Steel Dynamics Inc. (STLD) Q2 2021 Earnings Call Transcript

Steel Dynamics Inc. (NASDAQ: STLD) Q2 2021 earnings call dated Jul. 20, 2021

Corporate Participants:

David Lipschitz — Director of Investor Relations

Mark Millett — President and Chief Executive Officer

Theresa Wagler — Executive Vice President and Chief Financial Officer

Analysts:

Emily Chieng — Goldman Sachs — Analyst

Carlos De Alba — Morgan Stanley — Analyst

Sathish Kasinathan — Deutsche Bank — Analyst

David Gagliano — BMO Capital Markets — Analyst

Gordon Johnson — GLJ Research — Analyst

Phil Gibbs — KeyBanc Capital Markets — Analyst

Tristan Gresser — Exane BNP — Analyst

John Tumazos — Very Independent Research — Analyst

Michael Glick — JPMorgan — Analyst

Sean Wondrack — Deutsche Bank — Analyst

Presentation:

Operator

Good day and welcome to the Steel Dynamics Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that this call is being recorded today, July 20, 2021 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 of Investor Relations. Please go ahead.

David Lipschitz — Director of Investor Relations

Thank you, Darryl. Good morning and welcome to Steel Dynamics’ second quarter 2021 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, President 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 the call individually.

Some of today’s statements, which speak only as of this date, may be 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 to general business and economic condition.

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 as applicable in any later SEC Form 10-Q.

You will also find any reference to non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Record Second Quarter 2021 Results.

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

Mark Millett — President and Chief Executive Officer

Thank you, David. And good morning. Welcome to our second quarter ’21 earnings call. We appreciate your time and thank you for joining us today. The entire Steel Dynamics team delivered yet another phenomenal performance. It was filled with operating and financial records, including record sales, operating income, cash flow and adjusted EBITDA.

The tremendous performance driven by the dedication and passion of our teams executing on our long-term strategies that will continue to drive higher through cycle earnings. The team is delivering exceptional results and I’m very proud to be among them.

Due to the continued commitment of our teams to one another, our families and our customers, we continue to operate safely amidst COVID. The health and welfare of our teams is paramount and I thank each of them for their continued commitment to safety.

Record financial results are a little import and as everyone goes home safely at the end of each day. The number of injuries and associated severity improved in the first half of ’21 compared to last year. The teams are focused on reducing hazards and practices that could result in significant injury. Nothing is more important than the health and safety of our people. It is our number one value.

Our safety performance continues to be significantly better than industry averages, but our intent will always be to have zero incidents. To achieve this, we must all be continuously aware of our surroundings and our fellow team members, keeping safety top of mind in order to take control of safety.

Our commitment to all aspects of sustainability is embedded in our founding principles, woven into the fabric of our company, valuing the health and safety of our teams, partnering with our customers, supporting our communities and minimizing our environmental footprint. An extension of this commitment is evidenced in our recent announcement concerning goals for greenhouse gas emissions reduction and renewable energy milestones, including our goal for our steel mills to be carbon-neutral by 2050.

We’ve been a leader in the area of sustainability for more than 25 years and we plan to stay right in that position. We are starting from a place of strength with already industry-low Scope 1 and 2 carbon emissions, yet we plan to do more. As we progress on this strategic path, we will plan to share our outcomes with you.

But now, Teresa will now share insights into our recent performance.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Good morning, everyone. I’d like to add my sincere appreciation and congratulations to our entire Steel Dynamics team. As Mark said, we achieved numerous milestones, attained record second quarter performance with record revenues of $4.5 billion derived from record quarterly steel shipments, record fabrication shipments and strong product pricing across all of our operating platforms.

We achieved record quarterly operating income of $956 million and net income of $702 million or $3.32 per diluted share and record cash flow from operations of $587 million with record quarterly adjusted EBITDA of over $1 billion, a truly extraordinary performance.

Our second quarter 2021 results included costs of approximately $23 million or $0.08 per diluted share associated with the construction of our Sinton, Texas Flat Roll Steel Mill. Excluding these costs, second quarter 2021 adjusted net income was $719 million or $3.40 per diluted share.

Our second quarter revenues of $4.5 billion were 26% higher than sequential first quarter results with growth from all of our operating platforms, but most significantly from our steel operations based on record shipments and continued strong flat rolled steel selling values.

Our second quarter 2021 operating income was $956 million, 61% higher than the first quarter result, also driven by strong flat rolled steel pricing and robust demand more than offsetting increased scrap costs. As we discuss our business this morning, we continue to see positive industry fundamentals for 2021 and 2022. And we’re confident in our forthcoming unique earnings catalyst.

Our steel operations generated over $1 billion of operating income in the second quarter, 59% greater than first quarter sequential earnings as flat rolled steel selling values continue to strengthen. We also saw expanded margins throughout our long products steel operations due to improved pricing and volume.

We achieved record quarterly steel shipments of 2.9 million tons and our steel mills operate at 91% of our capability. We still have additional steel market opportunity based on our existing annual steel shipping capability of over 13 million tons. And when our new Texas steel mill is fully online, we’ll have over 6 million tons of availability.

Operating income from our metals recycling operations was $51 million, aligned with strong first quarter performance as domestic steel production improved, further supporting ferrous scrap demand and pricing. 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 working capital requirements.

Our fabrication operations once again achieved record shipments and expanded margins in the quarter as realized selling values more than offset continued higher steel input costs. Operating income was $28 million versus first quarter earnings of $10 million. Steel joists and deck demand remains very strong as evidenced by our record customer order backlog and continued robust order activity. We expect steel fabrication earnings to continue to increase through the remainder of the year.

