at Credit Suisse.

Carsten Riek -- Credit Suisse -- Analyst

Thank you very much. My question is on the portfolio optimization program that seems to be still on track. At least you keep it and will be finalized until mid-2021. My question to that one is, is it the right environment right now to sell assets? Or how do we have to interpret the mid-2021 guidance for finishing it? Could be some of the projects pushed out to 2021? How much do we actually want to achieve in 2020 out of the portfolio optimization program? Thank you very much.

Aditya Mittal -- President and Chief Financial Officer

Sure. So, we launched the program, as you know, first in May 2020. It's a two-year plan. We've done about $600 million. We have about $1.5 billion to go. We have multiple options in this. So, it's not like we're only focused on one asset or one opportunity. And so far, the interest of buyers is still there post-COVID. And so far, we still find that the values are attractive to ArcelorMittal. And I do appreciate your point. We're not in the fire sale mode, and I don't expect to a fire sale on any of these assets. But I do believe that we can get fair value and that we can still achieve and implement this program by May 2021.

Carsten Riek -- Credit Suisse -- Analyst

Okay. Thank you.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks Carsten. So, we will move to next question, please, from Myles at UBS.

Myles Allsop -- UBS Investment Research -- Analyst

Great, thank you. I'm just wanting to understand the curtailments that you're making, obviously cutting production in the second quarter by about 30%. And what proportion are hot idled versus cold idled? How quickly will it be to kind of ramp the blast furnaces back up? And just related to that as well, should we assume that you manage your supply in line with market demand? Or -- because it looks at the moment like you're doing more than your fair share of curtailments. Thank you.

Aditya Mittal -- President and Chief Financial Officer

Yeah, so in terms of banking furnaces or idling furnaces, to be honest, it depends a little bit by region and what our technologists want to do. And so, it's not uniform on a global basis. For example, in North America, there's much more banking than in Europe as an example. Nevertheless, the ability to restart a furnace and restart production is still relatively short, even if you idle a furnace, because we're hot idling furnaces. We're not cold idling furnaces.

In terms of our response, what we have done is, we have reduced our production levels in line with demand levels. And we do not believe that we have a deterioration in our demand level, i.e. we do not believe that we should be disproportionately losing market share as a result. I think on the contrary, the fact that we have reduced our costs, adjusted to the crisis should allow us to maintain the same market presence. Perhaps there are changes because we do have -- or differences because we do have automotive exposure, quite significant amounts of automotive exposure in Europe and North America. But apart from mix issues, I would not expect any change from the rest of the industry or the countries in which we operate.

Myles Allsop -- UBS Investment Research -- Analyst

Okay, thank you. Just to be clear on the cold idling, have you done any cold idling at all so far? And how long can you hot idle before you have to cold idle?

Aditya Mittal -- President and Chief Financial Officer

Once you cold idle, you have more or less -- if we're talking the same terminology, once you cold idle, you're basically taking down the furnace. And then, if you want to bring it back, you have to reline the furnace, i.e. put the bricks back in and then heat it up and then restart, and that can be a three to nine months job, depending on what is the state of the furnace, are the bricks available, etc., etc. So hot idle is when you keep the furnace warm, and so you would have to -- obviously, there's a slow restart, but there's a restart and then you begin production again. It's not a matter of time. You can keep hot idling furnaces hot idled for a considerable amount of time. It's really what is your market outlook. If you do not want the furnace on a medium-term basis, or even longer-term basis, then that's when you move from hot to cold idling.

Myles Allsop -- UBS Investment Research -- Analyst

Okay. Thank you.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks Myles. So, we'll take the next question, please, from Grant at Bloomberg Intelligence. Are you there, Grant?

Operator

Sorry, we do not have Grant in the questionnaire list anymore. So, Grant, if you would like to ask a question, please press star-one.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

So I think we can move then to Christian at SocGen.

Christian Georges -- Societe Generale -- Analyst

Yes, thank you. I wanted to ask you about your Canadian iron ore operations. Are you getting any production interference in Canada because of the pandemic at all? And in terms of your end markets, do you foresee some reduced demand levels in the second quarter, which may have an impact on your performance? Thank you.

