Ternium SA (TX) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ternium Second Quarter 2021 Results Conference Call. (Operator Instructions) Also please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Sebastian Marti. Thank you. Please go ahead, sir.

Good morning, and thank you for joining us today. My name is Sebastian Marti, and I am Ternium's Head of Investor Relations and Compliance Director. Ternium released yesterday's financial results for the second quarter of 2021. This call is complementary to that presentation. Joining me today are Ternium's Chief Financial Officer, Mr. Pablo Brizzio; and Ternium's Chief Executive Officer, Mr. Maximo Vedoya, who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, there will be a Q&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 2 in today's webcast presentation. With that, I'll turn the call over to Mr. Vedoya.

Thank you, Sebastian, and 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 12 months with strong steel demand and low inventories in the value chains. 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 chains, news from China with growing export rebates with the objective of limiting steel production and from Russia with taxes on steel exports.

In recent encouraging environment, we successfully started up our new hot rolling mill at Pesqueria on [May 15], a monthly 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 third quarter of 2021.

On the balance sheet side, in the second quarter, we continued 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 continues to be affected by the semiconductor supply chain disruption, a situation we expect should gradually 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 markets product needs, 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 currently 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 agribusiness. On the other hand, the macroeconomic environment in the country continues to be unstable. Also in November, the midterm election in Argentina, which could introduce a higher level of uncertainty in the market.

Turning now to the Other Markets regions. As anticipated in our previous conference call, we continue to integrate our slab mill in Brazil with our facilities in Mexico and Argentina. The resulted -- this resulted in a lower volume of slabs sold to third party in the quarter, offsetting the higher shipments -- of shipment 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 [Alseres] Metals Alabama facility expired. This was timed to concur with the start-up 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-19 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 months. 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 U.S. So there continues to be a risk of further lockdowns or disruption in the value chain if the sanitary situation worsens. Also, I would like to call your attention to the communication of Ternium's last sustainability report, we issued it in June, and 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 6 areas: safety, environment and decarbonization, people, community, value chains and business strategy.

Concluding, we expect to continue showing a strong performance over the following quarters as favorable global steel industry fundamentals should support 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 the webcast presentation of our performance during the second quarter.

Thanks, Maximo, and good morning to everybody. Ternium's performance in the first half of the year has certainly been remarkable. It reflects the varied conditions prevailing in the steel market that Maximo has just described. We will see now from this condition grow 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 3 in the webcast presentation. EBITDA in the second quarter of the year reached $1.4 billion, an 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 this out of the order margins are not going to be sustained over the cycle, I wanted to point out there is something that distinguishes Ternium among its peers, consistently higher margins and [EBITDA] over the cycle.

Net income in the period reached $1.2 million 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 4 to review steel shipments. When we compare our 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-19 outbreak.

Now on a sequential basis, shipments in Mexico and the Southern Region increased 2% in the second quarter of the year, remaining at the elevated levels in a scenario of strong steel demand in Ternium's main markets. Looking forward, considering the strong demand for Ternium's steel products in the U.S. and [Southern] Region and the ramp-up of the new hot rolling mill in Pesqueria, we believe our shipments in Mexico should increase by a total of approximately 600,000 tons, as Maximo already mentioned.

In the Other Market region, you can see that the ordering of slabs shipped to third parties in late [May , steel high grade, sorry,] continued to decrease quarter after quarter. The reduction reflects the increased integration of Ternium's slab facility in Brazil with the company's industrial systems. We expect this integration trend to remain in the third quarter. And as a result, we expect a further reduction of less volume shipped to third parties.

Okay. Now on the next page, you can see combining these developments, we have consolidated steel shipments of 3.1 million 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. Ternium revenue per ton in the second quarter increased sequentially and in a year-over-year basis. This, together with the large reset of contract prices in Mexico anticipate a further increase in Ternium's 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 $3.9 billion. Compared to the second quarter of last year, net sales in the second quarter more than doubled.

Let's now review on Page 6. The main driver, we had a sequential increase in EBITDA and net income in the second quarter. The chart on the top shows that EBITDA mainly increased as a result of higher realized prices, which were partially offset by higher cost per ton, mainly on higher raw material and purchase 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 continued 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 operations in Usiminas [in turn].

On the following page, we can see the same changes, but for the first 6 months of the year. In both charts, the drivers of the increase of EBITDA and 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 8 to review our quarterly cash flow and balance sheet performance. Cash from operations in the second quarter of this year was $628 million, 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 million after capital expenditure of $161 million in the quarter. This enables Ternium to slightly reduce net debt after paying $2.10 annually in May for a total amount of $412 million.