Our cash generation continues to be strong based on our differentiated business model and highly variable cost structure. At the end of the second quarter, we had liquidity of $2.3 billion comprised of cash of $1.1 billion and our fully available unsecured revolver of $1.2 billion. During the second quarter of 2021, we generated record cash flow from operations of $587 million and $849 million during the first six months of the year, also a record. Working capital grew over $700 million in the first half of 2021 due to higher prices resulting in increased customer count and inventory values.

During the first half of 2021, we’ve invested $587 million in capital investments, of which $489 million was invested in our new Texas flat rolled steel mill. For the second half of 2021, we estimate capital investments will be roughly between $350 million and $400 million, of which the Texas Steel Mill represents an estimated $300 million.

Regarding shareholder distributions, we maintained our quarterly cash dividend at $0.26 per common share after increasing at 4% in the first quarter of this year. We also repurchased $393 million of our common stock, representing 3% of outstanding shares. In July, we announced the Board’s approval of an additional $1 billion share repurchase authorization, demonstrating our confidence in Steel Dynamics’ future cash flow generation.

Since 2016, we’ve increased our cash dividend per share over 85% and we’ve repurchased over $1.6 billion of common stock, representing 19% of our outstanding shares, while during the same time frame we achieved an investment grade credit rating and maintained our growth company profile by investing $2.8 billion in organic capital investments and funding $720 million in acquisitions. These actions reflect the strength of our capital foundation and consistently strong cash flow generation capability and the continued optimism and confidence in our future.

Our capital allocation strategy prioritizes strategic growth. The shareholder distributions comprised of a base positive dividend that’s complemented with a variable share repurchase program. We are squarely positioned for the continuation of sustainable optimized long-term value creation. Sustainability is a part of our long-term value creation strategy and we are dedicated to our people, our communities and our environment. We are committed to operating our business with the highest integrity and have been since our founding. Further committing to this path, we recently announced greenhouse gas reduction and renewable energy goals, including a goal for our steel mills to be carbon neutral by 2050.

To increase transparency, we have set interim milestones for 2025 and 2030. As Mark said, we’ve led the steel industry with our exclusive use of EAF technology, circular manufacturing model and innovative solutions to increase efficiency, reduce raw material usage, reuse secondary materials and promote material conservation and recycling.

We plan to sustain our leadership position by executing our sustainability goals through, among other avenues, implementing emission reduction projects, improving energy management, increasing the use of renewable energy and developing and supporting new innovative technologies.

We have an actionable path that is more manageable and we believe considerably less expensive than what may lay ahead for the traditional blast furnace industry. Our sustainability and environmental impact strategy is an ongoing journey and we are moving forward with the intention to make a positive difference. We plan to continue to address these matters and to play a leadership role in developing innovative ways to reduce our impact on the environment.

Additionally, for those that track our individual flat rolled steel shipments, in the second quarter, our hot rolled and our P&O sales or shipments — excuse me were 719,000 tons. Our cold rolled shipments were 150,000 tons and our coded shipments were 1.055 million tons.

With that, Mark?

Mark Millett — President and Chief Executive Officer

Super. Thanks, Theresa. I’ll just add a little more color to each operating platform.

The steel fabrication platform delivered a strong performance again, achieving record quarterly shipments and almost tripling sequential operating income. Based on the strength of steel joist and deck demand, increased product pricing is more than offsetting the continued rise in steel input costs. Order activity continues to be extremely strong. We again ended the quarter with a record fabrication order backlog at levels considerably higher than historical peaks.

The non-residential construction market is strong, especially in areas that support online retail computing activities and pharmaceuticals, specifically represented by construction of distribution of warehouse facilities. We believe this dynamic will continue for the next several years as we see long-lasting changes in consumer behavior.

As we mentioned last quarter, we’ve hired additional people and expanding operating hours at our several steel fabrication locations in order to meet increased customer demand. These changes should increase annual production capability by well over 100,000 tons.

Our metals recycling operations had an extremely strong quarter with quarterly operating income of $51 million. Strong ferrous demand and increased pricing related to higher domestic steel production drove strong performance. Prime scrap index pricing averaged — increased $60 to $70 per gross ton during the quarter. Prime scrap generation has been solid based on strong North American manufacturing. We expect newer scrap generation and alternative iron unit production to keep pace with the increased demand from steelmaking in the coming years.

Additionally, we believe China’s scrap reservoir will grow considerably over the next three to five years, offsetting their expanding EAF capability while providing additional global raw material supply. We believe metallics pricing in general has peaked and scrap will remain flat in the coming quarters.

The steel team had an outstanding quarter, continuing to achieve numerous operating and financial records, including record shipments of 2.9 million tons and record operating income of over $1 billion.

While the domestic steel industry operated at a utilization rate of 81%, our steel mills operated 91% during the second quarter, slightly lower than our first quarter rate of 93%. In June, we experienced the burn through in one of our furnaces at our Columbus flat roll steel mill. Importantly, no one on the team was injured. The resulting outage though lasted about 10 days, impacting second quarter production and shipments by about 60,000 tons and 30,000 tons respectively. Columbus is now again fully operational.

Steel [Phonetic] demand is strong across our entire steel platform. Our long products steel operations achieved increased shipments at all of their locations with the Structural and Rail Division achieving record quarterly volume. The flat rolled steel mill remain especially tight. Strong demand, coupled with extremely low customer inventory levels across the supply chain, continue to support flat rolled steel prices above historical peaks.

Customers are placing orders for immediate demand requirements and have not had the ability to rebuild inventory. Additionally, the speculative risk associated with the accumulation of higher-priced inventory is also a significant deterrent to procuring imports.

