Ternium SA (TX) Q2 2021 Earnings Call Transcript

Ternium SA (NYSE:TX)
Q2 2021 Earnings Call
Aug 4, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Ternium Second Quarter 2021 Results Conference Call. [Operator Instructions] Also please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Sebastian Marti. Thank you. Please go ahead, sir.

Sebastian Marti — Investor Relations

Good morning and thank you for joining us today. My name is Sebastian Marti, and I am Ternium’s Investor Relations and Compliance Director. Ternium released yesterday its financial results for the second quarter of 2021. This call is complementary to that presentation. Joining me today are Ternium’s Chief Financial Officer, Mr. Pablo Brizzio; and Ternium’s Chief Executive Officer, Mr. Maximo Vedoya, who will discuss Ternium’s business environment and performance.

At the conclusion of our prepared remarks, there will be a Q&A session. Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on page 2 in today’s webcast presentation.

With that, I’ll turn the call over Mr. Vedoya.

Maximo Vedoya — Chief Executive Officer

Thank you, Sebastian. Good morning and thanks all for your participation in today’s call. Ternium reported remarkable results in the second quarter of the year. We had record quarterly sales, margins, EBITDA and net income. And looking ahead, I believe the current strong global steel market environment should continue to support at solid financial performance over the rest of the year. Steel prices in our region increased steadily to high levels over the last 12 months, with strong steel demand and low inventories in the value chain.

Prices are probably going to begin a downtrend at some point during the second half, but I don’t expect this to be a very profound downtrend. The main reason for this positive view are steel demand that remains strong, constraining the supply chain, news from China with growing export rebates with the objective of limiting steel production and from Russia with taxes on steel export. In this encouraging environment, we successfully started up our new hot rolling mill at Pesqueria on May 15, a monthly advance of our previous estimations. We are very pleased with this achievement and with the ramp up of the line, which is also doing better than anticipated.

As a result of these, we currently expect this new facility to enable us to increase our market offering of high quality steel products by approximately 600,000 tons during the second half of the year from the 400,000 tons I mentioned on our last conference call. All of these should result in subsequently higher EBITDA level in the third quarter of 2021. On the balance sheet side, in the second quarter, we continue to show significant cash generation and we kept a very low level of net debt, even after paying out our yearly dividend in May.

Let me go over our main markets now. In Mexico, the driver behind our sales growth expectations for the second half of the year is the industrial market. Steel demand in this market is very strong. Manufacturing industries like HAVC, electrical motors and household appliances are having record end user demand and significant backlogs, greatly increasing in turn the steel consumption. The auto industry in Mexico is also having strong end user demand, but it continue to be affected by the semiconductor supply chain disruption, a situation we expect should readily subside over the following quarters. In addition, we are seeing an increase in investment announcement in Mexico from these manufacturing industries. As our new hot rolling mill in Mexico is geared toward the industrial markets’ product needs, the ramp-up of this facility is going to help us increase even more our participation in this market over time.

The commercial market in Mexico more related to construction activity is currently not as strong as the industrial one, with no significant growth in infrastructure investment and softer demand from retail construction. In Argentina, we expect shipments to remain relatively steady in the third quarter after a strong second quarter of the year. In this market, we are seeing sustained domestic demand from building materials and higher activity levels in some industrial sectors such as automotive and agribusiness. On the other hand, the macroeconomic environment in the country continue to be unstable. Also in November, there are midterm’s election in Argentina, which could introduce a higher level of uncertainty in the market.

Turning now to the Other Markets regions, as anticipated in our previous conference call, we continue to integrate our slab mill in Brazil with our facilities in Mexico and Argentina. This resulted in a lower volume of slabs sold to third-party in the quarter, offsetting the higher shipments — of shipment of finished products sold in Mexico and the Southern Region. You can expect to see the participation of slabs in our sales mix to continue to decrease in the third quarter. One reason for this is that during the second quarter, the long-term slab supply contract we had with ArcelorMittal’s Alabama facility expired. This was timed to concur with the start up of our new hot rolling mill in Mexico, which is now requiring an increasing volume of slabs during the ramp up.

