United States Steel - Q3 2021
October 28, 2021
Transcript
Speaker 0
Everyone, and welcome to United States Steel Corporation's 3rd Quarter 2021 Earnings Conference Call and Webcast. As a reminder, today's call is being recorded. I'll now hand the call over to Kevin Lewis, Vice President of Investor Relations and Corporate at P and A. Please go right ahead.
Speaker 1
Thank you. Good morning and thank you for joining our 3rd quarter call. We are looking forward to discussing our record 3rd quarter performance and the enhancements to our capital allocation priorities announced yesterday, as well as providing an update on our strategy execution. Joining me on today's call is U. S.
Steel President and CEO, Dave Burrett Senior Vice President and CFO, Christy Breaves And Senior Vice President and Chief Strategy and Sustainability Officer, Rich Froehoff. This morning, we posted slides accompany today's prepared remarks. The link and slides for today's call can be found on the U. S. Steel Investor page under the Events and Presentations section.
Before we start, let me remind you that some information provided during this call may include forward looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties fees as described in our SEC filings and actual future results may vary materially. Forward looking statements in the press release that we issued yesterday, Along with our remarks today are made as of today, and we undertake no duty to update them as actual events unfold. I would now like to turn the conference call over to USCO President and CEO, Dave Burrett, who will begin on Slide 4.
Speaker 2
Thank you, Kevin. Thank you, everyone, on the line for joining us this morning. As Kevin just mentioned, we delivered record performance in the 3rd quarter, Record net earnings, record EBITDA, record EBITDA margin and record quality and reliability. Thank you to the U. S.
Steel team for this quarter's record setting performance and for your unwavering commitment to not only our customers, but of course, our steel principles, including our number one core value of safety. Our record setting performance in Q3 and throughout 2021 has truly transformed our business and demonstrates the progress we are making in pursuit of BEST. By year end, we will have transformed the balance sheet by repaying over $3,000,000,000 of debt, achieving our deleveraging target ahead of schedule. We expect to have total liquidity of approximately $5,000,000,000 Creating a foundation to confidently execute our strategy and invest in our competitive advantages. And We will have put the business in position to deliver another strong year in 2022.
Our transformed balance sheet, the ability to pre fund critical strategic investments and continued optimism for our business gives us confidence to return capital to stockholders while executing the next phase of our best for all strategy. We believe the market is significantly undervaluing the progress we've made and the value our strategy is creating. And now is the time to be more balanced in our capital allocation priorities. Our strategy is truly best for all, of course, including our stockholders. Let's get into today's presentation on Slide 5.
We're delivering strong performance year to date. Continued bullish outlook for 2022 and beyond and with direct returns. Our biggest challenges remain lowering our capital and carbon intensity. Investments in mini mill steelmaking, like the construction of a second mini mill, while investing in our competitive advantages, can deliver on these objectives and reposition the company for the future. The solution is to continue moving toward a more balanced capital allocation strategy by Successfully executing our best for all strategy with Mini Mill 2 in an electrical steel line and coating line at Big River Steel.
We are moving quickly on our path forward by expanding our competitive advantages through strategic investments improved through cycle earnings and cash flow and reduced capital and carbon intensity. Whether you're looking only at next year or our ability to build long term value, we believe that investors are undervaluing our progress and potential, But not our customers. They are noticing the transformations that's taking place at U. S. Steel and the importance of a regional supply chain.
Our industry leading finishing line capabilities are increasing our value proposition and customers are excited about the opportunities we are creating together. Whether it is advanced high strength steels, differentiated electrical steels or green and sustainable steels, Discussions with customers continue to shift from transactional to strategic, and that's important. We continue to create longer term value with customers by prioritizing innovation, differentiation and strategic goals and look forward to building deeper relationships that unlock the value of U. S. Steel for our customers and provide them The certainty of a regional supply chain.
Slide 6 further emphasizes our progress and performance. We are encouraged by our record setting performance, performance that is outpacing even those records being achieved by direct competitors. But there is more we can do. As we said, our goal is to be the best deal competitor. And while there is certainly much more opportunity ahead, we've clearly come a long way quickly.
As we always say at U. S. Steel, safety first. And I'm so pleased with the U. S.