We believe current legislated steel trade policies such as the Section 201 cases imposed in 2015 and 2016 and subsequent anti-circumvention restrictions will continue to keep steel imports at moderated levels. The current US administration has also commented constructively concerning trade parameters and the issues created by China’s steelmaking overcapacity.

Regarding the ongoing negotiations between the US and the EU on revoking 232 tariffs, we expect the final agreement will include import surge protections to protect US national security goals. Aside from Turkey, Europe has never been a significant import source and we have long thought collaborating with them against China and other Asian export-based economies that are the greatest contributors to global overcapacity is the most effective path to fair trade.

From an end-market perspective, the automotive sector is operating at solid production levels due to low inventories, coupled with strong consumer demand. Current build rate forecasts for the ’22 and ’23 were at 17 million units, representing a very strong outlook. Auto inventories are 55% below the five-year average at the lowest supply level in over 35 years. And additionally at this point, we’ve been fortunate that our automotive order book has not seen any significant impact from the ongoing electronic chip shortage.

The non-residential construction sector remains strong as evidenced by a record structural and rail division shipments, record steel fabrication shipments and strong long product steel order backlogs. We expect the strength to continue through the rest of this year and into next.

Residential construction has always been strong resulting in high demand for HVAC, appliances and other related products. We’re also seeing healthy demand from mining and yellow goods customers at our Engineered Bar Products Division. And more recently, we’re finally seeing some indications of an improved energy sector as global energy prices have improved.

We’ve executed numerous strategic investments across the company in the last several years and we continue to position Steel Dynamics for the future. We and our customers continue to be extremely excited about our Sinton Texas electric-arc furnace flat-roll steel mill investment. It represents transformational competitively advantaged strategic growth with associated long-term value creation for all of our stakeholders. It provides lower carbon emitting next-generation EAF steel production capabilities, new products and new customers.

The 3 million ton state-of-the-art facility is designed to have product capabilities beyond that of existing electric-arc finished flat-roll steel producers, competing even more effectively with higher carbon emitting integrated steel facilities and high carbon foreign competition. It provides us with broader steel portfolio while providing our customers with an even larger climate conscious supply option.

The electric arc furnace production route is by far the most sustainable, environmentally friendly supply chain and the lowest carbon footprint. We are currently hot-commissioning the 250,000-ton paint line and we expect this 550,000-ton galvanizing line with Galvalume coating capability to be operational next month. The entire Sinton team is doing a tremendous job. But due to excessive heavy rains experienced in Texas over the last several months, actual steel production at Sinton is not likely to begin until mid-fourth quarter of this year.

Theresa shared our views concerning shipments and through cycle earnings capability of this new steel mill. It’s truly a transformational project and we are just at the edge of seeing the tremendous benefits it will bring to us, our teams, our customers and our stakeholders. The town of Sinton provides a strategic location near Corpus Christi with regional commercial markets representing over 27 million tons of relevant flat rolled steel consumption in the US and Mexico.

As customers are excited to have freight advantaged regional flat rolled steel supplier, we currently have five customers committed to locate on site, representing over 1.5 million tons of annual processing and consumption capability. Based on our location, with much shorter lead times, we can provide a superior customer supply chain solution. It also allows us to effectively compete with imports coming into Houston and the West Coast, which inherently have long lead times and speculative price risk.

We’ve also made considerable progress concerning our raw material procurement strategy for Sinton. We completed the acquisition of a maximum scrap company last August at critical stat. The operations are strategically located near high volume industrial scrap sources throughout Central and Northern Mexico. They have an estimated annual scrap process and capability of almost 2 million gross tons. And we also acquired three smaller scrap locations in the Houston and Corpus Christi area in the last quarter.

Our performance-based operating culture, coupled with our considerable experience in successfully constructing and operating highly profitable steel mills, positions us incredibly well to successfully execute this transformational growth. We’re not simply adding flat roll steel production capacity. We have a differentiated product offering, a unique regional supply chain solution, a significant geographic freight and lead-time advantage and offering an import alternative to a region in need of options.

We also recently announced plans to have four additional value-add flat roll coating lines, comprised of two new paint lines and two new galvanizing lines with Galvalume coating capability. Our preferred supply chain has resulted in our existing lines consistently running at full capacity through both increased consumption and market share gain. Two of the new lines will be in the Southern US region to support Sinton.

The other two lines will be in the Midwest and will also be comprised of a new paint line and galvanizing line with a combined annual capacity of 540,000 tons. These lines will support our regional flat roll steel operations providing them with more value-add product diversification to serve our customer needs. We currently believe these lines will be beginning or begin operations in the second half of 2022. Our strategy consistently places value-added products and supply chain differentiation in the fall [Phonetic] and its benefit as well.

In closing, our business model and execution of our long-term strategy continues to strengthen our financial position through strong cash flow generation, demonstrating our sustainability and differentiating us from our competition. Additionally, our customer focus, coupled with market diversification and low cost operating platforms, support our ability to maintain our investment class financial performance.

Our amazing teams and their spirit of excellence are the foundation of that success. I thank each of them for their passion and dedication to one another. And remember that your health and safety are always the most important issue at hand. So thanks to all for you being on the call today. I appreciate you listening.

And Darryl, please open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Emily Chieng with Goldman Sachs. Please proceed with your question.

Emily Chieng — Goldman Sachs — Analyst

Good morning, Mark and Teresa and thanks for your update here. My first question is around the full value-add coating lines. I thought last quarter that the expected capex for these value-add lines ranged between $425 million [Phonetic], but I think you’ve outlined a budget of $450 million to $500 million today. So, I would be curious as to what has changed around the scope of the project or the time line that have maybe driven this increase here?

