Ternium - Earnings Call - Q2 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Ternium Second Quarter twenty twenty one Results Conference Call. At this time, all participants are in listen only mode. After the speaker presentation, there will be a question and answer session. Also, please be advised that today's conference is being recorded. If you require any further assistance, please press 0.

I would now like to hand the conference over to your speaker today, mister Sebastian Marti. Thank you. Please go ahead, sir.

Speaker 1

Good morning, and thank you for joining us today. My name is Sebastian Markey, and I am Ternium's Investor Relations and Compliance Director. Ternium released yesterday's financial results for the 2021. This call is complementary to that presentation. Joining me today are attorney's chief financial officer, mister, Pablo Riccio, and then chief executive officer, mister Maximo Melocha, who will discuss attorney's business environment and performance.

At the conclusion of our prepared remarks, there will be a q and a session. Before we begin, I would like to remind you that this conference call contains forward looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on page two in today's webcast presentation. With that, I'll turn the call over to Mr. Benodojo.

Speaker 2

Thank you, Sebastian. Good morning, and thanks all for your participation in today's call. Ternium reported remarkable results in the second quarter of the year. We had record quarterly sales, margins, EBITDA and net income. And looking ahead, I believe the current strong global steel market environment should continue to support a solid financial performance over the rest of the year.

Steel prices in our region increased steadily to high levels over the last twelve months with strong steel demand and low inventories in the value change. Prices are probably going to begin a downtrend at some point during the second half, but I don't expect this to be a very profound downtrend. The main reason for this positive view are a steel demand that remains strong, constraining the supply change, news from China withdrawing export rebates with the objective of limiting steel production, and from Russia with taxes on steel export. In this encouraging environment, we successfully started up our new hot rolling mill at Pesqueria on May 15, a month in advance of our previous estimations. We are very pleased with this achievement and with the ramp up of the line, which is also doing better than anticipated.

As a result of this, we currently expect this new facility to enable us to increase our market offering of high quality steel products by approximately 600,000 tons during the second half of the year from the 400,000 tons I mentioned on our last conference call. All of this should result in subsequently higher EBITDA level in the 2021. On the balance sheet side, in the second quarter, we continue to show significant cash generation and we kept a very low level of net debt even after paying out our yearly dividend in May. Let me go over our main markets now. In Mexico, the driver behind our sales growth expectations for the second half of the year is the industrial market.

Steel demand in this market is very strong. Manufacturing industries like HVAC, electrical motors and household appliances are having record end user demand and significant backlogs greatly increasing in turn their steel consumption. The auto industry in Mexico is also having strong end user demand, but it continued to be affected by the semiconductor supply chain disruption, a situation we expect should readily subside over the following quarters. In addition, we are seeing an increase in investment announcement in Mexico from these manufacturing industries. As our new hot rolling mill in Mexico is geared towards the industrial market's product mix, the ramp up of this facility is going to help us increase even more our participation in this market over time.

The commercial market in Mexico more related to construction activity is probably not as strong as the industrial one with no significant growth in infrastructure investment and softer demand from retail construction. In Argentina, we expect shipments to remain relatively steady in the third quarter after a strong second quarter of the year. In this market, we are seeing sustained domestic demand from building materials and higher activity levels in some industrial sectors such as automotive and agro business. On the other hand, the macroeconomic environment in the country continued to be unstable. Also in November, there are midterms election in Argentina which could introduce a higher level of uncertainty in the market.

Turning now to the other market regions. As anticipated in our previous conference call, we continue to integrate our slab mill in Brazil with our facilities in Mexico and Argentina. This resulted in a lower volume of slabs sold to third party in the quarter offsetting the higher shipments of finished products sold in Mexico and the Southern region. You can expect to see the participation of slabs in our sales mix to continue to decrease in the third quarter. One reason for this is that during the second quarter, the long term slab supply contract we had with Alsace Metals, Alabama facility expired.

