Categories Earnings Call Transcripts, Other Industries

Steel Dynamics Inc. (STLD) Q1 2022 Earnings Call Transcript

STLD Earnings Call - Final Transcript

Steel Dynamics Inc.  (NASDAQ: STLD) Q1 2022 earnings call dated Apr. 21, 2022

Corporate Participants:

David Lipschitz — Director, Investor Relations

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Analysts:

Emily Chieng — Goldman Sachs — Analyst

Michael Glick — JP Morgan Securities — Analyst

David Gagliano — BMO Capital Markets — Analyst

Seth Rosenfeld — Exane BNP Paribas — Analyst

Timna Tanners — Wolfe Research — Analyst

Carlos De Alba — Morgan Stanley — Analyst

Curt Woodworth — Credit Suisse — Analyst

Alex Hacking — Citi Investment Research — Analyst

Presentation:

Operator

Good day and welcome to the Steel Dynamics’ First Quarter 2022 Earnings Conference Call. [Operator Instructions] After Management’s remarks, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised this call is being recorded today, April 20, 2022 and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect.

At this time, I would like to turn the conference over to David Lipschitz, Director, Investor Relations. Please go ahead.

David Lipschitz — Director, Investor Relations

Thank you, Holly. Good morning and welcome to Steel Dynamics’ First Quarter 2022 earnings conference call. As a reminder, today’s call is being recorded and will be available on our website for replay later today.

Leading today’s call are Mark Millett, Chairman and Chief Executive Officer of Steel Dynamics, and Theresa Wagler, Executive Vice President and Chief Financial Officer. The other members of our senior leadership team are joining us on this call individually.

Some of today’s statements, which speak only as of this date, maybe forward-looking and predictive, typically preceded by, believe, expect, anticipate, or words of similar meaning. They are intended to be protected by the Private Securities Litigation Reform Act of 1995 should actual results turn out differently. Such statements involve risks and uncertainties related to our steel, metals recycling and fabrication businesses as well as the general business and economic conditions. Examples of these are described in the related press release as well as in our annually filed SEC Form 10-K under the headings Forward-Looking Statements and Risk Factors found on the Internet at www.sec.gov, and is applicable in any later SEC Form 10-Q. You will also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Record First Quarter 2022 Results.

And now I’m pleased to turn the call over to Mark.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Thank you, David. Welcome to our first quarter earnings call. And as always, we appreciate and value your time with us this morning. Record results are of no importance if our teams do not remain safe. Before beginning this morning, I want to pause for a moment to acknowledge the recent workplace fatality that occurred at our Heartland Flat Roll Division. We are deeply saddened. Our thoughts and prayers reside with his family and friends.

The reason I always begin our calls with the topic of safety is because it can never be over-emphasized. Safety is our number one value and first priority. Nothing is more important than sustaining a safe environment for our employees. We must all be continuously aware of our surroundings, and our team members. We must actively think about safety at all times, keep in the top of mind and active conversation. Simply, safety comes before everyone.

With this backdrop, it’s difficult to celebrate and otherwise with normal performance. So we here this morning to share what the team accomplished in the first quarter and congratulate them. Their record performance this quarter was another extraordinary achievement driven by the commitment, innovation and passion of our people executing on our long-term strategies of diversified, value adding growth. I thank the whole team, our entire team for your dedication to excellence in every pursuit.

We are committed to operating our business in an environmentally responsible manner, and have been since our founding. We’ve always been and continue to be a leader in production of sustainable low carbon emission steel products. We encourage the use of new technologies and processes to reduce our impact on environment, including a strategic focus on carbon emissions mitigation with a goal for our steel mills to be carbon-neutral by 2050. Our sustainability strategy is an ongoing journey. We are starting from a leadership position within the industry and plan to stay there by doing even more.

But before I continue with more market commentary, Theresa will share insights into our performance.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Thank you, Mark. Good morning, everyone. It’s exciting to continue the all of the new milestones being continually reached throughout the company. A personal thanks to our teams and congratulations. Your performance resulted in another record quarter for Steel Dynamics with net income of $1.1 billion or $5.71 per diluted share for the first quarter of 2022. In the quarter, we incurred costs of $84 million or $0.31 per diluted share for the continued commissioning and start up of our Sinton Texas Flat Roll Steel Mill. Excluding these costs, first quarter 2022 adjusted net income was $1.2 billion or $6.02 per diluted share.

First quarter 2022 record revenues of $5.6 billion and record operating income of $1.5 billion were both 5% higher than sequential fourth quarter results, driven by higher realized selling values in our steel fabrication business and continued strong performance in our steel and metals recycling operations. We also achieved record quarterly cash flow from operations of $819 million and adjusted EBITDA of $1.6 billion, a truly exceptional performance. We see positive industry fundamentals for at least the remainder of 2022, and believe our second quarter 2022 results to achieve yet another new record performance.