Mark Millett — President and Chief Executive Officer

Well, I think, two things, as we delved into it. We’ve got a clearer picture, firstly, of the cost structure. But I think more importantly, it’s just the expansion of the line capability that added a little bit more.

Theresa Wagler — Executive Vice President and Chief Financial Officer

It also has being priced on current steel values and so that appreciated the total project cost as well.

Emily Chieng — Goldman Sachs — Analyst

That’s clear. And maybe just to further this sort of line of questioning around growth, it sounds like you’ve got a pretty constructive view of the US steel industry, clearly providing some further opportunities for growth in the coming years. What else do you think that could be planned for Steel Dynamics longer-term beyond these four coating lines as it relates to growth within your capital allocation budget? Should it be further organic growth in the downstream additional capacity? How else should we think about how you could be allocating capital here?

Mark Millett — President and Chief Executive Officer

Sure. I think you will see going forward a continued sort of plan to invest downstream in value-added downstream processing. That has been a key part of our strategy to date and will continue to do so. And as one looks across our sort of operating platform on the steel side, we see continued organic growth capability there.

I do believe also, we have an incredibly strong balance sheet, strong liquidity, cash flow generation capability continues to improve through the cycle. And there will be, I think, a good balance sort of cash allocation strategy, transactional growth will certainly be part of that. That appears to be a strong pipeline of opportunity in both sort of pull through manufacturing-type operations on the market today along with, yeah, steel assets.

Emily Chieng — Goldman Sachs — Analyst

Great. That’s helpful color. Thank you.

Operator

Thank you. Our next question comes from the line of Carlos De Alba with Morgan Stanley. Please proceed with your question.

Carlos De Alba — Morgan Stanley — Analyst

Thank you very much, everyone. Mark, perhaps for you, you mentioned that you expect metallic prices to have peaked already. Any views on steel prices given what you said about metallics?

Mark Millett — President and Chief Executive Officer

No. I think, the — we remain incredibly bullish of the market for the rest of this year and into next year. On the demand side, it’s just incredibly strong. You have a tight supply side right now, inventories are at record low levels. I think MSCI band is 1.8 months, incredibly, incredibly low. And there’s no restocking capability there currently because there’s just lack of availability to meet present demand. Mills lead times are stretched. You have, yeah, imports have ticked up a little but they’re still moderated. And in all honesty, despite the large arbitrage availability, near-term availability for imports is still very, very, very, very tight. So, I don’t see being any ability for a surge there to take things over the top.

And if you look at the second half of this year, there are a myriad of mill outages both for just regular maintenance outages, but also for installation of new equipment, Theodore, Gordon [Phonetic], those mills as they plan on their future expansion. So, there’s going to be a lot of steel actually coming offline in the second half, which is going to just tighten the supply/demand balance even more. So, I think, for the rest of this year, it’s a bullish market for us.

Carlos De Alba — Morgan Stanley — Analyst

Thanks for that. So, basically you expect increase in margins perhaps as scrap prices go down and the steel prices remain high. What are the implications maybe, Theresa, for working capital given that it was a — I mean, cash generation was very solid, but working capital obviously, for obvious reasons, the consumer cash during the first half, do you continue to see that basically at the same level in terms of based on working capital, maybe account receivables and inventories in terms of days of sales and cost at similar levels than what we experienced in the second quarter?

Theresa Wagler — Executive Vice President and Chief Financial Officer

I think we should see that moderating because from the perspective of pricing, Mark’s crack, we’ve had very strong steel pricing and volumes have increased. But now that we’re at this level, I don’t see there being significant draws for the second half of the year, although we will be increasing working capital as Sinton ramps up. So, Sinton could be as much as $150 million to $200 million of working capital in the next, call it, six to nine months. But I don’t think that you’re going to see as significant of a draw in working capital in the second half of the year as we experienced in the first half of the year.

Carlos De Alba — Morgan Stanley — Analyst

All right. Excellent. Thank you very much.

Operator

Thank you. Our next questions come from the line of Sathish Kasinathan with Deutsche Bank. Please proceed with your question.

Sathish Kasinathan — Deutsche Bank — Analyst

Yeah, hi. Good morning, Mark and Theresa. Thanks for taking my questions. My first question is on the steel fabrication segment. The second quarter ’21 shipments were at record levels. But if you look out on a quarter-on-quarter basis, the shipments were only up 3% despite the record backlogs and your guidance in April on adding more crews. So just wanted to get a sense of was there any weather-related impact in 2Q and how should we look at the shipment progression for the rest of the year.

Mark Millett — President and Chief Executive Officer

Well, as you point out, it did increase albeit incrementally quarter-over-quarter. But at the additional folks that we’ve brought on board, obviously they have been ramping up and they need to be trained. You won’t see or wouldn’t have seen a massive increase to second quarter, but you will see that ramping up third and fourth quarter.

Sathish Kasinathan — Deutsche Bank — Analyst

Okay. All right. Thank you for that. And you mentioned about plant outages at some of your peers. I just wanted to get a sense of if we have any outages planned within your system for the second half of 2021.

Mark Millett — President and Chief Executive Officer

Well, I believe Columbus and Butler will take their normal kind of four-day outages in the third, fourth quarter.

Sathish Kasinathan — Deutsche Bank — Analyst

Third and fourth quarter, okay. Thank you for that. And good luck for the next quarter.

Mark Millett — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next questions come from the line of David Gagliano with BMO Capital Markets. Please proceed with your question.

