Steel Dynamics Inc. (STLD) Q3 2020 Earnings Call Transcript

Steel Dynamics Inc. (NASDAQ: STLD) Q3 2020 earnings call dated Oct. 20, 2020

Corporate Participants:

Tricia Meyers — Investor Relations Manager

Mark Millett — President and Chief Executive Officer

Theresa Wagler — Executive Vice President and Chief Financial Officer

Analysts:

Seth Rosenfeld — Exane BNP Paribas — Analyst

Chris Terry — Deutsche Bank Securities, Inc. — Analyst

Timna Tanners — Bank of America Merrill Lynch — Analyst

Andreas Bokkenheuser — UBS Securities — Analyst

Chris Olin — Tier4 Research — Analyst

Presentation:

Operator

Good day, and welcome to the Steel Dynamics Third Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After managements’ 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 October 20th, 2020, 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 Tricia Meyers, Investor Relations Manager. Please go ahead.

Tricia Meyers — Investor Relations Manager

Thank you, Shyamoli [Phonetic]. Good morning, and welcome to Steel Dynamics Third Quarter 2020 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, 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, as we are following appropriate social distancing guidelines.

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 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 heading Forward-Looking Statements and Risk Factors found on the Internet at www.sec.gov, and if 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 Third Quarter 2020 results.

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

Mark Millett — President and Chief Executive Officer

Well, thank you, Tricia. Good morning. Welcome to our third quarter 2020 earnings call. We appreciate your time, and thanks for joining us today. We continue to operate safely and are still closely monitoring the COVID-19 situation. Protecting the health and wealth of our teams is our highest priority, and I thank each of them for their continued diligence and commitment. I’m incredibly proud to work alongside each of them, especially during this unsettled time. They are a very special group accomplishing extraordinary things. We are committed to them, their families and our communities, all while supporting our suppliers and meeting the needs of our customers.

But without further ado, I will hand the mic to Theresa to provide further insights into our strong third quarter performance.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Thank you, Mark. Good morning, everyone. Our third quarter 2020 net income was $100 million or $0.47 per diluted share, above our guidance of $0.42 per share to $0.46 per share, due to stronger-than-anticipated flat rolled steel shipments and metals recycling earnings. Our third quarter results were reduced by costs, net of capitalized interest associated with the construction of our Sinton Texas Flat Roll Steel Mill of approximately $0.04 per diluted share. Excluding these construction costs, third quarter 2020 adjusted net income was $0.51 per diluted share, also above our adjusted guidance of $0.46 per share to $0.50 per share.

One comment before proceeding, the comparability of third quarter 2020 financial results to prior year amount is unfavorable, but to achieve what our teams have achieved in this environment is simply incredible, and I want to add to Mark’s comment and sincerely thank and congratulate them.

Our third quarter 2020 revenues were $2.3 billion, a 11% higher than second quarter sequential result, as volumes improved across all three operating platforms. Our third quarter 2020 operating income was $156 million, fairly steady with the sequential second quarter, but 32% lower than prior year results due to lower steel prices resulting in metal spread compression. However, currently, we’ve experienced a very strong rebound in domestic steel demand from the second quarter sequential COVID-19 induced trough environment. Customer steel inventory levels were extremely low entering the second quarter and then, were drawn down even further based on market uncertainty.

From an operating platform perspective, our steel operations delivered an outstanding performance during this challenging time. Third quarter steel shipments of 2.7 million tons were 7% higher than the sequential second quarter shipments and on par with prior year third quarter volume. Our steel mills operated at 85% of their capability, while the rest of the domestic industry operated at only 64%.

Due to the momentum from our record first quarter volume, our year-to-date steel shipments are only 1% lower than in 2019. Our ability to maintain higher steel volumes is a result of our value-added, highly diversified product offerings, our supply chain differentiation and our internal downstream manufacturing businesses. However, based on timing and the impact of flat roll contract-related sales, our average quarterly realized steel price per ton declined sequentially, more than offsetting the benefit of lower scrap costs and higher volumes.

Our average quarterly realized external steel sales price decreased $21 per ton sequentially to $734 in the third quarter, and average scrap cost only declined $7 per ton, resulting in steel metal margin compression. The result was third quarter 2020 operating income of $144 million for our steel operations, 17% lower than the sequential second quarter.