Net debt stands at just $0.2 billion at the end of June, equivalent to 0.1x net debt to last 12 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 may have. Please, operator, proceed with the Q&A session.

(Operator Instructions) Your first question comes from the line of Caio Greiner from BTG Pactual.

So my first question on capital allocation. I mean, this is probably the main question surrounding investment case nowadays. The company is moving to net cash, maybe in a matter of weeks. And we just wanted to understand how does Ternium see the growth versus dividend equation today? Because, well, on 1 hand, the company is still ramping up Pesqueria so we're not sure 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&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, we were speaking of or there were some talks of building an EAF in Mexico, electric furnace in Mexico.

And is that still the case? Or is that still -- 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 Pesqueria, 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 seeing EBITDA margins normalizing at the 15% to 20% range. And I just wanted to understand if you now see reasons to believe that long-term margins could be sustained above those levels.

Thank you very much, Caio. 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 externally. 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 next quarter. That's true. So this year, we are investing CapEx of $600 million. You already know that considering all the approved projects. We invest in capital -- in working capital around $1.3 billion 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 -- a little bit more than $300 million. We pay the dividend of $412 million in May. And let's remind that this was the highest dividend in Ternium's history. I mean, it was almost doubling 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 February. We always do that, and we pay dividends once a year. But looking forward, I think that this new level of dividend, at least this new level, can be sustained into the future. I mean, as I said in the conference, we are optimistic that the current steel business environment will provide Ternium with this opportunity. Extraordinary dividends, again, this is something that the directors should propose. But having in mind this, I can't rule out an extraordinary dividend, as you said. It's not something that we have today, again, but I'm not ruling that out.

And then CapEx clearly -- or opportunities. We are not doing an opportunity of a geographical diversification. We are concentrating in the Americas. We don't see an investment of ours far away or in other regions that are not the American continent. That's for sure. And again, we are analyzing different projects to grow our business. Today, we are analyzing organic growth. We -- the ramp-up of this hot roll mill in Mexico, which is a huge issue for us, is going to help probably to increase even more our participation in the [Other Markets], 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 strict rules supporting will require us to expand our upstream capacity in the region at some point down 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.

Okay, Maximo, let me take the second part of Caio's question, if I can you. You're right that the margin or the EBITDA per ton that we generated in the second quarter of over $450 per ton and with the perspective and the comments both Maximo and myself made are pointing out for a little higher EBITDA per ton into the third quarter of the year. Also, it's important to mention -- also important to mention that also with the view that the company has stressed by Maximo is that we are not expecting to see significant reduction in prices in the coming quarters after the next one. So even though it's not reasonable to believe that we will sustain 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 worked and it's also something that we mentioned in the opening remarks that the goal of the company is to continue to achieve not only very high levels of EBITDA margins and EBITDA per ton, but to keep on sustaining the feature that Ternium has, which is to outperform our peers in any part of the cycle. On 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 it would be easy to say that the margin of the range between 15% to 20% is something that we can easily overpass. But in a more normal market environment, this is something that we continue to sustain, always working to be not only the upper side of this range or even higher than that. And any investment that we've made, especially the new mill and everything that we are analyzing, is toward these goals. So we sustain clearly probably in the next year being closer to 20% 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 performance of the company.

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

Gentlemen. Hopefully, you're doing fine. A couple of questions, if I may. So Maximo when you said the 600,000 tons increase, are you talking about overall volume? Or are you talking about just the percentage of value-added volume in the company's overall shipments? And second, if you could give us a little bit of an idea of how much slab from the field you expect to sell internally in Mexico so internally and how much to external customers in the coming quarters, that would be great.

Okay. Thank you, Carlos, and thanks for asking. We are doing fine. I hope all you too. The 600,000 tons, if you remember in our last conference call, I told that in the second quarter, in the second half of the year, the hot roll mill 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.

The second part it's -- if I remember, the slabs?

Yes.

Okay. The slabs in the third quarter is going to be around between 800,000 and 900,000 tons at the quarter to Mexico. And to third parties probably it's going to be around 300,000 to 400,000 tons. I mean it's going to be in that range. So it's going to be decreasing from, I think, what a 700 -- no, a little bit less of what we do in the second quarter.

All right. Fair enough. And then just final question.

When you talk about potentially needing to invest in steelmaking capacity in order to comply with the USMCA rules, and would you consider the U.S., Canada or only Mexico?