David Gagliano — BMO Capital Markets — Analyst

Great. Thanks for taking my questions. Just on the capital allocation side of it, first of all, historically the mix over the last five years has been kind of 65%-35% between growth versus shareholder returns. Should we expect that mix to change meaningfully in the outyears? And a related question, I noticed long product utilization rates are now creeping up close to 90%, which is amazing. And I’m just wondering if you can speak to — as you think about capital allocation plans, are you interested in expanding your long products capacity given the utilization rates at this point and the positive outlook? And if so, would that more likely be organic or inorganic opportunities? That’s my first question. Thanks.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Hey. Good morning, Dave. From a shareholder distributions and capital allocation, so first and foremost, we definitely are a growth-oriented company and we intend to stay that way. But we believe it’s important during these periods of excess cash flow generation to provide increased distributions to the shareholders. And as we’ve said in the past, we like to keep our dividend in a very manageable level.

When Sinton is up and operational, you will see a significant increase in the dividend at that point because we’re going to have significantly higher through cycle cash flow. But until that time and as we’re generating excess cash, we will be utilizing the share buyback program as well. We think that’s an important tool. However, we are very much focused on growth. As Mark mentioned, there are transaction opportunities today. There’s quite an extensive pipeline, the teams are very busy, again, focused on manufacturing businesses as well as potentially steel production assets as well.

You’re correct. At our long products, utilization has improved nicely and we’re seeing a lot of both good demand. And then we’ve also, the commercial teams have been doing a good job of cross-selling those products and we’ve gotten some market share gains out of that as well. Mark, would you like to address the question whether or not we want to grow on long products?

Mark Millett — President and Chief Executive Officer

Yeah. But just to touch on, David, you’re right. The long products markets have got incredibly hot here of late. Certainly you’re seeing that in the margin expansion. There has been a change there, whereby pricing tended to be adjusted in lockstep with any change in scrap. But as you’ve seen over the last few months, it’s become a market-based, demand-based sort of pricing scenario and margins have increased $150 — sometimes $200 on certain products. So it is a very, very strong market for us today for sure across the space, merchants, beams, rail, stellar and engineered bar, in all honesty, I think we’re pretty well closed down from an order book perspective for the rest of the year and going into next year. So, a great, great market.

That said, if you look at the kind of the capacity in merchant shapes and beams in particular relative to through cycle consumption, that’s one area that is — it’s kind of a overcapacity situation through the cycle. And therefore, I wouldn’t envision us having any meaningful increase in sort of hot side production of shapes. I think you’ll see us utilize excess hot metal capability that we’ve got in a couple of our mills along the long product side. But again, it won’t be a massive increase in capacity.

David Gagliano — BMO Capital Markets — Analyst

Okay. That’s helpful. Thanks. And then, just my second — or my second question on switching gears a little bit on the cost side. If we kind of try to back in the conversion cost and obviously there’s different moving parts there. But it does look like they’re perhaps fairly meaningfully higher. I was wondering if you can just speak to the cost creep there? Was that mix driven or are there underlying cost pressures and how should we be modeling conversion costs relative to what we just saw this quarter on a forward-looking basis? Thanks.

Theresa Wagler — Executive Vice President and Chief Financial Officer

So, David, I know how you try to back end the conversion costs. In the world where now we have a lot more processing versus just steel production, it’s going to be harder and harder for you to back into that number that way. So we had a considerable amount of more substrate coming into the system and having it coated versus directly from the steel production itself. And so, we’re in as that makes it look like there’s increased conversion costs, there’s actually not. It’s just that, we are processing more outside tons because there such strong demand. And we can maybe try to unpack that a little bit better from quarter-to-quarter, but there were no significant increases in conversion costs.

David Gagliano — BMO Capital Markets — Analyst

Okay. That’s helpful. Thank you.

Operator

Thank you. Our next questions come from the line of Gordon Johnson with GLJ Research. Please proceed with your question.

Gordon Johnson — GLJ Research — Analyst

Hey, guys. Thanks for taking the question. I just wanted to get your thoughts on comments made by the President yesterday that the economy is booming. And looking at some of the survey data that came out of Michigan last week with respect to home buying trends and car buying trends, home buying trends being the worst based on a survey since the ’90s saying for cars. Clearly things are great right now. But do you guys see any potential for some pullback in the second half? And then I have a follow-up.

Mark Millett — President and Chief Executive Officer

Well, the simple answer to that is no. The demand is incredibly strong across all our sectors. We can’t make enough steel. There’s massive pent-up demand particularly on the automotive side. And as I said earlier, and if you look at inventories right now, they’re at very, very, very low levels on a historic basis and there’s a pent-up demand. And if you’ve talked to the large dealers out there, they just cannot get enough product and they would suggest it’s going to be a couple of years before they actually catch up.

So, we remain incredibly bullish for the rest of this year going into next year. There’s absolutely no doubt about it. There’s a lot — there seems to be this cloud over people’s minds or heads, but we’re in the trenches. We’re talking to customers each and every day. I’m talking to customers each and every day. I think we have a good finger on the pulse. And it’s got legs, there’s no doubt about it.

Gordon Johnson — GLJ Research — Analyst

Okay. That’s helpful. And then, on the flip side, there’s been fears around — and this is in my term, but I think we all know it well — steelmageddon and a lot of the incremental capacity that a lot of people expect to come on line. But based on our estimates, a lot of that capacity is either redundant or has been pushed out. Do you guys share that view? And on the positive side, do you see the potential for maintenance? Cliffs has taken a mill down here pretty soon. It’s going to be down for a while. There’s some other mills coming down. Do you think actually the potential for prices to move even higher from here? Thank you for the question.

Mark Millett — President and Chief Executive Officer

Well, we’ve had a — as many of you on the call know, I’ve had a very longstanding contrasting view to the overcapacity issue or situation. And what people have not been able to figure out or understand is that the US is one of the few, if not the only, countries that is steel short. Additional capacity is not our problem. In fact, our industry is doing the right thing. It needs to reinvest. It needs to get state-of-the-art equipment onboard both from a global competitive perspective because if you look at China, 85% of Chinese capacity today is less than 15 years old, it’s modern.