This was timed to concur with a startup of our new hot rolling mill in Mexico, which is now requiring an increasing volume of slab during the ramp up. Before finishing my remarks, it is worth mentioning that the COVID-nineteen delta variant, which is affecting the Northern Hemisphere now, is not widespread in South America. So we have yet to see its impact in our market over the following month. Vaccination programs in the region have improved significantly over the last months, although the percentage of the population with full vaccination is not yet as high as it is in Europe or The US. So there continues to be a risk of further lockdowns or disruption in the value chain if the sanitary situations worsen.

Also, I would like to call your attention to the publication of Pernium's last sustainability report. We issued it in June. I encourage you to review it. It shows our progress towards achieving our objectives in a sustainable way, describing the actions taken to achieve our goal in six areas: safety, environment and decarbonization, people, community, value change and business strategy. Concluding, we expect to continue showing a strong performance over the following quarters as favorable global steel industry fundamentals should support the solid high steel prices even if they began to soften at some point during the remaining of the year.

With this, Pablo, please go ahead with a webcast presentation of our performance during this second quarter.

Speaker 3

Thanks, Maximo, and good morning to everybody. Terms of performance in the first half of the year has certainly been remarkable. It reflects the current conditions prevailing in the steel market that Maximo has just described. We will see now how this condition drove the company to new record level of profitability and results in the second quarter after a very strong performance in the first quarter of the year. Let's start by reviewing the EBITDA and net earnings on Page three in the webcast presentation.

EBITDA in the second quarter of the year reached $1,400,000,000 and EBITDA margin of 36% or $463 per ton, a new record high. These margin levels are higher than those of most of our peers, probably at the world level. Although these out of the ordinary margins are not going to be sustained over the cycle, I wanted to point out there is something that distinguish Ternium It's a consistently higher margins and it does so over the cycle. Net income in the period reached $1,200,000,000 or $5.21 per ADS.

Looking out to the third quarter, we expect to achieve new record EBITDA with higher margins and volumes and we will analyze this in more details later on. Let's turn now to Page four to review three segments. When we compare volumes on a year over year basis, we see a significant recovery in Mexico and the Southern Region in the second quarter of this year. As you know, last year, the second quarter activity levels were deeply affected by the COVID-nineteen outbreak. Now on a sequential basis, shipments in Mexico of the solar vision increased 2% in the second quarter of the year, remaining at elevated levels in a scenario of strong steel demand in Ternium's main markets.

Looking forward, considering the strong demand for Ternium steel products in the USMCA region and the ramp up of the new hot roll in Minipas, Korea, we believe our shipments in Mexico will increase by a total of approximately 600,000 tons, as Maximo already mentioned. In the other market region, you can see that the volume of slab shipped to third party in late grade continued to increase quarter after quarter. The reduction reflect the increased integration of turbine slab facility in Brazil with the company's industrial system. We expect this integration trend to remain in the third quarter. And as a result, we expect a further reduction of slab volume shipped to third parties.

Okay. Now on the next page, as you can see, combining these developments, we are at to consolidate these two shipments of 3,100,000 tons in the second quarter of the year, relatively stable sequentially and 25% higher on a year over year basis. Moving on to steel prices, Tadian revenue per ton in the second quarter increased sequentially and in a year over year basis. This, together with a lag reset of contract prices in Mexico, anticipates a further increase in Permian realized price in the third quarter. Turning now to the net sales in the bottom left chart, the combination of higher realized price and stable shipments resulted in a 21% sequential increase in net sales in the second quarter to $3,900,000,000 compared to the second quarter of last year, net sales in the second quarter more than doubled.

Let's now review on Page six the main drivers behind the sequential increase in EBITDA and net income in the

Speaker 2

second quarter. Quarter. The chart on

Speaker 3

the top shows that EBITDA mainly increased as a result of higher realized price, which were partially offset by higher cost per ton, mainly on higher raw material and purchased slab prices and higher maintenance expenses. As I mentioned at the start of this presentation, we expect a new sequential increase in EBITDA in the third quarter reflecting the expected increases in shipments and revenue per ton, partially offset by higher cost per ton. As the increase in the purchase price of raw material slab continue to flow through the company's inventories. The chart below shows that the sequential increase in net income in the second quarter was mostly due to higher operating income. In addition, results from our own operation in Usiminas improved.

