Steel Dynamics - Q2 2023
July 20, 2023
Transcript
Operator (participant)
Good day. Welcome to the Steel Dynamics Second Quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised this call is being recorded today, July 20, 2023, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect. At this time, I would like to turn the conference over to David Lipschitz, Director, Investor Relations. Please go ahead.
David Lipschitz (Director of Investor Relations)
Thank you, Holly. Good morning, welcome to Steel Dynamics Second Quarter 2023 earnings conference call. As a reminder, today's call is being recorded and will be available on our website for replay later today. Leading today's call are Mark Millett, Chairman and Chief Executive Officer of Steel Dynamics, Theresa Wagler, Executive Vice President and Chief Financial Officer, and Barry Schneider, President and Chief Operating Officer. The other members of our senior leadership team are joining us on the call individually. Some of today's statements, which speak only as of this date, may be forward-looking and predictive, typically preceded by believe, expect, anticipate, or words of similar meaning. They are intended to be protected by the Private Securities Litigation Reform Act of 1995 should actual results turn out differently.
Such statements involve risk and uncertainties related to integrating or starting up new assets, the aluminum industry, the use of estimates and assumptions in connection with anticipated project returns, and our steel, metal recycling, and fabrication businesses, as well as to general business and economic conditions. Examples of these are described in the related press release, as well as in our annual filed SEC Form 10-K, under the heading Forward-Looking Statements and Risk Factors. Found on the Internet at www.sec.gov, and, if applicable, in any later SEC Form 10-Q. You'll also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Second Quarter 2023 Results. Now I'm pleased to turn the call over to Mark.
Mark Millett (Chairman and CEO)
Thank you, David. Good morning, everybody. Thank you for being with us on our second quarter earnings call. Once again, our teams achieved a solid financial and operational quarter. Highlights included continued safety improvement. 81% of our facilities were incident-free through the quarter. We had cash from operations of $808 million and EBITDA generation of $1.2 billion. We also received improved investment-grade credit ratings, providing further third-party confirmation of the strength of our business model. We're also making significant progress on our aluminum flat-rolled investments. There is great excitement within the prospective customer base for new and innovative supply chain solutions from a differentiated supplier. I'm incredibly proud of our teams. They are the foundation of our company, and they drive our success.
It is their culture of excellence, combined with our meaningful value-added growth, diversification, and supply chain positioning, that is resulting in our earnings strength in all market cycles. As I've often said, great financial performance is of no importance without safety for our SDI family. We are focused on providing the very best for their health, safety, and welfare. We're actively engaged in safety at all times and at every level, keeping it top of mind and an active conversation. That focus, as I said, the team safety performance, further improved in the second quarter, way ahead of industry averages. There's more to do. We will not rest until we consistently achieve our goal of zero injuries. Before I continue, Theresa, would you like to give us some financial color?
Theresa Wagler (EVP and CFO)
Thank you, Mark. Good morning, everyone. I add my sincere appreciation and congratulations to the entire team for another strong performance. Our second quarter 2023 net income was $812 million, or $4.81 per diluted share, with, as Mark mentioned, EBITDA $1.1 billion. Second quarter 2023 revenues of $5.1 billion were higher than sequential first quarter results, driven by increased realized steel selling values. Our second quarter operating income of $1.1 billion was 27% higher than first quarter results as a result of significantly expanded steel metal spread. As we discuss our business this morning, we are positive with industry fundamentals for the remainder of 2023 and beyond, and we're focused toward our continued transformational growth.
Our Steel Dynamics operations generated strong operating income of $706 million in the second quarter due to metal spread expansion and near-record shipments of 3.2 million tons. Higher realized pricing more than offset moderately higher scrap costs in the quarter. We realized increased pricing and metal spread across both our flat-rolled and our long product steel operations. As a reminder, we are the primary domestic steel supplier into the railroad rail market, as well as a producer of all other long steel products, including structural steel, special bar quality, merchant shapes, specialty shapes, and reinforcing bar, with over 4.5 million tons of annual capacity. Operating income from our metals recycling operations was $40 million, consistent with sequential first quarter results, due to increased shipments being offset by lower metal spread.
The team continues to lever our circular manufacturing model at SNES by providing high quality, lower-cost scrap, which improves furnace efficiency and reduces company-wide working capital. Our Mexico recycling operations also provide a competitive advantage for reliable supply as well as for future increased scrap aluminum collection. We are the largest North American metals recycler today, processing and using ferrous scrap and non-ferrous aluminum, copper, and other metals. Our steel fabrication operations achieved operating income of $462 million in the second quarter, lower than first quarter results, but historically strong as average pricing decreased 13% and volumes were steady. Our steel joist and deck order backlog extends into the first quarter of 2024. It has contracted from record highs experienced in 2022 as shipments have outpaced spot order activity.