So our industry needs to invest and it needs to continue to invest in electric-arc furnace type production routes from a sustainability standpoint. So, in my humble opinion, when you have an industry that arguably has somewhere 95 million to 100 million tons of production capability and a need in a normal market of at least 120 million tons, production capability is not the issue. Imports are the issue and controlling them. And I think as I said earlier, we do believe the tools are in place. Section 201 will maintain a sort of a barrier, even if the 232 tariffs have yet to get rolled.

So, I’m not concerned about overcapacity one little bit. Some of the older antiquated high-cost integrated capability will remain offline. And I think will offset

The somewhat 6 million tons or so of new flat roll coming into our marketplace.

Gordon Johnson — GLJ Research — Analyst

Thanks again for the questions.

Operator

Thank you. Our next questions come from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your questions.

Phil Gibbs — KeyBanc Capital Markets — Analyst

Hey, good morning. Congrats on all the progress.

Mark Millett — President and Chief Executive Officer

Thanks, Phil.

Phil Gibbs — KeyBanc Capital Markets — Analyst

Mark, I just have a first question just on the demand side with automotive and oil and gas. I know auto has been a strong kind of the first to lead us out of the hole last year. But recently IHS has kind of taken down their forecasts on demand and some e-chip issues. Kind of wondering just what you’re seeing there in terms of pull from your customers. And then, secondarily, you did mention oil and gas getting better at the margin. Maybe just expound upon what you’re seeing there and if your customers are trying to prepare you for a strong bounce back in ’22.

Mark Millett — President and Chief Executive Officer

Well, again, Phil, from our intelligence, people are looking at a 70 million ton build rate this year and next year — next year, sorry. That’s an incredibly strong number. And I think, as I suggested when we talked to the dealers out there when we look at the inventories, that is going to be — the demand or — it’s a pent-up demand out there that’s going to sustain things. The chip shortage for some may be sort of hindering shipping capability. As I said earlier, very few of our auto platforms have been affected to-date. So we’ve been fortunate. But if you think about it, okay, so chip shortages have slowed things down a little bit. The demand is still pent-up — is still there and it’s just going to help extend with this incredible cycle that we’re on or in.

Phil Gibbs — KeyBanc Capital Markets — Analyst

And then, on the oil and gas side markets?

Mark Millett — President and Chief Executive Officer

Yeah. On the — yeah, Theresa whispered that across, sorry, Phil.

Phil Gibbs — KeyBanc Capital Markets — Analyst

No worries. Not in a hurry.

Mark Millett — President and Chief Executive Officer

On the energy side, it’s a little bit of a mixed bag. Obviously global pricing, energy prices have come up a little. Rig counts are coming up a little. We’re seeing improved kind of down hole OCTG requirements, so Engineered Bar, for instance, we supply rolled bar into the seamless tube market, that has been picking up. A little slower though on the — kind of the infrastructure, the distribution pipeline is still very, very soft and the cancellation of a couple of pipelines here over the last few months have less inventory in the supply chain, that’s trying to get sort of reallocated across the country. So, OCTG down hole, strengthening infrastructure, distribution line pipe is going to be a little soft for probably at least another 12 months.

Phil Gibbs — KeyBanc Capital Markets — Analyst

Okay. I appreciate that. And then, just to follow-up here on the capex side, I think, Theresa, you said capex of $350 million to $400 million in the second half. Was there something pushed out into next year, because I thought last time, you had talked about making some pre-stage investments for your tandem lines?

Theresa Wagler — Executive Vice President and Chief Financial Officer

The — based on engineering and some of the more detailed plans that we’ve received on the four lines, some of that’s likely to be pushed from the fourth quarter into the first quarter. So, next year, without doing our detailed planning yet, you’re likely to see capital expenditures of probably somewhere between $550 million and $600 million.

Phil Gibbs — KeyBanc Capital Markets — Analyst

Terrific. Thanks so much. Appreciate it.

Operator

Thank you. Our next questions come from the line of Tristan Gresser with Exane BNP. Please proceed with your questions.

Tristan Gresser — Exane BNP — Analyst

Yes, hi. Good morning and thank you for taking my question. Regarding the new environmental targets, is there any capex associated to those targets and what’s the timeline? You have already identified new initiatives to cut emissions by 2025 and 2030. And if you can’t, what is roughly the contribution from each focus area? I mean, I think you talked about new technology, efficiency, but also renewable. If you had that split, that would be helpful as well. Thank you.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Good morning. Thanks for the question. That was a very detailed question. I’m not sure I might be able to go into all of it at this point in time. We do have some things that we can’t discuss yet. They’re very exciting on the renewable energy side of the equation. There will be some capital dollars obviously spent as we look at efficiency projects and as we move toward more renewable energy and the carbon reduction itself.

We really don’t have estimates to be able to discuss this morning because there’s still a lot of projects that are being vetted. We will be disclosing those items as we move forward. But we have a very — and this is the thing that we want everybody understand how we’re trying to differentiate ourselves in our carbon goals and in our renewable energy goals is that we’re being very transparent. There is a clear path on how we’re going to achieve 2025 and 2030. And as we’re able to disclose some of these projects, we absolutely trust and we’ll be sharing these projects. But at this point in time, it’s just too early to do so.