On the following page, we can see that the same changes but for the the first six months of the year. In most charts, the drivers of the increase of our UDA net income were the same as we have just already described for the second quarter. To finish the presentation, let me turn now to Page eight to review our quarterly cash flow and balance sheet performance. Cash from operations in the second quarter of this year was $628,000,000 even after a significant anticipated increase in working capital. In the third quarter, we expect further increase in working capital reflecting the expected increase in realized steel prices and higher costs as previously discussed.

Regarding free cash flow, the company generated $467,000,000 after capital expenditure of $161,000,000 in the quarter. This enabled Pernium to slightly reduce net debt after paying a $2.1 annual dividend in May for a total amount of four twelve million dollars Net debt stands at just $200,000,000 at the June, equivalent to 0.1 times net debt to last twelve months EBITDA. With that, I am concluding my prepared remarks. So thank you very much for your time and attention. And now we are ready to take any questions that you might have.

Please, operator, proceed with the q and a session.

Speaker 0

Your first question comes from the line of Caio Griner from BTG Factual. Your line is open.

Speaker 4

Hi. Thank you. Good afternoon. So my first question on on capital allocation. I mean, this is probably the main question surrounding investment case, nowadays.

The company is moving to net cash maybe maybe in a matter of weeks, And we just wanted to understand how does Ternium see the growth versus dividends equation today? Because on one hand, the company is still ramping up Biscaria, so we're sure if you if you would be willing to kick off another project, in the meantime. But if you are, what do you think, you're most likely to invest in, over the coming years? Would you see M and A as a feasible option? Or do you would you rather to go with organic growth?

What are the company's priorities on that? Because if that would be investing where you currently operate or maybe thinking about geographical diversification. And I do remember that some time ago, were speaking out for there were some talks of building an EAF in Mexico, an electric furnace in Mexico. And is that still the case? Or is that still the priority for the company?

And if the company is not willing to kick off another project at the same time where you ramp up Besquedia, could we see Ternium paying extraordinary dividends already in the second half? Or maybe could we be closer to seeing an official dividend policy being approved maybe based on free cash flow generation? That's my first question. And my second question really quick on EBITDA per ton. So Ternium delivered EBITDA per ton levels above $400 per ton in the second quarter, that could be potentially above $500 per ton in the third quarter.

So I just wanted to quickly understand, where do you see EBITDA normalizing ahead? Because I do remember that a few quarters ago, you were speaking of EBITDA probably normalizing or having seen EBITDA margins normalizing at the 15% to 20% range. And I just wanted to understand if you see reasons to believe that long term margins could be sustained above those levels. Thank you very much.

Speaker 2

Thank you very much, Tayo. I will take the first question, and then Pablo will probably answer the second one. So the first question about well, there's a lot of things in the first question, the capital allocation, the organic growth, the geographical diversification, extraordinary. Let me try to make a summary of what our thoughts are and try to answer this question, Caio. You're right.

We have a significant strong balance sheet, and we are going to be probably net debt negative in in next quarter. That's that's true. So this year, we are investing CapEx of $600,000,000. You already know that considering all the approved projects. We invest in capital in working capital around $1,300,000,000 in the first half.

We are continuing going to invest in this in the third quarter, probably half of what we did in the second quarter. That's around three a little bit more of $300,000,000 We pay the dividend of $412,000,000 in May. And let's remind that this was the highest dividend in Tammuz history. I mean, it was almost doubling the the highest dividend that we paid before this. So looking forward, 2022 and onwards, regarding dividends, I believe that I mean, you know the dividend is approved or proposed by the board in in in February.

We always do that, and we pay dividends once a year. But looking forward, I think that that this new level of dividend, at least this this new level, can be sustained in into the future. I mean, as I said in the conference, we are optimistic that the current steel business environment will provide Canyon with this opportunity. Extraordinary dividends, again, this is something that that the board of directors should propose. By having in mind this, I am I can't rule out an extraordinary dividend, as you said.

It's not something that we have today, again, but I I I'm not ruling that out. And then, CapEx. Clearly, or or opportunities. We are not doing an opportunity of a geographical diversification. We are concentrating The Americas.

