Feb 4, 2010
Executives
Fred Warner – IR Manager Keith Busse – Chairman & CEO Dick Teets – EVP, Steelmaking; President & COO, Steel Operations Mark Millett – EVP, Metals Recycling & Ferrous Resources; President & COO, OmniSource Corporation Gary Heasley – EVP, Strategic Planning & Business Development Theresa Wagler – EVP & CFO
Analysts
Kuni Chen – Bank of America/Merrill Lynch Brent Levy – Jefferies David Cath [ph] – JP Morgan Timna Tanners – UBS Michael Gambardella – JP Morgan Charles Bradford – Bradford Research Sal Tharani – Goldman Sachs Tony Rizzuto – Dahlman Rose & Co. Bob Richard – Southridge Investment Mark Parr – KeyBanc Capital Markets
Operator
Good day, everyone, and welcome to today’s Steel Dynamics Fourth Quarter 2009 Earnings Conference. Just as a reminder today’s call is being recorded.
Joining us today are Keith Busse, Chairman and Executive Officer, Richard Teets, President and Chief Operating Officer of Steel Operations, Mark Millett, President and Chief Operating Officer OmniSource Corporation, Gary Heasley, Executive Vice President of Business Development and President and Chief Operating Officer, Theresa Wagler, Executive Vice-President Chief Financial Officer, and Fred Warner, Investor Relations Manager. And now for opening remarks, I would like to turn the call over to Mr.
Fred Warner. Please go ahead, sir.
Fred Warner
Good morning and welcome to the Steel Dynamics Fourth Quarter 2009 Conference Call. The call is being webcast live, February 4, 2010, Fort Wayne, Indiana.
Later today, you will be able to replay the call from our Web site or download the podcast. During today’s call, our management will make some statements that are forward-looking.
All statements regarding anticipated future results or expectations are intended to be forward-looking statements, within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements which by their nature are predictive and are not statements of historical fact are often preceded by such words as “believe” “anticipate” “estimate” “expect” or other conditional words.
These statements are not intended as guarantees of future performance. We caution that actual future events or results may differ materially from such forward-looking statements or projections that may be made today.
Some factors that could cause actual results to differ include general economic conditions, governmental monetary and fiscal policy, industrial production levels, changes in market supply and demand for our products, foreign imports, conditions in the credit markets, price and availability of scrap and other raw materials, equipment performance or failures or litigation outcomes. You may find additional information concerning a variety of factors of risks that could cause actual results to differ materially from today’s forward-looking statements.
We refer to sections entitled “forward-looking statements and risk factors” in our most recent annual report on Form 10-K and in our quarterly reports on Form 10-Q as well as in other reports we file from time to time with the Securities and Exchange Commission. These reports are publicly available on the SEC Web site, www.sec.gov and on our Web site, www.steeldynamics.com.
After today’s management discussion, we will open the call for questions. Now, we’ll begin the call with comments from our Chairman and Chief Executive Officer, Keith Busse.
Keith Busse
Thank you, Fred, good morning, ladies and gentlemen, and welcome to our fourth quarter conference call. As you can see in the report, Steel Dynamics reported about $27 million in net income for the fourth quarter of 2009 or about $0.12 per diluted share.
That was within the range we prognosticated here a month or so ago. Yet, it was on the low side of it and I’ll do my best for those of you who were thinking it might be a little higher than that, something over $0.15 to tell you where the fallout occurred, if you will.
I did want to point out though that as noted in the paragraph Steel Dynamics lost nearly $83 million in the fourth quarter of '08, one of the worst quarters in our history and reported $27 million profit in this quarter, which is a delta of $110 million. So things have changed dramatically from year-to-year and I certainly believe we’re on the right course.
I do believe that the fourth quarter results were impacted by a number of factors, most of which were in the Recycling segment of our business plan. We had expected better operating results from the Omni organization.
Our volume was down at Omni both in ferrous shipments and non-ferrous shipments from what we have contemplated that perhaps not as significantly as the margin. We’re impacted more so on the margin, and our guess in that arena we just didn’t hit the numbers, but we reported fairly early in October of ‘09, third quarter results, and obviously we had the benefit of some knowledge about pricing in the scrap world dropping significantly in October, yet, we were furnishing scrap to the market at prices that it was procured at in September much higher.
So we had margin compression that occurred in October and more margin compression that occurred in November, which was not contemplated. Shipments were weaker in December and the collection or the combination of lower volumes and rising scrap cost took its toll on Omni’s earnings in the fourth quarter.
So if there was a miss in your head or our head, it was probably in that area. I think our Steel divisions did fairly well.
I did want to note that our net sales for the year were $4 billion, which is down 51% from the $8 billion of the previous year and we had a net loss this year of $8 million. We came fairly close to break even, but didn’t achieve it.
We’re hopeful that we could have achieved the breakeven if not a small profit had we had better margin results in the Recycling segment of our business. But, nonetheless, the revenue for the year being down 51% was very similar to that of other competitors in the industry.
The steel group did fairly well and achieved an operating profit, as noted of $108 million or $93 a ton. I think certainly best-in-class or best in the field from operating profit per ton perspective.
OmniSource did generate an operating profit in the quarter as noted with weak results due to lower margins and reduced volumes. We have continued losses in steel fabrication segment, and certain costs related to the start-up of Mesabi Nugget also detracted from fourth quarter results.
I won’t get very deeply into Mesabi Nugget, Mark will report on that. But our start-up is going fairly well from does the process work perspective.
We’re having some mechanical glitches with some equipment, mostly conveying equipment which we’ll probably talk about. The actual operation of the ferrous is on the money.
Very, very, very excellent results. So we think we have achieved everything we set up to achieve and probably going to do a little bitter than we thought we could as we get by some of these mechanical glitches in the process.
Some of you may note that in the third paragraph selling values actually increased $48 a ton, while scrap cost increased $29 a ton, so you would think that you would have better operating income or more margin report on, but it’s not the way this can mechanically works, there’s certainly other factors at work there and I think a number of analysts wrote about it this morning and said, gees, administrative costs were a lot higher at Steel Dynamics, we contemplate. They’re really not administrative costs.
And most of the damage as you might expect came in the structural arena. The structure division achieved a nice profit in the third quarter on significantly reduced volumes.
Obviously, their volume was down in the fourth quarter, another 20,000 tons so they had even less volume and were hovering around a breakeven, but still carrying that in the operating expenses that that division has. We have done laid off anyone in the Steel group.
We have done some rightsizing as we talked about earlier calls and OmniSource does some rightsizing of fabrication, we’ve done late in one-off in the steel making and to our business nor do we plan to. And we think business is actually improving and getting better.
We’re very pleased we’ll talk about that a little later on, but we’re still carrying much of that overhead, some are fixed, some are related to the employee population. At Columbia city, we probably had the equivalent of six operating lines, our staff, we’d only put two operating lines on the small mill.
Today, we’re operating with about five lines with people being farmed out to our braces operation and tie making operations and elsewhere in the company. And they are recallable.
But it’s really dividing the same amount of operating overhead by fewer tons, especially in the case of the structural segment of our business that produced the numbers. Although the numbers we achieved were fairly close to the ones we expected, so we really weren’t.
In spite of the fact that shipments were down 78,000 tons quarter-over-quarter, we still achieved fairly good operating results in steel as noted by many of you this morning. In the fourth paragraph, we talk about SDI’s average ferrous scrap cost per ton charge was $232 in 2009 compared to $421.
I think it’s the first time we probably ever reported this number and it allows many of you to sort of clean up your models, if you will, gives you bench mark that you haven’t had before, if you will. In the fifth paragraph, we talk about the fact that OmniSource provided 49% of the ferrous scrap purchased by SDI’s mills, maybe not consumed, but purchased, and that would be expected when you’re in a rising scrap market and you have a lull in the fighting, if you will.
From a steel making perspective, I can tell you that our backlogs dried up a good bit in late October and early November. So we didn’t produce as many tons as we felt we were going to produce even though we had very good operating results for the quarter in the Steel segment.