Before finishing my remarks, it is worth mentioning that the COVID-19 delta variant, which is affecting the Northern hemisphere now, it’s not widespread in South America. So we have yet to see its impact in our market over the following month. Vaccination programs in the region had improved significantly over the last months, although the percentage of the population with full vaccination is not yet as high as it is in Europe or the U.S. So there continues to be a risk of further lockdowns or disruption in the value chain, if the sanitary situation worsens.

Also I would like to call your attention to the publication of Ternium’s last sustainability report. We issued it in June. And I encourage you to review it. It shows our progress toward achieving our objectives in sustainable — in a sustainable way, describing the actions taken to achieve our goal in six areas: safety, environment and decarbonization, people, community, value chain and business strategy. Concluding, we expect to continue showing a strong performance over the following quarters as favorable global steel industry fundamentals should support solid high steel prices, even if they began to soften at some point during the remaining of the year.

With these, Pablo, please go ahead with the webcast presentation of our performance during the second quarter.

Pablo Brizzio — Chief Financial Officer

Thanks, Maximo, and good morning to everybody. Ternium’s performance in the first half of the year has certainly been remarkable. It reflects the current conditions prevailing in the steel market that Maximo had just described. We will see now from this condition grew the company to new record levels of profitability and results in the second quarter after a really strong performance in the first quarter of the year. Let’s start by reviewing the EBITDA and net earnings on Page 3 in the webcast presentation. EBITDA in the second quarter of the year reached $1.4 billion, and EBITDA margin of 36% or $463 per ton, a new record high. These margin levels are higher than those of most of our peers, probably at the world level although this out of the order margins are not going to be sustained over the cycle.

I wanted to point out there is something that distinguish Ternium among its peers, consistently higher margins and over the cycle. Net income in the period reached $1.2 billion or $5.21 per ADS. Looking out to the third quarter, we ex
pect to achieve new record EBITDA with higher margins from volumes, and we will analyze these in more details later on. Let’s turn now to Page 4 to review steel shipments. When we compare the volumes on an year-over-year basis, we see a significant recovery in Mexico and the Southern Region in the second quarter of this year. As you know, last year, the second quarter activity levels were deeply affected by the COVID-19 outbreak.

Now on a sequential basis shipments in Mexico of the Southern Region increased 2% in the second quarter of the year remaining at elevated levels in a scenario of strong steel demand in Ternium’s main markets. Looking forward, considering the strong demand for Ternium steel products in the USMCA region and the ramp up of the new hot rolling mill in Pesqueria we believe our shipments in Mexico should increase by a total of approximately 600,000 tons as Maximo, already mentioned. In the other market region you can see that the volume of lapse to third party continue to decrease quarter-after-quarter.

The reduction reflects the increase integration of Ternium slab facility in Brazil, with the company’s industrial system. We expect this integration trend to remain in the third quarter. And as result, we expect the further reduction of flat volumes shipped to third party. Okay, now on the next page, you can see combining this development we ramp to consolidate steel shipments of 3.1 million tons in the second quarter of the year relatively stable sequentially and 25% higher on a year-over-year base. Moving on to steel prices Ternium revenue per ton in the second quarter increased sequentially and in a year-over-year basis. This together with the lag result of contract prices in Mexico anticipate a further increase in Ternium realized price in the third quarter.

Turning now to the net sales in the bottom of the chart the combination of realized price and stable shipments resulting in a 21% sequential increase in net sales in the second quarter to $3.9 billion. Compared to the second quarter of last year net sales in the second quarter, more than doubled. Let’s now review on Page 6, the main drivers behind the sequential increase in EBITDA and net income second quarter. The chart on the top shows that EBITDA productivity mainly increased as a result of higher realized price which were partially offset by higher cost per ton mainly on higher raw material and purchased slab prices and higher maintenance expense.

As I mentioned at the start of this presentation, we expect a new sequential increase in EBITDA in the third quarter, reflecting the respective increases in shipments and revenue per ton partially offset by higher cost per ton, as a increase in the purchase price of raw materials lapse continue to flow through the company’s investors. The chart below show the sequential increase in net income in the second quarter was mostly due to higher operating income. In addition, result for our own operation [Indecipherable].