Tristan Gresser — Exane BNP — Analyst

All right. No problem. And maybe a follow-up on raw material. Can you talk a bit about how your raw material strategy will evolve in both the context of capacity expansion but also decarbonization as it has an impact on, for instance, Scope 3. How do you think your raw material mix will be in coming years? Thank you.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Well, the raw material strategy really is consistent from the perspective at least of what we’re looking at today. And as we use really only about 20% to 25% pig iron in our flat rolled mills and so it’s not as much as being advertised by maybe some of our peers today. And that is being sourced obviously internationally. So, today, we use a mix of HBI as well and we’ll continue to do that moving forward. But I don’t see the strategy at this point in time or at least over the next near-term changing dramatically. Mark?

Mark Millett — President and Chief Executive Officer

No. I think, we are — again, we’re executing on our plan that we’ve had in place for some time. Fortunately, we have a very, very good sort of foundation through our omni-source recycling platform that has the capability of some 6 million, 7 million tons of capability. So, supply of scrap is not going to be an issue for us for sure. And we’re adding to that capability, as I said, in Mexico and some of those tons will flow up to Sinton and to our Columbus mill. So I think we’re in good shape on the scrap side of things.

We — as Theresa suggested, we are using HBI and have been using that a little bit more of that of late. We have IDI that people seem to forget. That’s a very, very effective use for our Butler mill in particular. It’s making about 260,000 tons of liquid iron that we put into our electric-arc furnace each year. And just to emphasize, if you look across our steel platform, in total, pig iron is only — I think it’s less than 8% of the total limper. So, yes, it’s an impact, but not a massive one.

Tristan Gresser — Exane BNP — Analyst

Thank you.

Operator

Thank you. Our next questions come from the line of John Tumazos with Very Independent Research. Please proceed with your question.

John Tumazos — Very Independent Research — Analyst

Congratulations on $0.7 billion in a quarter. Looking at your capex strategy for the next two years, it looks like the focus is to maximize and complete the panning lines, the galvanizing, get all the squeal out of the pig. Is it fair for us to expect your next big capital expenditure initiatives to be 2024-2025 completion? Maybe outlays began a little sooner. But where you’re focused right now is making hay while the sun shines and getting everything out of the 3 million ton new mill.

Mark Millett — President and Chief Executive Officer

Well, thank you, John. It’s good to hear from you. Absolutely no doubt that the team’s focus has been execution of Sinton and it’s a very large scale facility. You can — actually you can jump on our website, we have a drone video that gets updated, I think, once a month. It’s a colossal phenomenal facility that’s being built by the team there.

And so, the focus for sure has been execution, execution, execution. Nonetheless, we have other folks on our team that can continue to look at transactional activity. And also at the individual mills, we have very talented teams that continue to look at areas of organic growth. So I think you’ll certainly see just a continuation of that organic growth that you’ve seen in the last 25 years or so.

From a Sinton standpoint, the new lines that you mentioned, that sort of parallels or just supports our long-term strategy of fully utilizing or building high levels of through cycle utilization. And so, not only are those four new lines very effective uses the capex with very, very, very good returns, it allows those capital intense steel mill assets to run at a high utilization, as I said, through the cycle. And I think we’ve demonstrated clearly that that strategy allows us to have superior shipments, production capabilities in any market environment.

John Tumazos — Very Independent Research — Analyst

So there could be a big project before ’24-’25 or a transaction?

Mark Millett — President and Chief Executive Officer

We would imagine — I think I’ve said it in the past, we don’t see a Sinton, Texas greenfield project on our horizon. Transactional activity, there could be something meaningful there.

John Tumazos — Very Independent Research — Analyst

Thank you very much and congratulations. $3 billion annual rates, amazing for profits.

Mark Millett — President and Chief Executive Officer

Thank you, John. We’ve got a great team. A little bit of a market tailwind, not hurting either but…

Operator

Thank you. Our next questions come from the line of Michael Glick with JPMorgan. Please proceed with your questions.

Michael Glick — JPMorgan — Analyst

Hey. Thanks for sneaking me in. You’ve mentioned talking to customers, auto customers in particular. But inventories across or beyond auto are also pretty low. Any sense as to what the game plan is for your non-auto customers in terms of rebuilding those inventories once they have access to more supply?

Mark Millett — President and Chief Executive Officer

Well, I don’t think there’s really any desire right now to rebuild. Firstly, people just can’t get enough steel to satisfy their immediate needs, number one, domestically. Number two, the speculative risk associated with accumulating inventory in today’s sort of market environment is a pretty gutsy call. Imports, as I said, despite the high arbitrage business, there’s very little available currently. The global markets are very, very strong and most material is being consumed within those markets. So there’s not much available even if they wanted to. That said, the speculative risk of material flowing in and import delivery times are November, December, January today. People don’t want to take that risk. So I don’t see any rebuild in the near-term. And again, that’s just another factor that’s going to extend the cycle.

Michael Glick — JPMorgan — Analyst

Understood. And then, I think you noted $475 million to $500 million of incremental through cycle EBITDA once the value-add lines are complete. Could you walk us through some of the spread assumptions there so we can understand the moving parts a bit better?

Theresa Wagler — Executive Vice President and Chief Financial Officer

Michael, we won’t go through the detailed spread themselves. We will tell you that the spreads are based on mid-cycle spreads, so definitely not what we’re experiencing today. And we’re starting with a base of hot-roll to prime scrap kind of mix spread. And then, we build the value-added product mix off of that. And we are using what we’ve experienced historically.

And then also, looking forward at what the expectations are in those individual markets on a mid-cycle basis. So, I’m sorry, we can’t give you specific spreads, but it is showing that Sinton, our expectations are that the volume operates very much like our Columbus and Butler facility — facilities operates. That means that production and shipments tend to be at or near capacity on a mid-cycle basis.

Michael Glick — JPMorgan — Analyst

Got it. Thank you.

Operator

Thank you. Our next questions come from the line of Sean Wondrack with Deutsche Bank. Please proceed with your questions.