We don't see, an investment of ours far away or or in other regions that are not the the the American Continent. That's for sure. And and and, again, we are analyzing different projects to grow our business. Today, we are analyzing organic growth. We the the ramp up this new control meeting in Mexico, which is a huge issue for us, is going to help probably to increase even more our participation in the general market, as I said, and it will open probably new investment opportunity for the downstream capacity in the region.

And as you mentioned also, and as I mentioned it in the past, USMCA stricter rules of origin will require us to expand our upstream capacity in the region at some point down the the road. So all of those are projects that we are analyzing. I hope that with this, I cover everything in your first question, Caio.

Speaker 3

Okay, Maximo. Let me take the the second part of of of Caio's question. Hi, Caio. How are you? So you're right that the the margin or the EBITDA per ton that we generated in the discipline quarter of over $1,450 per ton.

And with the perspective and the comments both Maximo and myself made are pointing out for a higher, a little higher EBITDA per ton in into the third quarter of the year. Also, it's important to mention also, as as as we believe that the company has expressed by by Maximo is that we are not expecting to see significant or on our graph, a reduction in prices in in the coming quarters after the after the the next one. So even though it's it's not reasonable to believe that we will sustain this this level of EBITDA, per ton or EBITDA margin, we are not expecting also to see a significant reduction on these numbers. On the long run, we continue to work as we have been always work and it's also something that we mentioned in the opening remarks that the role of the company is to continue to achieve not only very high levels of EBITDA margins and EBITDA per ton, but to keep and sustain the, the feature of TALMU has, which is to outperform our peers in any part of the cycle. The upper side or in the lower part of the cycle, we have been always able to achieve that, and this is something that we work very hard to continue to have.

So at this point, probably, will be easy to say that the the the the margin of the range between 15 to 20% is something that we cannot easily overpass. But in in a in a more normal market environment, this is something that we continue to sustain, always working to be not only the upper side of the range or even higher than that. And every investment that we've made, especially the new mill and everything that we are analyzing is toward these these loans. So we we sustain clearly probably in the next year being closer to 20% is is something that is probably easy to achieve, but this is something that we will sustain. And, clearly, we will work to increase as fast as much as we can with the the the performance of the company.

Speaker 4

Thank you very much, gentlemen.

Speaker 1

You're welcome.

Speaker 0

Your next question comes from the line of Carlos De Alba from Morgan Stanley. Your line is open.

Speaker 1

Yeah. Hello. Good morning, gentlemen. Hopefully, you're doing fine. A couple of questions, if I may.

So, Macron Macron, when you said the 600,000 tons increase, are you

Speaker 2

talking about overall volume, or are you

Speaker 1

talking about just the percentage of value added volumes in the company's overall shipment? And second, if you could give us a little bit of an idea of how much is lab from the field you expect to sell to Telny in Mexico, so internally, and how much to external customers in in in the coming quarters, that that would be great.

Speaker 2

K. Thank you, Carlos, and and and thanks for asking. We are doing fine. I hope all you too. The the 600,000 tons, if you remember in our last conference call, the I I told that in the second quarter, in the second half of the year, the the the cost we need is going to increase 400,000 tons overall sales.

That's what's coming net from the new facility. And because of the ramp up curve, we have updated this to 600,000 tons. So it's how much volume from the new facility we are putting in the market. Mhmm. The second part, it's if I remember the slabs.

Yes. Okay. The flaps in in in in the third quarter is gonna be around between eight hundred and and nine hundred thousand tons the order to Mexico. And and and to third parties, probably, it's gonna be around 300 to 400,000 tons. I mean, it's gonna be in that range.

So it's gonna be decreasing from from, I think, what, the 700 or no. A little bit less of what we do in the second quarter.

Speaker 1

Alright. Fair enough. And then

Speaker 2

just final question. When you when you talk about

Speaker 1

potentially needing needing to to invest in in in still making capacity in order to comply with the The US MCI rules MCI rules, and would you consider The US, Canada, or only Mexico?

