Ternium - Earnings Call - Q4 2020
February 24, 2021
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to Ternium Fourth Quarter twenty twenty Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to turn the call over to Mr. Sebastian Marti.
Please go ahead.
Speaker 1
Good morning, and thank you for joining us today. My name is Sebastian Marti, and I am Ternium's Investor Relations and Compliance Director. Ternium released yesterday's financial results for the fourth quarter and full year 2020. This call is complementary to that presentation. Joining me today are Chief Executive Officer, Maximo Avedoya and the company's Chief Financial Officer, Paolo Griceo, who will discuss Ternium's business performance and environment.
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. De Loijer.
Speaker 2
Thank you, Sebastian, and good morning. Thank you very much to all of you for participating in this conference call and your interest in Interview. I am glad to share with you today a very good set of results for the last quarter of the year, which has been actually been better than the ones we expected on our last conference call. Even though the pandemic continued to impose operating difficulties on all our facilities in the 2020, we took steel shipments to pre pandemic levels, reaching 3,100,000 tons, where we were also able to take advantage of an attractive steel business environment, showing a significant increase in our margins to 25% in the fourth quarter, while never losing sight of a strict cost control. Our current expectation is that margin and EBITDA will continue to increase in the first quarter of the year.
I'll let Pablo elaborate on this later on. Turning now to Tony's full year results. In 2020, we repeated the EBITDA of $1,500,000,000 we record in 2019. As all of us are aware, 2020 was a particularly difficult year to manage an industrial operation like Ternium's. It requires the full dedication and commitment of all our people.
The results we were able to obtain show this successful team effort. Performance and results over the 2020 were outstanding. Taking this into account, Ternium's Board announced yesterday its dividend proposal for the year with an amount in line with our comments on previous conference calls of $2.1 dividend per ADS to be paid in May after the expected approval of the shareholders' meeting. The return to shareholder is embedded in our company's culture, something that can be reflected in the long track record of progressively higher dividend payments over the last fifteen years. We intend to continue returning capital to our shareholders as we have done in the past, while at the same time, growing our company profitability when we see an opportunity to do so.
We trust we are going to be able to do this while maintaining, as usual, a strong balance sheet. In yesterday's Board meeting, the Board also discussed in-depth several initiatives related to sustainability. The care for the environment is a key aspect of Ternium's operations. The steel industry, as many others, has been increasingly allocating resources towards improving its environmental footprint. In the last five years, Ternium invested approximately $300,000,000 in environmental and energy efficient related projects throughout its facilities.
We have launched now an additionally $460,000,000 plan, the majority of which will be implemented over the next six to seven years. Climate change was also a key part of the Board's discussions as we have been working for some time now in a plan to reduce our CO2 emissions. The results of this work is our first road map to decarbonization with a medium term target of 20% reduction of CO2 emissions per ton of steel produced by 02/1930. The main initiatives we intend to pursue to achieve this target are increasing the participation of energy from a new source in our facility to approximately 40%, increasing the scrap share in metallic mix, increasing carbon capture capacity at our DRI facilities in Mexico, partially replacing met coal with charcoal in Brazil and Argentina and prioritizing lower specific emission steelmaking technologies. And we are also working on plan to continue descabonsizing our operations beyond 02/1930.
To better manage all these issues, we have recently put in place a reorganization of our environmental functions with two distinctive structure: one, to tackle with long term strategic environmental decisions and another, to oversee the day to day environmental issues. In addition, the Board of Directors has nominated one representative of the Board of Change Strategy. Carbon neutrality is a goal that can only be achieved if all parts of society work together. I expect there will be many more things in years to come that we will be able to do to improve our carbon footprint. So you will continue hearing more from us on this subject in the near future.
Let me now make a quick comment regarding the business environment in our main markets. Improved demand is widespread. The household appliance industry currently stands out as the strongest sector and the auto industry has their logistics bottleneck and its supply chain. Until the beginning of last week, our facilities in the country have been running at full capacity, but extreme weather conditions in the Southern U. S.
