Usiminas (OTC:USNZY) (USIM5.SA), a leading steel producer in Brazil, has reported a mixed financial performance for the second quarter of 2024. Despite completing the ramp-up of its Blast Furnace 3 with a significant investment, leading to a 14% increase in crude steel production and improved cost efficiency, the company faced industry challenges that led to a net loss.
While net revenue increased slightly, and the adjusted EBITDA showed positive figures, the company reported a net loss and is planning price increases to mitigate the impact of high import volumes and cost pressures.
Key Takeaways
- Usiminas completed the ramp-up of Blast Furnace 3, resulting in a 14% increase in crude steel production.
- The company reported a 2% increase in net revenue and an adjusted EBITDA of BRL 247 million.
- A net loss of BRL 100 million was recorded due to industry challenges.
- The mining unit experienced a 3% increase in sales volume.
- Usiminas plans to increase prices in the second half of the year to offset cost pressures.
- The company's cash position stands at BRL 5.6 billion with a net debt of BRL 1 billion.
- Executives expressed optimism about the demand for flat steel in the second semester.
Company Outlook
- Usiminas expects to end the year with CapEx close to the lower limit of the BRL 1.7 billion to BRL 1.9 billion guidance range.
- Price increases are anticipated in the flat steel sector during the second semester.
- The mining unit is prepared for potential drops in iron ore prices with a contingency plan in place.
Bearish Highlights
- The steel industry is contending with challenges such as high import volumes and unfair competition from Chinese steel.
- Usiminas reported a net loss of BRL 100 million for the quarter.
- Mining unit sales levels were still below those of 2023 due to market conditions.
Bullish Highlights
- The ramp-up of Blast Furnace 3 has led to increased production and cost efficiency.
- Usiminas has a strong cash position and manageable leverage.
- There is confidence in the demand for flat steel and the company's ability to adapt to market conditions.
Misses
- Despite operational improvements, the company still faced a net loss in the second quarter.
- Mining unit sales have not yet recovered to the previous year's levels.
Q&A Highlights
- Executives discussed the preference for local steel in the automobile industry and the development of competitive products.
- The company is monitoring the level of steel imports and is in discussions with the Brazilian government regarding quotas.
- Usiminas is focusing on long-term industrial strength, customer proximity, and sustainability.
Usiminas has taken significant steps to improve its operational efficiency and productivity, with the ramp-up of Blast Furnace 3 being a notable example. However, the steel industry's broader challenges have affected the company's bottom line. Usiminas remains optimistic about future demand and is actively working to address market conditions and unfair competition. The company's strategic focus on long-term growth, efficiency, and sustainability, along with its strong cash position, positions it to navigate the industry's complexities.
InvestingPro Insights
Usiminas, a key player in the steel industry, has been navigating through a challenging market environment as evidenced by its mixed financial results for Q2 2024. To provide a deeper understanding of the company's financial health and stock performance, here are some insights based on real-time data from InvestingPro and selected InvestingPro Tips.
InvestingPro Data:
- The company's market capitalization stands at 1340 million USD, reflecting its size and investor valuation in the market.
- Usiminas is trading at a low Price / Book multiple of 0.32, suggesting that the stock may be undervalued relative to the company's book value.
- Despite the challenges, the company maintains a dividend yield of 3.92%, which could be attractive to income-seeking investors.
InvestingPro Tips:
- Usiminas is currently a prominent player in the Metals & Mining industry and has maintained dividend payments for 7 consecutive years, indicating a level of financial stability and commitment to shareholder returns.
- The stock's RSI suggests it is in oversold territory, which might interest investors looking for potential buying opportunities.
For investors interested in a more comprehensive analysis, there are additional InvestingPro Tips available for Usiminas. These tips delve into various aspects of the company's financials and stock performance, offering valuable insights for those considering an investment. To explore these tips further, visit the dedicated page at https://www.investing.com/pro/USNZY and remember to use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. There are 17 additional InvestingPro Tips listed, providing a wealth of information for a detailed investment decision-making process.