But, when you have backlogs falling off, production falling off, scrap cost going up, you’re probably going to shop closer to home, so would be expected that normally we consume 45% to 47% of material we consume in our steel making operations come from Omni, either Omni north or Omni south, but it was 49% in this quarter. Other than that, in the last paragraph, we talk about looking back at 2009, in light of the extraordinary steel making market economic conditions the country faced throughout the year the company’s performance was reasonably good.
Mark is trying to get me to change that word to just good, and I kept saying highly reasonably good probably works for me, and we don’t often talk about some of the excellent competition we have out there quarterly, many of these entities that have reported some good numbers and are turning their ships around at this point in time, but as you look at all of the metrics for all of the companies that have certainly reported to-date, it clearly was the best performance by anyone in the steel sector. We had a slight loss which was the lowest reported loss of anyone in the steel community.
We have the highest operating profit and the highest operating profit per ton. We have the best EBITDA, the best EBITDA margin, even though we didn’t have a return on assets, it was the slightest loss relative to return on assets of anybody out there so.
A pretty impressive year of performance of our personnel perspective. As I said many, many times, they did a yeoman’s job of focusing on cost reduction and cost control, did a very good job of it throughout the entire year and we have very efficient operations that are very, very well maintained, and we paid a lot of attention to product quality this year, customer service, safety, and other very important key issues throughout the year.
So we came through this period much better prepared to enter '010 than we did entering '09. As we enter the new year, we have certainly seen a slight improvement in business conditions, and I want to note probably still a little bit misunderstood, but, in January, Butler ran 267,500 tons of production.
If you annualize that and I be careful doing that, it’s not the right calculation, there’s 31 days in the month of January, if you analyze that that’s over 3 million tons, by 3.2 million tons, we’ve not certainly achieved that even in normal environments because of outages and some months being shorter than others, etc., etc., glitches that we had long way, but the mill ran very, very well and achieved a record setting production in the month of January. I would expect that we’re not going to be at that level in February.
It’s not backlog-related; it’s just going 28 days there. We have full days with the down time that we need to take, but we should have reasonably good production in February, and significant production I think in March.
Our backlog certainly good enough to get us through February, and starting to get into the month of March at this point in time from a how long is your backlog perspective. But, with inventories being as low as they are and the economy being still as weak as it is I really just don’t expect people to really engage in a lot of restocking.
So I think what they’re ordering is probably a pretty good bird’s eye view of where the economy is really at, and I think we’ve been favored with good order entry, perhaps better than many of our peers. For whatever reasons, like to think because we’re competitive and we’ve great quality and great service, but we have been favored with a fairly positive order entry flows in all segments of the business.
So the backlog is, okay, at Butler, it remains at that level, has been at that level for a couple of months, and we just continue to plod along it, if you will. Our structural backlogs, Dick will talk about that, and we took upon ourselves to tweak the pricing environment that is out in the marketplace and the list price closer to real transaction values, but we’ve been blessed with some order of entry activity there we haven’t seen in a while in the structural end of our business.
We have a pretty good engineered bar backlogs, SPQ backlog, if you will. Backlogs remain fairly steady in the merchants arena.
Business is pretty good at Omni. They continue to operate at about 75% of capacity and certainly the outlook for Omni is for a lot stronger profitability.
They had an operating profit, but a lot better profitability in Q1. Obviously, with the month-to-month lag and with prices going up in December and going up significantly in December and January, and that material being delivered following month, their margins are improving, and this month, basically, prime goods went up 10, 15 bucks, and cut grades were about flat, so, maybe a little bit of margin help there as well, but not a lot, if you will.
But anyway, Omni should report certainly a better quarter. And as I said earlier, I think we’re in just excellent position to move forward as the economy continues to improve and I think it will continue to take small positive steps in the right direction throughout the year.
I know that the GDP reported was 5.7% when you factor out destocking and import activity, economy still only moved in real number of about 2%. So things are still fairly weak out there, but business is picking up.
We’re doing well, as I said, (inaudible) better in beans, about the same in merchants, and certainly better in recycling, and a lot better in SBQ. So I really don’t have anything other to report at this point in time and I would like to now turn it over to my colleagues to tell you a little bit about their specific areas of responsibility, and I’ll start with Dick Teets in the Steel segment.
Dick Teets
Thank you, Keith. Good morning.
I’d first like to acknowledge the safety efforts of some of our steel facilities. Although all have worked hard in improving, I’d like to acknowledge Pittsburgh operations, because they had their best year ever with zero lost time injuries.
Additionally, both Steel at West Virginia and Roanoke had the best performance as ever for lost time injuries with three and four respectively. So thank you very much, everybody, for your diligence on safety.
A couple of brief comments based about each of our major facilities. At Butler, I’d like to acknowledge some recent performance records.
In December, we established a new record for monthly shipments by besting the old by almost 10%. In December, the team shipped 290,000 tons.
That’s a tremendous job. And needless to say, starting with sales and all the way through the facility, all that support goes into that record, but the shipping team really did a great job.
As Keith mentioned, in January, the melt cast and hot mill teams set new monthly record of 267,000 tons, and also the pickle line established a new monthly record of 102,000 tons. Congratulations to everyone at Butler.
As Keith mentioned, the news from Columbia City is not as exciting from a production perspective, but it’s not due to lack of employee efforts. The good news is that as Keith implied the backlog for beam products today is almost double the recent history, but it is unclear how long the non-residential construction market will remain at the present state.
Some exciting news this week is that we received order from a third-party testing firm for a class one railroad that are samples of rail products and successfully pass all the testing requirement. That opens the door to pursue prime standard strength rail orders with that railroad and I believe that we will be submitting additional rail samples the second class for the road yet this month.
Great job, everybody associated with the rail product . Also at Columbia City, yesterday I toured the construction site of the number to caster, and is excited to see the progress.
Our team has safely installed all of the equipment downstream from the straighteners [ph]. It also assisting contractors with piping and wiring assignment.
Completion of this project is expected around June with commissioning on rail blooms to follow. We’re working that project on a very strict 40-hour work week for our employees and contractors.
So they are paying attention to details and just punching it out on a steady basis. Pittsboro ended the year with improving conditions and that has continued into the new year.
Including in their shipments in 2009 were some new sizes and products, including the first production of angles. SBQ shipments hit a low in the second quarter of 2009 and has steadily improved.
We continue to operate our milling and casting facilities of Pittsboro during off peak hours to realize better electrical cost. We improved mill efficiency and achieved better product quality and throughput, we have reinitiated the project of installing the two additional rolling stand.
One week outage will be required and scheduled these are in the second or third quarter based on production requirements, and that will be required for the swapping out of the gear box between an existing stand and a new one. Also during that outage, additional bundling and handling equipment will be installed through move existing bottlenecks in the finishing area.
At Roanoke, the shipping department in the fourth quarter also set a monthly shipping record for total finished steel and billets shipped. This was done while working around construction activities associated with the tying of the new mill shop backouts.
The mill shop was down for approximately three weeks for that tie in, but the rolling mill did not miss a ton of production due to the appropriate billet inventory control. Congratulations to everyone at the Roanoke team.
Steel of West Virginia during 2009, they reinvented themselves by offering new merchant products and specialty sections and they right-size the business to match demands and the requirements. As Keith said earlier, we have not laid anybody off in the Steel sector, but that is with the exception of Steel of West Virginia where contractually give the right and responsibility to manage that work force as needed based on order input, and we have done that.
The neat thing about some of the new sections that were created at Steel of West Virginia that they were components of alternative energy products, which has a very positive future. Also at Steel of West Virginia we commissioned two new rollings straighteners, one in each of the mills.
These upgrades will improve product quality and increased yield. We also expect an improvement to the safety performance because of the addition of automated material handling equipment.
These were exciting improvements that in Huntington. Congratulations to everyone involved.