On the following page we can see the same changes, but for the first six months of the year in most third the drivers of the increase in EBITDA and net income were the same such as we have just already described for the second quarter. To finish the presentation, let me turn now to page 8 to review our quarterly cash flow and balance sheet performance. Cash flow operations in the second quarter of this year was $628 million seen after a significant anticipated increase in working capital. In the third quarter, we expect further increase in working capital reflecting the expected increase in realized steel prices and failure cost as previously discussed.

Regarding free cash flow, the company generated $467 million after capital expenditure of $151 million in the quarter. This enabled Ternium to slightly reduce net debt after paying a $2.10 annual dividend in May for a total amount of $412 million. Net debt stands at just $0.2 million at the end of June the equivalent to 0.1 times net debt to last 12 months EBITDA.

With that, I am concluding my prepared remarks. So thank you very much for your time and attention and now we are ready to take any questions as you might have. Please operator, proceed with the Q&A session.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Your first question comes from the line of Caio Greiner from BTG Pactual. Your line is open.

Caio Greiner — BTG Pactual — Analyst

Hi, thank you. Good afternoon. So my first question on capital allocation. I mean this is probably the main question surrounding investment case nowadays. The company is moving to net cash maybe in a matter of weeks, and we just wanted to understand how does Ternium see the growth versus dividends equation today? Because well on one hand the company still ramping up Pesqueria. So we’re not sure if you would be willing to kick off another project. In the meantime, but if you are, what do you think you’re most likely to invest in over the coming years?

Would you see M&A as a feasible option or do you — would you rather to go with organic growth? What are the company’s priorities on that because if that would be investing where you currently operate or may be thinking about geographical diversification? And I do remember that some time ago we were speaking there were some talks of building an EAS in Mexico, electric furnace in Mexico and is that still the case or is that still the priority for the company?

And if the company is not willing to kick off another project at the same time where you ramp up Pesqueria could we see Ternium paying extraordinary dividends already in the second half or maybe could we be closer to seeing an official dividend policy being approved maybe based on free cash flow generation? That’s my first question.

And my second question really quick on EBITDA per ton, so Ternium delivered EBITDA per ton levels above $400 per ton in the second quarter that could be potentially above $500 per ton in the third quarter. So I just wanted to quickly understand where do you see EBITDA normalizing ahead because I do remember that a few quarters ago, you were speaking of EBITDA probably normalizing or having seen EBITDA margins normalizing at the 15% to 20% range and I just wanted to understand if you announced your reasons to believe the long-term margins could be sustained above those levels. Thank you very much.

Maximo Vedoya — Chief Executive Officer

Thank you very much, Caio. I will take the first question and then Pablo will probably answer the second one. So the first question about, there is a lot of things in the first question, the capital allocation and the organic growth, the geographic diversification extraordinary; let me try to make a summary of what our thoughts are and try to answer this question, Caio. You’re right, we have a significant and strong balance sheet and we are going to be probably net debt negative in the next quarter. That’s true. So this year we are investing capex of $600 million you already know that. Considering all the approved project we invest in capital in working capital around $1.3 billion in the first half.

We are continuing going to invest in this — in the third quarter, probably half of what we did in the second quarter. That’s around — a little bit more than $300 million. We paid the dividend of $412 million in May and remind that this was the highest dividend in Ternium’s history. I mean it was almost doubling the highest dividend that we paid before this. So looking forward, 2022 and onwards — regarding dividends, I believe that I mean you know that dividend is approved or proposed by the board in February. We always do that and we pay dividends once a year. But looking forward I think that these new level of dividends at least these new level can be sustained into the future.