Full transcript - Usinas Siderurgicas de Minas Gerais (USNZY) Q2 2024:
Leonardo Karam: Good morning. Welcome to Usiminas Conference Call, where we will discuss the results of the Second Quarter of 2024. I am Leonardo Karam, Usiminas' Investor Relations General Manager of Usiminas. For those who will follow us in English free interpretation of the webcast presentation is available on the Usiminas IR website. We also have simultaneous interpretation, please choose the sound channel on the icon at the bottom of your Zoom (NASDAQ:ZM) screen. All participants are connected on listen-only mode, and questions can be asked in writing in the Zoom Q&A session. This is the icon at the bottom of your screen. Participants listening in English can also ask questions directly in this section. This conference call is being recorded and broadcasted simultaneously on the Usiminas YouTube channel. This conference is exclusively for investors and market analysts. We request that you identify yourself so that your question can be answered. We also ask that any questions from journalists be directed to Usiminas media relations at e-mail imprensa@usiminas.com. Before proceeding, we would like to clarify that any statements made during this conference call regarding the company's business prospects, as well as operational and financial projections related to its growth potential are forecast based on the management's expectation regarding Usiminas' future. These expectations are highly dependent on the performance of the steel sector, the country's economic condition and the international market situation and are, therefore, subject to change. With us today, our President, Marcelo Chara; Vice President of Finance and IR, Thiago Rodrigues; and Vice President of Sales, Miguel Homes. Initially, Marcelo will make some remarks, then Thiago will present the results. Subsequently, questions submitted in the Q&A session will be answered. I now hand it over to Marcelo. Please, Marcelo, you have the floor.
Marcelo Chara: Good morning to everyone, and welcome. It is a great pleasure who speak to you in our earnings results live call. On July 4, we completed one year of change of our management. And I would like to share with you a number of important facts that are part of our operational plan. We have concluded during this quarter the ramp up of our Blast Furnace 3, where we conducted an important investment of BRL 27 billion. Just in terms of reference, in June our Blast Furnace 3 was able to achieve the greatest production of the last 11 years. This is a significant improvement in our productive structure, our cost efficiency, and I would like to highlight that during this last quarter when we compare it to past previous periods, we were able to increase our production of 14% in crude steel and we gained efficiency and productivity because what we do today with 2 Blast Furnaces in the past was done with 3 Blast Furnaces. Today, we operate with Blast Furnace 3 that went through an overhaul plus Blast Furnace 2. This also has allowed us to attain operational results aligned to our project. This is at least at the end of the quarter. With this, we have been able to improve our fill rate -- our fuel rate, and we have increased our metallic recycling level at around 7%, 8% when compared to the past. And also, we have been able to make progress in energy efficiency. For instance, the consumption of natural gas was 70% in this period, lower to what we had before overall. We have totally refocused on the environment and safety. We have also completely transformed our management routines. We have incorporated new KPIs that allow us to strongly focus on operational excellence in all the Usiminas processes also, with the incorporation of digital tools in order to make progress quickly. Now in the market, let's remember what we mentioned during our last call, we provided you an outlook that was conservative because we talked about the stability of the sales volumes and the cost, mainly because, as we mentioned during the semester of 2024, we will be focused on the operational stability, the ramp up of Blast Furnace 3 something that we achieved at the end of the semester. Now here, we have other impacts there. We will share subsequently like the nonrecurring effects and appreciation, depreciation of the dollar and the real. We have to be prepared for steel scenario that is still challenging cost pressure of raw material that are pegged to the dollar in our industry like coke, iron or whole and semi elaborate, they have an impact with the devaluation of this -- of the real, and this particular has affected our Cubatão plant. Now international prices are pressured by the excess of offering, especially from Chinese steel. And markets in all the regions of the planet are defending themselves because of these unfair competition practices. We have to pay attention together with the Brazilian government in order to see the evolution of steel imports and especially those that can present subsidy risks. Now the new measures of rates and quota have been implemented since June. We do appreciate the sensitivity, but the fact is that what happened during the first semester, well, with this, we increased 22% of flat steel vis-à-vis when we compare it to 2023. And this strongly impacts the industry because we have seen one of the highest penetration of imported steel in Brazil, which is 21%, 1 of every 5 tonnes consumed in the country are imported, and we are concerned that part of these imports are subsidized. During the first month of the quarter for instance, there was -- we have 233 million tonnes, that is above the average of 2023. Our customers are facing strong pressure all regarding imports. The automobile industry, there has been an increase of 38% of imported cars when we compare it to the same periods of 2024 and 2023. 