And Northern Mexico interruption of a stable provision of natural gas and energy in this area with a negative effect on production for approximately 80,000 tons. All facilities in the area are currently back to normal operations. As a result of these events, we expect shipments in Mexico in the first quarter of this year to remain at levels similar to those of the 2020 instead of sequentially growing. Our expansion project in the country continue advancing as planned with a new hot rolling mill at the Pesqueria facility expected to begin operations in four months. Mexico is our biggest market in the region, and we believe we are uniquely positioned to take advantage of the opportunities the USMCA and especially the reshoring of manufactured capacity will offer us in the future.
The decision we took three years ago to expand our capability to supply sophisticated industrial customers in the region is finally coming to fruition. And I really believe this will transform our company. In Argentina, our shipment continued increasing in the fourth quarter even after significant recovery in the third quarter, driven by growing demand for durable goods and building materials. This mostly reflects a shift in consumption patterns to our home improvement expenditures as it happened in other markets in the region. Even though the first quarter of the year is the seasonally weakest in the Argentinian market, we expect shipments in the 2021 to remain at high levels.
Finally, turning now to Brazil. This is a market that most swiftly recovered activity after the pandemic induced lockdowns. Our slab facility in Rio De Janeiro is working at full capacity, and we are increasing its integration with Telmu Mexico in the first quarter, so we expect lower slab sales of slabs to third parties compared to the fourth quarter of last year. 2021 will be a pivotal year for Ternium. We are going to be adding significant state of the art capacity in Mexico, expanding our product range and at the same time, increasing the cost efficiency of our operations.
This new capacity will also allow us to integrate even more our industrial system in The Americas with the help of our strong steel base in Brazil to better serve customers all over the region. In Colombia, we recently commissioned our greenfield rebar facility. Colombia's President, Mr. Ivan Duque, was present on the event as well as several members of his cabinet. And on his inaugural speech, he was very supportive of the commitments of the country's government to prevent unfair trade.
This new facility will significantly strengthen our presence and competitive position in Colombia. Wrapping up my remarks. First, I would like to acknowledge our people effort in last year, which made possible the amazing results we showed. I am proud of their commitment and teamwork in this very, very difficult year. Going forward, the following years will be a turning point in Serbia's life.
First, the new hot rolling mill at Pesqueria facility, which substantially increased our capability to serve the market with sophisticated products. Second, I have no doubt the U. S. MCA region will continue providing opportunities to develop our company. And finally, we will continue working towards premium sustainability and decarbonization.
This is key to continue delivering value to all of our stakeholders. I leave you now with Pablo, who will review our performance in the fourth quarter. Please, Pablo, go ahead.
Speaker 3
Thank you, Maximo, and thank you, everybody, for participating in our call. And let me review the results for the 2020. Indeed, our performance in the fourth quarter has been remarkable, above our expectations. Higher steel prices in our main markets, especially in North America, are combined with a boost in demand for steel products to drive revenues profitability and results to extraordinary levels, with higher raw material price not yet fully reaching our cost of sale line. On top of these favorable developments, net income was positively impacted by two nonrecurring events that we will see later on.
Let's start in our webcast presentation on Page three with the company EBITDA and net results in the fourth quarter. EBITDA reached $645,000,000 on an EBITDA margin of 25% or $210 per ton, a significant improvement by any measure, both sequentially and year over year. We will see this in more details in the next slide. Net income in the period was $671,000,000 or $3.6 per ADS. This outstanding result is the outcome of strong operating performance, but also includes the positive effect of $186,000,000 noncash gain related to the re recognition of a contingency on certain tax benefits at Ternium Brazil, equivalent to $0.95
Speaker 2
per
Speaker 3
ADS. And the net positive effect of a 13% appreciation of the Mexican peso against the U. S. Dollar in the fourth quarter. In next slide, we will review the developments too.