I mean as I said in the conference, we are optimistic that the current steel business environment will provide Ternium with this opportunity. Extraordinary dividends, ag
ain, this is something that the Board of Directors should propose but having in mind this I am — I can’t rule out — an extraordinary dividend as you said. It’s not something that we have today again. But I’m not ruling that out. And then capex, clearly are opportunities. We are not doing an opportunity of a geographical diversification. We are concentrating in the Americas. We don’t see an investment of ours far away or in other regions that are not in the American continent, that’s for sure. And again we are analyzing different projects to grow our business. Today we are analyzing organic growth.

The ramp-up of this new hot roll mill in Mexico, which is a huge issue for us is going to help — probably to increase even more our participation in the Other Market as I said and it will open probably new investment opportunity for the downstream capacity in the region. And as you mentioned also, and as I mentioned in the past, USMCA strict rules of origin will require us to expand our upstream capacity in the region at some point down the road so all of those are projects that we are analyzing. I hope that with these I cover everything in your first question, Caio.

Pablo Brizzio — Chief Financial Officer

Okay Maximo, let me take the second part of Caio’s question. Hi, Caio, how are you? So you’re right that the margin or the EBITDA per ton that was generated during the second quarter of over $450 per ton and we — the perspective and the comments both Maximo and myself made are pointing out for a higher-a little higher EBITDA per ton into the third quarter of the year. Also it’s important to mention that also as — with the view that the company expressed by Maximo is that we are not expecting to see a significant [Indecipherable] reduction in prices in the coming quarters after the next one. So even though it’s not the reason why we believe that we will sustain this level of EBITDA per ton or EBITDA margin we are not expecting also to see a significant reduction on these numbers.

On the long run, we continue to work as we have been always work, and it’s also something that we mentioned in the opening remarks that the role of the company is to continue to achieve not only very high levels of EBITDA margin, EBITDA per ton but to keep and sustain the future of Ternium has which is to outperform our peers in any part of the cycle. The upper side or in the lower part of the cycle we have been always able to achieve that and this is something that we work very hard to continue to have.

So at this point probably, it would be easy to say that the margin or the range between 15% to 20% is something that we cannot easily [Indecipherable] but in a more normal market environment this is something that we continue to sustain always working to be not only the upper side of this range or even higher than that and every investment that we’ve made, especially with new mill and everything that we are analyzing is toward this goal. So we sustain clearly probably in the next year being closer to 20% is something that is probably easy to achieve. But this is something that we will sustain and clearly we will work to increase as fast as much as we can with the performance of the company.

Caio Greiner — BTG Pactual — Analyst

Thank you very much, gentlemen.

Maximo Vedoya — Chief Executive Officer

You’re welcome.

Operator

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

Carlos De Alba — Morgan Stanley — Analyst

Yeah. Hello, good morning gentlemen. Hopefully, we’re doing fine. A couple of questions, if I may. So Maximo, when you said the 600,000 tons increase — are you talking about overall volume or are you talking about just the percentage of value-added volumes in the company’s overall shipments? And second, if you could give us a little bit of an idea of how much slab from Brazil you expect to sell to Ternium Mexico for internal use? And how much to external customers in the coming quarters, that will be great?

Maximo Vedoya — Chief Executive Officer

Okay. Thank you, Carlos and thanks for asking. We’re doing fine. I hope you too. The 600,000 tons, if you remember in our last conference call I told that in the second quarter — in the second half of the year, the customer need is going to increase 400,000 tons overall sales. That’s what’s coming net from the new facility and because of the ramp-up curve we have updated these to 600,000 tons so how much volume from the new facility we are putting in the market. The second part is, if I remember the slab. Okay, the slabs in the third quarter is going to be around between 800,000 tons and 900,000 tons the quarter to Mexico. And to third parties probably it’s going to be around 300,000 tons to 400,000 tons. I mean, it’s going to be in that range. So it’s going to be decreasing from I think was 700,000 tons. No, a little bit less of what we do in the second quarter.

Carlos De Alba — Morgan Stanley — Analyst

Alright, fair enough. And then just final question, when you talk about potentially leading to invest in the steel making capacity in order to comply with the USMCA rules and would you consider the U.S., Canada or only Mexico?