Simon C. Wandke -- Executive Vice President, Chief Executive Officer ArcelorMittal Mining

Christian, it's Simon speaking. So yeah, let's talk about Canada. So essentially, in Q1, the performance has been impacted by COVID right at the end of the quarter, and I'm going to just go through a couple of dates here. If you recall, the government of Quebec introduced an initial rule to reduce intensity of workforce on the ground around the 24th of March, and at that point, we had contractors on site. We had FIFOs as usual, and we are asked to stand down all those areas and reduce our workforce. And of course, we operated at a lower level for a period and then stepped back up when the government asked us to -- as with the mining industry to rekindle and get going safely from about the 15th of April on a steady basis, which we complied with. We're now running full.

And so while demand has changed within the group for a product in which we produce, and while we've lost some production, we're running full on a confident basis. We see this market strong in China. China is coming back. I think there was a few comments a little earlier. I mean, it's -- you're also looking at iron ore stocks at the ports, quite low at the moment, around 115 million tonnes, seems as though the value chain has been pulled through for the mills. Blast furnaces are running at high capacity, relatively high in the 80s, it seems. So we see a relatively easy transition to move products that may not be required in Europe in Q2 currently to move to other markets, particularly China. I think that sort of nailed it for you?

Christian Georges -- Societe Generale -- Analyst

Thank you. Yeah, absolutely. Thank you very much.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Great. Thank you. So we will move to the next question, please, from Olivia at Bank of America.

Olivia Du -- Bank of America Merrill Lynch -- Analyst

Hello?

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Hi Olivia, go ahead.

Olivia Du -- Bank of America Merrill Lynch -- Analyst

Hi, good afternoon. Thanks for taking my question. So I have a question regarding the variabilization of fixed costs. So I think for Q2, probably an important driver behind this is the state funding from the government to keep -- to partially subsidize our labor costs but going beyond first half particularly in I guess U.S. and ACIS, are you still able to get any sort of state support? And basically, how long do you think you can still revise the costs, even if COVID situation and all these lockdowns last into Q3 or Q4? Thanks.

Aditya Mittal -- President and Chief Financial Officer

Sure. Thank you. Thank you, Olivia. So, first of all, I think we're very grateful for governments who have stepped in and provided economic and employment support. I think that has been important not only for our company, but for sectors and economy in general to buffer the impact of the virus on the economy. In terms of what we have done, as you rightly pointed out, we have utilized these programs in Europe as well as in NAFTA and to a lower degree in other markets. I don't believe, we have done anything in terms of the CIS, I don't believe there is economic support for unemployment in the CIS but we still reduce our fixed costs there using R&M, SG&A as well as the fact that those currencies have also weakened. In terms of going forward, based on the discussions we have had, we see that this thing has legs, or at least has the same amount of duration as the weakness in demand. I don't expect that this economic unemployment support would be removed before demand levels normalize. So from our standpoint again, there's always limited visibility and no one can predict the future. I do not see that much of risk at these programs and before we can normalize our production levels.

Olivia Du -- Bank of America Merrill Lynch -- Analyst

Yeah, it's clear. Thanks very much.

Aditya Mittal -- President and Chief Financial Officer

Sure.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Great. Thanks, Olivia. Can we take then next question, please, from Seth at Exane.

Seth R. Rosenfeld -- Exane BNP Paribas -- Analyst

Sorry, my follow-up question was just answered. Thank you very much.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thank you Seth. Okay, so we do have some more follow-up questions. So I think we'll move -- next up is Carsten at Credit Suisse.

Carsten Riek -- Credit Suisse AG -- Analyst

Thank you very much. One follow-up question on India because the volume guidance was pretty much on your businesses, at least Europe, Americas and CIS. But we haven't really covered India yet, could you give some more detail, how you expect shipments to evolve in the joint venture in the second quarter and if possible post the second quarter? Thank you very much.