Steel team for continuing to prioritize safety and for embodying our steel principles each day. Moving to our margin performance. Our enterprise EBITDA margin reflects The disciplined value focused approach we've taken to our footprint. With revenues of nearly 6 $1,000,000,000 in the quarter, the quality of our earnings demonstrates a business model that is increasingly built upon Capability and cost differentiation. From our iron ore advantage to our integrated assets and from the newest mini mill in the country To the most efficient mill in Eastern Europe, our diversified footprint is extracting significant value from today's stronger for longer market.
While the competition isn't standing still, the actions we've taken over the past several years to invest in our assets, Streamliner footprint and ad capabilities have created significant value leading to outperformance versus peers this quarter. Our mini mill performance also continues to be the industry leader, further widening its performance versus other mini mill producers. Our position as a mini mill leader creates the perfect platform for high return investments In capabilities that expand our margins, reduces our carbon and capital intensity, and furthers our customer Value proposition for sustainable Green Steel Solutions. Those investments continue to be supported by strong liquidity, and we are moving forward with investments that create enduring value while rewarding stockholders for the progress we've made so far. Slide 7 expands on what makes U.
S. Steel unique and why Best We'll continue to grow the competitive advantages of U. S. Steel. We are investing to get better, not bigger, and expanding our 3 competitive advantages that differentiate us versus the competitors.
1st, low cost iron ore 2nd, lower greenhouse gas emission mini mill steelmaking and third, best in class finishing capabilities. Those competitive advantages are built on a foundation of research and innovation and deep customer relationships. Let's turn to Slide 8, where I will first provide an update on how we are expanding our iron ore advantage. We are pleased to report the first step in our metallics strategy, which pivots our iron ore advantage in Minnesota Towards our growing fleet of EAFs, we are finalizing an agreement with a strategic partner to produce up to 500,000 tons annually of pig iron at Gary Works. Under the contemplated deal, our potential partner would fund, install and operate pig iron production assets, which we would supply with excess liquid iron production.
This potential partnership would further enhance the cost structure of Big River Steel by in sourcing high value metallics while driving blast furnace efficiencies at Gary Works. The permitting process has begun and we expect Tiguan production at Gary to begin in early 2023. This is an efficient and quick way to expand our iron ore advantage to our mini mills, and we Continue to evaluate other opportunities to extract additional value from iron ore. Slide 9 provides some additional context on our mini mill number 2 investment. Last month, we commenced the site selection process to build a new state of the art mini This new mini mill will provide differentiated steelmaking supported by a comprehensive suite of finishing assets, including advanced high strength steel galvanizing, hot rolled galvanizing, painting and slitting.
We are expanding our minimal steelmaking capability as we continue to transition towards sustainable lower greenhouse gas emission steelmaking. This investment is a platform to provide our customers with more of the green steel they expect from like minded partners like US deal. We're in the process of filing permits in multiple states and are on track to begin construction as early as the first half of twenty twenty two. Mini Mill number 2 will be built by the same experienced construction team who built Phase 2a of Big River Steel ahead of schedule, under budget and fully ramped in record time. As we said in our press release last month and will reiterate now, we do not expect Mini Mill No.
2 to add to the overall production volumes of U. S. Steel. We expect the value added capabilities of mini mill number 2 to drive an approximately $650,000,000 of incremental EBITDA contribution from this investment once fully ramped. Also yesterday, we announced plans to build a new coating line at Big River Steel.
Slide 10 has the details. This line will have 325,000 tons of annual capability and will sustainably produce both Galvalume And galvanized product, we expect the investment to contribute another $60,000,000 of annual run rate EBITDA to Big River's already industry leading results. We expect the line to produce a mix of 75 percent Galvalume and 25 percent hot dip galvanizing. Galvalume capabilities create opportunities to target the higher value construction market, including exposed Building panels, hot dip galvanizing capabilities create additional opportunities to serve natural extensions of the Big River Camp with regards to our capabilities of the facility as we provide customers with sustainable steels to help meet their Decarbonization objectives. As we continue to demonstrate our industry leading position at Big River, we're excited to expand the mini mill footprint, Invest in downstream capabilities and further enhance the commercial mix of our business model.
Let's turn to Slide 11. The progress we have made in 2021 is undeniable. Over the past several quarters, we've transformed Our balance sheet. When we closed on the Big River Steel acquisition at the start of the year, We carried $7,000,000,000 of debt and expect to end the year with $3,900,000,000 And expect next year's run rate cash interest expense $225,000,000 Our pension plan is overfunded An enviable position that others in our industry are not close to achieving. We are in.