As states began reopening and domestic manufacturing improved, scrap supply and collection increased. This in combination with higher domestic steel production drove significantly higher ferrous scrap volume. Our operating income from our mills recycling operations was $15 million in the third quarter of 2020 compared to a $6 million loss in the sequential second quarter.

We also are benefiting from the addition of Zimmer, our newly acquired Mexican metals recycling business. The acquisition was completed in August. It’s is a key cog at our ongoing raw material strategy for our new Texas steel mill. Our metals recycling operations provide a competitive advantage for sourcing ferrous scrap for our steel mills, allowing for increased scrap quality, melt efficiency and reduction of company-wide working capital. Our vertically connected operating model benefits both platforms.

Our steel fabrication business had a record operating income of $39 million in the third quarter compared to sequential results of $27 million, due to record shipments and margin expansion, as product pricing increased, while steel input costs declined. We continue to experience a strong order backlog and customers remain positive concerning our non-residential construction projects. In fact, the Steel and Joist Institute recorded one of its strongest historical bookings months this last September.

Our cash generation continues to be strong based on our differentiated business model and highly variable cost structure. During the third quarter of 2020, we generated $152 million of cash flow from operations and $849 million during the first nine months of the year. We also invested $855 million in fixed assets, of which $640 million was invested in our new Texas flat rolled steel mills. For the fourth quarter 2020, we believe capital investments will be roughly $400 million, of which our new Texas steel mill represents $360 million. We currently estimate capital investments for the full year of 2021 to be in the range of $850 million with the Texas steel mill representing about $700 million of that amount, as their operations are still expected to begin mid-year 2021.

In addition, I’ve been getting a lot of questions about our effective tax rate. For 2020, the effective cash tax rate will be approximately 20% for the year. However, based on credits, we expect to receive due to the Sinton Texas mill, we would expect 2020 cash taxes to only be approximately 3%.

Regarding shareholder distributions, we maintained our quarterly cash dividend at $0.25 per common share after increasing at 4% in the first quarter of this year. Since 2016, we’ve also invested $1.3 billion in our common stock, representing over 15% of our outstanding shares and $444 million remains authorized for repurchase at the end of the third quarter.

Additionally, we opportunistically access the investment-grade capital markets in both June and October of this year, extending our debt maturity profile and significantly reducing our effective interest rate. We’re thrilled with the differentiation, our investment-grade bond investors recognize that Steel Dynamics provides and our fundamental free cash flow generation capability on a through-cycle basis.

As evident, in October, we issued $350 million of 1.65% seven-year paper and $400 million of 3.25% 30-year paper with proceeds intended to refinance our existing 2025 notes and other general corporate purposes. These actions reflect the strength of our capital foundation, consistent cash flow capability and strong liquidity profile, demonstrating our confidence in our sustainable through cash strong generation.

We entered 2020 in a position of strength with ample cash and available liquidity of $2.8 million. And at the end of the third quarter, we maintained strong liquidity of $2.5 billion, comprised of cash of $1.3 billion, and our fully available revolving unsecured credit facility of $1.2 billion. Pro forma, our October financing activities, our liquidity would have been $2.8 billion. As a reminder, you’re seeing this is our performance in the current market environment, and you can’t look historically at our financial performance to determine either a future trough or peak. We’ve grown significantly, transformed our Columbus Flat Roll Division, further diversified our steel product offerings and incorporated even more levers to increase our through-cycle financial performance.

In addition, collectively, our primary recent and planned strategic growth investments provide an estimated incremental annual future EBITDA of over $425 million on a through-cycle historical spread basis. This estimate includes our Texas steel mill and third Columbus metallic coating line, as well as our two operational rebar expansions. We are simply even more agile today than ever before. We more than doubled our annual free cash flow from operations to $1.1 billion from 2015 to 2019 compared to 2010 to 2014.

We are dedicated to preserving our investment-grade credit rating. Our capital allocation strategy prioritizes responsible strategic growth with appropriate shareholder distributions comprised of a base positive dividend profile that is complemented with a variable share repurchase program. We are squarely positioned for the continuation of sustainable optimized long-term value creation.

Some of you also use some more detailed information for our flat roll operations. I’ll give you the third quarter shipment profile now. Our hot rolled coil shipments for the third quarter were 803,000 tons, our cold rolled shipments were 144,000 tons, and our coated shipments were 1,013,000 tons, for a total of 1,960,000 tons. And on a personal note, I really do want to thank our teams for their passion and their generosity and really the care they are showing for each other’s health and safety.