However, forward backlog pricing remains very strong and price-- spot pricing remains very resilient. Based on our backlog, customer sentiment, and manufacturing momentum, we expect steel fabrication earnings to remain strong, but slightly lower than the first half of 2023 levels for the second half of the year. Infrastructure, Inflation Reduction Act, Department of Labor, decarbonization support, and manufacturing onshoring are expected to support not only fixed asset investment and steel consumption, but also steel joist and deck demand in the coming years. Our cash generation continues to be strong based on our differentiated circular business model and variable cost structure. At June 30th, our liquidity was $3.5 billion, inclusive of our recently renewed unsecured $1.2 billion revolver. I'd like to congratulate the team. They actually refinanced the revolver yesterday. Thank you to Rick and Dominic.
During the second quarter of 2023, we generated cash flow from operations of $808 million and $1.5 billion for the first half of the year. During the first half, we invested $585 million in fixed asset investments. We believe capital investments for the second half of the year will be in the range of $1 billion. The vast majority relating to our aluminum flat-rolled investments and the completion of our four flat-rolled steel coating lines by the end of 2023. In February, we increased our cash dividend 25% and repurchased $734 million, or 3.9% of our outstanding shares in 2023.
At June 30th, $606 million remained authorized for repurchase under our existing $1.5 billion program that we put in place during November 2022. Since 2017, we've increased our cash dividend 174% and repurchased $4.8 billion of our common stock, representing 39% of our outstanding shares. In recognition of our growth, strong balance sheet profile, and consistent free cash flow generation capability, last month, we received upgrades, as Mark mentioned, to our investment-grade credit designation from both Moody's and from S&P. Our capital allocation strategy prioritizes high return growth with shareholder distributions comprised of a positive base dividend that's complemented with a variable share repurchase program.
While we remain dedicated to our investment-grade credit designation, we've placed ourselves in a position of strength to have a sustainable capital foundation that supports meaningful strategic growth, strong shareholder returns, and investment-grade metrics. Our free cash flow profile has fundamentally increased over the last five years from an annual average of $580 million-$2.6 billion currently. Our aluminum growth strategy is consistent with this strategy. We will readily fund our flat-rolled aluminum investments with available cash and cash flow from operations. We also plan to continue strong and responsible shareholder distributions, as we have clearly demonstrated. We are squarely positioned for the continuation of sustainable, optimized, long-term value creation. Sustainability is also a significant part of our long-term value creation strategy. We're dedicated to our people, our communities, and our environment.
We're committed to operating our businesses with the highest integrity. We have an actionable path toward carbon neutrality that is more manageable and we believe considerably less expensive than may lay ahead for many of our industry and other peers. Our sustainability and carbon reduction strategy is an ongoing journey, and we're moving forward with the intention to make a positive difference, playing a leadership role. For those of you on the call that like to track the product differentiation among our flat-rolled shipments, for the second quarter, our hot-rolled shipments were 972,000 tons, our cold-rolled shipments were 149,000 tons, and our coated shipments were 1,150,000 tons. With that, I'll turn the call back over to Mark.
Mark Millett (Chairman and CEO)
Thank you, Theresa. Hopefully, you folks can hear us. I know it's, I guess our AV is not quite up to snuff today, so I apologize for that. Nonetheless, our steel fabrication platform turned in another strong quarter. The team continues to do an absolutely phenomenal job there. One second. Sorry, everyone. Apologies, but it appears that many folks can't hear us, hear the call. I would ask you to hang up and call back in, and we'll just pause the call for a second. Thank you.
Operator (participant)
Ladies and gentlemen, apologies. Please remain connected. David, we will dial out to you and reconnect on your line. Ladies and gentlemen, press, participants, please remain connected. We will reconnect the speaker line. David, we'll dial out to you momentarily.
Ladies and gentlemen, please remain on the line. The conference call will resume shortly. Ladies and gentlemen, please remain on the line. The conference call will begin shortly. Thank you for holding, ladies and gentlemen. We do apologize. Please remain on the line. The Steel Dynamics conference call will resume shortly.
The speaker line is now reconnected.
David Lipschitz (Director of Investor Relations)
Sorry about that, folks. We'll just continue from where we were.
Mark Millett (Chairman and CEO)
Well, good morning again. Apparently, I believe you heard everything that's been said, but it's very choppy. Obviously, we'll clarify things in the Q&A that perhaps you didn't hear. I was just kicking off, you know, our steel fabrication platform turned in another strong quarter. That team continues to do an absolutely phenomenal job. Thank you to each and every one of them. We continue to have high expectations for that business, and we believe non-residential construction markets will continue to be strong in the coming years. Non-residential starts and build rates are forecast to remain strong through the rest of this year and into 2024. Related spending has been higher in 2023 compared to last year at this time.