Our steel operations generated a very strong operating income of $1.2 billion in the first quarter, achieving record shipments of 2.9 million tons of which Sinton contributed 50,000 tons. Earnings from our steel operations were 15% lower than sequential record fourth quarter results related to metals price compression and our flat roll steel operations, as realized pricing declined more than raw material costs. In contrast, our long product steel operations experienced metal spread expansion based on rising product prices. Despite hitting record volumes, we still have additional steel shipping capacity much of which is within the long product steel group. When Sinton is fully operational, it will contribute an additional 750,000 tons per quarter of availability.

Operating income from our metals recycling operations for the first quarter were strong at $48 million, based on improved metal margins as both average ferrous and non-ferrous pricing improved in the quarter. The team continues to effectively lever the strength of our circular manufacturing operating model, benefiting both our steel and metals recycling operations by providing higher quality scrap, which improves furnace efficiency and by reducing company-wide raw material working capital requirements. Mark will have stand on the meaningful benefit of our steel and metals recycling teams working together to reduce our cost of raw materials as well.

A huge congratulations to our steel fabrication team. They almost doubled their previous record results, achieving a new record high quarterly operating income of $467 million, eclipsing the entire full year of 2021 results by almost 30% in just one quarter. These earnings were driven by record pricing supported by near record shipments of 210,000 tons.

Steel joists and deck order activity remains incredibly strong. Our steel fabrication business continues to operate with a record backlog, considering both forward product pricing and volumes, which currently extends through the first quarter of 2023. Based on this strength we expect steel fabrication earnings to continue to increase even further as the year progresses. Our cash generation continues to be consistently strong based on our differentiated circular business model. At the end of March, we had a liquidity of $2.4 billion, comprised of cash of $1.2 billion and our fully undrawn unsecured revolver. During the first quarter 2022, we generated record cash flow from operations of $819 million. Working capital grew $757 million due to higher customer account value, stemming from higher prices and volume coupled with the payment of our 2021 company-wide profit sharing of $360 million.

We also funded $159 million in organic capital investments. We believe full-year 2022 capital investments will approximate $750 million. The majority of which relates to our four new flat roll value added coating lines to be located in Sinton and Heartland. We also finalized the purchase of 45% of the equity interest in New Process Steel on February 1. We increased our first quarter cash dividend by 31% to $0.34 per common share, based on the additional ongoing through cycle free cash flow expected from our new Sinton Steel Mill. We repurchased 390 — excuse me, we repurchased $389 million of our common stock in the first quarter, representing 3% of our outstanding shares. As we exhausted our previous program, we also announced the Board’s approval on the additional $1.25 billion share repurchase authorization, further demonstrating our confidence in Steel Dynamics’ future cash flow generation.

Since 2017, we’ve increased our cash dividend per share by 143% and we’ve repurchased $2.7 billion of our common stock, representing 27% of our outstanding shares. Our capital allocation strategy prioritizes strategic growth with shareholder distributions, comprised of a base positive dividend profile that’s complemented with a variable share repurchase program, while also dedicated to preserving our investment grade credit designation. We’re squarely positioned for the continuation of sustainable optimized long term value creation. Sustainability is a part of that long-term value creation strategy. And we are dedicated to our people, our communities and our environment. We’re committed to operating our business with the highest integrity.

Further committing to this path, in 2021 we announced greenhouse gas reduction and renewable energy goals, including a goal for our steel mills to be carbon-neutral by 2050. To increase transparency and accountability we have also set interim milestones for 2025 and 2030. We led the steel industry with our exclusive use of electric arc furnace steel making technology, our circular manufacturing model and our innovative solutions. We plan to sustain our leadership position by executing our carbon reduction goals through among other avenues investing in emission reduction projects, increasing the use of renewable energy and developing and supporting new innovative technology. As an example, we’re incredibly excited to recently invest $25 million in the equity of Aymium. Aymium is a producer of renewable bio carbon products that replace fossil fuels and reduce emissions in large global industries including the electric arc furnace steel industry. We have an actionable path towards carbon neutrality that is more manageable and we believe, considerably less expensive than most of our peers. Our sustainability and carbon reduction strategy is an ongoing journey and we are moving toward intention to make a positive difference. We plan to continue to address these matters and to play a leadership role moving forward.

For those of you that like to track our detailed flat roll shipments, for the quarter hot rolled and pickled & oiled shipments were 736,000 ton, cold rolled shipments were 162,000 tons and coated shipments were 1,065,000 tons. Mark?

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Thank you, Teresa. Steel Fabrication operations executed another exceptional record quarter. The earnings power of this platform in this environment still has not been completely displayed as customer demand and pricing continue to be strong. Our steel joist and deck order backlog remain at record volume and forward pricing levels extending well into the first quarter ’23. The non-residential construction market remains solid, continuing the trend we’ve seen over the last year, especially in areas that support online retail, specifically represented by construction, distribution and warehouse facilities, along with data centers, schools, and healthcare.