Mark?

Mark Millett — President and Chief Executive Officer

Super. Thank you, Theresa. Thank you for clearly articulating the differentiation of SDI amongst its competition. And I think we’ve just navigated — just navigated an incredible, incredible cycle downturn and then, recovery and the performance that our team has turned in. It’s just beyond words. It’s humbling and speaking to them, in the end, nothing really is more important than the safety of our team. Safety is and always will be our number one value. Our safety performance continues to be significantly better than industry averages, but our continued goal is to have no injuries among our people.

Our safety performance has further improved from a severity perspective. However, among some of the operating platforms, our third quarter safety results were not what we would like to see for our teams. We all must be continuously aware of our surroundings and our fellow team members, and I ask all of us to keep safety top of mind. To control safety, we can take charge of safety, both in the traditional sense and as it relates to keeping one another in good health.

The steel fabrication platform delivered a remarkable third quarter performance with a record quarterly volume and earnings. Our fabrication order backlog remains strong, is higher than it was at this time last year, and in fact higher than 2018. Customers remain positive concerning non-residential construction projects. We anticipate the strength remaining through the rest of this year and into 2021.

The metals recycling volumes and earnings also meaningfully improved in the third quarter. As states rescinded shelter-in-place mandates and the automotive supply chain restarted, scrap flows dramatically improved throughout the third quarter. At the same time, domestic steel production utilization increased from an average 56% to an estimated 64%, and ferrous scrap demand significantly improved. As flows continue to increase and steel production remains steady, we believe scrap prices should remain fairly stable through the remainder of the year with likely seasonal price appreciation in December/January time frame.

We also welcome the Zimmer team into the Steel Dynamics family. The addition of this Mexican metals recycling business is a meaningful step in our raw material sourcing strategy for our Texas Flat Roll Steel mill. The combination of Zimmer with our existing operations has already resulted in new business, and we’re excited for the continued growth.

The steel team continues to achieve an outstanding performance, especially considering the environment and a sincere thank you to all involved, especially our customers for helping us achieve volumes that only modestly less than record shipments achieved in the first quarter of this year. As a result of COVID-19-related implications, a considerable number of high-cost blast furnace flat roll steel operations were idled earlier this year, potentially as much as 15 million tons.

Since that time frame, as steel demand and pricing has improved, an estimated 5 million to 6 million tons has been brought back online. Although some additional volume may return, we don’t believe all of it will come back. The cost of restart, along with through-cycle market pricing not supporting ongoing profitability, will likely keep significant volume curtailed, offsetting the new capacity increases to be seen over the next 24 months.

While the overall domestic industry operated only 64%, the strength of our differentiated business model, coupled with the passion of our people, drove SDI steel mill production utilization to 85%. Even more remarkable, our flat roll steel mills achieved utilization of 99%. In tough environments, the strength of our people and our superior business model become even more evident.

As demonstrated this year, during periods of market inflection, we maintained higher volumes compared to our steel peers and gained market share. Uninterrupted low-cost operations provide the greatest customer optionality. Our broad product portfolio and end market diversification within value-added market niches drives flexibility for our commercial teams. Superior supply chain solutions create additional value for our customers making us a preferred place to shop.

And furthermore, a powerful driver is the optionality of internal steel sourcing from our captive manufacturing businesses, what we call pull-through volume. To put this in perspective, our steel fabrication platform and steel processing locations purchased 2.3 million tons of steel in 2019. Only about half of this volume is typically sourced from SDI-owned steel mills. But in difficult markets, we have the option to direct the higher proportion of these orders internally.

As states continue to reopen to varying degrees, many steel consuming businesses have resumed operations. At the same time, customer inventory levels have been reduced to extremely low levels. This combination of increasing demand, coupled with low inventory reserves, has resulted in a tight flat roll steel supply environment. As a result, lead times have stretched out, and flat roll steel pricing has significantly improved.

The hot rolled coil CRU price index increased almost $160 per ton from the beginning of August to September and has since increased another $40 per ton to $50 per ton. The automotive supply chain has experienced the most significant recovery attaining production levels of either close to or in some cases, more than pre-COVID levels.