20,000 imported automobiles in -- during the first semester of 2020 for just something that was published by the press during the first semester of 2024 Chinese cars were imported in Brazil. There was an increase of 400% when we compare it to the same period of 2023. Now despite everything that we have mentioned regarding imported products and industrialized products and steel, we can say that the apparent consumption of flat sales during the second quarter of 2024 rows between 6% and 7%. This is higher when we compare it to the first quarter of the year. And our sales throughout all this process have followed this growth. Now for Q3 of 2024 the volumes about domestic market will see greater economic activity that we can see in different publications. There will be 5% increase in the automobile industry vis-à-vis 2023. And 1.5% in construction when we compare it to 2023. Now the international scenario shows very little opportunities in the export markets will is exception to the regional markets with high-value products, the strong pressures in the cost of raw material and the depreciation of real shows us means that we have to review our prices. Before I give the floor to Thiago, I would like to talk about our operation in Mineração Usiminas. And here, I would like to share with you that we continue our development plan in order to increase. During the next periods, our sales and operational level for the time being during Q3 of 2024, we expect a stable sales volume vis-à-vis Q2 of this year. Nonetheless, due to the volatility that we observed being over $105 per ton in the high stocks of iron ore that we are observing in the Chinese sports also present a challenging scenario for the mining industry. Thank you very much for your attention. Thiago?
Thiago Rodrigues: So let's go to my presentation regarding the results before we carry out our Q&A session. We will start with the highlights of the quarter. We have positive highlights that are worthwhile mentioning. One is an increase of 6% in steel sales in the domestic market this first quarter to the second quarter following the demand of flat steels, as Mineração and also Brazil announced. Also crude steel production increased 70% from one quarter to other. This is due to the stabilization of the blast furnace 3. This means that we will gain more productivity and we will reduce our cost of transformation. And we ended the quarter with a cash of BRL 5.6 billion. This is positive. And BRL 300 million in dividend payout. Now on our next slide here, very quickly. We will talk about the consolidated results. Now there was an increase in net revenue of 2% with the Mineração unit contribution. The adjusted EBIT upto BRL 247 million, a margin of 4% because of best results in mining, but this was offset by the steel unit by great pressure that come from the sales price and the cost because of the real devaluation. Now net income recorded BRL 100 million in loss, but with a strong effect from the exchange rate, BRL 290 negative due to our debt in dollars. Now when we see our steel unit, despite a high volume of imported steel we were able to increase by 6% in the automobile industrial sectors. And with the drop of exports, then we ended the quarter with 142,000 tons of sale. Net revenue during the period, we recorded BRL 5.728 billion. There was a drop of 1% in tons and the effects also came from the adjustments in the automobile sector that were partially offset by a better sales mix. Now the adjusted EBITDA of the quarter was BRL 70 million. This was also impacted by an increase of 1% in the ton CPV a non-recurrent effect, and we will give you more color during the next slide, where we can also see the EBITDA from the first quarter to the second quarter. And here, we can also see a drop of our net revenue per ton of BRL 82 million in the CP -- in COGS. We improved our efficiency because of the reduction of fuel, the reduction of natural gas and a reduction of fixed cost of BRL 89 million that were offset by the – by the slabs bought in the period and the devaluation of the real that strongly impacts -- that is around 60% of our production cost, which is connected to raw material back to the dollar. In addition to the BRL69 million of nonrecurring effects, and these are effects that had not been provisioned during the period and BRL51 million of nonrecurring effects. Now on our next slide. Here, we have the mining unit results where we can see a 3% increase. In sales, nonetheless, the level is below 2023. As Marcelo mentioned, due to the new rents that we are facing and we will initiate the operation by the end of the year, where we will go back to the levels of 2023. Now the net revenue was BRL777 million, 20% above the first quarter and there was an impact from the prices realized during this period, and this resulted in the increase of the net revenue and the EBITDA vis-à-vis the last quarter. And here, we have BRL156 million as a result. Now when we go to our financial indicators, it was positive during Q2, positive variation of BRL152 million of working capital with BRL381 million. As a result, the CapEx was BRL231 million. That was lower than the first quarter. But as we generally see, the second semester is a period of investment acceleration, and we will be able to end the year closer to the inferior limit of the guidance that was BRL1.7 billion to BRL1.9 billion for the year. And we have our free cash flow of BRL150 million. This is how we ended. Now here on our next slide, we can see our cash and our debt. Our cash continues sturdy with BRL6.7 million. It went to date, 6.1 -- because our debt is in dollar and our net debt was BRL1 billion with a leverage of 0.8. Now the debt profile hasn't changed for the time being, but we are observing the markets in good conditions and in a good moment, we will adopt a decision regarding 2026 maturity of our bonds. So with this, I hand it back to Leo, so we can initiate our Q&A session. Thank you very much.