And finally, at the Texas, they too finished the year with an improving backlog and we see the strength in that backlog during the first quarter. Thank you to everyone in the team in Pittsburgh for their continued fine performance.
Keith?
Keith Busse
Thank you, Dick. We’ll now turn it over to Mr.
Millett for a report on the recycling business and I’m sure everybody wants to hear that to start up in Minnesota Mesabi Nugget, which is going other than a few mechanical glitches actually quite well.
Mark Millett
Thank you, Keith. Good morning, everybody, and Hollywood [ph] Mesabi Nugget, we celebrated our initial nugget run on January 12th, that’s about three weeks ago now and we ran for about 2.5 hours without a single problem and then retired or guys up there retired at the bar, celebrated for a few hours.
But nonetheless, it was a quite phenomenal that it went as expected. Since then we’ve been making trial runs on daylight ships only while we’re continuing to fine tune the systems, finalize commissioning of ancillary equipment, and importantly the schedule is allowing the team to have hands-on-training while gaining an intimate knowledge of the plant equipment.
They’ve done a phenomenal job, in particular, for a commissioning construction phase; the safety performance has been absolutely outstanding. As Keith mentioned, unfortunately, we are starting up with a few mechanical problems.
We have experienced mechanical issues associated with conveyance of a variety of different materials, quality, contrite between the core elements. But we have identified the root causes of those flaws.
They are mechanical, manufacturing deficiencies and a couple of design flaws. We have solutions in hand and we will be replacing a lot of that equipment within four weeks to six weeks.
And we also are having some temporary fixes implemented in the short-term. Also, it’s Minnesota, it’s winter, and so with incredibly difficult time of year to start up and we’re experiencing temperatures in the minus 10, minus 20 degrees, and anyone associated with clamp, with a lot of water systems, it’s a quite complicated task, as is the reclaiming of raw materials from excise stockpiles, the materials, the coal, the ore, like concrete, and difficult even with a fully commissioned plant, let alone starting up from new.
But the guys there doing an absolute phenomenal job. The core components of the system, the palletizing, drying, half distribution of the pellets for.
the rotary hearth, the rotary hearth furnace itself, all have performed extremely well and the product quality is actually better than the material that we produced at the pilot plant and it’s quite incredible. When we have material in stock bins ahead of the rotary hearth furnace and the guys go ahead and plan a run, it does run as expected, and so we’re quite excited about that.
The key takeaway I think is the technology appears to be functioning well, the design considerations adopted from the pilot plant have lead a successful scale up of the process. Commissioning, as we said, with the exception of the material (inaudible) is proceeding well.
We have a great team in place and the expectation of 50% to 60% run rate by the summer is more than anticipated at the present time. On Dynamics, the team continues to be very consistent there.
Even with production curtailed somewhat during periods of reduced capacity of the steel mill earlier in the year, 2009 was another record of production. It produced 165,000 metric tons of liquid ion, and 38,000 metric tons of HBI, compared to 148,000 tons in 2008.
The team remains on a path that continues improvement. Operating cost was reduced by 10% year-over-year and they’ve transitioned the fee stock totally to recycled mill scale.
We no longer use iron concentrate from Canada. And they believe that continued focus on raw materials consistency, stability of operation, we should still be able to achieve a side to 20,000 metric tons a month as we continue to fine tune over the next couple of years.
Metal recycling. Ferrous shipments for the fourth quarter was 1.2 million tons, down approximately 7% from the 1.3 million tons shipped in Q3.
Year-over-year, 2009 shipments were 4.1 million tons and almost 30% from the 5.6 million tons shipped in 2008. And margins were compressed in October and November, as high priced inventory flowed through a depreciating market.
As you maybe aware in September, prime Bushland market pricing was about $340 a ton, so obviously inventory purchased in September had to flow through the system and we saw in October/November a strongly descending market. September to October, the market dropped about $30 and then another $45 to $50 from October to November.
And that had obviously an appreciable compression effect on margin. Additionally, prime grades tend to be purchased on a prior month basis.
So a lot of the material delivered in October was still being purchased at the higher September 340 number. So that obviously compresses it also.
And then two other factors. Firstly, if you look at the shipments, the volume was down, but the shipping volume tended to be front-loaded.
We shipped at a peak actually in October, 460,000 tons, so obviously we’re shipping a large volume of the fourth quarter at the lowest margin, unfortunately. And then finally, in November, when the market did dropped to roughly $265 for prime, shredded dropped to I believe $220-$230-ish, the dealers providing feed stock, the automotive body guys and others provides feed stock to the shredding community were very resistant to let go of their material.
They recognized that the markets probably going to be up further in January and February and held on to that material. So as the product pricing, shred price came down in November, we didn’t see an equal or greater decrease in our feed stock, so that further compressed the margin.
That ended up, I think with about a $35 million compression in gross margin quarter-over-quarter. This year, the ferrous markets have remained strong, particularly, in the sheet arena.
That requires the higher quality prime grades, bundles and bushing. As supply is now tight, as inventory accumulated in November and December by most of the scrap organizations were sold off in the up market in January.
Bad weather obviously also reduced scrap flow to the yards.
Nonferrous pricing generally strengthened through the quarter as most of you recognize, aluminum margins depreciated as markets remain strong. Copper actually seemingly defied any underlying weak market fundamentals and continued to appreciate through hedge fund activities and a jump from the dollar to the commodities as the dollar wavered and weakened.
The aluminum market depreciating, along with expanded product line of the outcomes, and a strong focus on cost pressure allowed our aluminum business to be profitable for the second successive quarter in what is typically a very difficult business. I think going into this year, we are well-positioned, our cost structure is excellent, and we have good inventory level, and should have a good first quarter.
Keith?
Keith Busse
Thanks, Mark. Good report.
We’re looking forward to certainly a better first quarter and I know we’ll get it. Gary?
Fabrication? Do you want to talk about that?
Gary Heasley
Sure, thanks, Keith. To put things in context with regards to fabrication, (inaudible) joint shipments industry wide in the US fell to 470,000 tons in 2009 of about 63% from the high of 1.3 million tons, which was what was shipped in 2006 and 2007, and off 57% from the 1.1 million tons shipped in 2008.
New Millennium shipments were down 53% from Q4 2008, and down 49% for the year, so they are in line with what has happened in the industry as a whole. For our results for 2009, if you recall, we idled two facilities in New Millennium, those two facilities represented about $4.5 million of the operating loss of 6.3 that the segment reported for the year.
As we look forward, we see that industry analysts continue to project nonresidential construction will be softer in 2010. Our take on that is that (inaudible) so far the segments we serve have been hit harder than the overall industry of nonresidential construction.
We don’t think it’s going to go a lot further south from where industry demand is today and in fact we think we may have hit the bottom and will be looking at a long slow recovery from here. When you look at the market in that context, we have to take a look at our business and the sizing of our team and the way we’re organized, and we’ve made a few changes.
In January, we reduced our staff at all three of our operating plants, and these reductions coupled with the plant closures we did late in ‘08 and early in 2009 and attrition that’s occurred through the year, bring our total staff production down to 50% of what it was a couple of years ago. At our current staffing levels, we got the capacity to handle any of our customers needs.
We can support all of their demands. Quick turn projects we can process and we’re actually staffed to begin to grow market share and pursuing opportunities.
We have begun to devote resources to market segment the New Millennium in the past has not served, has not focused on, and in an effort to get better leverage out of our plants, which we believe to be among the most efficient in the country, we are going to begin targeting markets we just have not focused on in the past. So that in the short, Keith as where we are, New Millennium, I’ll tell you it’s been a tough year for the employees in New Millennium.
They make a lot of sacrifices, and they’ve done a great job of cutting costs, maintaining cost, maintaining their position in the market, and I want to thank them for that their hard work. 2010 is not going to be an easy year, but they’re up for the job and they’re ready to go.
Thank you.
Keith Busse
Thanks, Gary. Theresa, before we get to you, I had someone ask me at a conference why we were reporting so late, is there something wrong?