As for our expectations for the next period, we see sequentially higher margins driven by a higher EBITDA in the 2020. Turning now to Page four, let's review the performance of our achievements in each region. In Mexico, shipments in the fourth quarter fully recovered from the impact of the pandemic Shipments volume increased by 14% on a sequential basis and 6% year over year. Looking forward into the first quarter, we expect sequentially stable shipment volume in the country, mainly as a result of the described disruptions in the production that Maximo Ocono.
In the Southern region, shipments in the fourth quarter twenty twenty surpassed pre pandemic levels by a wide margin, supported by increased demand of durable goods and construction material in Argentina. The shift in consumption patterns in Argentina continues, somewhat influenced by the COVID-nineteen pandemic. So looking forward, we expect steel shipments in the region to stay strong in the first quarter of the year. In the other market region, there was a sequential year over year decrease in shipments in the fourth quarter, mainly of finished steel products. We expect a higher integration of Ternium's lab facility in Brazil with the company's industrial systems in the 2021, with a consequent sequential decrease in volume of slab in third parties.
Turning now to the next page. Ternium's consolidated steel shipments reached 3,100,000 tons in the fourth quarter, up 8% sequentially and 5% year over year. Consolidated steel shipments in the first quarter twenty twenty one are expected to be similar to those of the fourth quarter on relatively stable volumes in our key markets as already discussed. Revenue per ton increased sequentially and year over year in the fourth quarter of the year. Prices in our key markets continue strengthening since our last conference call, especially in North America.
These, together with a large reset of contract prices in Mexico, which prevented realized price increase more in the fourth quarter, will show even more strongly in realized price in the third quarter of this year. The combination of higher shipments and revenue per ton in the fourth quarter resulted in a 21% sequential increase in net sales to $2,600,000,000 equivalent to a 15% year over year increase. Turning to the next page, number six, let's review the main drivers behind sequential improvement in fourth quarter EBITDA and net income. The EBITDA chart on top shows that the increase in revenue per ton was behind the strong performance in the fourth quarter with smaller contributions from increased steel volumes partially offset by a slight increase in cost per ton. We expect a new sequential expansion of EBITDA margins in the 2021 with higher revenue per ton partially offset by an increase in cost per ton, reflected the increase in raw material prices.
The net income chart below shows that the net income increased sequentially mostly as a result of better operating performance. Operating results in the quarter included two non recurring transactions. One and the first one is and the biggest one is the recognition of a contingency related to tax benefits in Brazil, amounting to a net noncash gain of $186,000,000 We have not included this amount in the EBITDA figures. This was a contingency that we recognized in our financial statements when we registered in our books the purchase price allocation of the acquisition of our facility in Rio De Janeiro. Now turning to Brazil, formally CSA.
And it was related to tax incentives granted by the state of Rio De Janeiro consistent of the referral of the ASMS payable by the company in connection with the construction and operations of the facility. This benefit has been challenged in court through a reduction action of inconstitutionality, but it was ultimately reconfirmed by the state of Rio de Janeiro and had a final ruling by the Supreme Court. So this contingency was recognized and by now this decision is completely final. The second one is another non recurring transaction was a gain of $25,000,000 related to a favorable court ruling from the Federal Justice regarding the recognition on certain tax credits stemming from the way of calculating piece to fin taxes, another Brazilian type of tax. The improvement in net income also reflected a better result from our investments in Usiminas and the net positive effect of higher deferred tax gain, partially offset by higher foreign exchange loss, both related to 13% appreciation of the Mexican peso against the U.
S. Dollar. Let's review now Ternium's full year performance on Slide seven. EBITDA was $1,500,000,000 2020, virtually the same as of in 2019. The 9% year over year decrease in shipments in 2020 reflected the impact of the COVID-nineteen pandemic and was offset by a $12 increase in EBITDA per ton.
