Good day, everyone, and welcome to the Nucor Corporation third quarter of 2017 earnings call. As a reminder, today's call is being recorded. Later, we will conduct a question-and-answer session, and instructions will come at that time. Certain statements made during this conference call will be forward-looking statements that involve risks and uncertainties. The words we expect, believe, anticipate, and variations of such words and similar expressions are intended to identify those forward-looking statements, which are based on management's current expectations and information that is currently available. Although Nucor believes they are based on reasonable assumptions, there can be no assurance that future events will not affect their accuracy. More information about the risks and uncertainties relating to these forward-looking statements may be found in Nucor's latest Form 10-K and subsequently filed Form 10-Qs, which are available on the SEC's and Nucor's website.
The forward-looking statements made in this conference call speak only as of this date, and Nucor does not assume any obligation to update them, either as a result of new information, future events, or otherwise. For opening remarks and introductions, I would like to turn the call over to Mr. John Ferriola, Chairman, Chief Executive Officer, and President of Nucor Corporation. Please go ahead, sir.
Good afternoon. Thank you for joining us for our conference call. We appreciate your interest in Nucor. With me for today's call are the other members of Nucor's senior management team, Chief Financial Officer, Jim Frias, Chief Digital Officer, Joe Stratman, and our other Executive Vice Presidents, Jim Darsey, Ladd Hall, Ray Napolitan, Leon Topalian, Dave Sumoski, and Chad Utermark. The leadership team in Charlotte would like to thank all of our teammates throughout Nucor for their excellent work in the first nine months of 2017 to build a safer, stronger, and more profitable Nucor. You are the reason our company's best years are still ahead of us. Thank you.
We also want to extend a very warm welcome to the newest members of the Nucor family, the approximately 125 teammates who joined us in September with our acquisition of cold finish bar facilities in St. Louis, Missouri, and Monterrey, Mexico. Nucor is proud and excited to have you on board. Our Chief Financial Officer, Jim Frias, will now review Nucor's third quarter performance and financial position. Following those comments, I will update you on the execution of our strategy for long-term profitable growth. Jim?
Thanks, John. Nucor reported third quarter of 2017 earnings of $0.83 per diluted share. Nucor's third quarter performance represents a decrease compared to second quarter of 2017 earnings of $1 per diluted share and year-ago third quarter earnings of $0.95 per diluted share. Our earnings for the first nine months of 2017 of $2.94 per diluted share compare to $1.99 per share for the first nine months of 2016. The first nine months of 2017 earnings actually exceed annual earnings achieved every year since 2008, a cyclical peak year. Nucor's disciplined strategy for profitable growth is working. During the steel industry's protracted downturn, we have invested aggressively to increase our capabilities for delivering value to our customers and profitable growth for our shareholders.
We are achieving these improved results when large parts of our business, including rebar, merchant bar, special bar quality steel, plate steel, structural steel, and DRI, are operating well below peak performance. Our team is encouraged but not satisfied by the initial returns we have realized this year. Compared with the second quarter of 2017, our third quarter earnings decline largely reflected lower capacity utilization rates and metal margins at our steel mill segment, as well as the impact of an unplanned outage at our Louisiana direct reduced iron or DRI plant. The facility stopped production in late July and resumed operations in early October. Third quarter earnings before income taxes and non-controlling interests in the raw material segment declined approximately $56 million compared to the second quarter.
The vast majority of this decline was driven by the unplanned outage at Nucor Steel Louisiana that lasted the majority of the third quarter. The profitability of our steel product segment improved in the third quarter from the second quarter. A comment about our tax rate, as it can be confusing due to the impact of profits from non-controlling interests. Excluding profits belonging to our business partners, the effective tax rate was 29.3% for the third quarter and 32.1% for year-to-date 2017. Third quarter of 2017 results included a benefit totaling $0.04 per diluted share related to tax return true-ups and state tax credits. This benefit was incorporated in our guidance issued in mid-September. Nucor's financial position remains strong. With total debt outstanding of $4.4 billion, our gross debt-to-capital ratio was 33% at the end of the third quarter. Cash and short-term investments totaled over $1.6 billion.