Our steel fabrication operations provide a significant natural hedge to our steel production operations in a stable or moderating steel price environment. They also support our steel mills during periods of weaker steel demand as a ready, internal customers, what we call pull-through volume increasing the through cycle utilization of our steel mills. We have steel fabrication facilities located throughout the U.S. and in Mexico, providing us with an advantage, broad-based customer centric supply chain.

As I move into metals recycling, I’ll just take a moment to thank Russ Rinn, given his impending retirement in July, for the truly significant contributions he has made to that platform over his 10 years — 11-year tenure. He has helped transform our business. Today, we’re operating at the same volumes with 1,500 less teammates. So the consolidation there, and rationalization has been excellent. And I have got massive faith in Miguel Alvarez who now is leading that platform, of a great place that is going to continue that transformation, and do great things with that business. So Russ, my sincere thanks, mate.

Now, recycling operations also performed well in the quarter with steady operating income of $48 million. As one of the largest ferrous and non-ferrous metal recycling in North America with operations throughout the U.S. and Mexico, we have a competitive advantage in providing the highest quality, cost-effective scrap to our EAF based steel mills and to all other customers.

In today’s environment, our advantage of having our metals recycling platform is even greater. In the last 18 months, our recycling and steel teams have worked closely in developing a higher quality shredded scrap that can be used in place of prime scrap. The combined efforts resulted in our Butler Flat Roll Steel division reducing its need for prime scrap from 65% of its mix to only 40%, while achieving the same steel qualities. We are currently rolling this out to our Columbus and Sinton steel divisions, allowing for a lower cost, readily available lowers scrap supply. Additionally, given the historically high spread between trying and obviously grades, which is around $170 a ton today, the reduced prime scrap requirement has provided a significant cost savings.

Teams are also working together as global pig iron supply chains have been disrupted with the advent of the invasion of Ukraine. Our flat roll steel operations have reduced the amount of pig iron usage, while maintaining the highest level steel quality through changes in our operating practices and the help of our metals recycling team in sourcing alternative inputs. We have sufficient resources for our steel production to continue operating uninterrupted. Additionally, of particular note, our Butler Flat Roll Division has the advantage of Iron Dynamics, an on-site liquid pig iron production facility that supplies almost all the Butler’s pig iron requirements. Forging liquid pig iron into the electric arc furnace also significantly increases productivity and reduces smelting cost. We developed the technology years ago and it’s the only existing facility of its kind today. We are currently in the process of pursuing opportunities to become even more pig iron self sufficient for the future.

Steel team had an outstanding quarter as well achieving record shipments and operating income of $1.2 billion. During the quarter the domestic steel industry operated at production utilization rate of 80% while our steel mills operated at a rate of 93%. We consistently operated at higher utilization due to our value-added product diversification, our differentiated customer supply chain solutions and the support our internal manufacturing businesses. Hot rolled coated pricing moderated in the early part of the first quarter. The prices of recently firmed with extending order lead times across the product set, especially in coated products. With continued strong demand, we believe steel prices will remain strong based on higher raw material input costs, global flat roll steel supply disruptions related to the Ukraine-Russia contract and lower steel imports.

Throughout our company history, we have intentionally grown our value-added steel product portfolio and created valuable customer supply chain solutions to mitigate the impact of price volatility. Today, at least 70% of our steel sales are considered value added. This differentiated business model will continue to provide best-in-class financial metrics and through-cycle cash generation.

Looking forward, we remain optimistic. The automotive sector steel consumption is expected to grow with production through 2024, returning to over 17 million units, supported by an extreme lack of automotive dealer inventory and a strong pent up demand. The non-residential construction sector is strong, as evidenced by the strength of our customer backlogs with our long product steel group. Our Structural and Rail and Roanoke Bar divisions both achieved record quarterly earnings, and our Engineered Bar Products division is operating at historically strong volumes. And additionally, as we discussed, Steel Fabrication operations are operating at never-seen-before levels. Residential construction is also good, resulting in high demand for HVAC appliance and other related products. Strong energy prices continue to push up the rig count, and we’ve seen solid demand for energy products. In aggregate, our steel order backlogs and order input strength, coupled with broad optimistic customer commentary and general market momentum drive us to conclude that steel market dynamics will remain strong throughout 2022.

Steel Dynamics is a dynamic growth company, increasing through-cycle earnings and cash flow to support continuous long-term value creation. The most recent and significant investment represented by our new state-of-the-art electric arc furnace flat roll steel mill located in Sinton Texas. This differentiated strategic investment facilitates significant through-cycle operational and financial growth for teams and customers and for our vendors and shareholders. This electric arc furnace steel mill represents next generation, lower carbon emitting steel production capabilities providing differentiated products and supply chain solutions. 3 million tons facility is designed to have product capabilities beyond that of any existing electric arc furnace flat roll steel producer, competing even more effectively with higher carbon emitting integrated steel facilities and high carbon foreign competition. It provides us with a more diverse value added steel product portfolio and benefits our customers with an even broader climate-conscious supply option. Sinton’s strategic location is centralized in an underserved consumer region that represents over 27 million tons of relevant flat roll steel consumption in the U.S. and Mexico. We offer shorter delivery lead times, providing a superior customer supply chain solution for the region. We also effectively compete with steel imports arriving in Houston and the West Coast. We have seven customers locating on our site, representing up to 1.8 million tons of annual flat roll steel processing and consumption capability. Four are already operating and the other two have broken ground — other three have broken ground, actually. This represents a unique closed loop process as we provide them on-site steel and simultaneously we claim their scrap to be rerouted into new steel products.