A - Leonardo Karam: Thank you, Thiago. Now we will go to our Q&A session. Well, our first question, we have a number of people that want to know the same thing from Miguel. Caio Ribeiro from Bank of America (NYSE:BAC), [indiscernible], Rafael Barcellos from Bradesco, and Lucas Laghi from XP (NASDAQ:XP), all of them want to know about prices. Caio says that we have seen the average prices of the industry increasing, and so have you followed these increases? Could you give us more color regarding when the price should go up. And they also ask if these prices is, if this increase of prices during Q3 is something that has already been transferred? Or do you expect to increase something in terms of prices and also regarding the great industry network
Marcelo Chara: Well, there will be more increases of flat steel during the second semester, I think you will -- well, we're going to try to explain the price dynamic that we're practicing in the market. As you know, three fourth of our sales are connected to contracts, one-third would be the automobiles the industrial, another one-third, that is now in auto and one fourth of our sales is for the distribution sector. The auto mill contracts will not be adjusted during Q3. These are express the industrial contract, approximately 50% of them are being adjusted right now during Q3. The other 50% of these contracts will be adjusted, will be renewed as of the fourth quarter. Within these contracts that were adjusted on Q3, there were increases of around 3% or 5%. Now regarding the distribution sector or the spot market negotiated by math, Usiminas has announced we are looking a need to increase prices because of the pressure of cost. This increase hasn't been defined. It will be applied as of August, and it will offset part of the depreciation suffered of six weeks, that is around 10%, 12%. Another question would be the major industry network. I believe that I have explained a dynamic of these adjustments low. I don't know if there are any more questions or if my comments weren't properly understood. I think that you outlined everything Your questions here are very similar. Now our next question for Thiago, they want to know about Caio Ribeiro from Bank of America, Ricardo Monegaglia from Safra and Camilla Barder from Bradesco want to know how much do you expect the CPV per ton to drop during Q3, this Q2 because of the price of slabs and the gain of attritions see of the blast furnace 3, what is the average price of the dollar of the reals of the average slab consumed in the quarter? And what can we expect on Q3 considering slab in the exchange rate. And have once more details regarding this magnitude, could you give us some idea of this drop during the third quarter.
Thiago Rodrigues: Caio, Ricardo and Raphael. We try not to disclose what we see in terms of cost reduction for the next quarter because there are a number of variables that can affect this cost in the future. For instance, the exchange variation has an effect, 60% of the costs are packed to the dollar. Now, we would like to remind you from the operational point of view, from the productivity that has been made in progress from the Ipatinga plant and the stabilization of Blast Furnace 3, the expectation is of improvement. Now, the exchange rate will have an important role. The average rate was 5.21 exchange rate and before it was below 5 during Q1. So this effect during the second quarter was felt strongly. Now, the exchange rate during the past weeks has been above 5.50 and even reached levels of 5.60. And in a scenario of the average exchange rate at this level, it is difficult to offset 100% of these effects. Therefore, what I can say is this. At the current levels, we cannot state that we will be able to offset this effect. And I would like to add something here, and convey, during the first part, I mentioned that during June we were able to achieve an operational level more that was more aligned with the high blast furnace, alignment what we want to say in terms of exchange rate we have is that -- we have of excellence and in terms of production consumption everything that impacts our industrial operation we will capitalize these improvements because the improvement of fuel is capitalized. Now metallic yields, what I mentioned in terms of productive configuration with two blast furnaces, we're doing that in the past. We would have to do with three Blast Furnaces. Due to all of these points, we do have good expectations. And we are capitalizing in the general improvement of our efficiency. So our position here before the situation, and in terms of dollars per cost tons, this will allow us to transfer steel from the Ipatinga plant to our Cubatão plant. This was something that was unthinkable in the past. So the context is challenging. The situation, the exchange rate volatility is something that affects the entire industry especially industries like ours that have their cost pegged to the dollar and as Miguel already mentioned, we are managing the situation we are managing the devaluation of the local currency. Our trade in the domestic market, because we wanted to follow what happens in the market, but we are reassured that, during the second semester, we will be able to capitalize the efficiency in our industrial efficiency.