Nucor's strong liquidity position also includes our $1.5 billion unsecured revolving credit facility, which remains undrawn. The facility does not mature until April of 2021. For 2017, we estimate capital spending of approximately $500 million and depreciation and amortization of about $730 million. During the third quarter of 2017, Nucor repurchased 1,591,000 shares of its common stock at a cost of about $90 million, or just under $57 per share. Nucor's capital allocation priorities are clear, and they have been consistently practiced over many years. Our first priority is to invest for profitable long-term growth. Nucor's growth investment strategy is simple and flexible. We are leveraging our five drivers to profitable growth. Our second priority is to pay cash dividends consistent with our success in delivering long-term earnings growth. Nucor has increased its base dividend for 44 consecutive years.
We believe that record is strong evidence of both the sustainability of our business and our disciplined approach to capital allocation. Our third priority is to opportunistically repurchase our stock when our cash position is strong and our shares are attractively priced. From 2004 through the just-completed quarter, Nucor has cumulatively returned $8.3 billion to our shareholders via regular dividends, supplemental dividends, and share repurchases. These returns to shareholders represent approximately 39% of Nucor's cash from operations generated over that period. We are confident that Nucor's significant competitive advantages, highly adaptable business model, and proven strategies will allow our team to continue to deliver profitable long-term growth and attractive returns to Nucor's shareholders. Approaching the end of 2017, we are encouraged by a number of positive factors impacting our markets going into 2018.
We see generally stable or improving conditions for our most important end markets, including non-residential construction, automotive, energy, heavy equipment, and agriculture. Although illegally traded imports remain at unacceptable levels, we are encouraged by the cumulative benefits of the U.S. steel industry's successful trade cases. We expect fourth quarter earnings to be similar to slightly decreased from the third quarter, exclusive of the previously mentioned tax benefit recognized in the third quarter. The Raw Material segment's performance should improve significantly, driven by more consistent DRI production. The Steel Products segment is likely to benefit from margin improvement. The Steel Mills segment will see some decline, largely due to weakness in plate and typical seasonality. Thank you for your interest in our company. John?
Thanks, Jim. Nucor's disciplined strategy for profitable growth is working. Jim noted that our first nine months of 2017 earnings represent Nucor's best performance for this period since the cyclical peak year of 2008. In fact, our year-to-date earnings of $948 million are more than double Nucor's average comparable period earnings of $411 million reported during the 2010 to 2016 time period. The more than 25,000 men and women of the Nucor team are delivering this profitable growth despite several ongoing headwinds. 2017 has seen a renewed surge of illegally traded imports into the U.S. Through the first nine months of 2017, finished steel imports have increased an estimated 15% compared to the same period last year. The year-to-date market share for finished steel imports stands at approximately 27%. Nucor continues to believe significant work remains to be done to achieve free and fair trade for U.S. manufacturers.
More specifically, it is time for comprehensive and broad-based remedies that address illegal foreign trade practices that have materially weakened our nation's economic vitality. We applaud the U.S. International Trade Commission's unanimous and affirmative vote earlier this month on Whirlpool's Section 201 petition regarding serious injury from imported washing machines. Nucor and our customers embrace and thrive in a marketplace where winners are determined by real economic advantages earned by efficiency and innovation. Additionally, growth remains modest in our key end-use market, non-residential construction. Estimated 2017 non-residential construction activity measured by square footage represents only 67% of the most recent cyclical peak level reached in 2007. Rebuilding America's infrastructure is an absolute prerequisite to the U.S. economy returning to a vibrant growth path that delivers rising standards of living for everyone. Nucor continues to urge bipartisan action on this critical issue.