We'll continue to look at the ability to delever further as debt becomes callable, we are very confident that this level of debt puts us in a sustainable and manageable position to support investments in our business. Next, we continue to believe the highest source of long term value creation is We have outstanding competitive advantages that reshape our earnings profile and reduce our capital and carbon intensity. Our cash and liquidity position more than supports these high return projects and allows us to execute with confidence. And today, given the undeniable progress we've seen over the past shareholders with the improvements we've made to the business. We believe that the market is not rewarding us for the strong performance, yet recognizing the long term
Speaker 3
to stockholders. And we expect to see a
Speaker 2
dividend per share quarterly dividend and
Speaker 1
Moving quickly on a $300,000,000
Speaker 2
Our commitment to ensuring our strategy is indeed best for all. Our goal is to ensure direct returns It's become an enduring part of our capital allocation strategy, and we believe there are catalysts that could drive additional buybacks Free cash flow generation, we believe there are near term opportunities to divest non core assets, primarily real estate, which could further accelerate or increase Further authorizations. In addition, the option for Stelco to acquire 25% of MINTAC remains in place through January of 2027 and presents an opportunity to return up to $500,000,000 of incremental capital to stockholders. Christi will now provide details into our quarterly performance before I provide some thoughts on 2022. Kristi?
Speaker 4
Thank you, Dave. I'll begin on Slide 12. As Dave mentioned earlier, the Q3 was a quarter of records. We delivered adjusted EBITDA and EBITDA margin of over $2,000,000,000 and 34%, respectively. This represents a nearly $750,000,000 or 58% increase over the Q2.
Adjusted earnings per share in the quarter was $5.36 per diluted share. We also generated approximately $1,300,000,000 of free cash flow in the quarter, including a 400,000,000 our investment in working capital. We expect another quarter of strong free cash flow generation in the 4th quarter. Next, let me expand on some key points related to the balance sheet. Year to date, we have repaid approximately $2,700,000,000 of debt and expect to end the year with $3,900,000,000 of debt on the balance sheet, an amount we are confident is sustainable supports the investments we're making in our business.
We ended the quarter with net debt to last 12 months EBITDA of 0.6x and expect to end the year at 0.2x. With the balance sheet strengthened, 80% of our remaining debt due in 2029 and beyond and a fully funded pension plan, we are well positioned for a future of value creation. Let me now transition into the individual segments, including expectations for the 4th quarter. Higher selling prices Going through our contract structure in the Q3 will likely continue to be in the Q3. We expect lower cost to be an offset.
We currently expect 4th quarter flat rolled EBITDA to be near our record 3rd quarter performance. Our Mini Mills also delivered record EBITDA and EBITDA margin. 30% 42% EBITDA margin In the Q4, we expect higher prices to continue to flow through the segments, primarily monthly contracts. We currently expect the 4th quarter to be another record for our mini mill segment, potentially exceeding $500,000,000 of EBITDA in the 4th EBITDA was $418,000,000 in the quarter or 33 percent EBITDA margin. A 60 day outage from the market in the Q4.
Operational headwinds as a result of the planned outage, modestly lower shipments And changes to the pricing dynamic in Europe are expected to result in reduced 4th quarter EBITDA versus I also want to take a moment to recognize and congratulate the USSK team for completing Slovakia's first us. Sustainability linked credit agreement reinforces our commitment to creating profitable solutions for sustainable steelmaking and replaces the previous €460,000,000 credit facility. Our Tubular segment reported similar quarter over quarter results. Improved commercial performance was largely offset by higher scrap and energy costs and continued high levels of imports. Imports We expect 4th quarter performance to be similar versus the 3rd quarter as higher selling prices are offset by elevated scrap costs for the Fairfield EAF and continued high import levels.
We expect Enterprise earnings in the 4th quarter to continue to reflect the strong market conditions we
Speaker 2
Moving to Q and A, let's turn to Slide 13 to provide an update on 2022 and the excellent work we are doing commercially to lock in incremental EBITDA next year on our fixed price contracts.
Speaker 3
We are
Speaker 5
in a great position to both create and deliver value to our customers.
Speaker 2
We are executing a robust contract process with customers, in most instances having begun discussions 90 days sooner than we have historically. Our strategy is paying dividends. Assuming the forward curve, which we believe to be a pessimistic view of spot prices, we fully expect for our Flat Rolled segment. We've also listened to our customers and, in some instances, have signed agreements beyond 12 months. This creates longer uplift and supply continuity while fostering collaborative product development opportunities to solve their most difficult challenges.