Sean Wondrack — Deutsche Bank — Analyst

Hi, Mark and Theresa. And congratulations on another great quarter here. Just a couple of housekeeping items. I apologize if you’ve mentioned these, but taxes, I recognize you had a shield related to Sinton. I think it’s supposed to continue to work in your favor. Can you maybe touch on that and sort of expectations for working capital for the year, please?

Theresa Wagler — Executive Vice President and Chief Financial Officer

Yeah, absolutely. So, yes, Sinton, well, still expected to provide a tax shield this year as we’re able to — the year of operations, we will expense that excess of that investment. And likely we’ll shield upwards of $350-plus-million. However, our earnings are so strong that we’re still having tax payments that are required this year. And I think we’re estimating our effective tax rate to be about 15%.

From the perspective of working capital, Sinton is likely to build working capital as it starts operations in the next six to nine months of somewhere between $150 million and $200 million. Outside of that, I would expect the rest of our operations’ working capital to remain fairly steady, just given that our volumes have already picked up and pricing has been really strong as well. So I don’t see a lot of additional movement in working capital.

Sean Wondrack — Deutsche Bank — Analyst

Great. Thank you. That’s helpful. And then, just in terms of opportunistic use of cash flow, you have $1 billion of cash on the balance sheet. And you’re going to continue to generate cash going forward. You’ve obviously done a nice job outlining the various ways you can use that cash. But I guess my question is, do you think it’s prudent to keep a solid cash balance there should an opportunity arise or should the market turn at some point to say that you have the ability to go out and make these transactions?

Theresa Wagler — Executive Vice President and Chief Financial Officer

It’s a good question. Our balance sheet is extraordinarily strong. So, even if you look at our net leverage or our growth leverage, either metric is solidly in the investment-grade arena. We have additional — significant additional debt capacity in the capital structure. And so, wherein as, yes, it makes sense to keep some cash on the balance sheet. We also have things that we can spend that money on, whether it’s additional share repurchases as we expect to make to the second half of the year. And it still won’t hinder all the growth expectations or projects that we think are available to us on the transaction side. So, yes, we do keep dry powder at the same token and there’s still debt capacity as well.

Sean Wondrack — Deutsche Bank — Analyst

Got you.

Mark Millett — President and Chief Executive Officer

And I guess, I’d just — I would just add. If you look — hopefully when you look at our experience of growth over the years, it’s always been very, very intentional, I would say. I would also say, it’s also very disciplined and we won’t do a transaction at ludicrous numbers. We always look at through cycle. So if we were to do a transaction today, it’s a — it’ll be a good investment through the cycle, not just based on today’s crazy probability that some might have.

Sean Wondrack — Deutsche Bank — Analyst

Right. No, that makes sense. I feel like you’ve demonstrated that over time as you scaled this business up. It’s not always easy to do that. And I guess, just my last question, it’s touching on something you said earlier, Mark. When you think about the US market sort of being in a deficit and stay in deficit for years, I guess, philosophically, do you believe that eventually domestic producers will evolve to fill that demand gap or do you think we’ll always have a component of imports coming into this country?

Mark Millett — President and Chief Executive Officer

I think there will always be some element of imports for sure. It’s been a long, long, long, long time. I think, I don’t know, mid-’70s or ’80 or whenever, when imports were de minimis. We’re not going to be a country that self-satisfies its demand in total. So, import is always going to be there. Today, we typically need 20% of demand as an import need. We just don’t need 30 million tons or 30% in imports. But I think if you — all the discussion has been relatively near-term, when I say near-term, six, nine months into next year.

But people are not, I don’t believe anyway, recognizing that the industry is in transition. And I think there’s some paradigm shifts occurring that are going to retain a lot higher sort of health, market health in our industry and much higher margins going forward. You look at the leadership mindset today in the current consolidation. The integrated industry is really focused on returning shareholder value. They are totally focused on sort of consolidating and rationalizing their assets to make good business sense. And that’s going to bring, I think, market health and market strength long-term.

USMCA has, I think, certainly for us been a market change in Dynamic where you see, particularly the European auto makers a shift in their supply chain from imports to domestic sourcing. Again, we’ve been a very, very large beneficiary and officiary of that. So, the market is changing for sure in this country. And as I said earlier, it needs more capacity. It needs state-of-the-art technological capability, low cost sustainable low-carbon footprint production rigs. And so, I am not fearful for a second that the capacity coming online. It’s needed and it will benefit the North American manufacturer base in spades going forward.

Sean Wondrack — Deutsche Bank — Analyst

I appreciate that. It’s a very thoughtful answer to a pretty difficult question. But thank you very much and good luck going forward.

Mark Millett — President and Chief Executive Officer

Thank you.

Operator

Thank you. That does conclude our question-and-answer session. I’d like to turn the call back over to Mr. Millett for any closing remarks.

Mark Millett — President and Chief Executive Officer

Well, thank you, Darryl. I would just emphasize, well, firstly, thank you for those that are still on the call. Thank you for listening today, to our thoughts and opinions anyway. It was an incredible quarter. We believe next quarter is going to be better even so. And that is driven certainly by the market tailwinds that we’re experiencing. But it’s also more importantly driven by the most phenomenal steel metals team in the world.

They’re incredible bunch of individuals. We number 10,000 there. If you include their wives and partners and kids, we’ve got, I don’t know, 25,000 people in the SDI family today. They all contribute to our success. So thank you to each and every one of them. Thank you to our customers. We can’t do what we do without you. We’ve had some incredibly loyal support. And I wish we could support them even more today because they were struggling to meet all their needs. So, thank you, everyone. Make it a great day and be safe. Take care.

Operator

[Operator Closing Remarks]