Net income increased 38% in 2020, reaching $868,000,000 or $3.97 per ADS, including the recognition of the conditions in Brazil equivalent to $0.95 that we have just commented. Let's turn now to our balance sheet and cash generation the quarterly performance. The chart on the next slide offer a clear description of the impact of the COVID-nineteen pandemic started in the second quarter twenty twenty. At first, Ternium's rapid adjustment to the new scenario targeting reducing working capital and lower cost to strengthen its cash position. And in the fourth quarter, the company resuming its growth agenda will increase capital expenditure and operate in a full recovery steel market with higher working capital requirements.
Looking forward, in the 2021, we expect working capital to continue increasing in a context of strong shipment volumes, increased revenue per ton and higher production costs. On the last slide of the presentation, you will find a yearly review of Ternium cash generation, balance sheet and dividend payment. Free cash flow in 2020 reached $1,200,000,000 This included a working capital release of a little more of $350,000,000 Capital expenditures in the year were $560,000,000 lower than in 2019 as several expansion projects have already been finished and the completion of the new hot rolling mill at the Pesqueria facility was postponed to mid-twenty twenty one. Our capital expenditure estimate for 2021 is currently in line to what we expect in 2020. The strong cash generation over the last three years enabled us to significantly reduce net debt from the peak of $2,700,000,000 at the 2017 after the acquisition of our LAP facility in Brazil to $372,000,000 at the 2020, equivalent to just 0.2x net debt to last twelve months EBITDA.
Regarding dividends, take into consideration the situation, as Maximo mentioned, Ternium Board of Directors proposed a dividend for 2020 of $412,000,000 equivalent to $2.1 per ADS. Okay. With this, we finish our prepared remarks. As always, we appreciate very much your time and attention. And now we are ready to take your questions.
Please, operator, proceed with the Q and A session.
Speaker 0
And your next question will come from Carlos De Alba from Morgan Stanley. Your line is open.
Speaker 4
Yeah. Thank you very much, gentlemen. Good afternoon. Very good results indeed. Congratulations.
Just two questions for me. Any any significant cost or expense impact related to the energy crisis in Northern Mexico, South Of Texas last week? You did mention, and it was in your press release, that the 80,000 tons lost, but anything that we should also model in terms of cost or expenses? And then clearly, the company has done a remarkable job in terms of generating cash flows. Your net debt to EBITDA now, as you just pointed out, Pablo, is really low.
So I wonder what is the next step for Ternium in terms of capital allocation or investments? You are also completing in a few months or starting to produce in a few months the whole oil in Pesqueria. So what come next? Is it more dividends potentially, another round of investments? Whatever you can comment, that will be great.
And regarding CapEx, if you can give us an update on your guidance for this year and next, that will be great.
Speaker 2
You, Carlos. Any significant cost? Well, yes, we have an impact of this 80,000 tons, and we have an increase in the price of natural gas during the four or five days that the contingency lasts. We are still discussing the final numbers, but it is a big number. I mean for the 80,000 tons, probably in the EBITDA will be a hit of $40,000,000 But again, this is because we won't be able to replace or to fulfill the shipments because we are at full capacity.
So we are not going to be able to recover the shipments in the quarter. CapEx next year, we are expecting to be around $600,000,000 a little bit more of what we have this year, and that's number. And the second question is, of course, the cash or the capital allocations we are going to see in the future, and that's a very good question, Carlos. 2020 was a very not only difficult, but strange year. So on the first, I think, nine months of the year, we were our focus was more on trying to solve the crisis and see where the market is going.
Clearly, today, these couple of months have been very good and very difficult different than what happened in 2020. So we're reanalyzing all our projects or growth opportunities that we were analyzing before. I mean we, as Ternium, has a track record, I think, in the last years where we did very sound and very quite good investments. CSA was a clearly excellent M and A acquisition. The Pesqueria II projects were very, very good.
And I think today, we are starting to analyze or we do have opportunities. I'm not prepared today to say which one are those exactly opportunities. But we do have opportunities, and we are analyzing them. And some of them, we think that the USMCA, Mexico in particular, has opportunity to grow. And probably in the next couple of months, we are going to see where we allocate some more investments.