Commercial terms for more than just price, leveraging continued strong interest in advanced high Future sustainable steel offerings from U. S. Steel. Customers who are foreshadowing That the trough of the chip shortage could be behind us. We expect
Speaker 3
that we will continue to see the growth of
Speaker 2
our 4th quarter and first quarter build schedules and indicating to us
Speaker 5
Kevin, let's move to Q and A. Thank you, Dave. We
Speaker 1
Operator, can you please queue the line for questions?
Speaker 0
We will proceed with our first question on the line from Satish Kaysinathan with Deutsche Bank. Go ahead.
Speaker 6
Yes. Hi. Good morning, everyone, and congrats on a great quarter. My first question is On the Rang Daty, could you please provide further color on the underlying assumptions? And The $650,000,000 up here based on similar capacity.
Could you please explain why this is higher? Thank you.
Speaker 2
Hi, this is Dave. I'll start and then I'll pass it to Kevin on this. And I just want to give an update here. We're We've got a number of possibilities that we can make a decision on fairly quickly and then get on with building the construction most likely in the first half of twenty twenty two. But just in brief, specifically your question, It's Mini Mill Big River Steel.
It's kind of second verse same as the first with enhancements cash flow related to the endless caster. So if you look at our performance, the mini mill at Big River Steel, not only was it on by 0.5 points or so better performance with the next closest mini mill, we feel really comfortable that the numbers that we suggest in here is something like 6 $50,000,000 of run rate EBITDA by 2026 is up and certainly in line with what our expectations would be. Don't know, Sven, do you have anything else to add?
Speaker 1
Yes, Dave. Let me just add to the point around differentiating Good about the attributes again Westcasting enrolling, our facility will deliver, how that translates to value for Not only financially, but also for our customers. And then I'll touch upon some of the assumptions that drive the $650,000,000 of run rate EBITDA. So 1st and foremost, as Dave mentioned, this is very much building on the success Enhancements to the technology at Minimo 2, the first being the inclusion of the endless casting and rolling facility. This really allows us to produce differentiated gauge and width combinations that will allow us to earn a premium in the marketplace.
So that contributes to the incremental EBITDA drive EBITDA and EBITDA margins of the second mini mill contributes to the $650,000,000 of run When you think about being able to serve advanced high strength steel automotive markets, value added construction and appliance markets, The underlying mix of the facility is going to be quite rich. As always, Satish, we evaluate these Projects on kind of a 3 cycle basis. So this is more of a normalized pricing environment looking back historically, call it, in the $600 to $6.15 HR, not necessarily driven by any pricing assumptions that are from historical through cycle averages, the incremental EBITDA is driven entirely by the technology suite and the value added mix of downstream facilities.
Speaker 6
Okay. Yes. Thank you for this color. A follow-up to that, can you talk about your metallic strategy for the new minimal? You just mentioned that you will have a New bigcaster for your current Big River mini mill.
So any color on the raw material strategy for the new mini mill? Yes.
Speaker 2
Well, thanks for that as well, Satish. We're capitalizing on our iron ore advantage that we have in Minnesota. The low cash cost mine sites in North America. And we know that many mills crave pig iron, And this is just a logical and necessary next step to make sure that our mini mill is getting We have regional facilities that many others don't have, and this is a way to enhance that. Rich, anything to add?
Yes. Thanks, Dave. So I think as you hit on, we did announce the pig machine opportunity at Gary. And as you said, that's the first step in an enhanced metallic strategy. It's going to free up some efficiencies at Gary, and it will allow us to start really pivoting our iron ore in Minnesota where we have about 22,000,000 tons of iron ore capacity right now increasingly to our EAF fleet.
And so when you think about that, over the past year. We've been taking home scrap, and that's really opportunity there. You're looking at about 500,000 tonnes per year coming out of this pig machine. And we will continue to evaluate other opportunities to extract value from our iron ore assets as we grow the mini mill segment.
Speaker 7
Yes. Good morning, Dave and team and congratulations on all the success. Just following up On the Pig Iron announcement, I guess why go with a third party there
Speaker 8
Do it yourself, is that
Speaker 7
just CapEx? And then obviously, pig iron is Adding more carbon into the steel there, the EAS steel, how are you thinking about the timing of Potentially adding some lower carbon metallics, HBI DRI product. Thank you.
Speaker 2
It really plays to what we're doing with our strategy. And I think People know that we have combined strategy and sustainable development. So Rich Freuhoff, of course, is here Working on that to make sure that we do move toward not only less Capital intensive, but also less carbon intensive. So this is a step On the way to green. Now 2,050 may seem like a long way away, but we have to do these pivots.