Continued onshoring of manufacturing businesses, coupled with infrastructure spending and fixed asset investment related to the IRA programs, should provide momentum for additional construction spending and extend the whole non-residential construction cycle. Equally important, our customers tell us demand remains solid and share our perspective. Our steel fabrication order backlog has shortened from its all-time high of over 12 months, achieved in 2022. It remains very strong from a historical perspective, extending into January of 2024 with a strong pricing profile. Current order entry pricing remains resilient. We expect second half 2023 volumes to be comparable to the first half of 2023 shipments. We also believe average pricing will remain elevated, possibly drift 10%-15% lower than average for the first half of the year.
Not only a significant contributor itself, our fabrication platform provides meaningful pull-through volume for our steel mills, particularly important in softer markets, allowing for higher through-cycle utilization rates compared to our peers. It also provides an effective natural hedge to lower steel prices. Our metals recycling platform achieved a strong second quarter despite price declines. After rising in the first quarter, scrap prices pulled back May through July, with shredded scrap prices falling almost $100 a ton. We expect scrap pricing to fluctuate modestly during the second half of the year, perhaps seasonally rising somewhat in the third quarter and moderating again in the fourth. Our metals recycling geographic footprint provides a strategic competitive advantage for our electric arc furnace steel mills and our scrap-generating customers. In particular, our Mexican volumes competitively advantage our Columbus and Sinton raw material positions.
They will also strategically support aluminum scrap procurement for our future flat-rolled aluminum investments. Our metals recycling team is partnering even more closely with our both our steel and aluminum teams to expand scrap segregation capabilities through process and technology solutions. This will preclude prime ferrous scrap supply issues in the future. It will also provide margin enhancement from the aluminum scrap streams and materially increase recycled content of our aluminum sheet products. Our steel operations achieved near record shipments of 3.2 million tons and solid financial results in the second quarter. Our steel production utilization rate, excluding Sinton, was 93%, compared to a domestic industry rate of 76%. Our higher utilization rates have been clearly demonstrated throughout all market cycles. It's manifest by our value-added, diversified product offerings, which amount to about 70% of our sales today.
Competitive advantage supply chain solutions, which is driving customer preference and mitigating price volatility, and the support of internal pull-through manufacturing volume. Our higher through-cycle utilization rate is a key differentiator and supports our strong and growing through-cycle cash generation capability and best-in-class financial metrics. Looking forward, backlogs are strong and customer order entry is good. Auto production is good, with expectations of higher output in 2023 relative to 2022 rates. Dealer inventories have improved but still remain below historical norms. Non-residential construction remains strong. Our long product steel backlogs are solid. Onshoring and infrastructure spending should provide further meaningful support in the coming years. The turndown in residential construction seems to be abating. Oil and gas activity is strong, driving improved orders for OCTG. Solar continues to grow substantially.
At Sinton, the team achieved positive EBITDA for the second quarter and produced shy of 390,000 tons, which is about 52% of full capacity, which is obviously lower than we had planned. That said, the team has done a phenomenal job to get to that EBITDA positive position. Some of that lack of utilization was being on a single electric arc furnace for a portion of the quarter. As we announced on July 1st, we experienced equipment issues with the caster shear. Repairs are well underway, and we should be restarting within the next few days. Once restarted, we fully expect to progressively ramp up month-over-month to an 80% run rate by the end of the year. The team has demonstrated the key competitive advantages of the mill.
We have full product dimensional capability that has been proven all the way out to 84-inch, down to 0.057, and up to 1-inch thick. Customers are reporting surface quality to be exceptional. Our strip mill design has allowed for thermomechanical rolling, allowing the production of higher strength grades with lower alloy content and thus lower costs. Grade 80, grade 100 have been achieved, and we've been approved on and shipped some API grades. It affirms our technical process choices, and there's no doubt that this is the next generation of electric arc furnace flat-rolled steel technology of choice. We've gained strong market acceptance and can sell everything we make and then some. Our exceptional through-cycle operating and financial performance continues to support our cash generation and growth investment strategies.
Relative to our expansion into aluminum, responses from both current and new customers across all market sectors remains incredible. We are developing the mill site to co-locate processing and consuming operations, as we have successfully done in Sinton. We have a number of customers already speaking with us about such opportunities, which would be a competitive and sustainably competitive model for all of us. To recap the project, it's a 650,000 metric ton aluminum flat roll facility, which will be located in Columbus, Mississippi, right across the highway, essentially from our steel mill there. State-of-the-art facility, serving the sustainable beverage and packaging markets, both including body and tab, the automotive arena and industrial sectors.
Specifically, we're targeting 300,000 tons of can, 200,000 tons of auto, and 150,000 tons of industrial product. The on-site melt cast slab capacity of 600,000 metric tons will be supported by two satellite recycled aluminum slab casting centers. We are purchasing, and we should be closing on land both in San Luis Potosí in central Mexico, and also in the southwest U.S., in the next two or three weeks. The mill includes cash lines for automotive coating line, downstream processing, and packaging lines. We expanded the project scope to include additional scrap processing and treatment to maximize aluminum recycled content. All of the principal equipment has been ordered. We anticipate rolling mill start up around mid 2025.