I said no, the fact I’m here at this conference, Dick’s at another conference, we just had a lot of our management team out of pocket, if you will, or we would have been reporting a week or two earlier, so we just weren’t there to be part of this gathering, if you will, had nothing to do with tardiness in reporting numbers. I think the team was ready to go a week or so ago.
Having said that I want to again note that our first quarter outlook is for stronger profitability, in both our steel operations and in metal recycling, and we expect to provide quantitative guidance later in the quarter. With that being said, Theresa, we’ll turn it over to you, and afterwards we’re right into the Q&A.
Theresa Wagler
Okay, thank you, Keith, and thanks for the free pass on the timing. During 2009, our focus really remained towards strengthening our capital structure and enhancing the long-term liquidity position.
In June, we executed a joint common stock and convertible note issue with great success, raising net proceeds of over $675 million, and prepaying all of our term debt of $552 million. We concurrently amended the covenant within our senior credit agreement to gain greater flexibility from 2009 through the remainder of this year 2010.
Not insignificant, during a very challenging year, we were able to decrease overall debt by $428 million, improve our liquidity by $194 million, all while investing over $374 million in growth projects, distributing $60 million in 2008 profit sharing contributions, and paying our shareholders $69 million in cash dividends. Not insignificant.
Additionally, our capital ratio decreased from 62% to 53% and our first lien leverage ended the year at 0.5 times, again, just a very strong year for us in that regard. Cash flows from operations were $446 million, reflecting effective management of our trade receivables and inventory levels during the year.
However, other working capital changes reduced cash flow by $115 million. This reduction was due primarily to 2008s employee profit sharing contribution payment and growth in our expected income tax refund due to weaker 2009 earnings.
During the year, we’ll expect to receive probably around $100 million, maybe more in the middle of the year, as a tax refund, and moving as quickly as we can to file those appropriate tax returns. So that will add to liquidity again in the middle of the year.
Additionally, our 2009 effective tax rate before minority interest was 39.6%. We currently expect the 2010 tax rate to be approximately 37%.
During the year our capital expenditures totaled 330 million, of which over 65% was related to Mesabi Nugget iron facility and the potential future mining operations. Depreciation during the year was 159 million and capitalized interest related to these projects was $21 million.
Our current 2010 plan capital investment totaled less than $150 million. This is extremely low if you compare our historical levels to this amount.
Our approach this year is to remain very disciplined. These plans only include those items compelling and fairly quick returns inclusive of appropriate and necessary environmental and safety projects.
As we proceed through 2010 as market and demand levels warrant and liquidity remains strong we would increase the number of authorized projects. Currently, over half of the planned project reside within our (inaudible) operations.
The outlook related to 2010 depreciation and amortization is for quarterly amounts to be between $55 million and $60 million per quarter, increases directly related to our anticipated increase in production levels. And finally, I’ll end with our share data.
We currently have outstanding shares of 216 million. We have convertible outstanding of 16.4 million.
If I were estimating shares to utilize on dilutive basis for the first quarter I would utilize 235 million shares. I never do, and I would like to thank the finance tax accounting teams.
They go through a Herculean effort during this time of year to be able to put this information together, so I would like to thank them as well. Keith?
Keith Busse
Theresa, thank you. It’s nice to have an equity posture that equals your long-term debt.
And I suspect if you look at the converts differently, we have more equity than we have debt, so I think we’re in pretty good shape. Thank you for that excellent report.
Sarah, we’re now ready for the Q&A.
Operator
(Operator instructions) We’ll go first to Kuni Chen of Bank of America/Merrill Lynch.
Kuni Chen – Bank of America/Merrill Lynch
Hi, good day, everybody. Hey, Theresa, just want to make sure I heard you right, you said $150 million CapEx?
Theresa Wagler
Yes.
Kuni Chen – Bank of America/Merrill Lynch
Okay. All right, great.
So I guess the first question I have here is, certainly, if you look at the industry lot of blast furnaces are starting to ramp back up here. Keith, can you just comment on how you feel about your market share, as you look out over the next one quarter to two quarters?
Have you gotten any indications from customers that they may look to shift some of their purchasing activity around? Just want to get a sense as to how you see some of the competitive dynamics developing over the near-term.
Keith Busse
We have no indications that there’s going to be any shift, but I think even though everyone’s operating rates are up, it would be hard pressed to probably find anybody who’s going to operate at a 100%. When you mention blast furnace, those metallics go into flat-rolled steel making.
And so I think for whatever reason, as I said earlier, whether it’s because we pay more attention, we have better product quality or more competitively priced, and that doesn’t obviously reflect itself in any lower operating profitability per ton, in fact, best in the industry, I think we’ll maintain our position. So we’re not going to give any ground there, and I think as long as the market doesn’t fall apart, it will move at a fairly healthy pace.
I know there’s been some talk of one or two furnaces coming back, but hopefully, that will made up reasonably well to improving market conditions, and there are improving market conditions. So, hopefully there will be a good match there.
I think a lot of conversation in the industry about certain competitors being behind the delivery, so maybe some additional pass-through will help them bring their deliveries back to on target and on schedule. No, I don’t think we’re going to lose any share.
Kuni Chen – Bank of America/Merrill Lynch
And then just a quick follow-up on Mesabi. I guess, can you quantify the start-up in the fourth quarter, I think in the past, you’ve said you expected about a 6 million impact for the quarter.
Is that still a good number? And what should we be thinking about for the first quarter?
Mark Millett
For the first quarter, I think we projected about 30,000 tons, or 34,000 tons. If we hit that, I think we’re in the 6 million to 7 million range.
The mechanical of the conveyance may slow that down, so perhaps 8 million that we should be in that range.
Keith Busse
I think it’s important to know too, if you didn’t catch it when Mark was talking, that there’s nothing in the process that isn’t working extraordinarily well. We’ve got some mechanical waying issues, and they’re important you got any material to the batteries, but nonetheless, the product coming out the other end is a very, very high quality.
In fact, I saw Larry Litman [ph] at the American Metal Conference last week. He was part of that original thinking of and the Mesabi Nugget was part of the team originally and offered his congratulations.
He said if you get any better at the start-up, you’re going to make it steel and not iron. I guess we had some pretty decent results from carbon content.
So I think the process, Tony, is working well; we just get through some bugs. You might say the losses are going to parallel what they were in the fourth quarter.
Kuni Chen – Bank of America/Merrill Lynch
Great. Thank you.
Operator
Up next from Jefferies and Co., we’ll go to Brent Levy.
Brent Levy – Jefferies
Hey, guys, can you talk about by major product areas where the backlogs are? I know, Keith, you sort of gave a rough sense, good, decent, etc., Can you talk in more specific weeks or months, sheet, bar, etc., where the backlogs are?
And then talk about what price increases have been announced, I guess most of them, if we can say from the beginning of the year how much of price increases been announced for the major products as well.
Keith Busse
We don’t announce price increases. We kind of go out and do our thing in the market.
I think it’s fair to say today that the hot roll markets probably a little north of $600, which is a pretty substantial improvement from a couple of months ago when it was back under $500. But scrap costs, in our case, certainly are up about as much.
We don’t use a 100% bundles and bushing, and we have stock on hand and liquid iron we introduced, pig iron we have on hand, so it doesn’t fall down to the bottom-line as $100. So I think we’re going to be able to maintain if not improve margins.
As to the size of the backlog, it’s really just that very steady in flat-rolled. 50,000 tons to 60, 000 tons come into, 50,000 tons to 60,000 tons gone up.
The backlog hasn’t gotten a lot longer. I don’t think they’re going to, in our case, as a spot guy, probably lengthen.
They’re not going to go out for three months. If you were an integrated shop and you’re dealing with longer lead times for the automobile community and plans to give to others, you might see backlogs be out a little further, but yet operating rates certainly aren’t at a 100% in those areas, competitive areas either, but we’re only out a month as I said in flat-rolled, and that’s fine by us.