So we have targets for Yes. So I think first of all, we're trying to reduce the capital intensity of the business. So there's no upfront capital needed for us to move forward with this pig iron project at Gary. So that's one of the factors there. In terms of the carbon intensity, I think it's fair to say that From a sustainability perspective, Pig Iron is more of an interim solution.
Longer term, as we've said when we announced our 2,000 and We're going to be looking for partners, and certainly DRI would be one of the opportunities in the future to get to a green DRI facility, but That's a little bit longer term, right? In the immediate term, we wanted to move quickly and get that pig iron down to Big River And then also Feeding Mini Mill 2.
Speaker 7
Okay, thanks. And I apologize if the quality of my phone line is poor. And then on the second question on the capital intensity, as you sort of switch almost 6,000,000 tonnes of capacity from blast furnace to brand new mini mill. What does that do to your through cycle annualized sustaining capital requirements? Thank you.
Speaker 2
Well, I think our through cycle, as we've talked about it before, pretty much stays about the same in the $450,000,000 range. But it will ebb and flow From year to year and maybe Kevin you talk a little bit about next year what the expectations are.
Speaker 1
Yes, sure Dave, happy to. So Alex, in the near term, we provided with that. Some incremental guidance in 2022 on the capital spending front, investments that we've just discussed here this morning, And email number 2, the non grain oriented electrical steel line at Big River as well as the new coating line at And these are the necessary investments we need to continue our transition to mini mill steelmaking. And as you well know, when you look at sustaining CapEx per tonne of steel produced by mini mill, you're looking at in the $15 to $20 a tonne range. So while that's not immediate here in our business model, that's we're guiding where we want to take this business longer term.
And as we increase and we become more of a mini mill steel producer, we'd expect our sustaining CapEx to follow that same trajectory. So that frees up capital to continue to invest in growth, and it puts the business model in a position We're in a directional future free cash flow generation. And when we can do that, like we are this year, we can be successful across the board. So
Speaker 0
Thank you very much. We'll now proceed with our next question on the line from the line of Gordon Johnson with GLJ Research. Go right ahead.
Speaker 8
Good morning, guys. This is James Bartoszki in at the Gordon. First of all, thanks for taking my questions. Good, great quarter. Nice job on the debt reduction.
I guess first question is, can you talk a little more about your contract prices
Speaker 2
and their built in lag. Also as an add You repaid nearly $3,000,000,000 year
Speaker 8
to date and expect I think you said a 0.2x ratio debt I also have a follow-up, please.
Speaker 2
Okay. Well, there's a couple of questions there. Maybe I can set the stage. Basically, the current landscape one customer is, and clearly, we're moving Those that are the enduring customers and those are the customers That like to have contracts, not just short term contracts, but 2 year contracts or so. So we're very pleased The commercial relationships that we have and frankly what we've done is we've revamped the whole commercial process, making the company to look differently Steel neither blessed nor handicapped, I'd say, with steel industry experience.
And that's been a big difference for us as well. But When you combine Big River Steel and the U. S. Steel teams together, it's allowed us to elevate our product offerings. And so that makes it more possible for our customers to engage in the products that they need For their future, and that alignment is really important with this.
So to your point and to your question, your first part of the question is that There's no question that next year's prices will be higher. You have to remember about when the We're set the time before and where the prices are being set right now and the negotiations that are going on. I mean, people want a stable supply base. They want to make sure that they got a regional supply that they can actually count on. And that means they're willing to lock down with the environment that we have now for at least 12 months into future, especially the best customers and find a way to make sure that we can make money and they can make money and we can give them the sustainable, advanced, High strength steel that they expect and will give our stockholders the profitability that they deserve.
So There is the lag in the fixed contracts. It's about, I'd say over 30% that's in the fixed And then we have some index contracts and of course the spot business. But I would say the big differentiator here for us is the customer relationships and then moving more want to have. And that's really a very good plus. So to the 2nd point related to debt.
I'll turn that to Christy.
Speaker 4
Yes. You were asking about, should we think where we are by the end of the year is the right level of debt? It'll be below 4 $1,000,000,000 We think that's a very sustainable level. We've been evaluating which debt may we'll continue to monitor it, but We think where we're at year end is very sustainable.