We have an advantage raw material procurement strategy for Sinton. Our acquisition of a Mexican metals recycling company in 2020 provides a critical source of prime scrap supply. These operations are strategically located near high volume industrial scrap sources throughout Central and Northern Mexico. Sinton provides a differentiated product offering, a unique regional supply chain solution, a significant geographic freight and lead time advantage, and offers a lower carbon alternative to imports in a region in need of options. We currently expect 2022 shipments from Sinton to be over 1.5 million tons, achieving utilization of approximately 80% by the end of the third quarter and over 90% before year-end.

In addition, our previously announced additional four value added flat roll coating lines are still on schedule to begin operating mid ’23 in support of our Sinton Steel Mill and our Heartland Flat Roll operations. The four lines comprised of two new paint lines and two new galvanizing lines with Galvalume coating capability. Our unique value-added coating supply chain strategy has resulted in our existing lines consistently running at or near full capacity. Existing customers are anxiously awaiting the volume from these new lines. We have launched a domestic non-automotive coater of flat rolled steels with an annual coating capacity of over 6 million tons. And these four lines will increase that capacity by an additional 1.1 million tons.

In closing, our sustainable symbiotic operating platforms and customer-centric supply solutions demonstrate our financial and operating stability, differentiating us from any competition. We’re not the same company that we were merely five years ago. We are not just a steel company. Our average annual free cash flow has more than doubled and is still growing. The consistency in industrial strength of our earnings is clear and we are investing for transformational growth. Our people and their spirit of excellence provides the foundation for this success. And I thank you, each and every one of you for your passion and dedication and remind you that safety is always almost critical priority.

So, everyone, thank you for joining us today, and we’ll open the line up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question for today is coming from Emily Chiang with Goldman Sachs. Emily, your line is live.

Emily Chieng — Goldman Sachs — Analyst

Good morning, Mark and Theresa. Thanks for taking my question today. My first question is just around your raw material update there. Could you remind us what the raw material mix is? What it was previously before the shift to using more obsolete versus prime scrap? The amount of IDI that you’re — liquid pig iron that you’re using and perhaps how we should see that changing over time?

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Well IDI is consistently running at about a 260,000 ton rate as we speak. It’s been very, very consistent for many years now. And after the original pioneering efforts or challenges that we had many, many years ago, it is an absolutely solid, solid, solid technology for us. And again, as I mentioned virtually all our needs at Butler’s is captured from that facility.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Emily, when we look at it from the shift that Mark talked about, from going to — from prime scrap to an upgraded type of obsolete scrap. Butler came from 65% to 40%. So if that were able to be accomplished with Sinton and Butler, if you just make high level assumptions that generally we would approximately 20% of pig iron, and then the rest would be more geared toward that prime scrap, if you think even at from a volume perspective, it could be as much as 1.5 million to 2 million tons shifting from prime scrap to higher grade. So if you apply any spread to that today, I think Mark mentioned it’s like around $170 per ton, which is higher than normal. Even if it’s a $100, $150 per ton, that could be a significant change once — if all three mills are fully operational.

Emily Chieng — Goldman Sachs — Analyst

Thanks. I’ll jump back in the queue.

Operator

Your next question for today is coming from Michael Glick with JP Morgan. Michael, your line is live.

Michael Glick — JP Morgan Securities — Analyst

Just on the cost side, beyond scrap, how should we think about energy costs more broadly just given some of the recent moves we’ve seen in several of the regional power hubs and natural gas prices as well?

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Just as a reminder, from a natural gas perspective for electric arc furnaces for Steel Dynamics specifically, it isn’t a huge part of the cost structure. It ends up being somewhere around 2% or 3% of the cost of manufacturing the steel products. But obviously it is impactful. And we’re likely to see increasing prices across the spectrum from the natural gas perspective, but nothing that we believe is necessarily a significantly impactful. And from a power perspective across the spectrum, we’re operating at all different grades, so it’s very different. In some areas, we’re in the open market and others, we actually have contracts in place. So there should be some escalating prices, but nothing that we think will be material at this point.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

And if you look at it from a global perspective, obviously energy prices in other parts of the world have appreciated far greater than in the U.S., along with other commodity pricing issues, and so the actual global cost curve has risen and should support pricing further. And obviously given our low cost position advantages Steel Dynamics.