We operate fairly well with that kind of a lead time and I think our customers understand that and they understand our ability to turn on a dime, if you will, or ramp up results, or ramp down as needed. I don’t think there’s any concern about the size of the backlog.
Dick mentioned that the backlog has structurally doubled, but doubled, it’s still nothing. Maybe actually we’ve had very good order recently, all kidding aside, I think people are now sensing that this is probably the bottom of that market and if stocking has reached the bottom, there are opportunities for a number of people to replenish inventories, those that have inventories that are too low relative to even market conditions.
We’ve had a number of small fabricators who about priced out of the market, if you will, with the spread between list price and transaction values, and really come back and given us kudos and said, thank you, I was thinking about shutting my business down. I think about to keep it open now, I can be competitive again.
So I think it’s going to be slow going there As you know, throughout 2010, I think I’ve said openly, we don’t expect to run anything north of 40%. If we are lucky enough to operate at 50% or 60%, it will make a meaningful difference in terms of the bottom-line for us.
Backlogs in the merchant arena are just steady. Not much change.
They don’t change a lot. Generally speaking, a month, month and a half production is sitting in backlog, and it hasn’t changed a whole heck of a lot.
So that SPQ bars, backlogs are up generously there, and order entry is very steady in that arena as well.
Brent Levy – Jefferies
Keith, you do opine on the outlook for scrap. From this point do you see it updown or sideways for the balance of 2010?
Keith Busse
A week or two ago, we looked at it as sideways, so that’s pretty much what happened for February delivery. I would think as flows pick up without any significant increase in demand because of the economic conditions, you probably could see scrap take a step or two backwards, a couple of people at the conference I was at, said, where in the world are you going to find a commodity in four months or five months at some 50%?
Certainly not in steel pricing. But he thought scrap was dramatically overpriced.
I wouldn’t tell you that it was dramatically over priced. It probably got ahead of itself a little bit, but I don’t know, there’s a chance it could go backwards a little bit in the spring.
it may not happen. There’s a chance surely in the summer, as always happens, might go up as you approach vacation time in the manufacturing world.
But we’ve basically said we don’t see it changing. If you look at January’s numbers compared to December’s numbers, we probably don’t see a lot of change.
I don’t think you’re going to see a run away freight train or a same goes from a $400 market to an $800 market. Mark, you might want to add some color?
Mark Millett
I think we’re seeing quite disconnect in the markets in February whereby prime scrap is a little tighter, obviously, domestic manufacturing hasn’t picked up at all and the sheet metal utilization is up, and so I think there’s going to be a little pressure on the prime side, and it causes a little uptick in pricing in February. Obviously, shred sizes decline, obviously, a lot of the structural mills are still kind of soft, and thereby demand for that product is not there, and I think that product in February and probably March is going to be sideways to down a little bit, so averaging out, it will be kind of sideways.
Going forward, I think the influence will have an impact one way or the other, as shred backs off a little bit, Turkish and other people will come into the market. Currently, their pricing is around about 300, 310 at the port, which is not attractive to any domestic suppliers of any note, but they may jump back in the market.
Ocean freights are going down, and that may give some stability to the obsolete grades. Any further rise in about three days, our crystal ball gets little clarity.
Brent Levy – Jefferies
Thank you, guys.
Keith Busse
Anything else, Brent?
Brent Levy – Jefferies
No, thanks very much.
Operator
We hear next from David Cath [ph], JP Morgan.
David Cath – JP Morgan
Hi, I just have a follow-up question on the capital expenditures. Obviously it’s coming down quite a lot to be 150.
I was curious what portion of that now is maintenance CapEx, and in an ongoing better market, what do you think maintenance CapEx would rise to be?
Theresa Wagler
Dave, the way that I think about our maintenance CapEx is a little bit different than what we used to be talking about, in fact, our maintenance CapEx will be a project that improves efficiency or do necessary things it’s not just maintenance in nature, but I tend to say that that amount typically is $50 million to $60 million, as you include all the operations. Of that amount I’d say probably it’s less than that for next year’s expectations we’ve got most of it in steel operations, and it was in the steel operations most of the CapEx are at structural mill, and it will probably fit evenly between the structural mill, the flat-rolled division and engineer of our products through some of the changes that Dick talked about earlier on the call.
David Cath – JP Morgan
And carry over from Nugget?
Theresa Wagler
Carries, there is little carry over from Nugget, not very much.
Dick Teets
And we have needless to say maintenance types and environmental CapEx at Huntington we’re in the process of spending about $5 million in total for (inaudible) exhaust control from an environmental perspective and we’re also going to be putting in and do scrap charging crane down there. That’s about $2.5 million to $3 million expenditure.
So that is the maintenance type (inaudible).
David Cath – JP Morgan
Okay. And then I believe in the past that you’d talked about at some point the possibility of maybe doing something on the West Coast.
Obviously, in this market environment, that type of expansion might not be what’s foremost on the plate, but, do you think longer-term that may still be something that you guys would consider?
Keith Busse
Probably not.
David Cath – JP Morgan
And why has that changed?
Keith Busse
It’s a small market, and I think there may be better opportunities for the company in the next couple of years. You never want to say never.
It’s becoming more difficult to cite steel making activities on the West Coast. It’s impossible in California, becoming more difficult in Oregon and Washington.
So given the size of the market, we’ve kind of backed away from that project.
David Cath – JP Morgan
Okay. Thank you.
Operator
Timna Tanners of UBS has our next question. Your line is open.
Timna Tanners – UBS
Hi, good morning
Keith Busse
Hi, Tanners.
Timna Tanners – UBS
Hey. I wanted to see if we can get as much as possible here in terms of understanding the recycling business.
And I think we’re all learning that this new element of your company is going to be perhaps more volatile than the steel making that we’ve gotten used to, but really trying to understand in terms of from the third quarter to the fourth quarter, how would you think about a more run rate number? I know you have talked a little bit about this in the past.
Can you give us more of an idea what you expect the profitability or the performance to be like in the near future?
Keith Busse
I’m going to let Mark answer that question. Before we get to though, recall that we had nearly a $50 million quarter in the third quarter and the margin shifts, because of rising pricing environment for scrap, changed that by, gees, $35 million.
I think we had other sundry nonrecurring charges of $7 million or something like that. So you’re right, it’s a little tougher to learn it, get your arms around it, and we’ll get better in forecasting than we’re today.
Go ahead, Mark.
Mark Millett
I guess I’d suggest you that we could forecast it really well if we knew where the pricing was going to go. Literally, mid month, if you go back the last 24 months or 36 months, and you just go mid-month prior to the negotiations or the first week of the following month, it’s anyone’s guess, honestly, what the price is going to be.
Obviously, we have market intelligence, and we have a field for, yes, things are going to be tight and the market is going to move up, but I don’t think anyone would have guessed two months ago that the market is going in the last three months or the last 90 days be up $140 or whatever it’s been. So it’s the volatility of the market that things complicated.
With hindsight, we can quite easily go back and reconcile the difference between the third quarter and the fourth quarter and again, when you got September pricing at 340, I can’t remember our exact inventory, we had 270,000 tons or 300,000 tons or thereabouts of inventory in September, for delivery in a down market in October and November. So it’s not a mystery when you know where the pricing is going to be.
Keith Busse
And that alone could be a $15 million reversal of fortune, if you will.
Mark Millett
We’ve broad numbers. We shipped in October and November, 780,000 tons or thereabouts.
Take 780,000 tons, you put the number to it, down 30, down 40, September to October, was down I think $30 in October to November down another 45,000 tons. You take 780,000 tons times $30, $35, you got a huge swing there.
You could tack for quite readily.
Keith Busse
Tanners, it wasn’t that we didn’t think the market wasn’t going down, we did, just not down as much, and therefore, thinking we were going to suffer a margin loss of maybe 20 million turned out be a lot more than that, especially when combined with some one-time adjustments we had to make.