The construction sector remains resilient and related steel demand has been steady, as evidenced by our Structural and Rail Division volume and our record steel fabrication shipments, and strong customer backlog. The order activity from our construction sector customers, combined with the strength in our steel fabrication order backlog, support our optimism for continued strength through the rest of this year heading into 2021.

Residential construction has also been surprisingly strong, generating high demand for HVAC and appliance products. The energy sector though continues to be structurally weak and will likely require a longer recovery period.

Related to our growth, we have a summary update of recent investments in our most recent investor deck. In the last 12 months to 24 months, we’ve executed several strategic investments that have already or will meaningfully benefit our through-cycle earnings and free cash flow position. We expanded two steel mills by the combined addition of 440,000 tons of annual steel rebar production capability providing product diversification and a differentiated customer supply chain. This end market diversification is providing for higher through-cycle utilization for our Structural and Roanoke Steel Divisions.

We continue to expand capacity at Heartland. It is an 800,000 ton value-added flat roll steel processing. The team has been operating at record levels, providing additional internal production support and operational flexibility for our Butler Flat Roll Division, increasing the utilization of our steel assets and broadening our value-added product portfolio.

The acquisition of 75% of United Steel Supply has also been an excellent investment in addition to our portfolio. As a local distributor of prepainted construction products, it has provided a meaningful channel to new, more diversified customers. United Steel Supply continues to break shipment records.

Since the acquisition of our Columbus Flat Roll Division in 2014, we have meaningfully increased its through-cycle earnings capability. We have transformed this product portfolio with the expansion of its value-added steel capabilities and the diversification of its customer base. The team achieved another milestone in July, with the startup of a new 400,000 ton value-add coating line.

Columbus now has four higher margin coating lines there. The investment both reduces Columbus’s hot rolled coil exposure and provides a ready Southern hot band consumer base for our Sinton Texas steel mill. We remain incredibly excited about that new -generation flat rolled steel mill, a significant contribution to our growth and future earnings capability.

As Theresa explained, we purposefully ended 2020 from a point of financial strength providing ample liquidity for the required investment associated with this transformational project. Our team has an incredible depth of experience in the construction, startup and operation of large steel manufacturing assets. Collectively, we believe they have more experience than it exists in any other company in our industry. The Texas team’s performance and momentum continues to be absolutely remarkable.

Construction is going extremely well and is still on track for a mid-year 2021 start date. We are having frequent conversations with the equipment suppliers regarding the impact of COVID-19 and currently, don’t believe our planned schedule has been meaningfully impacted.

The new state-of-the-art 3 million ton steel mill will include two value-added coating lines, comprised of 550,000 tons of galvanizing and 250,000 tons of prepaint. We will follow the same stringent sustainability model, as our other steel making facilities, with state-of-the-art environmental controls and processes.

Our existing steel mills have a fraction of the greenhouse gas emission and energy intensity of average traditional steel making technology. With an 84-inch coil width and up to 1-inch thick 100 ksi product, the Texas mill will have capabilities beyond existing electric arc furnace producers competing even more effectively with the integrated steel model and foreign competition.

The steel mill is strategically located in Sinton Texas near Corpus Christi. We have three targeted regional sales markets for the Sinton mill representing over 27 million tons of relevant flat roll steel consumption in the Southern and West Coast United States and Mexico. We also plan to effectively compete with the heavy imports in Houston and the West Coast.

Our customers are excited to have a regional flat rolled steel supplier. We now have three customers committed to locate on-site representing between 800,000 and 1 million tons of annual processing and consumption capacity. We’re still speaking with several other interested parties.

The Sinton location provides a significant freight benefit to most of our intended customers relative to their current supply chain options. This freight advantage, coupled with much shorter lead times, provides a superior customer supply chain allowing us to be the preferred domestic steel supplier in the South and Western US. It also allows us to effectively compete with imports, which inherently have long lead times and speculative price risk.

We’ve also made considerable progress concerning our raw material strategy for Sinton. As I mentioned, we completed the acquisition of a Mexican scrap company in August. This is a critical step in our strategy. The acquisition complements our current metals recycling business in both the US and Mexico, and Zimmer’s operations are strategically located near high volume industrial scrap sources throughout Central and Northern Mexico. Prior to our ownership, they shipped approximately 500,000 gross tons of scrap annually, but they have an estimated annual processing capabilities of almost 2 million gross tons a year. We plan to ramp up that volume quickly.