Aditya Mittal -- President and Chief Financial Officer

Yeah, Carsten, that's an excellent question. And just for the benefit of everyone, even though it's in our ER presentation, I'll just take a few minutes to update everyone on India. That's the latest acquisition. We completed it in December, and we have had more than a quarter now operating the business, but I'll talk about Q1. So, the business did about $140 million of EBITDA which is run rating at about -- sorry, $160 million of EBITDA which is run rating $540 million. And in terms of the cash requirements of the business, it's less than $250 million. So you can see this is strong EBITDA to cash conversion ratio. We also finalized our long-term financing for that with the Japanese banks held that the cash requirements are low. This includes maintenance capex, interest tax; the usual to get to what is the free cash of the business. We also made strategic progress in the business with 5 million tonne mine for less than $15 million. We have also acquired a relatively new power plant for 500 megawatts for about $60 million. So, as we look forward, we see that the cost position of our business continues to improve.

We see the cost of iron ore in India has come down, because a lot of the iron ore in India, as you know, is stranded. On top of it, we have seen the price tag for natural gas come down and so that has made our DRI facilities that much more competitive. And thirdly, we have the advantage of the fact that the facilities that we have purchased are coastal. So as you realize, the steel making is on the coast as well as our pelletizer facilities. In the second quarter, we have exported a lot of pellets. And we have also exported steels to nearby markets, Southeast Asia and others. So we have not provided a specific guidance for India, as it's not consolidated. But I think at every quarter we can update you on its performance. In terms of India as an economy, clearly it's a developing economy. There is pent-up demand, I believe post-COVID, the government will be focused on restarting infrastructure spend and restarting consumer spend and trying to get back to a more normal environment as well.

Carsten Riek -- Credit Suisse AG -- Analyst

Okay, thank you.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks, Carsten. And so we will move to another follow-up from Alan at Jefferies.

Alan Spence -- Jefferies International Ltd -- Analyst

Thanks. Just wondering over quite a positive step change in safety performance there. Is there anything within those ratios that's a function of lower activity? Or do you think you've achieved some breakthrough and perhaps implementing some best practices in that facility?

Aditya Mittal -- President and Chief Financial Officer

In terms of your question, you're referring to Q4 versus Q1 performance?

Alan Spence -- Jefferies International Ltd -- Analyst

Q1 really compared to any of the quarters from all of 2019.

Aditya Mittal -- President and Chief Financial Officer

That's a fair comment. I think what we have achieved in Q1 is higher levels of production. And clearly, we began to implement our improvement programs, which as you know, started in the first half of 2019. And then we were hit with two circumstance -- two events. The first was we had a hurricane which impacted our raw material station, raw material unloading peer. And as a result, we were producing less in the third quarter. And then there was a lot of political noise around community, which we finally launched in November. As a result of those factors, we do not have very normal operations in the second half of last year. Now entering into Q1, those issues are largely behind us. And so we have more normal operating environment and on top of it, some of the savings that we had begun to implement kicked in. So I think that's what we're seeing, but I don't want you to get carried away. It's still loss making in Q1.

Alan Spence -- Jefferies International Ltd -- Analyst

I was actually referring to the safety ratio. Is there any best practice there because that's been quite a big change in Q1?

Aditya Mittal -- President and Chief Financial Officer

Yeah, I think it's a combination of everything I have said. I think clearly, we -- when these exogenous circumstances were behind us, we could focus on managing the business on a day-to-day basis with more vigor and we see that in the safety numbers as well.

Alan Spence -- Jefferies International Ltd -- Analyst

Yeah, thank you.

Aditya Mittal -- President and Chief Financial Officer

Sure.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Okay, thanks Alan. And so we'll come back to Grant at Bloomberg Intelligence. Hopefully, you're there now, Grant.

Grant Sporre -- Bloomberg Intelligence -- Analyst

Hi, good afternoon, everyone. I hope you can hear me.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

We can thanks.

Grant Sporre -- Bloomberg Intelligence -- Analyst

Great. Thank you. Thanks for taking my question. It's just -- it's a regarding the Action 2020 program, which I'm just trying to square in my own mind, you've obviously got the variabilization of fixed costs which is very understandable in this environment. But how should I think about the targets under the more permanent let's say reduction of costs? I'm just trying to square, what's temporary and what's permanent going forward? Thanks very much.