Timna Tanners – UBS
That makes sense. I guess what I’m trying to understand is maybe ask differently, the margin on the normal basis with understanding there’ll be abnormal situations, it’s been more like 6% to 8%, maybe 5% to 8% historically, is there anything structurally that’s changed as you think there is a margin that on a normal basis you would expect to achieve in this segment?
Operating income margin.
Keith Busse
He’s thinking.
Mark Millett
I’m thinking, not saying anything, because if I say a number, then it’s going to be used going forward. It’s not quite as simple as the steel roll.
You have a variety of different flows, and you have brokerage turns flowing through, and margins in that business maybe two, three, four bucks. You have industrial flow, scrap management business, where margins may be $10 to $20.
And then you have the very volatile flow of the obsolete world that can, in the retail world, that can be anywhere from very little to a lot.
Timna Tanners – UBS
But, is there anything structurally changed?
Mark Millett
Structurally changed? I would say, no.
Timna Tanners – UBS
Okay.
Mark Millett
In the shredded world, things have got a little more competitive, but I think structurally, I don’t believe so.
Timna Tanners – UBS
Okay. And if I could, one more question.
I’m trying to just get a sense of your impression of the new capacity that’s coming on in sheet, both in the short-term with restarts, and in the longer-term with some new capacity. If you could comment on that and also your anticipated plans with regard to any new capacity as well.
Thank you.
Keith Busse
Before I do that, I usually am a little bolder than Mark, and I’ve said it before that I think this business can earn in normal times a normal capacity without huge volatility, I think you could at least look at a $30 type margin times, 6 million tons, not unreasonable to think about $180 million. I’ve said that before, Mark’s shaking his head, that’s reasonable.
I think in normal times, that’s something you can circle or pin around probably, but with volatility, it does change it up or down. Back to your other question about new capacity, I think the order books are improving, and some key capacity was offline.
I think we’ll be coming back. I don’t know that these capacity additions are all that outrageous.
I think, as I understand, the project that if Warren, they’re thinking about lots of different things, anywhere from making pig iron to producing slabs because they have a need for them at other locations potentially. I’ve heard anything about our rolling mill restarting, but I think non-ferrous metal was going to bring ferrous back and then want electric furnaces are coming back, but as I said earlier, I should hope that improving demand, that that will just keep up with improving demand, and we won’t suffer a step backwards at this point in time.
Timna Tanners – UBS
Okay. Thanks.
Mark Millett
I think, Tanners, not to cross party line here, but the one thing that we found in the past, is the flexibility and short lead time of our mills is that the folks do a phenomenal job reacting and the service center distributor arena today cannot necessarily finance a huge amount of inventory, and given the flexibility of our mills, we will continue to be the preferred supplier.
Timna Tanners – UBS
All right, great, thanks.
Keith Busse
Tanners, we didn’t talk about hiss and crop, but I think start ups the ways off in that impact is ways off.
Operator
Anything further, caller?
Timna Tanners – UBS
I could go on and I don’t want to hog the call, but I know there’s also the (inaudible) additional capacity, and there’s some comments, you said publicly about new capacity, so I just wondering if you were going to be able to comment on that as well.
Keith Busse
I have no comment.
Timna Tanners – UBS
Okay. Thank you.
Operator
Michael Gambardella of JP Morgan has our next question.
Michael Gambardella – JP Morgan
Yes, good morning, guys. Where are you operating right now company wide on the sheet business in terms of capacity utilization?
Keith Busse
Probably less than a 100% at the text, but at Butler, at a 100%.
Michael Gambardella – JP Morgan
Okay. And on Mesabi Nugget, do you get all the iron ore feedstock from Cliffs?
Dick Teets
We got about almost, if we run 600,000 this year, we may not have what three years worth of commitment, but we have I think three years of commitment, give or take a little bit on concentrate, and that’s a combination of material from old material from QCM that we redirected from iron dynamics, we have a substantial amount coming from our good friend Cliffs, and we have a supply coming from Magnetation, which is principally owned by Larry Litman, who is recycling iron concentrate tailings deposit to ore mines up on the range.
Michael Gambardella – JP Morgan
And could you talk about the pricing of that material?
Dick Teets
It’s little immaterial. Cannot talk.
Off the top of my head, I don’t no what the price is.
Michael Gambardella – JP Morgan
Is the QCM, because they’re on the eastern side, are they tied to the sea born price of iron ore?
Dick Teets
Canadian, yes.
Michael Gambardella – JP Morgan
And then is Cliffs?
Dick Teets
Cliffs is Canadian.
Michael Gambardella – JP Morgan
So that’s the sea born price as well?
Dick Teets
Magnetation is slightly discounted that well.
Michael Gambardella – JP Morgan
And then where do you get the coal?
Dick Teets
Coal, we have a couple of different sources, principally from West Virginia, currently.
Michael Gambardella – JP Morgan
Can you give us an idea of what you estimate the cost of Mesabi Nugget finished product to be once it’s up and running at safe current levels of input cost?
Dick Teets
Currently, we would predict about 340. Somewhere between 330 and 340 with market price material.
With Mesabi Nugget material even 300 to 320 range.
Michael Gambardella – JP Morgan
And then I guess, we could estimate depending upon what iron ore and net coal prices do for the contract year in terms of increases off of that?
Dick Teets
Yes.
Michael Gambardella – JP Morgan
Okay. All right.
Thanks a lot.
Dick Teets
That’s for metric ton.
Michael Gambardella – JP Morgan
That’s for metric ton? Right.
Keith Busse
300 to 320, I can say, (inaudible).
Michael Gambardella – JP Morgan
Okay. Thanks a lot.
Operator
Bradford Research, we’ll go to Charles Bradford.
Charles Bradford – Bradford Research
Good morning. Could you talk a bit about product mix change?
Because you showed or commented about a $48 a ton increase in average selling price, and a $29 increase in scrap, which would imply an improved spread. I was sort of guess that maybe there’s a lot more coated product in here and maybe the –
Keith Busse
Chuck, it is impacted somewhat by the fact that the text by material, and in the third quarter, we’re working off of more a old stock, in the fourth quarter, more a new stock, if you will, that was priced differently, but that’s not the real color. The real color is the structural division, and it’s really not administrative in nature.
Structure made decent money in the third quarter and basically broke even in the fourth quarter and you’re still carrying the same amount of overhead. So it’s the overhead the operating cost, not administrative that impact that number.
That’s why you didn’t see margins improve.
Charles Bradford – Bradford Research
Understood. In looking ahead, in just basically the quoted market prices look like something like a $50 a ton increase in price in the first quarter compared to the fourth quarter, at least on the flat-rolled side, does that make any sense for you as well?
Keith Busse
Yes.
Charles Bradford – Bradford Research
Okay. And then you have some catch-up on scrap, some of those scrap might be significantly lesser increase, especially with the flat in February and possibly weaker in March, would that be fair?
Keith Busse
Yes, I think that scrap costs would probably peak for us in the February time frame in terms of the price of the unit put in the furnace and then flatten out and go down a little bit from there. But obviously increase substantially with the price increases of December and January being significant, although lesser [ph] earlier, we have the same ore pile on hand in terms of iron ore, and that didn’t change, and a lot of the things we consumed didn’t change or went up very little or not as much as premium grade.
So it’s a mixed bag. And you’re not going to see all $100 in past, it might turn out to be six year, seven year, I’ve studied it, but, it’s not a 100% of that, it’s drilled through, so certain areas, it could leave room for margin increases and others it could be margin compression, but overall we should have a little better margins and hopefully better volume in this quarter.
Charles Bradford – Bradford Research
But, probably not back or do you think it could get back to the third quarter level? Obviously, not the structural.
Keith Busse
Yes, not the structural. That’s right.
But I think probably flat-rolled could, yes.
Charles Bradford – Bradford Research
Thank you.
Operator
We’ll move next to Goldman Sachs’s Sal Tharani.