We believe 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 the transformational Texas growth investment. We’re not simply adding flat-rolled production capacity. We have a differentiated product offering, a unique regional supply chain solution, a significant geographic freight and lead time advantage and offer an important import alternative to a region in need of options.

Our unique culture and the execution of our long-term strategy continues to strengthen our financial position through consistent, strong cash flow generation, long-term value creation clearly differentiating us from our competition and demonstrating our sustainability. This has clearly been demonstrated during the past two quarters.

Again, our commitment is to the health and safety of our people, our families and our communities, all while supporting our vendors serving our customers and sustaining our value-creation journey. Our team is extraordinary. And we would like to thank each of them for their patience, resilience and commitment during these unchartered times. They have an indomitable spirit that drives us to excellence. Additionally, a sincere and heartfelt thank you to the healthcare providers and their families within Steel Dynamics and those serving individuals across the world. Thank you. Be safe. Be well.

And so, Shyamoli, please open the call for questions. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question is from Seth Rosenfeld with Exane BNP Paribas. Please proceed with your question.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Good morning. Thank you for taking our questions today. If I can kick off, please just with the — a question on kind of the near to medium-term outlook for demand. In your prepared remarks, you presented quite an optimistic outlook on steel demand highlighting both orders and construction. Can you just speak with regards to the outlook for Q4? How should we expect the trade-off between kind of post-COVID real demand recovery, if they are just offset by normal seasonality that we’ve seen in the years past? What should we expect for shipments in your mills and fab businesses over that time period?

And then, just a follow-up on that. With regards to construction in particular, your comments with regards to backlog in particular should be much more positive when we heard last week from one of your peers. Can you speak a bit about the regions or maybe the private versus public sector mix that’s contributing to the optimism? Thank you.

Mark Millett — President and Chief Executive Officer

Certainly, I would caveat my comments that, as I’ve said in the past, you can — I think always clearly see what’s happening in the marketplace through ones’ order book. And I think our order books across our space are in pretty good shape. But generally obviously, flat-rolled demand is going to continue probably a strong momentum. There is a robust market recovery there. Inventories are at almost historically low levels. We have low import activity. There is a — although it’s diminishing, the arbitrage is still somewhat unattractive. So the supply side is very, very tight. Lead times as you see are extending. Mills are — some mills anyway have late deliveries. And all-in-all, that’s driving market pricing up significantly and quite healthily. That being said, obviously, our third quarter results were impacted by sort of contract pricing lag and that will revert obviously in Q4.

But just specifically to the market times that in automotive, the US producers have I think achieved their anticipated 90% run rate, pre-COVID run rates. And I would say that the European producers actually are exceeding that. They are more than 100% of pre-COVID for sure. And that’s been supported obviously by low inventory levels and the dealerships. Dealerships that I talk to are struggling to get product. And I think if you look at just the automotive market in general, it supports that. Used car prices are extremely high today. And interestingly, that’s having an impact on the scrap market because hopes are, the pick-a-part guys are keeping their cars longer, and it’s given a little tightness to the scrap supply. But nonetheless, it’s a good market environment, and we believe that’s going to continue.

The low interest rate environment is obviously a positive, as our low gas prices. I saw just yesterday, our gas prices dropped to $1.95. And so, that tends to help certainly the truck sales. And I think generally that’s going to continue, the sort of urban dissertation, people moving out of the cities, ridesharing and Ubers are not necessarily as available. And people are needing cars. And I think automotive will remain strong. It’s not just a sort of a two-month, three month replenishment of inventory. In that environment, we’ve been fortunate. We’ve been gaining market share and I think both in flat roll and in SBQ.

Just generally manufacturing is strong. We see residential construction incredibly strong. And I think that’s having an impact both new construction and HVAC and appliance and garage door products, but also kind of the do-it-yourself renovation projects. This — there has been a change, I think, in consumer spending. People are not going out as much. They see themselves not going on vacations. And so, they are actually, I think, spending that cash closer to home, and I think that’s a positive going to next year for sure.

Energy, low gas prices, low energy prices, global demand is there. So I think that’s going to be weak for some time to come. A very, very strong positive is non-residential construction. It has been, in all honesty, incredibly resilient. We see that in sort of heavy structural products demand. Fabricators are busy. Service centers processes are buying stock [Indecipherable]. And so, I think there is generally low inventory through the supply chain there.