Michael Glick — JP Morgan Securities — Analyst

Got it. Great.

Operator

Your next question for today is coming from David Gagliano with BMO Capital Markets. David, your line is live.

David Gagliano — BMO Capital Markets — Analyst

Hi, thanks for taking my question. I just wanted to ask a little more about the fabrication business. Unbelievable how much has exploded higher over the last year. I know it’s directionally not new but again another doubling and basically the profit contribution this quarter, which is fabulous. And but it’s — there is a lot of moving parts embedded in that business and in my view the visibility towards longer term is still fairly low. So I’m just trying to see if you could give us a little more information on that segment. Can you talk more about how this business is priced, are there cost pass-throughs, are there lags between those pass-throughs and contract prices? I know there’s a lot of different pieces within that business, but if there is any more visibility, really appreciate it. And really just to summarize, if you could just give us what you think your view is on a normalized go-forward EBITDA contribution basis from this business beyond the first quarter of 2023?

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

So several points, somewhat collective maybe, but firstly, demand is at historic highs. If you follow the American Joist Institute numbers, it’s at peak, peak, peak levels for sure. And it is driven largely by the change in retail, doing online retail distribution as is along with the data centers. So that arena is truly pushing massive demand. Secondly, I think it needs to be recognized that the industry, since prior peaks has changed dramatically. It’s a rationalized, consolidated industry today, and that allows — just the changed dynamic allows us to have inflated pricing strike, and as a realization today that the value of the product is a lot higher than people suggest in past history. That product is going to sell at higher levels going forward no matter where we are in the cycle.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Good morning, David. Just a couple of other points to add what Mark described. So if you’re looking at backlog for the Fabrication business versus the Steel business it’s very different. So once a project enters the backlog in our fabrication business the entire project been highly engineered and is part of a bigger construction project overall. And if you look at the steel costs that are involved in these large projects that we’re participating in, it’s really not a large percentage of the entire project. So the customer base, if you will, is not as sensitive to steel pricing as one would think. I mean, I think you saw that in the first quarter where even though flat rolled steel prices had a couple of months of weakening, that didn’t change at all what we are putting in the order backlog and our Fabrication business. And so that’s one thing.

The second thing is because our backlog is out much longer than it typically is, we typically would see a backlog of maybe four to six months, now it’s out — and that would be a very good backlog, and now we’re out in queue well into 2023. And so we changed some of the contract terms as well to try to ensure there is more security, and what I would say is more visibility and certainty around the backlog. And so we believe that we have a great deal of visibility and we know what we’re pricing today, and Mark mentioned in his notes that that forward pricing is higher than what we have even realized at this point in time, and that’s why I have the confidence in my notes to say that we expect earnings from the Fabrication business to continue to increase throughout 2022.

And so — I’m not sure, there is no specific — you asked about pass-throughs of cost, there’s no specific surcharges et cetera like you might see in some steel businesses in fabrication. But all of that, once it hits the backlog, it’s already guaranteed from a price perspective. So I’ll just pause on that and see if Mark and I have addressed your question.

David Gagliano — BMO Capital Markets — Analyst

Yeah, that’s definitely helpful. Thank you. Just, again, I’m trying to gauge what the comfort level is around that normalized — the EBITDA contribution is 20x what it was historic average for well over five years. And that 20x increase happened in four quarters. I’m just trying to figure out as we go out beyond 2022 and in 1Q ’23 — some of this is structural and some of it is not. I’m trying to figure out what you think a normalized sort of contribution should be for a business that’s relatively low visibility from my perspective?

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

So David, I would tell you that — and I can’t answer to you specifically at this point, but what I would tell you that it’s certainly not what the last fives years were. Mark was referring to some structural changes within the industry itself from consolidation and other other avenues as well as in the construction market itself, and what it’s doing to. So There has been some structural change, which I think will makes that normalized earnings report a higher than we’ve seen historically, as well as what we’ve done internally. The fabrication team has really done an incredible job. And I know that you’ve been to some of our operations. And we’re looking to further automate and to do some really exciting things in the future as well, but it’s also not what we’re experiencing today from a normalized level. There is some specific things that happened, and with the extended steel prices with a very strong construction market, we think that market will continue. I mean it’s specific to — there’s a large concentration in warehouses at this point, but we will do our best in the future to try to give you a little better idea what normalized might look like.

David Gagliano — BMO Capital Markets — Analyst

Okay, that’s helpful. Thank you.

Operator

Your next question for today is coming from Seth Rosenfeld with BNP. Seth, your line is live.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Good afternoon, and thanks for taking our questions today. I have two follow-up, please, with regards to the raw material strategy. First, thanks for the color on your efforts to cut your reliance on prime scrap and pig iron. Could you just talk a bit more about those markets and the outlook into spring. So there was a huge squeeze in March. Are you not seeing any signs, some softening of those markets as availability improves?