And clearly, the returning to shareholders through dividends is also a priority for us in the future.
Speaker 4
And
Speaker 0
your next question will come from Kyle Grenier from BTG Pactical.
Speaker 5
Two questions from my side. So first one on North American steel prices. So we're still seeing lead times quite elevated in The U. S. Especially.
And we have been seeing virtually no volumes on the spot market. So I was just wondering if you can share with us your expectations on how long you really think that prices can be sustained at current levels? And how do you see new capacity in North America impacting those prices in the medium term? And my next question is regarding Vesqueria. So I was just wondering if you guys can share with us an update on the project.
And I was trying to understand how much of incremental shipments you guys can actually materialize in the project? Because this is a 4,400,000 tons project. And I do understand that you guys have 2,500,000 tons to 3,000,000 tons, which is not capacity or imports replacement. So this in our calculations, obviously. But I was just wondering if you guys can have can provide any guidance regarding how much in terms of incremental shipments you believe you can actually deliver over the coming years.
I don't know if you guys can share a number for 2021, 2022. That would be great. Thank you
Speaker 2
very much, Caio. First question, North American pricing. And clearly, I mean, prices continue to increase, and we are seeing that every day. I remember in the last conference call, we talked about prices. We said that we see that they are continuing to improve, but we thought that in the second quarter, they were going to start not decreasing, but not increasing.
Clearly, they are much higher than what we expected. And I think one of the things that are happening is that the consumption in all markets, not North America, I mean, it's very high. I mean, there is a change in the pattern of consumption of steel that we see in most of the in our markets, but we are seeing in other markets. People are spending more in refurbishing their house, in moving. Mean construction is very deep in all markets we can see, even in Europe.
And so consumption in it's one driver of the prices. Prices in North America have increased, but if you see prices in Europe also are increasing substantially. On the other hand, the offer, I mean, utilization in The U. S. Still is at 75%, 76%.
So this is making that prices are at these high levels. Do I see more increases? It's very difficult to say I see that. I think that the prices are going to stabilize. But what I think is that it can stay at high levels for longer than what I thought.
That's why I'm what I'm seeing today. Pesqueria update. So Pesqueria, we are going to produce our first coil in June. Of course, the step up of one of these facilities is a long one. So it's not going to be reflected a lot more in 2021.
But we are expecting that in a few years, we will be producing at 4,400,000 tons in that facility. Remember that from that part, we have our own imports of Cotro. So we are going to substitute our own imports that are whatever near 1,000,000 tons, a little bit less than that. So part of the shipments is going to substitute imports. And I think that in incremental shipments from would the be around 3,000,000 tons in the next not in 2021 or 2022.
I mean, again, it's a process. But 3,000,000 tons is probably in 2023, the incremental shipments of Tamil Mexico. I hope with this, I answered both questions, Caio.
Speaker 5
Yes, yes, you did. So just so and I see if I understood it correctly, you do believe that by 2023, you will be able to sell 3,000,000 tons more than you're selling in 2020. Is that correct?
Speaker 2
Correct. Some of those shipments can be exports. I mean, if you say shipment from Tel New Mexico, not to the Mexican market exactly. But the facility is going to produce at full capacity replacing imports that we have.
Speaker 0
And your next question will come from Timna Tanners from Buffalo. Your line is open.
Speaker 6
Hey there. Good morning, guys. How's it going?
Speaker 2
Very good. Thank you. Good morning, Timna.
Speaker 6
Good morning. I wanted to ask a few questions. One was just shifting to the South America region. I know you mentioned that things were returned to pre COVID, but even before COVID, obviously, there was a recovery begun. So just wondering if you could give us a little bit more color on the Southern market if the fourth quarter is a good run rate into 2021 and beyond?
Speaker 2
Well, I mean, sales in the Southern region are mostly in Argentina. First quarter is going to be a very good quarter. The recovery of the Argentinian market, it's very unexpected. But Argentina has a lot of, I would say, challenge going forward. I mean there's a renegotiation of the debt with the IMF that has to come, and there are some challenges in the macro economy.