And if you look at the Steel Joist Institute information, I think it’s incredibly persuasive. In September, Steel Joist Institute bookings were its third highest month in history. Bookings are about 10% year-over-year, and it’s largely driven by warehouse expansion and you keep seeing that e-commerce increasing. E-commerce in the first quarter was around 11% [Phonetic]. Last quarter, it was about 16%.

So the Amazons of the world are — the distribution channel is going to remain strong. I think just yesterday on Bloomberg, you saw Amazon reporting that they are going to be constructing about 1,000 warehouses in the next year or two. So that business is going to be incredibly, incredibly positive going forward. And that’s translating into sort of a record backlog for New Millennium and is obviously correlating into strong building products on the flat roll side of our business. HVAC, prepaint is very, very strong. So I think generally, it’s a very, very positive environment. We’re very bullish. Again, you can’t tell what may happen as the pandemic continues to unravel. But through our eyes, through our order book today is an incredibly solid positive upward momentum.

Theresa Wagler — Executive Vice President and Chief Financial Officer

So Seth, your other questions related to the mix between private and public sector on the construction side, I would tell you that it’s very heavily weighted at this point to private sector. Hopefully, if may be some things happen in Washington, it could get more to the public sector eventually, but we’re not seeing that at this point to Mark’s earlier comment.

And from a seasonality perspective, as it relates to volumes and we did come off record volumes for the fabrication. I’m not sure that, that will stay as strong that we expect to see very strong shipments heading into the fourth quarter. And the split on the steel side, you really I think need to look at it a split between long products and flat products. It’s our estimation that given the strong demand that is existing today for the flat rolled products, I doubt you’re going to see a lot of seasonality more at least much less than you would see typically. On the long products, you’re likely to see some. But again, I think coming off of the very weak second quarter, we would expect to see some momentum carry into the fourth quarter environment and mute that seasonality impact.

Seth Rosenfeld — Exane BNP Paribas — Analyst

That’s great. Thank you both very much.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Thanks, Seth.

Operator

And our next question is from Chris Terry with Deutsche Bank. Please proceed with your question.

Chris Terry — Deutsche Bank Securities, Inc. — Analyst

Hi, Mark and Theresa. A quick question from me. Utilization rates are about 20% above the industry. I think you said, you had market share gains in autos. Just wondered if you could elaborate on either a product basis or end markets, where you’re getting those market gains from? Thanks.

Mark Millett — President and Chief Executive Officer

Right. I think the — from an automotive perspective, we are — the fact that we remain running gave customer base optionality and just availability of product for one thing. Secondly, the whole ESG sustainability story, I think, is playing incredibly well for us and for electric arc furnace producers, particularly with the Europeans in all honesty. And as they see the North American options, the fact that we have a wonderful sort of recycling ESG story is helping us there. So I think in the market share, automotive is strong, also SBQ in auto. Obviously, we constructed and ramped up the smaller diameter mill there some years ago. We’re seeing some positive market share gains there as well.

Theresa Wagler — Executive Vice President and Chief Financial Officer

And I guess, the — the other component, I would add is that with the advent of having reinforcing bar as a product set, as we enter the market, we’ve been seeing some positive momentum from that as well.

Chris Terry — Deutsche Bank Securities, Inc. — Analyst

Thank you. That’s it from me.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Thanks, Chris.

Operator

And our next question is from Timna Tanners with Bank of America. Please proceed with your question.

Timna Tanners — Bank of America Merrill Lynch — Analyst

Yeah. Hey, good morning, guys.

Mark Millett — President and Chief Executive Officer

Good morning.

Timna Tanners — Bank of America Merrill Lynch — Analyst

I wanted to — hey, I wanted to dive in a little bit more, if you could on the recycling and fabricator. I think my question there was may be answered a bit, but just those were really strong rebound sequentially and even strong from a trend basis. So I was hoping that you could tell us how sustainable those might be and fab may have had a bit margin expansion on the low steel price maybe that reverses. But just in general terms like is that a good new run rate or what to think about going forward in those areas?