Action is years overdue on a meaningful infrastructure investment plan for our country. Economic and industry conditions remain challenging, but the men and women on the Nucor team are doers. Our focus remains on what is under our control, execution of our disciplined strategy for long-term profitable growth. The strategy is simple and flexible. We are leveraging Nucor's five drivers to profitable growth. The five drivers are: strengthen our position as a low-cost producer, achieve market leadership positions in every product line in our portfolio, move up the value chain by expanding our capabilities to produce higher quality, higher margined products, expand and leverage our downstream channels to market to increase our steel mills' base load volume for sustained results, and achieve commercial excellence to complement our traditional operational strength. I will now update you on highlights of our team's recent progress implementing our strategy for profitable growth.
During the third quarter, we announced two growth investments for our bar mill group. A micro mill project is being considered for five states in the Midwest and Southeast: Nebraska, Kansas, Missouri, South Carolina, and Florida. We will also be expanding our existing merchant bar operations in either Illinois or Ohio. Nucor's bar mills are a cornerstone of our company, capitalizing on our position as a market leader and a low-cost producer of merchant and rebar. They consistently generate attractive returns on capital and free cash flow. Both the micro mill project and the expansion of our merchant bar operations leverage our existing infrastructure and allow us to better serve our customers. These investments will combine the firepower of multiple drivers to profitable growth, enhancing our position as a market leader and low-cost producer, expanding our capability to serve our downstream channels to market, and pursuing across-the-board commercial excellence.
In September, we completed our acquisition of two cold finished bar products facilities, one in Missouri and one in Mexico, for a purchase price of approximately $60 million. The combined capacity of the plants is 200,000 tons, which increases Nucor's total cold finished bar and wire facilities to more than 1.1 million tons annually. This acquisition advances our profitable growth strategy on a number of fronts. It expands Nucor's market leadership position in cold finished products. It grows our portfolio of value-added products. It creates synergies with our bar mills by providing an additional channel to market for Nucor's special bar quality or SBQ products. From a geographical perspective, we are increasing our footprint in the U.S. and gaining entry into the Mexican market. This positions Nucor Cold Finish to better serve North American automotive and industrial customers.
In his remarks, Jim discussed Louisiana's DRI plant's negative impact on third-quarter earnings. When in operation, our Louisiana DRI facility has met, and in many cases exceeded, our expectations for quality and conversion costs. The challenge has been Louisiana's inability to achieve consistent uptime. Various equipment failures and other issues have resulted in a number of unplanned outages. In light of this unacceptable performance pattern, we are currently focused on developing a more holistic approach to achieving system-wide reliability at the plant. As we study potential design and engineering modifications at Louisiana, we will be drawing upon lessons learned from our Trinidad DRI plant. Trinidad is currently approaching world-class productivity levels to complement its long-standing world-class quality achievements. Nucor's DRI production capacity is a critical foundation supporting our strategy to move up the value chain, and that strategy is working.
I am pleased to report that our Decatur, Alabama sheet mill was notified this month that Nucor will be one of three recipients of the Honda Environmental Recognition Award at Honda's Sustainability Symposium on October 24th. Nucor is receiving this recognition for supplying galvannealed cold rolled high-strength steel as a replacement for this grade produced by integrated steel mills. Nucor's EAF production process emits roughly 70% less carbon dioxide and equivalent greenhouse gases to manufacture the equivalent amount of steel produced by integrated steel mills, yet has improved formability. Congratulations, and thank you to our Decatur sheet mill teammates for your excellent work. Please keep it going. For a company such as Nucor, with its unique position of strength and proven ability to execute its strategy for profitable growth, this is a time of great opportunity.
That is why the Nucor team is both ready and eager to continue unleashing the pent-up earnings power that we have built into our company during the industry downturn. I am absolutely confident that Nucor's best years are still ahead of us. We appreciate your interest in Nucor and would now be happy to answer your questions.
Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. Our first question will come from Jorge Beristain of Deutsche Bank.
Hey, good afternoon, guys. I just wanted to do a check on your situation with electrodes in the face of the recent 10x spike. How much inventory do you have, and when do you see the price effect kind of kicking in in 2018?