And the follow-up, please, you’ve commented quickly in your prepared remarks regarding some interest, some more self-sufficient for pig iron, what might that include? Just going to be organic or inorganic in nature? I’ll start there, please.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Well, firstly on the pig iron opportunities, I’d still not too point to that. Just suffice to say that we have plans. Relative to — and I apologize, I didn’t necessarily hear all the first question.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Yeah. Mark, the questions Seth had — and good morning, Seth, relates to pricing around raw materials and what we’re seeing kind of in the near-term and longer term for scrap, and maybe for pig iron.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Okay. Well, obviously, the unimaginable human tragedy of — in UK — Ukraine, sorry, is to be at the forefront of areas mind that the consequences of that on our industry has obviously been massive. I think just on commodities in general, all commodities. If you look at the pig iron, the typical global trade is around about 12 million tons, merchant trade, roughly 7 million, maybe 8 million tons of that were originating from Russian and Ukrainian mills. So there has been a big chunk of availability or supply taken out. We — I can’t speak really for other metals, but I think they followed suit. But we scrambled as an industry to cover our needs for the rest of the year into 2023. Some of the sources, I believe were very, very successful in procuring material from from Brazil and from India in particular. At the same time changing our, sort of operations and process to lower the need or the requirement of that pig iron. So, typically in the mill is around about 22% pig iron input, and our mills today are running around 14%. So in combination, that’s got us into 2023 from — uninterrupted supply.

Consequence of all that though, obviously pushed pig iron pricing up. It peaked around about $1,100 a ton. And that drew typically prime scrap up with it. Prime scrap today is around some $75-ish, I guess. Pig iron now is turned over. Transactions are in the kind of the very low $900 range today, and we foresee that pressuring scrap pricing down, at least sideways, but more likely pressuring it down going forward into the summer.

On the flip side, on the obsolete side, when you have pricing at these levels and as Theresa suggested there is a record spread between obviously tread grades to prime of around about $170 a ton. Historically, that was only about $40 a ton. At these trading levels, everyone is out there with their pickup trucks picking up old cars and old refrigerators, and so the obsolete stream is considerable today. Flow is very, very, very high and we feel that is going to pressure scrap pricing over the next few months as well.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Thank you. If I can ask just one follow-up, please. Within your recycling, I noticed that the fair shipments were down year-over-year quite considerably. Can you touch on what’s driving that decrease, and how you would expect it to transpire into Q2?

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Yeah, from affairs perspective, the shipments were down in the first quarter. It wasn’t structural per se. We had to do it where raw material inventories were at the end of the year heading into the first quarter. There were some low outages during the first quarter as well. Heading forward is when traditionally, you’re going to see seasonality kick in. And based on where we see steel demand and how that translates then into raw material demand as well we would expect to see increase in volumes in second and third quarter for metals recycling.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Thank you very much.

Operator

Your next question is coming from Timna Tanners with Wolfe Research. Timna, your line is live.

Timna Tanners — Wolfe Research — Analyst

Hey, good morning, guys.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Good morning.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Good morning.

Timna Tanners — Wolfe Research — Analyst

So, first off, wanted to just get a little bit more color on the new guidance for Sinton starting up. I think now 1.5 million and it was previously 2 million. Is it possible there is just further delays? Can you give us a little more color on that and what’s happened there?

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Well, absolutely. And I would say — just to emphasize, the progress at Sinton is remarkable. The reduced volume, and I think we gave that — January, I recall, was a little higher than that. And that was before — with the start of the hot side of the Casta, and the Casta that was delayed just to start-up itself. But since then the mill is running extremely well. As we commissioned all the different sort of bells and whistles and commissioned our capabilities. We’ve already at 84.6-inch with coil, and we’ve already been down to 0.60 on high-strength out low alloy grades. So the Heartland itself is — it was described to me this morning as — from our customers. as beautiful. So I think it’s going well to be honest. And confident, that what we will exceed that 1.5 million tons in all honesty. i’m just being conservative.

Timna Tanners — Wolfe Research — Analyst

Okay.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

I would say that we just had our National Sales — Flat Roll Sales Meeting at Sinton for the last two weeks — for the last Last two days, sorry, and the turnout there is — the customer interest is absolutely off the charts. As I said, it’s such an underserved marketplace today, and the product differentiation of that facility is insane, and the fact that we have those seven facilities, four of which were already operating, will be a massive sort of pull-through sort of volume for that facility. So we couldn’t be happier. Hey. Yeah.

Timna Tanners — Wolfe Research — Analyst

So 90% of the…

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Happier, last December, but the good side and — I think it was, I can’t remember which one of you suggested, but yeah a slow ramp isn’t all that bad from a supply demand dynamic right now anyway. And if you consider a ramp-up is going to be solid through the rest of this year. And we went to 2024-’25 operation just this Monday, up until that point, we were just commissioning sort of 12 hours a day on days. But steel, obviously is not ramping up and Delaware is not. So net-net, it’s a good thing.