Speaker 2

That's a very specific question, Carlos. I think that we I mean, we are analyzing. As I said, we we don't have any announcement to make. Probably, what we have to do is part of that is doing it in Mexico. I mean, our hot stream need is there, and and our customers are probably there.

So it makes sense to make at least a part of that in Mexico. Again, this is not an announcement. It's something we we we are analyzing. Remember, the the USMCA rule of origins are for the automotive industry, and and they are going to to to start in 2027. So we have time to to analyze all the the alternatives, and and that's what we are doing, Carlos.

Speaker 1

Yeah. Fair fair enough. I mean, this is all hypothetical at this point in time. But on this basis, on this hypothetical basis, I'm considering the fact on the one hand that you have iron ore pellets and and DRI in Mexico and there are enormous pressure pressure pressures to to reduce carbon emissions in the steelmaking process. Is is it fair to say that an EAS might be a better option for you guys than a than a Blasone integrated facility?

Speaker 2

No. That that's for sure. No. That's for sure. We are not analyzing a Blasone.

That I can tell you.

Speaker 1

Thank you very much. All the best. Thank you.

Speaker 0

Your next question comes from the line of Andreas Buchenhauser from UBS. Your line is open.

Speaker 5

Thank you very much. I hope you're all safe and well. A couple of quick questions on demand and exports pertaining to your strategy for Pesqueria. Just firstly, on demand. So I think you mentioned that Mexican domestic demand for flat steel has been quite strong.

It's been solid. We've been getting an increasing amount of reports suggesting that demand is actually on the weaker side in Mexico. So I'm just trying to kind of get a sense of what's happening there because, of course, you could be capturing market share either from domestic players or imports. So could you talk a little bit about that? Do you see yourself capturing market share?

Is that why you're seeing strong domestic demand? Or are you actually seeing end demand pretty strong in Mexico at the moment despite the high price? That is my first question.

Speaker 2

Thank you, Andreas. I'll take that one. We are seeing both, to be honest. I mean, the demand is increasing in Mexico compared to last year. It's not increasing as much as it is increasing in Brazil or in The US where our power consumption is increasing more.

But Mexico is gonna close at around a little bit more of 10% steel consumption increase in 2021 compared to 2020. So the month is increasing. But what you are also right is that it's very different between the markets. The industrial market, which we are very much invested in that market, it's very strong. And the commercial side with the commercial part of the flat products and the loan products is not it's decreasing or it's not improving, sorry, as much as the flat industrial part of the business.

So there is a little bit of both. And clearly, we are gaining some market share against imports.

Speaker 5

That makes sense. Maybe a quick follow-up there. So you mentioned obviously from last year, I don't know if you have the numbers in front of you. Do you have a sense of where we are this year versus pre COVID in 2019 where demand sits?

Speaker 2

It's almost the same. I mean, last year, don't have the exact number, but I think last year, the apparent consumption decreased around eight to 9%, and we are seeing an increase this year of around 10, probably a little bit more. But, I I want to be on the casual side here. So it's a par it's it's almost the same '20 2019 to 2021. A little bit more, but almost the same.

Speaker 3

Okay.

Speaker 2

Again, with difference, Andrea, flat industrial products, the demand is much higher than 2019. Construction products or commercial side, it's lower. So there are difference in the market size of

Speaker 5

Yes, That's clear. Different on the product mix in terms of demand. That's very clear. Exactly. And then my second question, just as you basically ramp up Pesqueria, how are you kind of envisioning and I know it's a little bit might not be an easy question to answer, but how are you kind of envisioning where those shipments will go?

I mean we've obviously seen The U. S. Steel price going up a lot, which seems to be more supply demand driven with a lot of capacity having been shut down in The U. S. So does that mean that you see yourself exporting more than you proportionally have before from Pesqueria into The U.

S? Or do you see yourself more capturing market share from imports coming into the coming into Mexico from The U. S? How do you see those or where do you see those Pesqueria shipments?

Speaker 1

Yes.