Marcelo Chara: Another question, when you said the price of the slabs or COGS, there is a moment when you negotiate the slab and after a couple of months you see the effect on the COGS. The market indicator results in this period, we saw an increase of the price in dollars as the not exchange rate, there was an increase of 20% and from the second to 3Q maybe a drop. It won't even be 5%. So this also impacts strongly the production cost.
Leonardo Karam: Our next question, Miguel. Caio Greiner from BTG Pactual says that he didn't understand the distribution number. If you can clarify?
Miguel Homes: Caio, the depreciation of the currency in the past two weeks has devalued 10%, 12%. Our expectation is to transfer to the distribution sector 50% of this impact. This is an adjustment of 5% of 7% of our prices towards distribution.
Leonardo Karam: Thank you, Miguel. And Thiago, also cost. Marcio Farid from Golden Sachs and from Safra, Ricardo Monegaglia. Marcio says, can we assume that the cost level of Q3 should already incorporate all the benefits of the Blast Furnace 3 ramp-up or we should expect more improvement? And Ricardo asks if the benefits of Q3 had a cost level that was normal, and the Q3 should be the first quarter with normal costs?
Thiago Rodrigues: Okay. I will start and Marcelo can also jump in and add something. As he just mentioned, well, we reached our stability level by the end of Q3, the cost of Q3 still contains FX of the stabilization -- yes, the second -- of the second -- at the end of the second. So there are effects of the stabilization process of the furnace that was achieved by the end of the period. So this quarter where we will see a normalized cost should be Q3. But it's important to mention that the Blast Furnace is in the situation that we expected it is where it is what we expected the continuous improvement process will take place, and we have more challenging targets for this Blast Furnace in the mid-run. So this we also expected to present better performance because it will use less fuel and other production KPIs, this is in the future.
Marcelo Chara: What I want to convey that this is a non-stop process, and I could mention that we have created a strategic plan in the short, mid and long run. Short run was the ramp-up to be able to produce in Blast Furnace 3 the greatest amount in the last 11 years and moved around an investment of BRL2.7 billion. It is a short-term measurement. As of this, there are a number of measurements that impact the number of sectors of our industrial operation efficiency, labor production, energy. Also, we midterm improvements of how we handle raw material blast furnace will allow us to improve our rate yields. There is a menu of actions that are continuous, and they will be little-by-little incorporated in our industrial operation. And yes, an important part of our -- important part is in the next quarter, but we will continue improving in the other quarters, we have a clear strategic industrial plan that has been defined for other quarters as well.
Leonardo Karam: Thank you very much. Our next question regarding the mining unit, Thiago? Daniel Sasson from Itau wants to know Minas made $15 of EBITDA per ton in mining with an average of 112, does iron ore close to $100 this concerns? Or do you expect to do something that will improve this?
Thiago da Fonseca Rodrigues: Well, number one, we see great volatility in the price of iron ore. It's close to $100, but it will go back to $110. Now within this scenario, when the price is between $100 and $110, this is not a major concern. Now, in a scenario where the price is constantly below $100, I believe that not only us, a great part of the mining companies will look at this very carefully. They will start analyzing the breakeven and the marginal cost in order to maintain their mining operations. So, at the current level, that would be $100 and $110. I believe this is no major concern, but we are paying attention to the improvement of margin in mining.