So how it's going to be in the first two quarters, I think these volumes would be achieved, as I said. Going forward, it depends a lot in these renegotiations and the successful debt renegotiation and the stability in the macroeconomic context. I mean inflation has to come back has to come down in Argentina and stabilize the debt problem. So that's I mean, I think that's going to be what I mean, if those are resolved, this can continue forward. But first, we have to see what is happening in this area.
I hope I'm clear, I think
Speaker 6
Sure. As clear as possible. I think you have to stay tuned, but that's helpful. Thank you. I guess, I forgot people usually ask all their questions at once.
If I could ask another one or two. That's probably. Yes. I'm slower these days, I guess. With the fourth quarter, on the third quarter call, had said that EBITDA margins could get to as much as $200 per ton.
So it did. And I know that we you anticipate higher pricing, especially because of the lag effect into the next couple of quarters. So can that margin be sustained and grow? I mean, are you continuing to grow faster than your costs? That's my second question.
My other question is, following up on the dividend comments from before to Carlos, is it possible that I know that you were compensating for not paying last year, but is it possible the Board consider this dividend payment a new starting point going forward if your profitability continues near recent levels?
Speaker 2
You, Lina. Two great questions. Pablo, why don't you answer the first one?
Speaker 3
Okay. Hi, Tina. How are you? So you're right. We were expecting an increase in EBITDA margins like we like to look at our numbers, and that is reflected in an increase in the EBITDA per ton to higher than $200 per ton.
Clearly, we are expecting an increase in that number for the first quarter of the year and take into consideration the picture that maximally depicted on prices in the North American market, this could be sustained in the following one. Then we will need to analyze clearly and to see which is the impact of the new pricing scenario to reflect that number. Again, what we have and we'll continue to do, and I think that the Pesqueria facility will help us to continue to do that, is to sustain our margins at the highest level possible. And even in this scenario that we are seeing with the significant level of pricing that we are seeing, we keep having an EBITDA margin much higher than our competitors. And this is what we are looking for and what we are continuing working on.
And even in this area that we have very significant difficulties, we have reached an EBITDA margin that was higher than last year. So we see some opportunities to continue in having very high EBITDA margins and EBITDA per ton during the upcoming quarters, and we will keep working very hard in order to sustain as much as we can into these levels.
Speaker 2
And the second about the dividends, Timna. Mean dividends, as you know, in our company are decided by the shareholders meeting, so I cannot comment exactly if this is a new standard or not. Having said that, I see our expectation is of a strong performance at least in 2021. So if this continue, there's no doubt that this good performance would be reflected in the dividend payment of '22. I think that with this, I answered the question.
Speaker 6
Yes, definitely. Thank you so much. Best of luck.
Speaker 2
Thank you, Tina.
Speaker 0
And your next question will come from Andrea Wilkenthauser from UBS. Your line is open.
Speaker 7
Thank you very much. Just two quick questions from me. Follow-up on the capital allocation. You obviously mentioned dividend, you mentioned CapEx. Obviously, you're very cash generative at the moment.
And obviously, your expansion in Mexico is kind of coming close to an end. Any thoughts about doing a potential potential share buyback at this point in time? That is the first question. And secondly, you've also mentioned that you expect slab sales to kind of pump down in the first quarter as you reallocate volumes into Mexico. Why is it happening so early with the Mexico expansion not ramping up until June?
Is that just restocking driven that's driving that reallocation of snaps? Those are the two questions.
Speaker 3
Maximo, let me take the first one. You know that we always look at different alternatives to increase our share price, the level of floating that we have. So we don't consider everything together in analyzing these type of transactions. So it's difficult for Permian to move ahead with that because going to that direction will probably be good for the market, but then we could be generating additional problems in the near future or taking a decision like that. So that's why we have been reluctant to take a decision like that one in turn.