The Mexico slabs center should be January 1st, 2025, and the Southwest U.S. slab center sometime in the first quarter of 2025. Total project cost, including the recycled slab centers, should be $2.5 billion. 100% of that is gonna be funded with cash. We expect to add $650 million-$700 million of through-cycle annual EBITDA to the company through that investment, plus around $40 million-$50 million of additional earnings from the OmniSource recycling platform. From an investment premise perspective, we just see a market environment not unlike that in the steel industry when we started SDI 30 years ago. Old assets, little reinvestment, heavy legacy costs, inefficiency, and high cost operations.
A significant aluminum flat roll supply deficit is existing today in North America and is expected to grow in the coming years. We see a real business alignment whereby we can leverage our core competencies of construction, strength, our operational know-how, and our culture to truly leverage and exploit the technology. We also will be able to leverage OmniSource's recycling footprint and maximize recycled content of the product. We believe it's a very cost-effective, high return growth for us. Again, the existing and new customer interest and support is quite unbelievable. In closing, we are excited. We're impassioned by the future growth opportunities as they will continue the high returning growth momentum we've consistently demonstrated over the years. We're celebrating our 30th year in business this August. There are only better things to come.
Our teams are our foundation. I thank each of them for their passion and their dedication and their commitment. We're committed to them. I remind those listening today that safety for yourselves, your families, and each other is our highest priority. There's nothing more important. Our culture and our business model continue to positively differentiate our performance, leading to best-in-class financial metrics. As I said, I think in the last call, we're no longer a pure steel company, but an integrated metals business, providing enhanced supply chain solutions to the industry, which in turn mitigates volatility and cash flow generation through all market cycles. We're competitively positioned and continue to focus on providing superior value for our company, customers, team members and shareholders alike. We look forward to creating new opportunities for all of us today and in the years ahead.
With that said, Holly, we would love to hand the call over to you and start the Q&A session.
Operator (participant)
Thank you. If you would like to ask a question, please signal by pressing the star key followed by the digit 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you pressed star 1 earlier during today's call, please press star 1 again to ensure our equipment has captured your signal. We also ask that you please limit yourselves to 1 question to facilitate time for everyone. Any additional questions can be addressed upon reentering the queue. 1 moment while we poll for questions. Your first question is coming from Curt Woodworth at Credit Suisse.
Curt Woodworth (Director and Equity Analyst)
Yeah, thanks. Morning, Mark and Theresa.
Mark Millett (Chairman and CEO)
Good morning.
Curt Woodworth (Director and Equity Analyst)
Mark, you talked about, fab pricing. You said it would be roughly 10%-15% lower in the back half of the year versus the first half, which seems to put, realized pricing around the $4,100 per ton level. Can you, help us understand maybe the cadence of how that would shake out between 3Q and 4Q? Then you noted the backlog for fabrication is extending into 2024. You know, are you seeing, any evidence of price stabilization, at this point in terms of how the backlog is shaping up in the early part of next year?
Theresa Wagler (EVP and CFO)
Thanks, Curt. This is Theresa. Appreciate the question. When Mark said that the average pricing was expected to be down 10%-15%, that was just for clarity for everyone on the call. That was measuring the first half of 2023 to the second half of 2023. It wasn't specific to a point in time or specific to the second quarter itself. We would say that we expect the cadence to be pretty equal from that step down in the third quarter and then stepping down a bit finally into the fourth quarter. Pricing is stable.
It's been very, I think the term we keep using is resilient, that's something that we've pointed to in the past, that we think there's been a structural shift in pricing for steel fabrication, as there's really a lack of substitutability when you think about steel joist and deck. There is very good demand today, and we think increasing demand with the momentum behind manufacturing for all the different reasons that we've pointed to this morning. The backlog has good pricing in it, very strong pricing from a historical perspective. I think that we see that, you know, heading very favorably into the first quarter.
We were just talking about this morning, as you think about a lot of the public monies and those programs, those are being awarded, especially with the IRA and some of the Department of Labor dollars. Those are getting awarded sometime this fall, kind of call it late third quarter, early fourth quarter. That should really benefit 2024 and 2025, as you think about manufacturing and construction. Definitely steel fabrication will benefit from that.
Curt Woodworth (Director and Equity Analyst)
Okay, you know, in terms of the volume guidance, it seems like volumetrically, you're still expecting year-on-year declines in the 15%-20% level. You noted some project delays. Can you just comment on, you know, within the backlog or I guess, you know, projects that have been burning off, are there certain pockets of weakness you're seeing that are greater than others? Obviously, there's been a lot of talk on some of the warehouse spending dying down. Data centers and other areas seem to be really strong. Any color you can give on that would be helpful. Just as a follow-up, can you give a comment on what you think capital spending for 2024 would be? Thank you very much.