Well, good afternoon. Let me start by saying that we do not buy our electrodes on the spot market. We have a long-established contractual relationship with our suppliers, and as a result, we feel pretty good about our position. First, the most important thing we take a look at is our availability to make sure that we do have electrodes. We have right now, we think our inventory could get us through the first quarter of next year. So we're feeling very confident about that. We have letters of intent from our suppliers to be able to supply us with electrodes for the rest of 2018. So for us, supply is really not an issue. Because of these contractual arrangements, all the hype that you're reading about the spot price increases really doesn't pertain to us.
We have pricing through the first half of next year, and we expect to see increases in the second half of next year in pricing. But again, availability is really not an issue for us. We buy almost all of our electrodes domestically. Let me rephrase that and say we buy none of them from China. So we don't see any issue with the Chinese issue of supply. The other thing that I would point out that gives Nucor a little bit of an advantage on this is our DRI usage. Through our DRI, we're able to accomplish what we call single charging, and that reduces our power-on times at our EAF and reduces the energy consumption that we have, as well as the electrode consumption by about 10%, which is pretty significant.
That's a result of us not requiring us to swing the roof off as a result of using the DRI and the feeding of the DRI through the roof of the furnace. So for all those reasons, we feel pretty good about where we are, both on availability and where we are on pricing, and frankly, our position in terms of consumption of electrodes as a result of our DRI usage.
Perfect. Thank you. Sorry if I could squeak in a second question. Can you just comment, there's been some competitors recently announcing price hikes. Do you believe the market is ripe for a hike right now in HRC?
Well, we announced one last night, and as I've said many times on this call, we don't make price increase announcements unless we believe that they're appropriate and that the market is ready to accept them. So that's my answer to that question. We think it is appropriate, and we think that it will stick.
Okay, thanks very much.
Our next question will come from Seth Rosenfeld of Jefferies.
Good afternoon. I have a couple of questions on the plate market outlook, please. You flagged earlier on the call, I think in the release as well, that plate was a meaningful drag on Q3, and you expect again in Q4 earnings. Looking through the shipment and pricing data, it looks like your shipments perhaps grew over 20% year-over-year in Q3. Realized price is roughly stable quarter-over-quarter. Can you just help us understand a bit better what's driving the current margin drag? Then, with that in mind, perhaps what we should expect into Q4. Obviously, the spot market has indeed weakened. Are you basically expecting a bit of a catch-up on margins in the fourth quarter? Thank you.
I'm going to let Leon, who's responsible for our plate operations, begin, and then I'll add anything maybe towards the end. Leon?
Great. Thank you, John. We have seen some metrics that are better than a year ago. Certainly, shipments are up year-over-year, as you indicated. Our backlogs are a little stronger, and we do see some segments in bridges, mining, military applications that are improving and continue to have strong demand. As we look to the fourth quarter, we would anticipate probably the market stable going through the fourth quarter. However, as we saw in the first half of 2017, service centers really began to restock inventory levels.
In the last quarter and moving forward, we see that pretty stable and putting a lot of pressure on pricing. Obviously, the demand is tepid at best, and that'll put some constriction on our pricing moving forward.
I might add just two quick points to that, Leon. When I look at our Q&T products, our Q&T lines are now full.
Yes, they are.
That is an improvement of what we have seen in the past. That is good news. The trade cases have helped limit the amount of dumped Q&T imports. Frankly, the return of the mining and energy business has contributed to the demand side. My final comment would be on infrastructure. We feel very strongly that this country is in dire need of a very intensive infrastructure program. We have confidence that at some point in the near future, we will see some action. We are encouraging bipartisan action on this issue. I think if there is one thing the hurricane and the damage caused by the hurricanes have taught us, is that we need to really upgrade our infrastructure throughout the United States. When that happens, we expect to see an improvement in the plate demand as a result of that infrastructure rebuild.
Going into 2018, we see some positive things on the horizon.