Speaker 2

Andreas, that's a very good question. I am not sure if I agree with you that the price is more supply driven than demand driven, to be honest. I I agree that there are some restrictions and and some capacity that's down. But to be honest, today, The US is the utilization in The US is at pre COVID levels, and and and and Mexico is probably producing more. So North America is not producing less than pre COVID levels today.

It's in in the past. And, we are seeing an increase in demand. I mean, The US also US probably is gonna the demand in US is gonna probably grow up this year for more than 15% with still six months to go, but but it's a huge number. So so we are seeing some demand driven issues. And and and, again, we are also seeing that that this reassuring, which clearly is gonna take time, it's happening.

I mean, we are seeing investments in in a in a huge range of of different industries that consume steel, driven probably by USMCA, driven by the fact that supply chains are getting more difficult, driven by a lot of things, but people are investing in the USMCA. So demand is going to increase. Remember that the imports of steel are very important in the region, but imports of indirect steel or imports from final product that consume a lot of steel are much bigger than import from steel. And we are seeing a trend that this is changing. It's going to take time, but this is changing.

So I think that our new facility comes just in the right moment for this. Again, so for us, where is volume going? It's going to go mainly to Mexico. It's going to go mainly to substitute imports and, new demand coming from these investments. And some parts can be export for for The US, but mainly it's going to be for Mexico and the increase in demand and again the imports.

We see a lot of space there.

Speaker 5

That's very I would probably just make would probably just make the argument on the demand side for flat steel in The U. S. That if we look at the two dominant drivers of flat steel in The U. S. Being autos and energy, I think those account for about 80% of that steel demand in The U.

S. I mean we know that auto production is down because of the semiconductors, and we know that energy is down because the rig count is down almost 50%. So if we put that together, it it looks like demand is still lower than it was 2019 pre COVID in in The US. And it looks that steel production is up because imports are down quite before until recently. So I I guess that's the that's the basis of my question.

We're right now seeing HCP and U. At 1,500, which is, you know, $400 a ton below the current spot price. So I think I agree with you that we're gonna see some weakness, but it's probably not gonna be significant weakness in the short term.

Speaker 2

Yeah. And and, again, you're right about some some part. I mean, demand in in in oil and gas, clearly, is not going to to return. I I I don't think it's gonna to return to '3 I don't know. 2017 or 02/2018.

I mean but, again, on a general demand is increasing apparent consumption is gonna increase 15%. 2021 is gonna be is gonna consume more steel than 2019 in The US according to our numbers. And and and this is a huge issue. And, again, of course, you're right. Imports, I mean, we are more aggressive against imports and and and and most of The US producers also.

So it's a combination, I think, of both.

Speaker 5

That that that's a good point. That is a good point. And I and I I don't wanna monopolize the Q and A session. Maybe one final follow-up. Do you think that continues into 2022?

Because we're obviously seeing a lot of pent up demand in 2021 from demand that was lost in 2020. So what got lost in 2020 got pushed into 2021. Does that continue into 2022 in your analysis, in your estimates? Do you think we're going to see more demand growth in 2022 versus 2021? Or does that stabilize?

No.

Speaker 2

I think, yes. I mean, if if yeah. If you look to the the the prospect of of of what we are thinking about the GDP increase in The US and Mexico, even Canada, they are in in 2022, not not only 2021, there are huge increases. Again, there's the market. I mean, the market is very good economic point of view.

So I think the money is going to continue increasing. I think exports are going to continue. I mean, they are cyclical. So it's they are going to increase a little bit by the end of the year, most likely in The U. S.

But as a whole trend, imports are going to continue decreasing in the North American region. And and the things that Russia and China is doing, those are signals that that overcapacity in those part of the world, I mean, they are trying to to finally do something about that. I mean, the the the signal that China is, I mean, canceling all the export rebates and probably thinking about putting an export tax, it's a huge issue, which is going to help all all of this.

Speaker 5

That's very clear. I I appreciate your insights on this, and and I've taken more than my fair share of the q and a session. So thank you very much.

Speaker 2

Okay. Thank you, Andrea.

Speaker 0

Your next question comes from the line of Caio Ribeiro from Credit Suisse. Your line is open.