Theresa Wagler (EVP and CFO)
Thanks, Curt. As it relates to the mix of the backlog, and I would say more so even in the current order intake activity, we have seen, and I think it's positive for the economy in general. We've seen more projects coming in from whether it be education, healthcare, definitely manufacturing. We're starting to even see the electric vehicle batteries. We've seen the chips, and we've seen a lot of advent in manufacturing from onshoring, new things that we've talked about. There is a mix toward those type of projects and away from just purely retail warehouses, which we've been seeing and talking about for a while now, probably six to nine months.
As it relates to capital spending for 2024, we expect to have capital spending for the aluminum project this year is likely to be somewhere between $900 million-$950 million in total. Next year, for the aluminum project, it's likely to be about $1.2 billion. When you combine that with additional growth projects, as well as a minimal amount of maintenance capital, we're likely to have total capital spending in 2024, from what we can see today, still around that $1.5 billion for the year.
Mark Millett (Chairman and CEO)
Great. Thanks so much.
Operator (participant)
Your next question for today is coming from Cleveland Rueckert at UBS Securities.
Cleveland Rueckert (Executive Director and Equity Research Analyst of Paper and Packaging | Metals and Mining)
Great, good morning, thanks for taking my question. I said maybe just one sort of on the aluminum side. you know, I guess just looking at your budget and sort of outlook for demand there, you know, recently there's been a downturn in aluminum can demand, and, you know, that industry has been, I guess, a little bit disrupted. I'm wondering if that's at all concerning to you and if you've adapted your demand forecast at all?
Mark Millett (Chairman and CEO)
Absolutely not. We remain very bullish. Now, you know, if you go back, like a year now, perhaps the folks were projecting that, you know, demand would grow and you need four new aluminum mills. We didn't believe that then, we don't believe that now. We certainly feel there's more space than to satisfy our market share, for sure. The kind of the sort of the pullback, I would say, was more an inventory standpoint. There's a lot of inventory. People panicked a lot last year. That inventory has to flow through the system, and there's absolutely no doubt that it is doing so today.
in all honesty, when our mill comes up, I think the marketplace is going to be in a beautiful place for us to receive product.
Cleveland Rueckert (Executive Director and Equity Research Analyst of Paper and Packaging | Metals and Mining)
Very good.
Mark Millett (Chairman and CEO)
You're going to look longer term. There definitely is a social change away from PET, you know, plastic bottles. That will continue. It's not just beer, it's water, it's all fluids. When you look at the automotive arena, we believe and we've with our communications with virtually all the automotive folks, they have been restrained from developing greater volumes of aluminum through the lack of availability. We're providing that availability going forward, and I think we, just as we've done in steel, we'll gain market share quite rapidly. From a market perspective, we are very bullish.
The amount of interest we have across the aluminum space is incredible. I think I said it on our last call. You know, in steel, we've never entered a market that is underserved. Every market we've gone into, we've had to differentiate ourselves to gain market share. It's refreshing for us that people are actually coming to us. When you combine that need with our ability to change the supply chain, to provide much greater value to the customer base, I think we're confident to gain that market share quite rapidly.
Theresa Wagler (EVP and CFO)
Believe, just as a quick reminder, in the last several years, they've had domestically, the consumers of aluminum sheet actually had to import about 20% of their needs, and that had a high tariff associated with that imported cost. There's definitely room for just, you know, 650,000 tons of additional supply.
Cleveland Rueckert (Executive Director and Equity Research Analyst of Paper and Packaging | Metals and Mining)
Good. Got it, I appreciate the confidence. If I may just sneak in one follow-up question on Sinton. I think you had to replace a bearing on the caster. I'm just wondering if I didn't hear it in the prepared remarks, if that maintenance work has been done and, you know, sort of back on schedule.
Barry Schneider (President and COO)
Yeah, this is Barry. I'd just like to comment that those bearing issues we talked about at the tail end of last year, our team's mitigated most of the effects of that. We have a supply chain now that is both a more robust design and a more robust supply chain. We're really excited about the quality improvements and really the reliability of those casting segment parts. We believe our long-term plans, we kind of approached it with several different prongs, and all of them are really being successful, and it's to the point now that we can manage it very well, and we're operating full capacity, as Mark spoke. All capabilities of the machine right now are in place.
We believe long term, that's going to be not an issue going forward, that it will just continue to be, higher reliability and continuing high quality.
Cleveland Rueckert (Executive Director and Equity Research Analyst of Paper and Packaging | Metals and Mining)
Thanks, Barry. Wasn't there an unplanned outage very recently?