That's a very specific question, Carlos. I think that we -- I mean, we are analyzing, as I said, 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 milling is there, 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 are analyzing. Remember, the USMCA rule of origins are for the automotive industry. And they are going to start in 2027. So we have time to analyze all the alternatives, and that's what we are doing, Carlos.

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

That's for sure. No, that's for sure. We are not analyzing a blast furnace. That I can tell you.

Your next question comes from the line of Andreas Bokkenheuser from UBS.

I hope you're all safe and well. 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 calls 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.

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 U.S. where private consumption is increasing more. But Mexico is going to close at around a little bit more of 10% steel consumption increase in 2021 compared to 2020. So demand 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 long 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, again, imports.

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?

It's almost the same. I mean, last year, I don't have the exact number, but I think last year, the apparent consumption decreased around 8% to 9% and we are seeing an increase this year of around 10%, probably a little bit more, but I want to be on the cash flow side here. So it's almost the same 2019 to 2021, a little bit more, but almost the same. Again, with difference, Andreas, 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.

Yes, that's clear. different on the product mix in terms of demand. That's very clear. My second question, just actually basically ramp up Pesqueria. How are you kind of envisioning -- I mean I know it's a little bit -- I might not get 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 driven than 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 Mexico from the U.S.? How do you see the -- or where do you see those Pesqueria shipments?

Yes, 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 agree that there are some restrictions and some capacity that's down. But to be honest, today, the U.S. is -- the utilization in the U.S. is at pre-COVID levels. And Mexico is probably producing more.

So North America is not producing less than pre-COVID levels today. It's in the past. And again, we are seeing an increase in demand. I mean the U.S. also. The U.S. probably is going to -- the demand in the U.S. is going to probably grow up this year for more than 15%. We've still 6 months to go, but it's a huge number. So we are seeing some demand-driven issues.

And again, we are also seeing that this reshoring, which clearly is going to take time. It's happening. I mean we are seeing investments in a huge range 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 imports or imports from final products 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 it is changing. So I think that our new facility comes just in the right moment for this.

Again, so for us, the worry is that the volume is 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 the U.S. But mainly, it's going to be for Mexico and the increase in demand and again, imports. And we see a lot of space there.

Okay. That's great. I would probably just make the argument on the demand side for flat steel in the U.S. that, if we look at the 2 dominant drivers of steel in the U.S. being auto and energy, I think those account for about 80% of flat 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 looks like demand is still lower than it was in 2019 pre-COVID in the U.S. And it looks like steel production is up because imports are down from what we see. So I guess that's the basis of my question. We're right now seeing potential of [1,500], which is $400 a ton below the current stock price. I think I agree with you that we're going to see some weakness, but it's probably not going to be significant weakness in the short term.

Yes. And again, you're right about some part. I mean demand in oil and gas clearly is not going to return. I don't think it's going to return to pre, I don't know, 2017 or 2018, I mean -- but again, on a general demand is increasing, apparent consumption is going to raise 15%. 2021 is going to be -- is going to consume more steel than 2019 in the U.S. according to our numbers. And this is a huge issue. And again, of course, you are right, imports. I mean we are more aggressive against imports and most of the U.S. producers also. So it's a combination, I think, of both.

That's a good point. That's a good point. And I don't want to monopolize the Q&A so maybe 1 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, but 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 and remain steady?

No, I think, yes. I mean, yes, if you look to the prospect of what we are thinking about the GDP increase in the U.S., in Mexico, even Canada, there in 2022, not only 2021, there are huge increases. Again, it's a market, I mean, the market is very good from economic point of view. So I think demand 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 the things that Russia and China are doing, those are signals that overcapacity in those parts of the world, I mean, they are trying to finally do something about that. I mean the signal that China is, I mean, can sell in all the export rebates and probably thinking about putting an export tax, it's a huge issue, which is going to help all of this.

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

So my first question is on the infrastructure package in the U.S. There's a lot more visibility on the different components now. And a few companies have already provided their estimates on the demand that it could generate for steel throughout this duration. So I just wanted to ask if you already have an estimate on that, on what kind of demand generation this package could generate for you in the market as a whole? And then secondly, on flat steel prices in the U.S., I just wanted to get your perspective on what the supply additions that are expected for 2022 could generate for pricing momentum? We estimate that these supply additions, they could add up to 4 million, 5 million 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 more than absorbing it?