Maximo Vedoya — Chief Executive Officer

That’s a very specific question, Carlos. I think that, I mean we are analyzing as I said, we don’t have any announcement to make. Probably what we have to do is part of that is doing it in Mexico. I mean, our hot roll mill is there and our customers are probably there. So it makes sense to make at least the part of that in Mexico. Again this is not an announcement, this is something we are analyzing. Remember the USMCA rule of orders are for the automotive industry and they are going to start in 2027. So, we have time to analyze all the alternatives and that’s what we are doing, Carlos.

Carlos De Alba — Morgan Stanley — Analyst

No, fair enough. I mean, this is all hypothetical at this point in time, but on this basis on these hypothetical basis and considering the fact on the one hand you have iron ore pellets and DRI in Mexico and enormous pressures to reduce carbon emissions in the steel-making process, is it fair to say that [Indecipherable] might be a better option for you guys than blast furnace integrated facility?

Maximo Vedoya — Chief Executive Officer

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

Carlos De Alba — Morgan Stanley — Analyst

Fair enough, thank you very much. All the best.

Maximo Vedoya — Chief Executive Officer

Thank you.

Operator

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

Andreas Bokkenheuser — UBS — Analyst

Thank you very much. I hope you’re all safe and well. Couple of quick questions on demand and exports pertaining to your strategy for Pesqueria. Just firstly on demand, so I think you mentioned that Mexican domestic demand for flat steel has been quite strong, has been solid. We’ve been getting an increasing amount of reports suggesting that demand is actually on the weaker side in Mexico.

So I’m just trying to kind of get a sense of what’s happening there because of course you could be capturing market share either from domestic players or imports. So could you talk a little bit about that? You see yourselves capturing market share. Is that why you’re seeing strong domestic demand or are you actually seeing end demand pretty strong in Mexico at the moment despite the high price? That is my first question.

Maximo Vedoya — Chief Executive Officer

Thank you, Andreas. I’ll take that one. We’r
e seeing both to be honest. I mean, the demand is increasing in Mexico compared to last year. This is not increasing as much as it is increasing in Brazil or in the U.S. where apparent consumption is increasing more but Mexico is going to close at around — a little bit more of 10% steel consumption increase in 2021 compared to 2020. So demand is increasing, but what you are also right is that it’s very different between the markets. The industrial market, which we are very much invested in that market, it’s very strong and the commercial side with the commercial part of the flat products and the long products is not — it’s decreasing or it’s not improving, sorry, as much as the flat industrial part of the business. So there is a little bit of both and clearly we are gaining some market shares again in imports.

Andreas Bokkenheuser — UBS — Analyst

That makes sense. Maybe a quick follow-up there, as you mentioned obviously from last year, I don’t know if you have the numbers in front of you, do you have a sense of where we are this year versus pre-COVID in 2019, where demand sits?

Maximo Vedoya — Chief Executive Officer

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

Andreas Bokkenheuser — UBS — Analyst

Okay.

Maximo Vedoya — Chief Executive Officer

Again, the difference Andreas, plus industrial products, the demand is much higher than 2019. Construction products for commercial side, it’s lower, so they are different in the market size of.

Andreas Bokkenheuser — UBS — Analyst

Yeah, that’s clear. Different on the product mix in terms of demand, that’s very clear.

Maximo Vedoya — Chief Executive Officer

Exactly.

Andreas Bokkenheuser — UBS — Analyst

My second question, just as you basically ramp up Pesqueria, how are you kind of envisioning. I mean, I know it’s a little bit — might not be an easy question to answer, but how are you kind of envisioning where that — where those shipments will go? I mean we’ve obviously seen the U.S. steel price going up a lot, which seems to be more supply driven than demand driven, with a lot of capacity, having been shut down in the U.S. So does that mean that you see yourself exporting more than you proportionally have before from Pesqueria into the U.S. or do you see yourself more capturing market share from imports coming into Mexico from the U.S.? How do you see or where do you see those Pesqueria shipments?