Barry Schneider (President and COO)
Yeah, that, we had a caster shear issue, just here at the beginning of July, not related to the bearing issue.
Cleveland Rueckert (Executive Director and Equity Research Analyst of Paper and Packaging | Metals and Mining)
Okay.
Barry Schneider (President and COO)
perhaps you mentioned with the casting machine. It's kind of a technical issue with the caster shear. Suffice to say, it's large parts that we wanted to make sure we had put in properly, and we are taking this opportunity to address a couple other issues. We anticipate that facility being up and operational in the next few days. Team's done a phenomenal job for working together and getting this scope of a project. We're super excited. Mark and I were down there for moral support, definitely not getting in the way of the guys making the repairs. Great to see this team just really owning their technology and bringing it forward.
We anticipate this problem to be behind us, and we think we've put in a really good things to mitigate any future failures that are similar to this.
Cleveland Rueckert (Executive Director and Equity Research Analyst of Paper and Packaging | Metals and Mining)
Okay. Got it. Thank you. Appreciate it.
Operator (participant)
Your next question is coming from Tristan Gresser with Exane BNP Paribas.
Tristan Gresser (Head of Steel Equity Research)
Yes. Hi, good morning. Thank you for taking my questions. The first one is maybe on the steel side. Can you tell us a little bit about the volume outlook into Q3? I noticed long volumes were down on a year-on-year basis in Q2, so should we expect some pickup there? With, you know, the Sinton outage, how should we think generally speaking for steel shipments into Q3? That's my first question. Thank you.
Theresa Wagler (EVP and CFO)
Tristan, this is Theresa. Thanks for the question. We generally, we don't give guidance as it relates to specifics on shipments. If you look historically, the third quarter is gonna be generally the strongest shipment quarter that we have in shipments for steel, simply because of seasonality. Sinton is going to be down for July. We are still running the cold mill and the value add lines, which will help supply some of the lost volume. We're likely to have lost volume of anywhere between 50,000 and 70,000 tons of total steel shipments as it relates to the shear outage in July. Other than that, we really can't give you any additional guidance. As Mark mentioned, the backlogs across the steel platform are very strong, and order activity has been very good.
Tristan Gresser (Head of Steel Equity Research)
Okay. No, that's that's helpful. Maybe a quick follow-up just on the fabrication business. You mentioned that joist and deck spot prices have stopped falling. At which level exactly are you seeing them now?
Theresa Wagler (EVP and CFO)
Tristan, we can't give specific pricing relates. The commercial teams would be after me. I think what we said about pricing for fabrication is that the pricing has been very resilient. We have strong pricing in the backlog, but we did mention that there are expectations that pricing on average compared to the first half of the year, pricing on average for the second half of the year, is likely to be down 10%-15%. We do believe pricing is stable, and it's been very resilient.
Tristan Gresser (Head of Steel Equity Research)
Okay. I appreciate the call. Thank you.
Operator (participant)
Your next question is coming from Carlos de Alba at Morgan Stanley.
Carlos de Alba (Managing Director and Senior Equity Research Analyst)
Thank you very much. Good morning. Just on pricing as well, maybe you can provide some color, even without giving us details. What we have seen in the benchmark information is the hot-dip galvanized or galvanized prices have been recently below the substrate cold-rolled coil prices, which is a little bit weird, and obviously not sustainable. Can you provide some color as to whether you are also seeing that in your realized prices for these products? What might explain this unusual situation?
Barry Schneider (President and COO)
Carlos, thanks for the question. It, the marketplace is a little frothy right now. I would tell you the recent, the most recent change here, in the CRU, downward here yesterday or the day before, in our mind, doesn't represent the market dynamics that's going on out there.
Carlos de Alba (Managing Director and Senior Equity Research Analyst)
All right. Okay. Thanks, Mark. Just on Sinton, wanted to confirm that you still expect the cost of the recent outage to be around $1 million, which is pretty insignificant. When would you expect to reach, you know, closer to 100% capacity utilization, if that is your intent? Or, or you believe, or you wanna stay around 80%, that you will reach towards the end of the year?
Barry Schneider (President and COO)
Actually, the outage, the actual specific cost, it was well under $1 million. It, as Barry said, the issue was just getting parts and just the size of the equipment involved. It wasn't necessarily, you know, a large expense to repair. The second part of that? Sorry. Again, I, as you saw, or as you heard from our comments, we're just tempering our expectations. You know, we've always had high, high, high expectations.
Mark Millett (Chairman and CEO)
We just believe once we get up and running here in the next few days, you know, we were at, when we shut down, 52%-55% or thereabouts. We're just suggesting now that, hey, month-over-month, we're gonna progressively ramp up to that 80% by the end of the year. Into next year, we'll continue to incrementally ramp up that full production through 2024.
Bill Peterson (Senior Equity Research Analyst)
Got it. In the second half of next year, fourth quarter next year is when you expect to get full capacity then?