Speaker 6

Yeah. Good morning, everyone. Thank you for the opportunity. So my first question is on the infrastructure package in The US. There's a lot more visibility on the different components now.

And, you know, a few companies have already provided their estimates on the demand that it could generate for steel, you know, throughout its its duration. So I just wanted to ask if you already have an estimate on that, right, on on what kind of demand, generation this package could could, could generate for for you and and the market as a whole. And then and then secondly, you know, on flat steel prices in The US, I just wanted to get your perspective on what the supply additions that are expected for 2022 could generate, you know, for for pricing momentum. We estimate that these supply additions, they could add up to 4,000,000, 5,000,000 tons of additional capacity in 2022. So I just wanted to see how you think that that will impact pricing momentum.

Do you think the market could become oversupplied with these supply additions, or do you see demand growth, you know, more than absorbing it? Thank you.

Speaker 2

Thank you, Caio. The the first question about infrastructure in in The US, to be honest, I don't have a different estimate than what the steel industries have said in in in The US. They clearly know more than than that I do. So I'm not going to change that number. Our main issue here is, I mean, we are not seeing a lot of or we are not participating a lot in that market, to be honest.

But clearly, it's going to be very good for us because, as you know, some some of The US steel producer exports, to the to to Mexico, and we compete with them. And and and and this is something that is gonna affect the ability to supply to Mexico. So for us, it's it's it's very good. Although, we are not expecting to ship a lot to The US to these projects. Second thing is prices and and and the the the increased capacity that is coming and you're right, it's around 5,000,000 tons of flat capacity.

But I don't see this as a huge driver of oversupply or prices coming down because of this. As you know, imports in North America are much higher than 5,000,000 or 6,000,000 tons. I mean, in The US, they are more than 10,000,000 tons. In Mexico, are around 2,000,000, 3,000,000, 4,000,000 tons depending if you put the galvanized products also. So there's a huge amount of imports coming to the region, which this extra capacity is much lower than that.

And second, as I told before, I think the money is growing faster than what we thought. So I think it's gonna most likely be absorbed with that. Saying that, again, all the capacity, not only ours, but the other coming, it's a very competitive capacity. So at the end, probably, if the market doesn't react or the demand shows sign of slowing down, those are not the meters that are closing some of that capacity. Probably some old capacity will close.

But I'm I'm not seeing that right now.

Speaker 6

Perfect. That's very clear. Thank you, Masu.

Speaker 2

You're welcome.

Speaker 0

Your next question comes from the line of Thiago Lofiego. Line is open.

Speaker 7

You. Massimo, two questions. One, back to the pricing discussion with that you had with with Andrea. Just more of a theoretical maybe question here. What what in your view would be the drivers for steel prices to trade at a new normal and that new normal being a higher level versus the old normal?

Right? I think you already mentioned a bit of the changes that you're seeing and we are seeing as well. Right? So China is is changing the way it is, you know, acting in the global market, potentially exporting less. But but how would you defend a higher for longer pricing scenario for steel?

Even if even if we see steel price in US dropping, let's say, 50%, still gonna be, you know, $1,000 per ton. Right? So that's way above normal level. So how would you defend the higher for longer scenario? And then the second question, just to confirm, you mentioned new slab the the new level of slab shipments to third parties of 300 to 400,000 tons per quarter.

Is is that after the Biscadia Atrc Mill is fully ramped up or that's in the near term? Just to understand what the new normal level will be after the full ramp up of the Biscadia Mill, the Atrc Mill? Thank you.

Speaker 2

Perfect. Thank you, Thiago. I start with the second, which is a little bit more easier, and then I I go to the pricing question, if if you don't mind. Yes. I think that is the 300,000 tons, 400,000 should be a a new normal for the facility in Brazil to to ship to third parties.

Most of those third parties will probably be sales in Brazil to as we are doing today. But that doesn't mean I mean, the the new rolling mill in Pesqueria is gonna produce more. It's gonna reach out some point the 4,000,000 tons a year. And and and so we are going to buy more slab from third party. So we are going to sell to to the Brazilian market some slabs, and we are to and we are going to to to to buy more slabs from third parties for the Pesqueria.