Maximo Vedoya — Chief Executive Officer

Yeah. Andreas, that’s a very good question. I am not sure if I agree with you that the price is more supply driven than demand driven to be honest. I agree that there are some restrictions and some capacity that’s down but to be honest, today, the U.S. is — utilization in the U.S. is at pre-COVID levels and Mexico is producing more. So North America is not producing less than pre-COVID levels today, it’s in the past. And again we are seeing an increase in demand. I mean, the U.S. also — the U.S. probably is going to — the demand in U.S. is going to probably grow up this year for more than 15%, still six months ago. But it’s a huge number. So, we are seeing some demand driven issues and again, we are also seeing that this reassuring, which clearly it’s going to take time.

It’s happening. I mean, we are seeing investment in a huge range of different industries that consume steel driven probably by USMCA driven by the fact that supply chains are getting more difficult, driven by a lot of things, but people are investing in the USMCA. So demand is going to increase. Remember that the imports of steel are very important in the region, but imports of indirect steel — imports from final product that consume a lot of steel are much bigger than imports from steel and we are seeing a trend that this is changing. It’s going to take time, but this is changing.

So I think that our new facility comes just in the right moment for this. Again, so for us the word is that the volume going, it’s going to go mainly to Mexico. It’s going to go mainly to shift to imports and new demand coming from these investments and some part can be export for the U.S. but mainly it’s going to be for Mexico and the increase in demand and again the imports and we see a lot of space there.

Andreas Bokkenheuser — UBS — Analyst

Okay. That’s — I will probably just make the argument on the demand side for flat steel in the U.S. that if we look at the two dominant drivers of flat steel in the U.S. being autos and energy, I think those account for about 80% of flat steel demand in the U.S. I mean, we know that auto production is down because of the semiconductors and we know that energy is down because the rig count is down almost 50%.

So if we put that together, it looks like demand is still lower than it was 2019 pre-COVID in the U.S., and it looks like steel production is up because imports have been up. So I guess that’s the basis of my question. We’re right now seeing about $1,500 which is $400 a ton below the current spot price, so I think I agree with you that we are going to see some weakness, but it’s probably not going to be significant weakness in the short term.

Maximo Vedoya — Chief Executive Officer

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

Andreas Bokkenheuser — UBS — Analyst

That’s a good point. That’s a good point. And I don’t want to monopolize the Q&A session. Maybe one final follow up.

Maximo Vedoya — Chief Executive Officer

Don’t worry.

Andreas Bokkenheuser — UBS — Analyst

Do you think that continues into 2022 because we’re we obviously seeing a lot of pent-up demand in 2021 from demand that was lost in 2020 so what got loss in 2020 got pushed into 2021. Does that continue into 2022 in your analysis, in your estimates you think we’re going to see more demand growth in 2022 versus 2021 or does that stabilize?

Maximo Vedoya — Chief Executive Officer

No, I think, yes, I mean, yeah, if you look to the prospect or what we are thinking about the GDP increase in the U.S. and Mexico, even Canada they are — in 2022, not only 2021, there are huge increases again. I mean the market is very good in an economically point of view. So I think demand is going to continue increasing. I think exports are going to continue. I mean they are cyclical so they are going to increase a little bit by the end of the year, most likely in the U.S., but as a whole trend inputs are going to continue decreasing in the North American region. And I think that Russia and China is doing those are signals that overcapacity in those part of the world. I mean, they are trying to finally do something about that. I mean the signal that China is, I mean, canceling all the export rebates, and probably thinking about putting an export tax. It’s a huge issue, which is going to help all of these.

Andreas Bokkenheuse
r — UBS — Analyst

That’s very clear. I appreciate your insights on this and I have taken more than my fair share of the Q&A session. So thank you very much.

Sebastian Marti — Investor Relations

Okay. Thank you, Andreas.

Operator

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

Caio Ribeiro — Credit Suisse — Analyst

Good morning, everyone. Thank you for the opportunity. So my first question is on the infrastructure package in the U.S., there is a lot more visibility on the different components now. And a few companies have already provided their estimates on the demand that it could generate for steel throughout its duration. So I just wanted to ask if you already have an estimate on that, on what kind of demand generation this package could generate for you in the market as a whole?