Marcelo Chara: And I would like to mention something. And here, I believe that as we talked about the effect of the exchange rate in line, the costs are in BRLs. So, this means that -- and our mining operation has a level of competitiveness that is very important due to the flexibility that we have in our operation in order to adapt to the market conditions very swiftly. So, what I can convey and I can mention is that that there is no doubt that this volatility that we face in iron ore impacts the revenue of the operations, but we are reassured of our capacity of our team at [indiscernible] that will be because they will be able to adapt themselves in a flexible way and we have outlined and defined different productive settings that will allow us to offset in costs, all the potential drops. We are prepared for important drops in prices, and we are also prepared for the worse, but we expect the best. We do have a contingency plan in order to mitigate or in order to face this price drop.
Thiago Rodrigues: Thank you, Marcelo. Our next question is about mining. [indiscernible]. He wants to know about an update regarding the scheduled shutdown of the East iron ore operation?
Marcelo Chara: We are focusing on licensing, and we're also preparing the logistics in order to enable our operation. In the East mine and I would like to say that for starters, we're not going to see this in the next quarters, but we are working on all our fronts in order to incorporate the fastest possible.
Thiago Rodrigues: Thank you, Marcelo. And still about costs. Lucas Laghi from XP Chiago [ph], he wants to know if you could talk about the difference of cost between the last month of the last quarter, that would be done vis-à-vis April and May when we think about the gradual stabilization of the furnace during the quarter?
Marcelo Chara: Lucas, we do not break this out on a monthly basis, as we already said, the Blast Furnace reached an adequate stability level at the end of the period, especially during the month of June. So the cost of June was better than the past months and better than the quarter average. So this is something that we can disclose regarding our costs.
Thiago Rodrigues: Another question regarding [indiscernible] of England. He wants to know about the difference in production cost and sales costs. He mentions that it is close to above 1,000 tons, so what do we need or greater convergence in COGS.
Marcelo Chara: This is something interesting to clarify. We changed how we communicate in order to give more clarity and to provide a more uniform information. So when we comment on the expectation of the next quarter COGS, you understand this is a COG or something that will affect the COGS, but we understand that this -- so it's easier to understand that the effect that we expect from the company. We don't talk about the production effect on a monthly basis. And yes, we talk about the COGS and COGS and CBB, it was difficult to explain because there are effects that don't come the material, but affect the COG like freight delivery, freight that depends on the mix where we -- and where we sell credit effect because of our tax benefits in Minas, there are a number of lines that affect our COGS and you don't capture them in the CPP. The CPP wasn't the best indicator in order to project the impact of the cost. Now we comment the expectations of the COGS in our company's results.
Leonardo Karam: Thank you, Thiago. Our next question about CapEx. Daniel Sasson from Itau, say that the CapEx was around BRL 500 million during Q1 and the average point of the guidance, that was BRL 1.8 million. Will it accelerate during the second semester? Or will it be lower? When do you expect to disperse the two main projects that would be coke or the coke plant two and the PCI.
Thiago Rodrigues: Without going into details regarding the disburse value, the expectation is to close to the lower limit of the guidance that would be $1.7 billion. For the time being, we see nothing different from this. So yes, there will be an acceleration of our CapEx during the next semester. And our coke plant, as we had planned, we already initiated in investments in the second battery of our coke plant and up till the moment we spent BRL 1 billion in three years and the PCI that is an investment that was part – was part of the blast furnace 3. That is an important investment that will provide competitiveness to mine. We will additionally diminish the amount of coke that we use because we will use more PCI added schedule to become operational by the end of the year or the beginning of next year.
Leonardo Karam: Thank you, Thiago. Our next question for you, Marcelo about coke plant. Marcelo Falerio [ph] from Goodman. He wants to know about the expectation regarding the overhaul of coke plant 3.