Thank you. Just one follow-up question then. I guess a lot of what you walked through outside of the move on inventories of service centers actually paint some more positive picture for plate on the demand side in particular. Can you give us a sense then of what is happening in terms of your margins, whether or not we are being a bit more dramatic, I guess, in expecting a pullback into the fourth quarter? Then a separate question as well, if I may. On the Louisiana DRI facility, can you please just walk us through in a bit more detail what really has been the cause, you believe, of the recent maintenance issues, what level of confidence you have in a more stable Q4?
If, as you mentioned earlier, you're just in the process of taking a more holistic view towards the facility, when should we expect a more complete update on what's happening looking forward?
Well, I'll ask Jim to address the first issue on margins. I thought I saw a thumbs up there.
Yeah, you did.
Okay.
I think when Leon was talking about service center restocking, he was talking about the beginning part of the year, not what we're seeing currently. So now that time has passed. So we were getting a bit of a boost in the first part of the year in the plate market because of that. Then as the year progressed, scrap prices moved up, and we weren't able to move plate prices up with scrap prices, so we started to see a margin compression, and that's where we live now. We're living in a margin-compressed world today, and we think that'll continue on to the fourth quarter. However, when we look at end market demand, it hasn't changed dramatically. It's probably improved. It's just that that restocking that benefited us at the beginning of the year is over.
Since we are back on plate, I might just make an additional comment that when I look at the work that we are doing on grades at our Tuscaloosa facility as well as our Hertford facility, we are now qualified, and in some cases, in the process of being qualified to be able to supply most of the plate that goes into the large pipe and transmission lines, and that is very exciting.
One more point on this, because I hear this all the time about the U.S. industry as a whole, and that is that we are not able to produce all of the products necessary to feed the pipe market in the United States. While Nucor cannot supply all of the grades, they are all available within the U.S. market, and there is no reason, therefore, to have any exceptions on the trade cases relative to pipe. Now we will move on.
Your final question was on Louisiana. I will make some comments on that, and then Jim, you can jump in if there is anything that you would like to add to it. One of the things, as we said in the script, what we were looking to accomplish with the modifications that we have to our long-term process that we have been using, what we call HYL, the new process. We were looking to accomplish improvements in our quality and at the same time decrease the amount of emissions, and therefore improve the environmental friendliness of the process. In those two metrics, we have been very successful. We have been very pleased with the quality of the product that has come out of Louisiana, and we have been very pleased with the reduction in emissions by using this technology.
The challenge, of course, has been reliability, and we recognize that, and we are now in the process of taking time to look at the engineering of the entire process, making the necessary adjustments, as we refer to it, as taking a holistic approach to the entire process from beginning to end, and making the changes that we believe are necessary to improve the reliability. As we go forward in that study, we of course, will be tapping into the talent and the lessons that we learned in our Trinidad facility, which is frankly world-known for its reliability as well as its quality, but particularly its reliability. That process, we expect to take the next couple of months.
At the end of that period, we will be able to give you a better explanation of the time that would be involved to make any repairs that we feel are required.
Yeah, John, let me add one other thing, and that is that the plant did start its operations up in early October. It's running near full capacity again. We're doing these things proactively, not because we have a problem today. It's running well, and we don't see any reason why it shouldn't continue to run well. However, when you've had the track record we've had, you'd be foolish to put your head in the sand and it's not possible there'll be another problem. So we're trying to be proactive in looking at every possibility, should there be other things we could do that make the plant even more reliable.
That's a good point, Jim, because I should have pointed out. We might go through this process—
In the second, yeah—
—of re-engineering it and taking a hard look at it from a holistic engineering perspective, and come to the conclusion that the improvements that we have made to the process to date, both in the process gas heater and in the furnace itself, have rectified the issues. I mentioned several times on this call, and I'll repeat it, the technology itself doesn't seem to be the issue. It's the equipment that has enabled the technology to result in less emissions, in particular. That's been a major change that has given us the most heartburn with the facility. So we're taking a hard look at that. We want to find a solution that allows us to continue the improved environmental aspects of producing DRI while still having the improved reliability.
Great. Thank you very much.
Our next question will come from Timna Tanners of Bank of America.
Hey, good afternoon, everyone.