Aditya Mittal -- President and Chief Financial Officer

Thank you. Thank you for joining us today and thank you for your question. At this point in time, all the fixed cost savings that we have outlined are temporary in nature. Clearly, it's very hard to predict the future. We all have limited visibility. To the extent that demand levels don't come back to pre-crisis levels and then we would review how to make some of these temporary fixed cost savings more permanent in nature and look for structural cost measures.

Grant Sporre -- Bloomberg Intelligence -- Analyst

Okay, thank you. Can I just sort of just clarify my own mind? And maybe I've missed something, are there sort of the targets that you previously outlined are under that program? Have you sort of formally removed those?

Aditya Mittal -- President and Chief Financial Officer

So that's our Action 2020 targets. And two-thirds of that is variable and a third is fixed cost. So I think the focus of the whole organization has been to adjust our cost base to the new operating environment in the second quarter, and we talked about how we've done that and I think the teams around the world have done a good job. In terms of the variable cost piece of Action 2020, that's more difficult to achieve when you're not operating at high utilization rates. Yes, some savings can be made, but it comes through when operating rates are higher. And so I would expect that we would achieve the variable piece more in 2021 than in 2020, or the latter half of this year depending on when operating rates normalize. The fixed cost portion, yes, we should still continue to make progress on that this year in terms of Action 2020.

Grant Sporre -- Bloomberg Intelligence -- Analyst

Got it. Thank you very much for the explanation.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks, Grant. So we'll move to a follow-up from Rochus at Kepler.

Rochus Brauneiser -- Kepler Cheuvreux -- Analyst

Yeah, thanks for taking the follow-up. I want to come back to the previous question on Chinese inventory. I guess if we all see this data in China, on steel rate and mill side where inventories ticking down from record high levels, what do you observe from your market knowledge in terms of the direction of these inventory, which are stuck at so-called unmonitored locations? Are you seeing a similar trend in terms of inventory decline and considering that total inventory has been kind of two-times higher than normal at this time of the year, what kind of risks do you see that this will end-up sooner or later in the world market when world ex-China opens up again or would you expect more production basically in China to absorb that?

Aditya Mittal -- President and Chief Financial Officer

Yeah, it's very hard for us to see through that inventory as well. I do not have any more information than what you have. I think we have seen the drawdown. We have seen that IPS picked up, we have seen coal production pick up, we have seen also automotive producers are seeing that demand for automotive is also normalizing. And perhaps Daniel has more insights. I'm just going to turn it over to Daniel.Thanks, Aditya. I think we're all watching the same data. So we obviously saw the concerning accumulation of inventory during the crisis, obviously and maybe unlike some of the other regions, production was maintained despite the drop-off in demand. So there was quite a sizable accumulation of inventory as we went through January and February. But the pace of the drawdown as you identify has been very rapid and both at the service centers, but also even more dramatically at the mills over the past seven weeks and if that rate of drawdown continues for the next four, five, six weeks then you'd be back in that sort of normal range of inventories in China.

So that's something that we're watching and we're obviously also watching the export pattern from China. And that that was impacted during the crisis when they struggled to get material to the coast, we have seen a little bit of an increase the past couple of months. But no, no big concerning increase in those exports. But that is something that we'll be very watchful of in the coming periods.

Rochus Brauneiser -- Kepler Cheuvreux -- Analyst

Okay. Thanks for that.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Great. So I think we've got one final question to come from Myles at UBS.

Myles Allsop -- UBS Investment Research -- Analyst

Great, thank you. Basically two questions that are not particularly quick to answer, I'm sure. Just on the capex side, first of all, $2.4 billion, it's pretty low. How long can you keep capex at this sort of level? Is this a one-year wonder and so we normalize that to 3.5 next year or can we keep it at this level for two, three years if we have more of depression type outlook? And then secondly, just on the new credits associate, I don't quite get why you went for a 12-month facility, are there restrictions around the $5.5 billion facility means you don't withdraw, does it protect the credit rating? What was the rationale with that new bank facility?