Marcelo Chara: Well, what I can anticipate here is that we have already defined how our coke plant settings will be like and it will be aligned with horizon on the mid- and long run. This is something that we have to present to our Board because of the magnitude of investment. Nonetheless, I cannot provide you details, but the good detail. The good news is that we have industrial and the productive setting or this production line of our Ipatinga plant. We have already carried out a deep analysis and study approval everything that we need incorporating. Also the improvement of fuel efficiency, together with our decarbonization commitment, we want to reduce by 50% CO2 emissions by 2030. And all of this has allowed us to outline our future interventions in our coke plants. And the expectation perhaps, during the next call, we will be able to give you more details, but we already know, and it is a very clear how to continue evolving here. Thiago, something, we got another question connected to this question from Igor. He wants to know about efficiency. How important, I know that there are a number of variables that you can control like the price of slabs, but you're investing in coke plants to reduce more and more the dependency of the price, of the input by third-party. How does this balance the COGS per tonne? I don't know if I understood your question clearly, but when you depend on external coke well, it doesn't provide you the best situation in terms of competitiveness. So the need to make progress in all other halls and in the production of additional coke is extremely important for USIMINAS competitiveness. Everything that we are doing in terms of the improvement of production costs, well, currently have a very small effect, when we see the investment in our coke plant. The coke production is still very low, and the expectation has always been well. This is a project underway. We will have a more relevant effect by the end of the three years of projects in terms of production volume of coke. Now parallelly, what we have already done during the past year and this year we continues is we've improved our capacity to manage the external coke, going at the more qualified producers, more reliable in terms of the quality of the product, handling better this coke until it reaches the plant, and we have already achieved important gains here. Now another comment today -- today, we performed the hot repair of battery number three. And some we've introduced an important concept in the production with mathematical models that allow us mainly align 100% of the emissions to the limit of particles to the environment. This is a very important point. And as we've introduced these new concepts in our industrial operation, we have been able to improve our efficiency and cost, and we've even reached the production for the limited volume that we can produce. We have changed completely the carbon emission of the coke plant. We have other raw materials in the coke plants that allow us to reduce emissions, increase productivity and to increase the resistance and the efficiency of this coke. We have pulse call injection of Blast Furnace that -- this will allow us to double our injection carbon rate in injection This is a significant competitiveness, because this reduces the coke demand that we have for the project that we already mentioned. That is a midterm project, because we will only be capitalized in three years, but is to increase the production capacity of [indiscernible] to gain efficiency, reduce consumption and to increase our capacity to be self-sufficient and the co-consumption will be blast furnace 3 that is our main line for the upcoming 20 years. Well, this is our focus on the short, mid- and long run.
Leonardo Karam: Our next question, Thiago from -- comes from Igor – Genial. He say we saw the prices realized and improving in the mining unit on Q2. And we believe that during the past quarter, we sold iron ore low-grade. Can you give us an outlook how the company sees the opportunistic movements regarding trade-off of downgrade of the mix, but with an increase of sales.
Marcelo Chara: Igor, during the last quarter, there were -- we did not see opportunistic sales of downgrade iron or yes, during the first quarter because of a market matter. And it was an opportunity that during Q2, this did not take place.
Leonardo Karam: Thiago, Mauro Lucie [ph] from Invest Brazil wants to know about the exchange hedge and our dollar debt, if there is a strategy to back this debt in dollars and if there are exports.
Thiago Rodrigues: Today we do not have derivatives in order to protect the dollar variation. We do understand that by and large and in the long run, there is a balance because of the exposure -- the active exposure to it, we have to the sales in iron ore and liability, our debt in dollar. In the steel industry, we are in an environment to dollar. And we're trying to transfer this to the market in BRLs.
Leonardo Karam: We still have a number of questions, and we're heading towards the end. Let's be brief. Rafael Barcellos from Bradesco. He wants to confirm the COGS expectation for Q3, COGS per tonne. And he says, is there a risk to see higher costs during Q3 vis-à-vis Q2?
Thiago Rodrigues: Rafael, as we stated, there's an expectation of drop due to the gain of efficiency that we have achieved in parting now external factors like the exchange rate strongly influence the production costs. So currently, it's very difficult to state something. Let's wait till the end of the quarter to see what the effect will be like.