Theresa Wagler (EVP and CFO)
Carlos, I would say that's not what Mark meant. What Mark said is that we're gonna have kind of an even pace, we expect, of ramp up the second half of this year for 2023 to get up to that 80%. We'll reach 100% of capacity very quickly in 2024.
Bill Peterson (Senior Equity Research Analyst)
All right. Got it. Thank you very much. I appreciate it.
Theresa Wagler (EVP and CFO)
You're welcome.
Operator (participant)
Your next question for today is coming from Timna Tanners at Wolfe Research.
Timna Tanners (Managing Director of Equity Research)
Hey, good morning.
Mark Millett (Chairman and CEO)
Good morning, Timna.
Timna Tanners (Managing Director of Equity Research)
Wanted to just ask a little bit more about the cadence of added supply that you've outlined on the new coating and painting lines. Like, should we start modeling contribution, you know, immediately in the third quarter, or would that be more fourth and first quarter weighted? I have a second question. Thanks.
Barry Schneider (President and COO)
Timna, this is Barry. We're anticipating bringing the new coating and the galvanizing lines, paint lines on at the end of the year. I wouldn't expect any kind of a significant contribution to shipments till going into 2024. The lines are constructing very well. There continues to be supply chain issues with certain parts of the construction, but we're resolving those and mitigating them and moving stuff. Teams are very active and manned up, so we look forward to bringing these lines on, but it'll be near the end of the year.
Timna Tanners (Managing Director of Equity Research)
Okay, helpful. Appreciate that. My only other question was just an update on your export activity and just how that's trending. I know you've been pretty active shipping to Mexico. Just wondering if there's anything new there.
Mark Millett (Chairman and CEO)
From other than a small little bit of nonferrous, we have no export activity other than Mexico.
Barry Schneider (President and COO)
Yeah, Timna, this is Barry again. We've been doing quite a bit of shipments into Mexico this year. Sinton is uniquely the capabilities of Sinton are unique for what the Mexican markets are. Being able to get some heavier gauge products and wider product down there has been a very good place for us to develop relationships. We've been down and shipping to Mexico for a long time, but significantly so in the first half of this year. We continue to do more of that, especially through our campus partners at the Sinton facility. We see that as really good business and continuing to grow forward.
Timna Tanners (Managing Director of Equity Research)
Okay, thanks again.
Mark Millett (Chairman and CEO)
Yeah, we certainly capitalized a little on the AMSA situation down there. Even as they restart, and obviously there's a lot of projections as to how quickly they restart, if they restart. We're quite confident that the customer base there around AMSA, certainly in Monclova, has recognized that single sourcing is a huge mistake. Even with an AMSA startup, we're gonna continue to secure a lot of that business and market share that we've gained.
Timna Tanners (Managing Director of Equity Research)
Got it. Thank you.
Operator (participant)
Your next question is coming from Bill Peterson at JPMorgan.
Bill Peterson (Senior Equity Research Analyst)
Yeah. Hi, good morning. Thanks for taking the questions. I wanted to ask you about the decarbonization strategy. You put some information on the biochar, biocarbon initiatives. I mean, discuss the operations by early 2024, but just to confirm, I guess, has the plant construction begun, or are there any other areas to prove out or technical readiness issues to address? That's the first question.
Theresa Wagler (EVP and CFO)
Thanks, Jim.
Bill Peterson (Senior Equity Research Analyst)
Yeah.
Theresa Wagler (EVP and CFO)
The bioreductant biocarbon facility is actually going really well. The teams have, you know, done a lot of groundwork already. The major equipment is either has been ordered or is on order, and some of it's actually going to be received fairly shortly. The team's doing a phenomenal job. I'm very proud of them in Mississippi, and the expectations are that it will start before the end of 2024. There's nothing left to prove as far as the product itself. There is a facility in Marquette, Michigan, that Midrex operates, which is the technology provider, and we've tested the product extensively, both for injection and charged carbon.
We don't have any expectations for anything other than wonderful product that we can replace eventually 100% or a very large portion thereof, of our anthracite usage going forward. Everything is going really, really well.
Bill Peterson (Senior Equity Research Analyst)
Yeah, appreciate that. I forgot to ask, what do you expect in terms of the, you know, cost on that, but, you know, compared to traditional? I guess my second question is, as we think about this, additional galvanized capacity, you know, you've mentioned kind of end of the year and then more contribution for next year. I guess, how is your view, you know, given that there's also another, a lot of other plant capacity coming to market, what's the risk of you might see in terms of lower prices longer term with the additional capacity from competitors in the space? Would that kind of-
Theresa Wagler (EVP and CFO)
Let me-
Bill Peterson (Senior Equity Research Analyst)
you know, inform you ramp plan?