Sal Tharani – Goldman Sachs
Thank you. Theresa, quickly, on the amortization of intangibles, what should we consider going forward for the next year or so?
Theresa Wagler
Around $12 million a quarter.
Sal Tharani – Goldman Sachs
Okay. Thanks.
Keith, wanted to ask you on your previous comments you’ve made in the past about further expansion. You have one of the best conversion costs with Mesabi Nugget, you’re probably going to have a good raw material feed price over a cycle, and do you think that that plan still is in place and what would be the path and what would you need from Mesabi Nugget side project to implement that plan?
Keith Busse
I think that feed stock would be important to increase capacity, and we’ve talked about looking at additional flat-rolled capacity down the road. That’s, as we said earlier, years away, not an immediate thing.
We continue to model it, look at it, price it, but feedstock is an important part of that equation. We have a pretty steady basket of suppliers of ferrous goods, including our own resources which are growing and will continue to grow, but Mesabi Nugget would play a key role in that, and obviously, we will probably know a lot about that process and its capability by mid-year.
But clearly that would be an important element in the feedstock for Butler and any food enterprise prices serving that market place in the future. We’d like to see that mix improve to where today it’s 5% iron ore and 10% iron dynamics kind of thing, and the rest is scrap, just kind of rough numbers, which puts you at 15%, and we’d like to see material available at the 30% rain for the mill or perhaps as high as in the 40 sometimes.
And it would obviously help the residual problems we deal with from time to time and again be problems. And so we certainly would welcome that material part of the north Texas.
Sal Tharani – Goldman Sachs
And the path to the Mesabi, let’s say, if you go that way down the road and you depend on Mesabi, depending on it success, obviously that would require expansion of Mesabi south and you have room over there, but would that depend on your actually operating your own mines or mine at that time?
Keith Busse
Yes, and Mark didn’t really give a report on the mining activity. He might do that.
As we said in the past, if the first battery works well, there’s pretty broad commercial market for a product of this nature. We think we could sell all we could make it, and would hope to build several more batteries in time, one after another so to speak.
We have to certainly await the results of first one, but it would require the mining effort at that point in time. Mark, do you want to speak to that?
Mark Millett
Nothing really changed, Keith, since the last conference call. I think I suggested then that the firming process had a couple of issues, we’ve addressed it and we anticipated getting some at the end of this year, and it’s probably shifted about 10 months to 12 months.
So would be hopefully November of next year.
Sal Tharani – Goldman Sachs
Next year being 2011?
Mark Millett
Yes. Again, currently, we submitted the application and it’s in the state’s hands.
Sal Tharani – Goldman Sachs
Thanks. Mark, another question on the scrap is, you alluded to a very good point that when the prices were going up in November and December, obviously you got margins are squeezed, but when the prices went down, you ran into the flow problem where people started to holding back, expecting prices to go back a bit at some point.
Is there any way to minimize this factor, because this can happen again, where, because you have done fairly well, and they don’t need to sell right away, may continue to do this action? Is anything do you think scrap industry can do or process like just out to mitigate that issue?
Mark Millett
I think as you’ve seen couple of our competitors that they’ve got further backwardly integrate into the auto arena, pick part types of organizations, trying to get into sort of the grass roots, I should say, supply. We’re looking at a variety of different options there.
We build on crushing crew to go out and help work in partnership with the order crushes and rankers, so we’re looking to try and send that volatility.
Sal Tharani – Goldman Sachs
Thank you very much.
Operator
Up next, we’ll move to Tony Rizzuto of Dahlman Rose & Co.
Tony Rizzuto – Dahlman Rose & Co.
Thanks very much. I got a couple questions.
First, a follow-up on the Mesabi Nugget question about that cost of $300 per ton to $320 per ton, what kind of assumptions are you guys making your base case for met coal and sea born iron ore this year, and what is maybe in those figures you gave us?
Keith Busse
That is contemplating about a $70 (inaudible) price and about a $160 coal price.
Tony Rizzuto – Dahlman Rose & Co.
Great. And then also just a follow-up on, I heard some comments about an income tax refund for this year around mid-year I was wondering if you could talk broadly about how you see the working capital requirements planning out in the first half of this year as well.
And then I have one more question too.
Theresa Wagler
Regarding working capital in the first half of the year, you’re going to see pretty significant draw, somewhere between $75 million and $100 million, probably due to increasing receivables and inventories, both small amount due to Mesabi Nugget, but more aggressively due to what we expect to be more positive first half. But then a lot of that is minimized in the second half of the year.
So I would expect maybe a $100 million over the year.
Tony Rizzuto – Dahlman Rose & Co.
Okay. Thanks, Theresa.
And then a bigger picture question for you, Keith. Obviously, a lot of enterprise here with a dollar and there’s new administration, and the credit still seemingly tight on a lot of different levels, at least what we continue to hear out there, and I was wondering what your thoughts are on how this may be changing the competitiveness of the U.S.
industrial/manufacturing economy, and do you see a meaningful opportunity here that we could really see in key end markets, operating rates move meaningfully higher here in 2010?
Keith Busse
I think there could be significant opportunities tied to the weaker dollar. But we still have not addressed or, our competitive disadvantage is relative to RMB and China fixing the RMB pegging it to the dollar and it’s not being a strong enough currency yet.
It has its negative effects as well. Although China has never, from a steel making perspective been a major importer in the United States.
There have been times when you got a little out of control, but nothing wild. And I don’t expect with the dollar being weaker of this, you’ll see imports come into this country in any kind of a major way and for those who are in a better position to ship material from coastal ports, I think there will be export opportunities, which could help overall demand.
I don’t think we’re going to see terrific pressure, given the malaise that still exists globally on the scrap market, from time to time, people going to drift back in and out of that market, put some pressure on it, which is creating most of the volatility. I think you talk to most people in scrap business, they really would prefer stability, yet they still, each one of them sometimes they can outsmart the other guy relative to taking long positions in the market, and for some, it works out, for others, it doesn’t, usually causes greater heartache and pain than it does a better bottom-line, because everybody thinks they’re smarter than the next guy.
So we’d all prefer less volatility, but that is probably any volatility here is probably going to be at the hands of foreign activity, and that will be China and Turkey related as that in the past.
Tony Rizzuto – Dahlman Rose & Co.
You’re not concerned, it sounds like, about this near-term a little bit of reversal that we’ve seen in the dollar? You don’t expect that will continue?
Do you see that because of the structure issues we’re dealing with as a country that the dollar will continue along the week or maybe more stable?
Keith Busse
I think you said it. I can’t say it any better than that.
Tony Rizzuto – Dahlman Rose & Co.
All right, Keith, I appreciate your thoughts on that. One more, just a quick follow up.
You guys indicated that you’re seeing somewhat better order patterns for the structurals, and I was wondering is there any other light at the end of the tunnel that you can point to? It seems like a lot of those projects were coming off, and we still had some of that follow-through, but what else can you tell us maybe more detail there?
Keith Busse
Yes, I would hardly characterize the risk order entry, we’ve had recently as an order entry pattern. I hope it continues, and if it does, I’ve said earlier, I think it’s probably largely tied to over-destocking more than stimulus related activity.
Dick Teets
I think you will see in this timeframe both in structural and as well as in large shapes that many times we see these spikes in order entry and they’re very short-term relationships to perceived pricing changes. We had a run at the end of December or shipments out of the angles and small merchant shades, because there was a pending price increase 1st of January.
If scrap goes up and there’s another price increase in rebar and so forth. We can see people restocking for a short-term position, but not necessarily a long-term improving economy.
Tony Rizzuto – Dahlman Rose & Co.
That’s great color, Dick, appreciate that. Keith and Dick, thanks so much.
Operator
From Southridge Investment, we’ll move to Bob Richard.
Bob Richard – Southridge Investment
Hi, good morning. Question regarding fabrication.
You mentioned last quarter that there could be some pent-up demand that was awaiting financing, based on the intensity of some quote activity. Are you still seeing that?