Leonardo Karam: Miguel [indiscernible] from Santander (BME:SAN) wants to know about the demand. How do you feel the demand of flat steel at the beginning of the second semester. We are very optimistic regarding the demand. We see positive activities in all of the segments, if you see the statistics announced by Aso Brazil [ph] June presented a significant growth. When we compare it to the average of Q2, we expect to maintain this level of activity throughout Q3. And with a solid portfolio, we expect to follow the evolution of the market.
Leonardo Karam: Miguel, regarding prices for the automobile industry. Igor Guedes wants to know customers from the automobile sector prefer to buy imported steel with more generic specifications. Perhaps you won't be able to increase volume, but you will be able to maintain the prices.
Miguel Homes: I believe that this preference, this doesn't exist. I believe that the preference of the assembly lines want the level of services. So the automobile service is one of the sectors that demands more quality in terms of product and services, we closely follow-up and we work with all of the automobile industries to develop more competitive products that can follow all the decarbonization products and green economy in the country. There is no such thing as this preference, the local assembly lines prefer local steel. And yes, we are part of the leadership of the steel sector that services the Brazilian automobile sector. What concerns us is the imports of cars and that these are cars that are not produced, they do not -- there is no labor, because of this and doesn't generate salaries here.
Leonardo Karam: Now what about quotas, Rafael Barcellos and Lucas Laghi from XP, I want to know about the quotas. Do you believe that there was an advance anticipation of imports? Will there be -- will you destock during Q3?
Miguel Homes: We believe that this can postpone the increase of prices in the short run. Yuri, Rafael and Lucas, up till the day, we haven't seen any impact of the quarter. We haven't seen a high level of imports. And to the history of imports in Brazil and consumption, this is important. We follow-up together with authorities and the Brazilian government regarding the impact at this level of imports present and there are tools that can be used if we see unfair competition and we will be -- we will pay attention together with the associations and the Brazilian government to apply this mechanism. We continue monitoring. This is important for us. It's important to the market and very important for the Brazilian industry. We are still concerned with a level of imports, the inflow of imports in Brazil.
Leonardo Karam: Now Thank you, Miguel. Well, our last question is for Thiago, Marcelo. Regarding the Cubatão strategy. Edgard de Souza from Itaú say, how do you see the Cubatão operations in the long run? Are you seeing alternatives to mitigate the exchange rate effect in the cost of the slab? And in this line, there are also alternatives to mitigate the price of the slab.
Thiago Rodrigues: What I would like to convey, we have to be more competitive in any environment and analyze internally the company. So as we efficiently produce steel in Ipatinga and as we consolidate the productive level. That is efficient and a greater yield. With this, we will be able to transfer slabs from Ipatinga to Cubatão. We have challenges to improve efficiency yield productivity. So what I would say here the agenda here is focused on these two drivers to improve efficiency, productivity and competitiveness of the Cubatão plant in the product lines that we supply and try to supply with our own steel in order to reduce the level of exposure that we have. But we are strongly focused on internal management always.
Leonardo Karam: Thank you, Marcelo. And we -- this is the end of our Q&A session. Now Marcelo, I hand it back to you for your final comments.
Marcelo Chara: Well, once again, I would like to thank all of you for your attention and also convey that our project is a long-term project. Our vision is not a monthly or a quarterly view. Our view is to build strongly focused with industrial strength that will allow us to supply to the market and to our customers in a competitive fashion. And to improve the industrial sector, we want to be closer to our customers and as a main target, the markets upgraded of greater added value. We believe that Usiminas represents a differential has a potential of development in terms of service and the quality of the products, strongly focused on environment that are very -- because we're close to our communities. We have to be good neighbors to our communities to earn the trust of our community to earn the licenses, the environmental licenses in all the sites where we're present. And we'd also to acknowledge all our employees because of their efforts, their dedication, professionalism, enthusiasm that they convey in all the units in the middle of a transformation process that is being developed with trust in Usiminas. And I could not end without mentioning our support to our employees, customers and suppliers from Rio Grande do Sul that had to face very difficult situations due to the rainfall impacts in the past months and we are closely following all the recovery process. Once again, thank you to everyone and have a very good afternoon. So we thank all of you for your participation. So should you have further questions, our IR team is at your disposal.
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