Aditya Mittal -- President and Chief Financial Officer

Thank you for your question. In terms of capex, there is some growth capex in the $2.4 billion number as well, i.e., we're completing the Mexican hot strip mill, we're more than halfway through that. So there is not that much capex left. We will continue with the agreed projects in Italy as well as some of the CO2 projects that we had started. In terms of how long can we maintain this, I think we can maintain this for some time. I don't want to come out with a very specific prediction of how long but we're not -- it's not that we're not maintaining or doing essential capex. We're doing that and so I do expect that as unit production levels have not normalized, we could maintain this capex assuming production that was normalized. Clearly, I would expect and imagine that the maintenance capex level, maintenance capex levels would increase.

Also, I would just add that if the economic environment remains weak, then you do have two effects on our capex line. Number one, you can negotiate better prices or costs from capex suppliers. And we do get some benefit from the devaluation that has occurred in some of the markets in which we operate. Coming back to the liquidity line, no there's no restrictions on the $5.5 billion liquidity line we had. We just thought, we would bolster our liquidity so that we further strengthen our balance sheet. We do have a commercial program, commercial paper program which saw some weakness but I think that has also normalized. So just entering into the crisis, we thought it's a good idea to enter into liquidity line.

This was signed obviously this week, but obviously the negotiations began five, six weeks ago, right. So it was at that point in time with some of the actions we can take is to strengthen the liquidity line. It's not at a significant cost whenever liquidity lines are drawn, it's just there as a backup facility. So and I don't think I mean perhaps to tell from the margin, for the rating, but it's not driven due to rating agency considerations.

Myles Allsop -- UBS Investment Research -- Analyst

Okay. So it's linked to the commercial paper more than anything else which makes sense to me. Thank you. Thank you.

Aditya Mittal -- President and Chief Financial Officer

And at that point in time, when we began the discussions, we thought it was appropriate to improve our liquidity as we enter the crisis. And maybe today, you look at it and say, OK, the situation globally is in terms of hippies and other lines are not so bad. So perhaps the requirement is not as great but I think it's very good that we have it, it ensures that we have strong liquidity through this period.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Thanks, Myles. And so there is one final question actually and it's a follow-up from Phil at KeyBanc.

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

Hey thanks for taking my follow-ups, I'm all set. Appreciate it.

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Okay, perfect. So I'll hand back to Mr. Mittal for any closing comments.

Lakshmi N Mittal -- Chairman and Chief Executive Officer

Well, thank you everyone for your continued interest in ArcelorMittal. I wish you and your family all the very best in this difficult times. Keep well, we will speak soon and stay safe.

Duration: 51 minutes

Call participants:

Daniel Fairclough -- Vice president, Corporate Finance and Head of Investor Relations

Lakshmi N Mittal -- Chairman and Chief Executive Officer

Aditya Mittal -- President and Chief Financial Officer

Genuino M. Christino -- Vice President, Group Head of Finance

Simon C. Wandke -- Executive Vice President, Chief Executive Officer ArcelorMittal Mining

Seth Rosenfeld -- Exane BNP Paribas -- Analyst

Alain William -- Oddo BHF -- Analyst

Alain Gabriel -- Morgan Stanley -- Analyst

Rochus Brauneiser -- Kepler Cheuvreux -- Analyst

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

Bastian Synagowitz -- Deutsche Bank -- Analyst

Alan Spence -- Jefferies International Ltd -- Analyst

Luke Nelson -- J.P. Morgan -- Analyst

Carsten Riek -- Credit Suisse -- Analyst

Myles Allsop -- UBS Investment Research -- Analyst

Christian Georges -- Societe Generale -- Analyst

Olivia Du -- Bank of America Merrill Lynch -- Analyst

Seth R. Rosenfeld -- Exane BNP Paribas -- Analyst

Carsten Riek -- Credit Suisse AG -- Analyst

Grant Sporre -- Bloomberg Intelligence -- Analyst

More MT analysis

All earnings call transcripts

AlphaStreet Logo