Mark Millett — President and Chief Executive Officer

Well, certainly for scrap, Timna, we would see that going forward. Obviously, in that business, it’s a — it’s kind of inventory flow. You buy it one month and you sell the next month. So when you have a stable pricing environment, one tends to do a lot better as opposed to the periods, where you just see progressive downward pricing trends month-over-month. And obviously, volume played a big role in recycling.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Yeah. From a recycling perspective, I’d say that remember we did close on the Mexican scrap company and — in the first part of August, which was actually very beneficial. We find that the Mexican market a little bit different than domestic market. So it might be a natural hedge going forward as well. In addition to that — to Mark’s point, if domestic steel production stays very strong, which we expected to stay strong in the fourth quarter, you’re going to see that volume come to metals recycling arena. So we would expect it to be very steady if not improving.

And I think for the fabrication, you really kind of hit it a bit Timna in that with the low raw material input costs it had. It really did benefit from where the steel mills sort of suffered in the second quarter. So you’ll see that sustainable for a little while. But as steel prices continue to increase, it’s not likely that you’re going to get a dollar for dollar margin expansion in fabrication. But we do expect to see still very strong volumes and good results.

Timna Tanners — Bank of America Merrill Lynch — Analyst

Got you. Okay. Thanks. And then my second question was, if you could just discuss a little bit more the outlook for capex. There is a couple of things I want to follow up on. So one is that you talk about a little higher number than you had said in the past, I believe the $850 million compares to $700 million, $750 million in the last quarters. So is that just kind of a drag from this year, maybe a little lighter spending next year catching up. And how do we think about further capital allocation beyond if you could start to give us some thoughts on what you’re looking at that?

Theresa Wagler — Executive Vice President and Chief Financial Officer

Well, from the capex perspective, it’s not more capital, Timna. But to your comment, it’s actually a transfer. So we’re expecting to probably spend about $100 million less in 2020, as it relates to the Sinton mill. It’s just hard to project. It’s when equipment arrives etc. Nothing is delaying the project and just leave that probably about $100 million will shift from the fourth quarter into 2021. So that’s why 2021 total capital estimate today is $850 million versus the $750 million. It’s simply related to timing. Mark, did you want to talk about the capital allocation or…

Mark Millett — President and Chief Executive Officer

Well, I think, Timna, our strategy is not going to change. We’ve always been somewhat conservative relative to the balance sheet and liquidity. We still remain very comfortable with our dividend profile. It’s very manageable through-cycle. It will remain intact. And during periods of excess cash flow, we will continue to — our share repurchase program to complement that dividend policy. But right now, we see immediate strength and momentum in the markets, and I think things are good. But we’d like to see how things unravel for the next three months, four months before we reinitiate any repurchase program.

Theresa Wagler — Executive Vice President and Chief Financial Officer

I would just add to that. As a quick reminder that our sustaining capital is only $150 million per year. So as we get on the other side of the Texas steel mill, there will be considerable cash generation, which we can use to Mark’s point for continued growth both organic and inorganic.

Timna Tanners — Bank of America Merrill Lynch — Analyst

Got you. Thanks, guys.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Thank you.

Operator

And our next question is from Andreas Bokkenheuser with UBS. Please proceed with your question.

Andreas Bokkenheuser — UBS Securities — Analyst

Thank you very much. Just a follow-up question from me. I mean, you obviously mentioned the Texas mill, and you’ve talked about it before and — in terms of where you intend to kind of capture market share. But in particularly now with a lot of integrated capacity down and for your point, Mark, you guys don’t expect all of it to come back. Are there any particular products where you see the new Texas mill base capturing market share, namely on the auto side, products that you weren’t able to produce before, but you’ll be able to produce with the new mills, will you effectively continue that market share capturing trend if you will?

Mark Millett — President and Chief Executive Officer

Well, I think we can garner market share on several different fronts obviously, just pure economics. The geographic location of that facility and freight savings to the customer will be very, very persuasive, number one. Number two, we will be able to be a very strong option for imports that flows through Houston. So just general economics or a pricing or value to the customer will be massive. And again, there is a — we see a 27 million ton market between South West, the West Coast import market and Mexico.

But also the technology is going to allow us to produce combinations of grade, strength and dimensional characteristics that are totally unavailable today in the US. It’s a 84-inch mill. Although I — let me rephrase that. It’s going to make a real 84-inch wide coil. The current 84-inch mills in the US are just the — with the roll itself and so, cannot make a 84-inch true width. And you need 84-inch width to get into 26-inch diameter pipe. And so, that is a very differentiating commodity, particularly when you go to 1-inch thick 100 ksi steels.