Theresa Wagler (EVP and CFO)
Let me address the cost of the bio facility, and then Barry and Mark can take the galvanizing pricing question. We believe we're still kind of trying to fine point on it, but it's likely to cost somewhere between $200 million and $230 million for the entire project. Remember, it is a joint venture that we have with Midrex, and so, we have 75% ownership of the facility, and Midrex has 25% of the facility.
Mark Millett (Chairman and CEO)
Okay, thanks.
Relative to the concern of overcapacity and honestly, over the years now, perhaps I've been in the industry too long, everyone... it wasn't so long ago that there was gonna be overcapacity in the iron ore business, and iron ore was gonna go down to $35 a ton. Now, then it was the sheet issue, where I think everyone is recognizing now that with the continued shutdown of the old, inefficient, high-cost assets in the integrated business in the country, the desire for low-carbon product, that we're not gonna see a material impact to any increase in the sheet market. I think the same with coated.
People are gravitating to produce their parts with more coating. You know, I can remember cars that not so long ago, the outside skin was just galvanized. Now, you look at a car today, and almost every single piece is galvanized. Demand is increasing for sure. The world is getting lighter gauge galvanized, and so the line time of goes up, and thus the actual sort of effective throughput of a line or lines are going down today. We're not overly concerned.
Appreciate the color. Thanks.
Operator (participant)
Your next question is coming from John Tumazos at Very Independent Research.
John Tumazos (President and Metals Analyst)
Thank you. In planning Sinton, you have 1.8 million tons of customers on your campus. The buy-in to the distributor based in Houston for coating lines, as well as the customer opportunities in Mexico you were describing, more than the 3 million ton capacity. As you're ramping up, how are you allocating the volume among those customers? It appears as though there's more customers than ton output. What specifications have you been not yet gotten to melting, and casting, and rolling in terms of chemistries, gauges, widths, et cetera?
Barry Schneider (President and COO)
John, this is Barry. As far as product dimensions, we've explored everything that we believe we needed to do. We're doing light gauge to heavy stuff, full width of products. We've done many different of the metallurgical needs, from vacuum to gas products, all the way up through the range of different steels we would make. We are minded to do automotive there, but those types of trials require us to really get an idea of what our line capabilities are. We are doing those. We are doing the same with the API-type products. That requires us to have confidence in the data, so that we design the best products to go into trials.
We do have customers in both areas taking material. We're doing it in a very controlled manner to make sure that again, we are understanding the unique capabilities that Sinton has. At this point, the broad swath of products, we've done something for almost every single thing we hope to sell, and it's more about getting more data, getting more characteristics from how we produce those things. At the same time, establishing those internal, you know, how we process things is very important. Just this week, the ISO certification audits are going on, so it's very important that we do this as our customers expect. Right now, good progress. We're excited by it, and we will look to optimize each of our units.
We've always had a very diverse order book, so that we have many small markets that we can participate in. We're focused on making sure that we're feeding all the different buckets, keeping all of our lines operational as we ramp up and bring these new coating lines online. It's a very controlled structure, and we're trying to be very respective to the customer base that's very anxious to receive these products.
Mark Millett (Chairman and CEO)
Yeah, John, the. I guess we remain. Is something happening here? Hopefully, you can hear us still. But we remain incredibly excited by what we've seen in Sinton. As I said earlier, we can sell everything we can make and a whole bunch more. We're really excited about the additional galv line and pre-paint line down there, that will allow us to, as we've done at Columbus and in Butler, diversify the product mix and bring even more value add to it. The energy products, you know, the ability to thermomechanical roll, produce those higher strength grades, the high tough grades at a lower cost, is working incredibly well, and that's going to be a great market for us down there.
Those products are value-add. It may be hot band, but you accrue a good premium for those products. We're also seeing in the plate arena a great potential down there. You know, one of the on-site processes that you mentioned, you know, that we co-locate is a real heavy heavy plate cutter cut-to-length line. We feel there's gonna be massive opportunity there, particularly as the, you know, the infrastructure growth occurs and, you know, plate is gonna be a big component in that. Sinton is it's incredible. One needs to go there to really experience it. The equipment reliability issues are frustrating, but it's absolutely a state-of-the-art mill.
The team is excited. They will get that thing running full blast, in time. It will be the technology of choice going forward.
Operator (participant)
That concludes our question and answer session. I'd like to turn the call over to Mr. Millett for any closing remarks.
Mark Millett (Chairman and CEO)
Super! Well, thank you. For those still on the call, our employees, in particular, thank you for what you do each and every day. You do drive our success. We can't do things without you. Our customers, thank you for your loyal support. Our shareholders, thank you. Those that are invested in us, we will continue to treat your dollars just like they're our own. We're gonna continue to grow them, and we have a huge, bright future ahead of us. With Sinton kicking in, with the aluminum going forward, the growth momentum continues. Thank you.
Operator (participant)
Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation, and have a great and safe day.