And we continue to believe exactly the same. So I do not see in the near future a transaction like that one. What we see is continuing, as Maximo was explaining, our dividend payment, our dividend increase in as we have been showing in the last year. So there is where we are in respect to that. Maximo?
Speaker 2
Yes. The second one, Andreas, is the slab. And you're right. I mean slabs, we are still buying or using the same amount of slabs because we mill didn't start. But two things.
First of all, this integration is going to happen. So in some sense, we are trying to certify our slabs in a lot of customers with our own hot spring mill, but to be ready to improve and to sell from the new hot spring mill just from the beginning. So that's one of the reasons. And the second reason is more a commercial reason. I mean we are always looking of what is our best opportunity as cost to buy and sell or to transfer to Mexico.
So we are always using this I mean, this equation to see what is and to be honest, in the first quarter, the question given that it was better to ship more to Mexico than to sell from Brazil and ship and buy from Mexico from other sources. So those were the two reasons, Andrea.
Speaker 7
Okay. That's very clear. I appreciate that. And maybe a quick follow-up. So you already answered this question partly, but just to clarify, for the expansion in Mexico, how many months or quarters do you kind of expect it to take from June to kind of reach the full run rate?
I mean you always talked about twenty twenty three in terms of sales of full nameplate capacity, but presumably, it's not going to take eighteen months to ramp it up. So how should we kind of think about the sequential increase in production the way you're planning it right Yes. Now from the new
Speaker 2
And you're right. But remember, the new sales I mean the hot spring mill in Pesqueria will probably be at full capacity as soon as possible. I'm not saying in six months. But I mean, in next year, we will probably be producing at full capacity. The thing is that most of an important part of the new sales are industrial customers, which we have to go through a very long period of certifications, which we are advancing in some of the customers, but not in all.
So to have both, I mean, our Churubutsco facility and our Pesqueria facility producing at 100 will probably take to 2023. We will probably, I mean, improve I mean, put our facility in Pesqueria at full capacity. And probably for some time, the Churubusco facility will decrease a little bit production. It's a facility older and with a higher cost. So we are going to focus over everything in Pesqueria and then increase Chirubusco in 2023.
Got it. So it's a way of being I mean, it's conservative, I know, but we want to do it that way. I mean, again, if the market or we are able to certify all our products quicker, probably we'll increase that or we will improve that.
Speaker 7
Yes. No, that's very clear. That's very clear and conservative is good. I appreciate you taking the question. Thank you very much and congrats on the solid results.
Speaker 2
Thank you,
Speaker 0
Your next question comes from Your line is open.
Speaker 8
Thank you. Good morning, gentlemen. Two questions on my side. The first one on slab on the slab market. Could you comment on the dynamics there, supply and demand?
We are seeing pretty pressured prices if you expect this to hold for longer? And the second question on the demand side in Mexico. What are the sectors that you're seeing the most positive demand momentum, if you could comment on that as well? And then the very final one, just to double check, you mentioned the $40,000,000 impact because of the specific issue. Just production loss or that there are other costs associated there?
You.
Speaker 2
Thiago, I start for the third one. This is production loss, most of it. I mean there's not much else. There's some part of that we purchase natural gas a little bit higher, but the main impact is production loss in a facility that is at full capacity. So if we lost production, we lost shipments.
We cannot recover today. So we cut, I mean, that's the only thing. Demand side in Mexico, I think most all of the industrial customers are at full capacity here. I mean, the sectors. As I said, I think in my remarks, I mean, I mean, home appliances, HVAC, everything is running at full capacity, all our customers.
Even auto, the auto industry, which has these problems of the semiconductors, I mean, they are also running at a very high level with this stoppage going back and forward because of this constraint. But they are very I mean, at a very high level of production. So all the industrial sectors are very high in Mexico. Construction is starting to improve, but it's not the main driver of the demand in Mexico. If I may, I'm sorry
Speaker 8
to interrupt. On the on this very strong demand dynamic, how much of that do you attribute to a restocking cycle across different industries because of the situation created by the pandemic? We are seeing that in Brazil. That's why I'm asking. So do you think that is happening also in Mexico and other regions?