Speaker 2
Yes. You look at the maturity levels that we have right now, we really don't Take some of
Speaker 5
this debt out, but there's some small amounts in between that
Speaker 2
As we move forward, it's really important to us that when we say best for all, everybody understands That's just not for our customers, but it's for our stockholders. And now is the right time for that capital allocation priority to change Because we do believe it's stronger for longer, not just because of the pricing, but also because the And we've identified what the major investments are. But We want to grow this business' capabilities. Be very clear about that. We are not growing capacity.
We are growing capabilities, and We want to make sure we're differentiated. We want to be low on the cost curve and also have the differentiation that our customers desire. Does that help?
Speaker 8
It helps very much. I appreciate the clarity. And then just as a quick follow-up, don't mean to Squeeze too many in there. But just to make sure I'm understanding this correctly, the expected strategic CapEx, Is that the consolidated level or is that going to be your share, even though obviously you don't know what your share level is going to be
Speaker 1
That represents the total contribution of the 3 strategic projects that We are executing, and our share is 100% of those strategic projects. So we will we very much look forward to 24 beyond when these projects begin to hit run rate EBITDA contribution. There are significant We'll now take a look at our financial results. We'll now take a look at our financial results. So those are all our strategic projects, and we'll be the sole beneficiary of those investments.
Speaker 0
Thank you very much. Wilkenhauser from UBS. Go ahead.
Speaker 9
Thank you very much. Just one question on the capacity expansion. I know you guys have been talking about what you want to do is to built better and not bigger. So how should we think about that in terms of capacity at risk? You've already obviously shut down Great Lakes and one of the major main furnaces at Granite City.
Is that how to think about it? I mean, the capacity that was going to That was going to get shut down to basically make room for the new mills has been shut down? Or should we think about potentially more capacity being shut down to kind of
Speaker 2
want and if our customers want the additional capacity at Great Lakes and they're willing to pay for that capacity, we're whole Urbanize it. It does not look like that will happen. So that's been The thing that we need You remember here, and you alluded to it, we are not building capacity. Capability means that you are better than others. And we want to be low on the cost curve, in many respects, lowest on the cost curve.
And so we want to take share from others. And with what we're constructing, we will certainly do that. We have the opportunity to take share from others. And Frankly, if we're not low on the cost curve versus others, those businesses will be downsized as well. It's basically the survival of the fittest, right?
And so, we like the competition. We like the direction of our strategy. And some people are Going downstream, some people are going upstream. We're making our steel facilities the very best in an integrated model, taking the best On their finishing mills, they're not spending time on their steel assets. Remember, a few years ago, we spent some Our assets.
Other companies didn't do that. So we have assets that are running incredibly well. And You see days away at 0.07, I mean, who's even close to that? That Tells you the assets are running extraordinarily well. And since the integrated mills are the largest part of that, that tells you that that's where those numbers coming from.
So make no mistake about it. We're building capability. It's not capacity. We are very confident that we're going to be low on the cost curve and have the differentiation that our customers want, low carbon footprint, less capital intensity, and we will take share.
Speaker 9
Okay. Thank you. And maybe just a follow-up on that in terms of taking share. So How are you guys thinking about kind of the auto market in the years to come? I mean, obviously, some of your EAF peers have been talking about increasing their share of cash.
And one of your integrated peers have talked about the auto market. Where do you guys kind of fit in that strategy, do you want to you're going to be a bigger part of the auto market or smaller part of the auto market?
Speaker 2
Well, that's a really interesting question Because the answer is always, well, it depends. When we create the kind of relationships that we must It's a win win situation. So we like to play in the differentiated market and we are clearly the leader in advanced high strength steel with our Non oxidized wet flash cooling, what we'd say arguably the best finishing lines in the world, certainly the largest
Speaker 5
So, we feel about
Speaker 2
continue to
Speaker 0
Thank you very much. We'll now proceed to our next question on the line from the line of Emily Chang from Goldman Sachs. Go right ahead.
Speaker 10
Good morning, Dave and Christine. Congratulations on a great quarter. My first question The pig machine at GaryWorks. You mentioned there was cash. Capital associated with this.
But perhaps how should we think about what the licensing or processing costs associated with that on a go forward basis could look like?
Speaker 1
So Emily, this is Kevin. So appreciate the question. I think as we've highlighted a few times, this This is a really important kind of first step in expanding the metallic strategy here at U. S. Steel and continuing to leverage our iron ore advantage For our growing fleet of electric arc furnaces.