The technology, as we’ve said in past calls, it’s a thicker slab. So it’s going to allow a much superior surface condition. And if there was a technology, our mini mill technology to get into exposed automotive, this would be it. We’re not advertising that, but certainly, would hope we get there one day. But higher toughness, higher strength steels will certainly differentiate the product portfolio compared to what’s available in the states today.

Theresa Wagler — Executive Vice President and Chief Financial Officer

So I think from an end market perspective, what you will see is that, this will take market share along the lines, especially because we’re starting with a paint line and galvanizing metal coating line will be in the appliance arena, especially in Mexico, automotive in Mexico. HVAC metal buildings will be a big focus point as well. And obviously when the energy market comes back, we will be right in the middle of that arena.

Andreas Bokkenheuser — UBS Securities — Analyst

That’s very clear. And in terms of sourcing of raw materials, I mean, you obviously — you’ve got pig iron coming in, and you have scrap from Mexico and so on. Any thoughts on HBI. I mean, you’ve obviously seen some HBI capacity coming online in the US, some of it you might obviously spoken for, but any thoughts on HBI. That’s not going to be part of your product, makes it a better greater deal going forward.

Mark Millett — President and Chief Executive Officer

Well, we would contemplate all raw materials in all honesty. I think you have — obviously Nucor has been ramping up and is doing well now there. Cliffs will be starting their facility. That likely would be ineffective from a freight perspective to go all the way down into Sinton, but certainly will find its way into the Midwest market and just by association there help the raw material pricing environment. Voest has a DRI or HBI facility in Corpus Christi. And I would imagine that Sinton mill would be a natural home for some of that material. And so it — again, if the value is right, we would be consuming some of that material.

Andreas Bokkenheuser — UBS Securities — Analyst

That is very clear. Thank you very much for taking my questions.

Mark Millett — President and Chief Executive Officer

You’re welcome.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Our next question is from Chris Olin with Tier4. Please proceed with your question.

Theresa Wagler — Executive Vice President and Chief Financial Officer

Chris?

Mark Millett — President and Chief Executive Officer

Hello, Chris?

Chris Olin — Tier4 Research — Analyst

Yeah. I’m sorry about that. Hey, I wanted to first, see if I can get a clarification. Theresa, did you say the cash tax was 3% for 2021? And then, I guess, I had a mini follow-up question regarding this whole market share issue. I guess, my question is, there was some outages, I guess, unplanned, if you will at some of the steel assets or coating lines for your competitors. And I guess, I wanted to make sure there wasn’t some type of volume or mix benefit in the quarter that potentially goes away or we need to think about going forward? Thanks.

Theresa Wagler — Executive Vice President and Chief Financial Officer

I will answer the first question, Chris. Yes. Our cash — our effective cash tax rate for 2021 is likely to only be around 3% and that’s just reflective of state taxes because at least currently with the tax code, with Sinton actually starting in 2021, we’re able to — from a tax perspective, take the immediate depreciation impact for that and it’s quite significant. So we would expect that to take care of all of the cash requirements from a federal basis for 2021 and likely that would roll into having some protection into 2022 as well. We just don’t have that estimate at this point.

Chris Olin — Tier4 Research — Analyst

Okay.

Mark Millett — President and Chief Executive Officer

Yeah. Chris, and the — regarding demand, yeah, there is some shifting of products here and there between the different players. But the market strength and our results are — it’s just the underlying demand profile there, which is going to remain in place for some time to come.

Chris Olin — Tier4 Research — Analyst

Okay. Thanks.

Operator

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

Mark Millett — President and Chief Executive Officer

Thank you. And for those remaining on the call, seriously, thank you for your support and your time today to listen to our perspectives. To the customers that may be listening, a sincere thank you on my behalf and on the behalf of every one of the 9,000 SDI employees and their families. You helped us through a challenging time, and we will hopefully continue to earn your business.

And to all our team members on the call, again, one shout out regarding safety. Please double down on safety. It wasn’t a disastrous quarter in any respect. Severity continues to improve. But nonetheless, we need to continue our improving trend there. And just thank you for your passion, your commitment through this challenging quarter. It’s been a crazy time. But you folks have come through as always shining like superstars. So thank you. You guys be safe. Have a great day. Bye-bye.

Operator

[Operator Closing Remarks]