Timna Tanners — Wolfe Research — Analyst

Sure. So David and I decided, we’re going to start a Fabs shop. I’m joking, obviously, but we would — I did want to ask you how hard it would be to see any competitors there in that space given that prices are now higher than $4,000 a ton, and historically, I calculated $1,350. I mean, even with the higher cost, those are pretty nice margins. I know you said it’s consolidated, but how hard would it be to see a new entrants there and how much of that could be a risk? Thanks again.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

The cost of entry from an asset perspective is not massive. As we’ve seen or as we described in our last call, we substantially increased productivity and volume capability from our facilities there, with almost almost no capital expense because simply it’s people on lines more than the actual capital asset. The engineering of that product is intense. To engineer cost effectively is a — it’s kind of intellectual evolution of many, many, many years. Someone who jumped in fresh, hey, nothing is impossible, there is absolutely no way they could emulate our productivity and our efficiency, and they wouldn’t be able to penetrate in my mind, the marketplace.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Just to add to what Mark is saying, if you think about it, you have to have the architecture and the firms, the customers willing to design at some extent for your products, et cetera. So it’s not something that someone can just get involved and have all the constituents and know you right off the bat, right? Mark said it incredibly well.

Timna Tanners — Wolfe Research — Analyst

Understood. Thanks, guys. And I’ll stay put.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

One last thing I would add also is to create the cultural — the culture for those facilities is absolutely phenomenal. Our team does incredibly well. And if you were to visit a joist plant, it’s almost a choreography of action and activity, and it’s very, very difficult to replicate.

Timna Tanners — Wolfe Research — Analyst

Thanks again. Your next question is coming from Carlos De Alba with Morgan Stanley. Carlos, your line is live.

Carlos De Alba — Morgan Stanley — Analyst

Hello, everyone. Good morning. Just a couple of questions. The first one, are there — could you talk about any potential additional cost in these enhanced scrap products that you are now creating and charging your mills with? I mean all that on the spread, which obviously is a big incentive for you to move down to shredder — are there any costs that you incurred and maybe we should take into consideration just besides the spread and the cost of those shredded scrap?

And then my second question, if I can, is you could you remind us or provides an updated capex guidance for this year? And in particular, is there any changes on the capex for Sinton given the lower ramp up and the delay on the castor?

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

I’d take the scrap one, and essentially Carlos, I’d say somewhere around $10 a ton.

Carlos De Alba — Morgan Stanley — Analyst

Right. Thanks, Mark.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

And, Carlos, good morning. That was a very short response. From the perspective of guidance for capex for this year, and we’re still expecting around $750 million. And your question was specific to Sinton. And specific to Sinton, we don’t expect anything insignificant for additional capex related to the delays. There was additional expense which you saw flow through to the first quarter already due to the delay and just manpower and maintenance and things associated with that delay, but not from a capital perspective. So for Sinton, we’re still at that $2 billion mark, which honestly is incredible given what the teams have gone through for them to be able to maintain their budget while being able to make it through COVID and whatnot and everything else. We’re not expecting anything for the rest of the year in addition from a Sinton perspective for capital.

Carlos De Alba — Morgan Stanley — Analyst

All right. Thank you, Theresa.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question is coming from Curt Woodworth with Credit Suisse. Curt, your line is live.

Curt Woodworth — Credit Suisse — Analyst

Yeah, thanks, good morning.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Good morning.

Curt Woodworth — Credit Suisse — Analyst

Mark, with respect to the 1.8 million tons on-site that I know it’s four operating, three under construction, but when would you expect that to be fully operational? And then also when you look at that sort of localized manufacturing capability, do you have a sense of, it’s how much of that would be our potential on-shoring capability, i.e. sort of new demand, or are those facilities replacing, say, existing sites within North America? That’s my first question.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Well, I guess the the the on-campus — so, the development is firstly evolved much quicker than we anticipated. It has been absolutely incredible to see the of our customer base in the coming to and investing in our sort of dream. And secondly, as I say — when I say intentional, we wanted to make sure that we differentiated our supply chains. And each of those on-site customers per se are in a different field. So we have everything covered from automotive to page coated to heavy gauge plate cuts and leveling. We have a pipe producer there and we have — a couple of pipe producers there, actually. So it’s a good spread, good array of activity to support our supply chain to the customers. And obviously it’s a huge benefit to them. We’re able to firstly deliver that material to them free of charge. It’s just 200 — well, it’s more than 200 yards. It’s a big site, but a mile down the track, we can deliver it very, very effectively at low cost. If you see and stand beside one of our coils there, it is absolutely remarkable. The difference in size between a 22 ton coil and a 52 ton coil. That’s giving those customers massive operational benefits, yield benefits. And so that’s a plus. And it also obviously — just the elimination of that first straight is $25, $30, $35 a ton savings in the supply chain. We see it is a very, very effective solution. It’s going to allow us to penetrate markets much, much quicker.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Including in addition to what Mark said, one reason we’re getting a lot of excitement from this, from customers — of those customers that are on-site is that it removes considerable amount of the greenhouse gases associated with delivery and movement of material. And we will be able to take their scrap as well. So it’s almost a perfect closed-loop environment that heretofore really hasn’t been available. So it will be interesting to see how that develops from marketing perspective as well.