I think that we will provide some incremental detail on kind of how the structure will work. One of the unique things, and let me just provide a little bit of context for everybody so you appreciate the opportunity here, is that at our Gary Works facility where we have 4 blast furnaces, The steel shop, in many ways, is our constrained asset, which means that the furnaces can out produce the steel shop. So when we evaluated this opportunity and why Gary makes sense is because that we can increase our iron production at Gary Works, which in turn increases our utilization of our blast furnaces and allows us to produce incremental melt that then can feed the pig machine that will be installed. It also makes all of the other products produced at Gary more cost effective because you're starting with a lower cost Iron cost at the facility. So strategically, the footprint in Gary made a lot of sense to extract some incremental value from their Excess iron position.
And it'll be a really nice fit, and as Rich and Dave alluded to, to produce about 500,000 Tons annually of pig iron to serve, obviously, primarily Big River here in the near term. That would be about 50% of Big River's pig iron needs. So really, really exciting opportunity. I think as we finalize the deal with our partner, we can get some more Specifics around how the business is, but obviously, Emily, we're investing here because this is a lower cost solution for River Steel and it gives us certainly certainty within the supply chain. It generates efficiencies at Gary Works and it continues the transition of our iron ore competitive advantage to our mini footmill footprint.
So it's a win win whether it's the mines at Gary or Big River, it's quite a comprehensive value added
Speaker 2
strategy.
Speaker 10
That's really helpful So just to be clear, the new pig iron machine there does not necessarily impact the steelmaking capacity at Gary Works. And then just a quick follow-up, just around Big River Steel's current raw material strategy up until this new pig machine starts up. Can you just remind us how you're seeing sort of the strategy there evolve?
Speaker 1
Sure. So your comment around Gary Steel production, Emily, is accurate. It wouldn't impact the overall steel production capability at Gary Works, given that we're using incremental iron production. And then if you look at Big River's metallic sourcing strategies. Rich touched upon some of the internal synergies we've been able to generate as a result of the transaction by optimizing the flow of prime And home scrap generation within our overall footprint.
They're also buying their outside Scrap needs and metallics needs on the open market, and that's something that we want to continue to in source over time. I think one of the things that's Often over underappreciated is that U. S. Steel really is uniquely positioned with High quality, low cost iron ore and highly capable electric arc furnace and mini mill production. So we have a really unique We have a really unique opportunity to bring those two things together, and we'll continue to do that, as Rich mentioned, to explore other alternatives in the future about how to continue that transition.
So more to come, but the goal is certainly to make Big River more effective. And let
Speaker 2
me just punctuate that. We believe we can provide a Metallics needs by translating our iron ore advantage in our Flat Roll segment To our EAF footprint, the pig iron
Speaker 5
at Gary alone Supply nearly 50% of our
Speaker 2
metallics needs at Big River Steel. So I'll say there
Speaker 0
we'll proceed with our next question on the line from the line of Tristan Gerstner from Exane.
Speaker 11
Yes. Hi. Thank you for taking my questions. The first one on natural gas, if you could please remind us what is your exposure going on? To natural gas in the U.
S. And also in Europe, if you have hedges or contracts in place and you flagged it for the outlook in Q4 for Flat Loeb. What kind of energy inflation are you seeing in Q3 and moving forward.
Speaker 2
Yes. I do think you're Tristan, you're talking about something that's it's important that we manage well because there is Pressure on natural gas and we do have A close watch on that end and all the materials. Frankly, we had an extraordinarily talented procurement team that does hedging And has an opportunity to make sure that we get the right price at the right time and has managed that pretty well. That organization actually reports to Christie, so maybe a little more, Christie.
Speaker 4
Okay. Yes, we did see some increases in the Q3. About $20,000,000 was the increase in the Q3 on natural gas. We are hedged, both in Europe and in the U. S.
And for
Speaker 11
All right. Thank you for the And my second question is a bit more on the steel price outlook in the U. S. You mentioned that That makes you more optimistic than other market participants that probably see higher inventories, imports and new capacity coming online in coming quarters.
Speaker 5
Tristan, I think Maybe there's a
Speaker 3
couple of pieces. So, I
Speaker 2
think, we're going to be looking at drivers what we view as a super cycle here for the steel industry. I've been talking This for over a year now, I guess. And I'll just
Speaker 5
kind of run through a bunch of things that From
Speaker 2
a macro perspective and then we'll get into some of the more details. So bear with me here
Speaker 5
a bit as I just kind of lay Things that inform the way we think. Well, 1st and foremost,
Speaker 3
Well, I think
Speaker 2
that's a very good question.