Speaker 2
I don't think it's happening in Mexico. I think that all the final goods are really consumption in Mexico and North America. I mean people are spending much more in improvements in their houses, in new houses. I mean and to be clear, we don't see a stock in distributors or high stock in distributors or intermediates. We don't see that.
Service centers don't have much stock in Mexico. I don't think they have a lot stock in The U. S. So I'm not seeing an increase in that. I'm seeing real demand, at least in the industrial part of our shipments.
In construction, again, there are not much stock, but it's not that high as the industrial sector. I'm not saying it's not improving. It's improving a lot since the pandemic, but it's not as high the demand as it is in the industrial sector. Hope
Speaker 8
And
Speaker 0
with this, it's
Speaker 2
again, we are not seeing also that in Argentina, to be honest. I mean, the increase in stock in a lot of things. In some parts, yes, but in others, not. Slab market, how hot it is, I mean, all the prices have increased. I think it's not only the slam market.
I mean, with hot rolled coin with a price of $1,300 in The U. S, I mean, it's clearly slab market has also increased the prices, not as much, I think, but increased the prices. So I think that is a thing of all the market, not of slabs particularly.
Speaker 8
Do you think there is a mismatch between supply and demand in the slab market, meaning some integrated steel producers basically reduced capacity utilization. So they basically started to Well,
Speaker 2
in North America the North America Yes. In the North America, there's always a lack of supply of slabs. That's for sure. Before the pandemic and clearly now, I mean, there are not even one producer of slabs except probably La Zacrocadena, which they are shipping everything to them. So the lack of slabs in the core North America unit, North America economy, it's a thing that happens, I mean, prior to pandemic, and it's happening today.
I mean that's a reality. In the rest of the market, I think Brazil and Russia, which are the two main suppliers of slabs, I mean, they are producing slabs normally.
Speaker 8
Yes. What I meant, Massimo, is just like the rolled steel demand might have recovered faster than capacity, than slab production is recovering, and that created a mismatch. So steelmakers that used to have their own slab supplied internally, they are now buying the market while they stabilize their slab production?
Speaker 2
I am not seeing that. To be honest, I am not seeing that yet. Okay. I'm not saying that it's not happening, but it shouldn't be a huge impact on the slab market.
Speaker 8
Okay. All right. Thank you, Maximo.
Speaker 0
And your next question comes from Jonathan Branch from HSBC. I
Speaker 9
just wanted to return back to capital allocation. So Maximo, you mentioned you have a few different things under study at the moment. I'm just wondering sort of how does M and A fit into that? Is that something you're also looking at? Or are there is there any possibilities there?
Or is the expectation that it will be typically organic growth going forward? And then secondly, just as it relates to some of the internal projects, is it fair to say that this would be sort of more incremental steel capacity? I'm just wondering sort of how you'd be thinking about iron ore at the moment. Would it be possible for you to increase production of iron ore and sell more to third parties given the high price? Is that under consideration?
Speaker 2
Thank you, John. Capital allocation, organic or M and A, I think I mean, we always look to both, to be honest. We analyze both, and you see that was track record. I mean, we have made M and A acquisitions and part of our growth, our history was through M and As. So that is possible.
If you said, well, you have something concrete to know, we don't. And some of the projects we are analyzing are organic growth, for sure. Iron ore, as you know, we finished a couple of years ago our investment in Pena, Colorado. We have some opportunities in iron ore, but they are not still big opportunities. I mean we are going to increase production but not in a substantial way yet.
I mean we have to look more for that.
Speaker 0
At this time, we have no further questions in queue. I turn the call back over to the presenters for closing remarks.
Speaker 2
Okay. Thank you very much to all of you for attending this conference, for your interest in Interneum. I hope this call has been useful. And if you have any additional questions or comments, please contact. Thank you very much, and stay safe, please.
Speaker 0
Thank you, everyone. This will conclude today's conference call. You may now disconnect.