Mark Millett
We’re still saying jobs quoted multiple times, and what we’re seeing occasionally is it with financing freeze up on a job get approved on a job, the owner wants the project move forward very quickly to take care of these depressed pricing levels to take advantage of structure cost in today’s market. So there’s some of that.
Now, doesn’t imply that there’s going to be a massive surge, it just means that we think that this market has hit bottom, it declines faster than the rest of the numbers in structure market, statistically speaking of the overall dollars put in place statistic, and we think that some of that pent-up demand could contribute to this year being just a little bit easier even than 2009, just a little bit better.
Bob Richard – Southridge Investment
It helps. But you mentioned joist pricing in the last quarter being also competitive, are you still seeing that out of whack from maybe production costs from your competition?
Mark Millett
It’s different in different regions, but it remains extremely competitive.
Bob Richard – Southridge Investment
And then, Keith, just beat Mesabi Nugget is 500,000 tons per year do you think that enough to supply your prime scrap consumption in flat-rolled or is it that not quite enough?
Keith Busse
We would want supply the prime, right now, we probably look something on the order of 65% prime bundles and bushing and that’s never going to totally go away, that could go down to 45%, with an improvement in iron content or 50%, but it’s not going to go away.
Mark Millett
With the commission (inaudible) you’re limited through carbon content of the pig iron to about 40% or so, of the mix.
Bob Richard – Southridge Investment
Okay. That helps out quite a bit.
Thanks for taking my question, and best of luck.
Mark Millett
But if I may, I spoke in error here earlier; I forgot we’ve moved into a new year. When I talked about the permanent optimistically, it is the end of this year, not end of 2011.
Keith Busse
Yes, Mark saw me nearly fall off the table when he said that. Glad he corrected it.
Mark Millett
I’d not to say may not get into the first quarter of 2011.
Keith Busse
Thank you. Biding from hopefully it’ll be the end of this year.
Operator
Moving on from KeyBanc Capital Markets, we’ll go to Mark Parr.
Mark Parr – KeyBanc Capital Markets
Hey, thanks a lot. Good morning.
Keith, just to round out the scrap discussion, you had indicated that scrap costs, at the melt chop, were going to peak in February. Assuming that we –
Keith Busse
We don’t know that, because I don’t know what material is going to deliver for in March. I’m assuming it’s probably sideways.
It down a little, and if it is, then they would peak in the February time frame.
Mark Parr – KeyBanc Capital Markets
Yes, that’s where I was going, but kind of assuming we don’t get any major changes on the February buy relative to what’s been indicated, do you have a sense of where scrap for the first quarter overall could be overall relative to the fourth quarter?
Keith Busse
I thought I said earlier that I thought the melt costs we’re looking at sort of in the first quarter would not look altogether differently by the end of the year, be in the same arena. It might go down in the spring and up in the summer, end up in the same place.
Mark Parr – KeyBanc Capital Markets
Okay. All right.
Thanks for that. Just one other thing on Mesabi, Mark, I was wondering, what’s your update on the national gas assumption for the cost of Mesabi?
Mark Millett
I think reasonably serving. And we think that earlier number…
Mark Parr – KeyBanc Capital Markets
By the way, appreciate all the color that you’ve given on Mesabi. It’s an amazing achievement you guys have done in the weather up there.
Mark Millett
We’ve plugged down about 4 million BTUs. 4 decatherms per ton, iron dynamics is running about 3.5 in a quarter.
So I think we have a reasonably conservative at 4 decatherms per ton.
Mark Parr – KeyBanc Capital Markets
Okay, terrific. Thanks for the color, and good luck rounding out the first quarter operations.
Thanks for your time.
Operator
Michael Gambardella of JP Morgan has a follow-up question. Please go ahead.
Michael Gambardella – JP Morgan
Keith, just to follow up on the Mesabi Nugget issue, and just scrap substitute need in general, first of all, did I hear someone say that an EAF has limitation of pig iron at 40% feed?
Mark Millett
I say that conventional pig iron, conventional electric arc furnace matches that number, yes.
Michael Gambardella – JP Morgan
Okay. Just hypothetical question.
If you had great need for scrap substitute product and say more capability on your balance sheet would you go to a more conventional route like a blast furnace to get this?
Keith Busse
The way this thing is looking right now, probably not. Remember, with any new blast furnace operation, you’ve got considerable depreciation that you’re looking at, and whether or not financed or not, we financed a good bit of Mesabi Nugget, that’s going to impact it till that debt is paid down.
Mesabi Nugget cost of production goes down significantly, so the stability and the iron and coal market goes down remarkably without interest load on it, depreciation load it, it goes down significantly becomes a very, very competitive process as you would measure against assets that are already depreciated, aren’t carrying any debt load. So I can’t imagine us given the earlier results of this wanting to go another route.
Michael Gambardella – JP Morgan
And just to refresh me again what are the capital costs on Mesabi Nugget?
Mark Millett
It’s probably around about 290.
Keith Busse
We’ve said the battery too, because you have a certain amount of ancillary support would not cost that much. We know better what we’re doing and what we’re buying, and we don’t have to buy all the tools.
I can’t quote you a number, but it’s not 290, and it’s probably about 200.
Mark Millett
That’s about right.
Michael Gambardella – JP Morgan
Did you say 290 million or 290 per ton?
Keith Busse
$290 million, I think is what Mark was saying and battery number too would probably north of $200 million because there are certain soft costs.
Michael Gambardella – JP Morgan
Right. And what kind of capability would you give on one and two?
Keith Busse
500,000 is the anticipated volume per battery.
Michael Gambardella – JP Morgan
Okay, thanks a lot.
Operator
Charles Bradford of Bradford Research has another follow up question. Please go ahead.
Charles Bradford – Bradford Research
Hi, I don’t want to beat this Mesabi Nugget to death, but I’m hearing that pig iron, out of Brazil, which is what you’re substituting for, is running maybe 410, maybe as much as 430 at New Orleans. What are you hearing and what would it take to get it up to Butler?
Because that’s really where the savings are going to be.
Keith Busse
You hear all numbers about where it’s at, I heard of cargoes of 400, we also heard of 370-380, but call it $400, put a frank number on it, it’s about 40 bucks I recall to get it up here. $47, Mark said.
It becomes pretty expensive material for us at $50, $450, we wouldn’t mind that kind of a number at nugget, they probably ought to earn a reasonable amount of money with that spread.
Charles Bradford – Bradford Research
Because if Nugget is even 340 plus freight, that would seem like pretty good return.
Keith Busse
Yes, it could a decent early return, which should only improve, Chuck, over time.
Charles Bradford – Bradford Research
Yes, maybe a three year payback on the 290?
Keith Busse
I’ll leave that up to you.
Charles Bradford – Bradford Research
Okay. Thank you very much.
Keith Busse
You’re welcome.
Operator
Sal Tharani of Goldman Sachs has a follow-up question. Your line is open.
Please go ahead.
Sal Tharani – Goldman Sachs
Thank you. Two quick questions, all the tons we are using in Mesabi Nugget in cost and volume is all metric ton?
Keith Busse
Yes.
Sal Tharani – Goldman Sachs
Thank you. Theresa, you generally give us a break down on the flat-rolled side.
Would you be providing this time?
Theresa Wagler
Absolutely. For the fourth quarter, the breakout was hot roll tons 263,000.
Pickled and oils, 72,000. Coal rolled 61,000.
Hot rolled galvanized 91,000. Cold rolled galvanized 72,000.
Payment products 68,000, and finally galvalum was at 19,000.
Sal Tharani – Goldman Sachs
Thank you very much.
Theresa Wagler
You’re welcome.
Operator
And it appears we have no further questions at this time. I will turn the conference back over to our speakers.
Keith Busse
Thank you, Sarah. Thank you, ladies and gentlemen.
I think we’ve provided some pretty good color today, in an improving environment, we’re all thankful for that.
Operator
That does conclude today’s conference. Thank you for your participation and you may now disconnect your lines.