Curt Woodworth — Credit Suisse — Analyst

Okay. And then with respect to Iron Dynamics, I mean it seems like that facility has really become a viable asset to the company. I know in the past it had some issues. Are you evaluating potentially building another facility like that at some point? I know in your prepared remarks, you said you were evaluating potential further investment into pig iron. Just curious kind of how you could see the evolution of that going forward. Thank you.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

I’d prefer not to reveal our strategy on pig iron supply right now.

Curt Woodworth — Credit Suisse — Analyst

Understood.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

But I appreciate the question.

Operator

[Operator Instructions] We do have a follow-up question coming from Seth Rosenfeld. Seth, your line is live.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Thanks for taking my follow-up. Just one more with regards to working capital, please. Obviously, very significant investment in Q1 weighing on free cash flow. Can you give a bit more color on the split? Perhaps how much of that was tied to strengthen steel prices, volumes, versus growth in raw materials, inventories? Perhaps there was a need to build elevated inventories of raw mats given supply chain disruption. And then looking forward into Q2 or into the back half, what should we think about the sequencing of working capital investment potential release as Sinton begins to ramp up? Thank you.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Sinton — from the working capital, one big draw, which I’ll just reiterate, even though I had in my opening comments, is that we do pay our company-wide profit sharing in March of every year — the following year. So there was a $360 million payment to the profit sharing, which clearly excited to be able to provide that for the retirement of our teams. It’s based, as you know, on 8% of pre-tax earnings. And so that was a big part of the that. And the other piece of it really relates fabrication and customer account values and volumes. And that has really less to do with inventory. So inventory was fairly flat. Specifically as it relates to Sinton, Sinton is in a building working capital mode. So It increases working capital in the first quarter, somewhere around $150 million to $200 million. You’ll see that continue. It might be another $100 million to $150 million in the second and third quarter combined. And then we should really be reaching that capacity point outside of any big movements in inventory valuation itself or in customer valuations themselves for Sinton.

From a consolidated perspective, moving throughout the year, again, we’re heading into the seasonally strong environment second and third quarter. I don’t — you’re not going to see as big of a build as we saw in the first quarter because you won’t have the same movement in payables and accruals. And so I would say it’s going to be muted, and then likely you’ll see some working capital give back in third and fourth quarter.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Great. Thank you very much.

Theresa E. Wagler — Executive Vice President and Chief Financial Officer

Thank you, Seth.

Operator

Your next question for today is coming from Alex Hacking with Citi. Alex, your line is live.

Alex Hacking — Citi Investment Research — Analyst

Yeah, morning, Mark and Theresa. I got dropped off the call for a little bit, so I apologize if this was asked, and I also appreciate if you’re going to give me the same answer as you just gave Curt, but you’ve talked about scrap and pig, how does DRI, HBI potentially fit into your raw material strategy? Thanks.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

We currently are purchasing and procuring DRI — well, not DRI, HBI, and have been for many years. For us, it tends to be what we call value-in-use kind of economic calculation. If it makes financial sense to put it in the mix, then we will buy it. HBI tends to be an inferior product to the electric arc furnace. It’s slows productivity down, it’s low yield and increases energy consumption. So, it’s never a preferred material. But at the right price, it makes sense. And so we do have a small but kind of steady diet to keep in mind within that supply chain. Our furnace is actually at Sinton and we’re converting Columbus to sort of in line charging which allows higher volumes of HBI to be added to the furnace if need be.

Alex Hacking — Citi Investment Research — Analyst

Thanks, Mark.

Operator

That concludes our question-and-answer session. I would like to turn the call back over to Mr. Millet for any closing remarks.

Mark D. Millett — Co-founder, Chairman, and Chief Executive Officer

Again, we certainly appreciate your time and hopefully, and I see some are just recognizing that the strength of our business model, the vertical integration, the downstream supply chain solutions that we have, the diversified value-add mix that we have, and now Sinton coming online and another four lines soon thereafter, we truly, in my humble opinion, we the team has truly transformed this company over the last five, six years. We’re a different company today, we’re not just a steel company. And I see that some of you are recognizing that, and I think with time and as my mum always used to say, proof is in the pudding. Well, we’re making the pudding, we’re proving it, and I can’t be prouder of the team. You are a phenomenal team. I ask them to be safe each and every day and looking after each other. Thank you for the customers for your faith and support and for our vendors, particularly the vendors that have gone far and beyond the call of duty, so to speak, in putting Sinton together. You’ve done a phenomenal job, so thank you. And thank you to our shareholders who support us.

So with that said, thank you. Have a safe and wonderful day.

Operator

[Operator Closing Remarks]

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