Thank you, Caio. The first question about infrastructure in the U.S., to be honest, I don't have a different estimate that what the steel industries have said in the U.S., they clearly know more than 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 pr 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 of the U.S. steel producers exports to Mexico, and we compete with them. And this is something that is going to affect the ability to supply to Mexico. So for us, it's very good, although we are not expecting to ship a lot to the U.S. to these projects.

Second thing is prices and the increased capacity that is coming and you're right, it's around 5 million tons of 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 million or 6 million tons. I mean in the U.S., we have more than 10 million tons. In Mexico, there are around 2 million, 3 million, 4 million 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 going to most likely be absorbed without saying that. Again, all the capacity, not only ours, but the other coming is a very competitive capacity. So at the end, probably if the market doesn't react or the demand showed signs of slowing down. Those are not the [markets] that are closing some of that capacity, probably some old capacity will close. But I'm not seeing that right now.

Your next question comes from the line of Thiago Lofiego.

Maximo, 2 questions. One back to the pricing discussion that you had with Andreas. Just more of a theoretical maybe question here. 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 changing the way it is acting in the global market, potentially exporting less. But what -- how would you defend a higher for longer pricing scenario for steel? Even if we see steel prices in the U.S. dropping, let's say, 50%, still going to be $1,000 per ton, right? So that's way above normal levels. So how would you defend the higher for longer scenario?

And then the second question, just to confirm, you mentioned new slab, the new level of slab shipments to third parties of 300,000 to 400,000 tons per quarter. Is that after the Pesqueria mill is fully ramped up? Or is that in the near term, just to understand what the new normal level will be after the full ramp-up of the Pesqueria mill?

Perfect. Thank you, Thiago. I'll start with the second, which is a little bit more easy and then I go to the pricing question, if you don't mind. Plus, I think that the 300,000 tons, 400 tons should be a new normal for the facility in Brazil to ship to third parties. Most of those third parties will probably be sales in Brazil to [Semina, social], as we are doing today. But that doesn't mean -- I mean, the new rolling mill in Pesqueria is going to produce more. It's going to reach out some point the 4 million tons a year.

And so we are going to buy more slabs from third party. So we are going to sell to the Brazilian market, some slabs and -- and we are going to buy more slabs from third parties for the fiscal year. That's how we are foreseeing this. Of course, if the markets change, that could change also. Regarding the pricing discussion. I think you're right that there's going to be a new level or a new normal for steel prices. What -- I don't want to put a number, as you said, which seems a very logical number.

But what are those drivers? I think the first one is -- there are 2 drivers. One is overcapacity for sure. China is, I mean, I don't see much investment in capacity in China or other parts of the world right now. I mean, for various reasons. But one of those is decarbonization. I mean the targets that we are putting or the steel industry or the government is 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 of the capacity is going to stay idle, and it's going to stay idle forever because of these trends. The second one, probably is demand. Demand in the region, and now I'm talking in specific of the North American region, is going to 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 don't want to put a number of that new normal, but they are going to be higher.

Your next question comes from the line of Alfonso Salazar.

I have 2 questions. The first one is related to what you just mentioned that you are not analyzing the blast furnace 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 the situation there, or your plan, and also about you hear a lot about violence in the region of Michoacan where the mine is located. So if you can give us an update on that as well.

And the second is regarding the South American operations. If China is implementing this more strict export, the relations and they become eventually a net importer of steel, what are the implications for South America, especially for your operations there because apparently, that could make a stronger investment case in some countries. So I just want to hear the thoughts on that.

The update of the mining operation, I mean, the mining operation in Mexico are producing 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 parties some of the extra we have but it's not a huge volume. We expect that this will continued working as it is. To be honest, I know 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 the things you read in the news.

South American operation and China, I think the first benefit from this is -- remember, China is the first in order, for example, in Brazil. I mean, as you know, the Brazilian market is importing some -- I mean the imports in Brazil are increasing, and most of them are coming today from China. So I think the benefit of this new policy is changing as the industry or the steel industry there 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 business case to increase steel capacity in Brazil, for example, for exports to China, to be honest. I don't see today that case. I think that Brazil is going -- or steel mills or our operations in Brazil have to be more focused on the Brazilian market and some export to some regional countries.

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

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 ramp up. But again, there are things -- there are things that we are analyzing if this trend changes and there is a case for making a new investment in Colombia. Today, we don't have that in mind yet.

(Operator Instructions)

There are no more questions at this time. Turning the call back over to Mr. Maximo Vedoya.

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

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