And then secondly on flat steel prices in the U.S. I just wanted to get your perspective on what the supply additions that are expected for 2022 could generate for pricing momentum? We estimate that these supply additions they could add up to 4 million or 5 million tons of additional capacity in 2022. So I just wanted to see how you think that that will impact pricing momentum? Do you think the market could become oversupplied with these supply additions or do you see demand growth more than absorbing it? Thank you.

Maximo Vedoya — Chief Executive Officer

Thank you, Caio. The first question about infrastructure in the U.S. To be honest, I don’t have a different estimate than what the steel industries had said in the U.S. They clearly know more than that I do. So I’m not going to change that number. Our main issue here is, I mean we are not seeing a lot of — we are not participating a lot in that market, to be honest, but clearly it’s going to be very good for us, because as you know, some of the U.S. steel producers exports to Mexico and we compete with them and this is something that is going to affect the ability to supply to Mexico.

So for us it’s very good although we are not expecting to ship a lot to the U.S. to these projects. The second thing is prices and the increased capacity that it’s coming and you’re right, it’s around 5 million tons of flat capacity. But I don’t see this as a huge driver of oversupply or prices coming down because of this. As you know imports in North America are much higher than 5 million or 6 million tons. I mean in the U.S. they’re more than 10 million tons. In Mexico they’re around 2 million, 3 million, 4 million tons depending if you put the galvanized products also.

So there is a huge amount of imports coming to the region, which this extra capacity is much lower than that. And second, as I told before, I think the money is growing faster than what we thought. So I think it’s going to most likely be absorbed. We’re not saying that. Again, all the capacity not only ours, but the other coming is a very competitive capacity. So at the end, probably if the market doesn’t react or the demand show sign of slowing down, those are not the mills that are closing some of that capacity, probably some old capacity will close, but I’m not seeing that right now.

Caio Ribeiro — Credit Suisse — Analyst

Perfect. That’s very clear. Thank you, Maximo.

Sebastian Marti — Investor Relations

You’re welcome.

Operator

Your next question comes from the line of Thiago Lofiego. Your line is open.

Thiago Lofiego — Bradesco BBI — Analyst

Thank you. Maximo, two questions; one, back to the pricing discussion with — that you had with Andreas. Just more of a theoretical maybe question here. What in your view would be the drivers for steel prices to trade at a new normal and that new normal being a higher level versus the old normal, right? I think you already mentioned a bit of the change you’re seeing and we are seeing as well, right? So China is changing the way it is acting in the global market, potentially exporting less. But how would you defend a higher for longer pricing scenario for steel even if we see steel price in U.S. dropping, let’s say 50% still going to be $1,000 per ton, right?

So that’s way above normal levels. So how would you defend the higher for longer scenario? And then the second question, just to confirm, you mentioned new slab, the new level of slab shipments to third parties of 300,000 tons of 400,000 tons per quarter. Is that after the Pesqueria HSE mill is fully ramped up or that’s in the near term? Just to understand what the new normal level will be after the full ramp-up of the Pesqueria mill, the HSE mill. Thank you.

Maximo Vedoya — Chief Executive Officer

Perfect, thank you Thiago. I start with the second which is a little bit more easy and then I go to the pricing question, if you don’t mind. Yes, I think that the 300,000 tons, 400,000 tons should be a new normal for the facility in Brazil to ship to third parties. Both of third-parties will probably be sales in Brazil [Indecipherable] as we are doing today. But that doesn’t mean, I mean the new rolling mill in Pesqueria is going to produce more, it’s going to reach out some point the 4 million tons a year. And so we are going to buy more slab from third-party.

So we are going to sell to the Brazilian market some slabs and we had to — and we are going to buy more slabs from third-party for the fiscal year, that’s for — that’s how we are foreseeing these. Of course, if market change, that will change also. Regarding the pricing discussion, I think you’re right that there is going to be a new level or a new normal for steel prices. I don’t know — I don’t want to put a number as you said, which seems very logical number, but what are those drivers? I think the first one is that there are two drivers. One is over-capacity for sure. China is — I mean, I don’t see much investment in capacity in China or other parts of the world right now, I mean from various reasons. But one of those is decarbonization.