Speaker 3
I think that's a very good question. I think that's a very good question.
Speaker 2
I think that's a very good question. I think that's a
Speaker 5
There's a lot of uncertainties there, but it's pretty clear that it's going to continue for the foreseeable future.
Speaker 2
We're also seeing the fiscal policy expansions in the U. S. As well as in the other countries. There's lots of Supply chain concerns, and it's not uncommon. We see this all the time.
When you see robust upturns, you have ports that have trouble, Trucks have trouble, any type of logistics. They struggle with this. And so what that means is another stronger for longer. And then you Later on top of that, there's all kinds of cash just sitting on the sidelines. I think I read somewhere here that the savings Rate for folks in the U.
S. Is you add it all up, it's like $3,000,000,000,000 It's just a lot of money just sitting on the sidelines And that doesn't count the investments that were sitting on the sidelines before the pandemic hit. So there's a lot of pent up A motion for getting on with things. And once the pandemic is clearly behind us and we've had a lot of starts and stops, It does seem like it's getting better, but it's going to be episodic for a while and that probably extends things for a while. When you think about the climate change thing, a year ago, hardly anybody was talking about climate change, right?
Now at World Steel Being on their executive committee, it's like the lead discussion. People really care about the environment here, and we know how this works. Countries are going to pay. Our customers are going to pay. We bring the capability, right?
And of course, we're More specific, the home here, we're waiting for and I think it might be December, it's not going to come in 2022, come in 2023. And so, there's another opportunity. And governments around the world, they're given grants, whether it be in Canada. We heard about the grants to the steel industry there, right? And then you have Belgium and Spain and Germany and Slovakia and others that are really interested in decarbonizing.
We see that around the world. 232. Think about 232. That's U. S.
Trade Representative Tai Commerce Secretary, Raimundo, has done an incredible job. They understand how important Steel is the United States of America. They get it. And so, yes, 2, 3, 2, there may be some tweaks, Some kind of court assistance tax or something like that for the foreseeable future because you're not going to build back better With Biden, you're going to build back better with Biden. You're not going to build back better with China that?
Steel. You're not going to build back better with steel that goes into Europe, into the United States. They get this. They understand the importance of enforcement. And I think they're doing an incredible job holding the line with a lot of bad actors.
I mentioned that with COVID. We haven't seen what's going to be unleashed here. The semiconductor issue, look at where There's going to be a big uplift on that, maybe not 2022, but 2023. People want to buy cars. We saw what happened in the used car area, right?
And transitioning Domestic steel industry to sustainable steel, I think everybody's on board with that. Some will do a better job than others. But There's a lot of money coming into the world right now that wants to go to work. This is an incredible time to be working. We went through awful times with COVID, but it's one of these things.
You just don't find something you like about it. You find something you love about it and get on with moving to the future faster. And that's exactly what we're doing. Treat this thing as a blessing and we will see the money flow that we haven't seen in a very long So, if you can't tell from the passion in my book, I'm not just bullish. I am over the top super cycle on this because I am a strong believer This is stronger for longer and it's bottom line is This the economic circumstance for a macro environment and from a steel industry environment.
And then, of course, with U. S. Steel, we think I presume that was a yes.
Speaker 0
Thank you very much.
Speaker 3
And I will now turn the
Speaker 0
call back to US Steel's CEO, David
Speaker 3
I will now turn the conference
Speaker 0
over to Mr. Kurt for closing comments.
Speaker 2
Well, thanks for your continued interest in U. S. Steel. We're executing on our strategy and it's The entire business and I have to say thank you to the employees. Your laser focus on safety and the customer, It's proving out to be a spectacular year to date.
Our strong culture and workforce, we're most recently recognized, believe it or Here is the Newsweek one of the Newsweek most loved workplaces. And our employees certainly Are pleased with that, and we are too. Our industry leading safety performance, diverse and collaborative workplaces and inclusive employee benefits are examples of how we create an environment where employees can thrive. It's all about relationships with your employees, with your customers and now you can tell with our stockholders as well with the capital allocation uplift that we're providing and will endure. We're pleased by the recognition of this from Newsweek and look forward to building On the future.
And then finally, thanks to our customers for your continued business. We're investing today to meet tomorrow's needs. We want to continue being a trusted partner in your success and know together we can create a better future for our businesses and for the planet. Now let's get back to work safely.
Speaker 3
Thank