That's for that's how we are foreseeing this. Of course, if market change, that could change also. We regarding the pricing discussion, I think you're right that there's gonna be a new level or a new normal for for steel prices. What I don't know. I don't want to put a number as as you said, which seems very logical number.

But, what are those drivers? I think the first one is that there are two drivers. One is overcapacity for sure. China is, I mean, I don't see much investment in in capacity in China or other parts of the world right now. I mean, for various reasons.

But one of those is decaponization. I mean, the the targets that that we are putting or the steel industry or the government supporting to the steel industry are very aggressive, and it should have enormous amount of investment if you want to invest in new capacity and replace some of the old capacity. So some products are going to be investment, but some old capacity is gonna stay idle and it's going to stay idle forever because of these trends. The second one probably demand. Demand in the region, and now I'm talking specific the North American region, it's gonna continue increasing for the things I said.

And there's also the thing of raw material. I mean, more and more, we are going to depend on scrap and prices of raw material are going to be a little bit more higher probably. So those trends are things that I see as a trend that prices are going to be at a new normal in the future. I I I don't I I don't want to put a number of that new normal, but but they are gonna be higher.

Speaker 7

Okay. Very clear. Agree with you, Massimo. Thank

Speaker 1

you. Thank you, Charlie. Thank you.

Speaker 0

Your next question comes from the line of Alfonso Salazar. Your line is open.

Speaker 1

Thank you. Hello, Maximo and Pablo. I have two questions. The first one is related to what you just mentioned that you are not analyzing the platform at this point in time. And the question was more related to your plans for the mining operation in Mexico.

And if you can give us some update on what's the situation there, your plans? And also about, we hear a lot about violence in the region of Michoacan and where the mine is located. So if can give us an update on that as well. And the second is regarding the South American operations. If China is implementing this, the more strict export relations and they become eventually a net importer of steel.

What are the implications for South America, especially for for your operations there? Because, apparently, that could make a stronger investment case in some countries. So I just just want to hear the thoughts on that.

Speaker 2

Thank you. Alfonso, the the update of the mining operation I mean, the the mining operation in Mexico are producing at full cap at full capacity. As you know, most of what we produce of pellet goes to our own facility, although we are exporting or selling to third party some of the extra we have, but it's not a huge volume. We expect that this is continue working as it is. To to be honest, I know there your question about violence in Michoacan and other parts of the South Of Mexico.

We are not seeing any of that in our region. Although one of our mining operation is in Michoacan. It's very near the Colima border, so this is far away from from from the things you read in in the news. South American operation and and China, I think the first benefit from this is remember, China is the first importer, for example, in Brazil. I mean, as you know, the the Brazilian market is importing some I mean, the import imports in Brazil are increasing, most of them are coming today from China.

So I think the benefit of this new policy is changing as the the the the the industry. So the steel industry there, it's got are going to ship more to the market and can increase the market share because of this new policy of China. I don't see yet a a business case to to increase still capacity in in in Brazil, for example, for exports to China, to be honest. I don't see today that case. I think that Brazil is gonna or steel mills or our operations in Brazil, it has to be more focused on on on the Brazilian market and some export to some regional countries.

Speaker 1

Okay. What about marginal expansions or smaller expansions in other countries like Colombia? Do you see an investment case for that?

Speaker 2

We are not analyzing that. As you know, in Colombia, we are ramping up the new facility in Barranquilla. Today, we don't have a project in the near future to ramping up. But, again, there are things as you know, there are things that that we are analyzing if this trend changes, and there is a case for for making a new investment in Colombia. Today, we don't have that in in mind yet.

Speaker 1

Fair enough. Thank you very much, ma'am.

Speaker 2

Yeah. You're welcome, Alfonso.

Speaker 0

Again, for anyone else who wants to ask questions, you may press 1 on your telephone keypad. There are no more questions at this time. Turning the call back over to mister Maximo Vidoya.

Speaker 2

Okay. Thank you all very much for participating today in our conference call and and for your question. Please keep in touch and contact us if you have any comments or additional question. And again, thank you very much. Have a nice day and please stay safe.

Thanks a lot.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.