I mean the targets that we are putting or the steel industry or the governments are putting to the steel industry are very aggressive and it should have enormous amount of investment even if you want to invest in new capacity and replace some of the old capacity. So some parts are going to be investment but some old capacity is going to stay idle and is going to stay idle forever because of these trends. The second one is probably demand, demand in the region. And now I’m talking specific of the North American region is going to continue increasing for the things I said.

And there is also the thing of raw material. I mean, more and more we are going to depend on scrap and prices of raw material are going to be a little bit more higher probably. So those trends are things that I see as a trend that prices are going to be at a new normal in the future. I don’t want to put a number of that new normal. But they are going to be higher.

Thiago Lofiego — Bradesco BBI — Analyst

Okay, very clear. I agree with you Maximo. Thank you.

Maximo Vedoya — Chief Executive Officer

Thank you Thiago.

Sebastian Marti — Investor Relations

Thank you.

Operator

Your next question comes from the line of Alfonso Salazar. Your line is open.

Alfonso Salazar — Scotiabank — Analyst

Thank you, and hello, Maximo and Pablo. I have two questions, the first one is related to as you just mentioned that you are not analyzing the blast furnace at this point in time. And the question was more related to your plans for the mining operation in Mexico. And if you can give us some update on what the situation there?

And also about this year also about violence in the region of Micho
acan, the mine is located. So if you can give us an update on that as well. The second is regarding South American operations. China is implementing this modest export relations and they become eventually a net importer of steel. What are the implications for South America especially for the operations there because apparently that could make a stronger investment case in some countries. So I just want to hear the thoughts on that.

Maximo Vedoya — Chief Executive Officer

Thank you Alfonso. The update of the mining operation, I mean the mining operation in Mexico are producing at full capacity. As you know, most of what do we produce of pellet goes to our own facility. Although we are exporting or selling to third parties some of the extra we have, but it’s not a huge volume. We expect that this is continue working as it is. To be honest, I know your question about violence in Michoacan and other parts of the south of Mexico we are not seeing any of that in our region.

Although one of our mining operations in Michoacan, it’s very near the Colima border. So this is far away from the things you read in the news. South American operation and China I think the first benefit from this is — remember China is the first importer for example in Brazil. I mean, as you know, the Brazilian market is importing some — imports in Brazil are increasing and most of them are coming today from China. So I think the benefit of these new policy is changing as the industry saw the steel industry, there, it’s got are going to ship more to the market and increase our market share because of these new policy of China. I don’t see yet our business case — to increase steel capacity in Brazil for example for exports to China. To be honest, I don’t see — today that case. I think that Brazil is going — our steel mills our operations in Brazil, as have to be more focused on the Brazilian market and some export to some regional countries.

Alfonso Salazar — Scotiabank — Analyst

Okay. What about marginal expansion or smaller expansion in other contracts like Colombia, do you see, I mean, I think it’s for that?

Maximo Vedoya — Chief Executive Officer

We are not analyzing that. As you know, in Colombia, we are ramping up the new facility [Indecipherable]. Today we don’t have a project in the near future to ramping up, but again there are things — as you know there are things that we are analyzing if this trend changes, and there is a case for making a new investment in Colombia. Today we don’t have that in mind yet.

Alfonso Salazar — Scotiabank — Analyst

Fair enough. Thank you very much, Maximo.

Maximo Vedoya — Chief Executive Officer

Yeah. You’re welcome Alfonso.

Operator

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

Maximo Vedoya — Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Sebastian Marti — Investor Relations

Maximo Vedoya — Chief Executive Officer

Pablo Brizzio — Chief Financial Officer

Caio Greiner — BTG Pactual — Analyst

Carlos De Alba — Morgan Stanley — Analyst

Andreas Bokkenheuser — UBS — Analyst

Caio Ribeiro — Credit Suisse — Analyst

Thiago Lofiego — Bradesco BBI — Analyst

Alfonso Salazar — Scotiabank — Analyst

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