Good afternoon. How are you?
I'm doing all right, thanks. I wanted to ask you a question I asked earlier, but I'm just fascinated with how much the U.S. market has kind of lagged the global market, and I know the recent price hike maybe addresses that. Is there any structural reason you can think of why the U.S. market wouldn't respond to higher global prices? Or do you think that this has just been something maybe related to this time of year, or any other explanation you have would be great.
Yeah, I definitely do not feel that there's any structural change that is resulting in this. I think it's more or less a question of a lagging and leading cycle. We go through this from time to time, where one or the other will make a major move. In this case, we've seen global pricing move up and at the same time, frankly, because of the import surge that has occurred in the United States, that has had a very negative impact on the demand here in the United States and our ability to meet that demand. Although demand has improved, the improvement in demand is being filled by illegally traded products. We see that, again, actually coming to an end. We see pricing. Frankly, we think it's bottomed out.
We've made our price announcements, and as you point out, a $40 move on our part, and we do believe the market will support that, will reduce the gap. Really, Timna, I think it's more of just a case of lead, lag on what is normally a cyclical pricing environment, compounded a little bit by the impact of illegally traded imports on us. We're shifting the demand supply in the United States. That had a negative impact on pricing. Now, as I said, we believe that has bottomed. There's a little bit of seasonality to this also. I think, Timna, if you look back over the past several years, you'll see the same kind of thing happening in the end of September, early October. Things kind of slow down a little bit. You see an impact on pricing.
That occurs more here in the States than on the global marketplace. That also might have played a role in it.
Okay. That makes sense. I have kind of a big question just to end this whole topic of capital allocation, how you think about using cash. Clearly, you need to buy back. You hadn't done that for a while, so I was just hoping you could comment a little bit more about how you think about buybacks in your toolkit. Talking about a new micro mill, do we really need more rebar? If you could explain that a little bit more, and then how you're looking at other M&A and options in a little more detail would be great.
Okay. Let's start with the first question, and I'll ask Jim to address the buyback issue.
Yeah, Timna. We have done a lot of returning of cash to shareholders over the years, and we've used base dividends, supplemental dividends, and share repurchases. We also look at what we have in our pipeline in terms of free cash flow as we forecast the future and imminent M&A transactions. We always have things in the pipeline. We look at what's imminent and about to happen. We were encouraged by both the fact that we felt like the stock price was a little undervalued. We had a lot of liquidity. We'll always opportunistically look at that. We know that our dividends this year, as we've gone deeper in the year, our payout ratio is going to be above 40%.
As we've talked in the past, that's something that we think about in terms of wanting to make sure we're paying at least that much in dividends. That was kind of the way we looked at it, is it was a good opportunity to use some of our extra cash with the stock price where it was.
The second question had to do with rebar and our investment in new rebar mills relative to the marketplace, and I'm going to ask Dave to tackle that one.
Yeah. Thanks, John. Yeah, Timna, Nucor, we are committed to the rebar business and maintaining our low-cost position in the market. We believe that micro mill is a viable technology, and it will allow us to better utilize our regional approach in growth markets where we have scrap available. We're confident that we'll see some increased investment in infrastructure as well.
Hey, Dave, maybe can I add two quick points to that?
Absolutely.
One is, you kind of touched upon it. Where we're looking to place these markets, so we refer to them as micro mills. We're looking to place them in markets where Nucor has a large scrap supply, as well as we know that there's a good demand that's being underserved in that particular region. So we look at this being able to give us a good return, basically based upon a logistics and the impact that we'll have by a lower logistics cost in getting scrap to the mill and then from the mill to our customers. The other point that I would just, we mentioned this in the script, and I want to just emphasize it again. When you look at rebar and merchant bar in general, long products in general, that's been a real cornerstone for our company.
In fact, I like to say that it built our company. When I look at the rebar strategy and the expansion of it, one of the five drivers of profitable growth is to improve and increase our downstream, our channel to the market. We have a great channel to the market through Harris. So we feel that although you might feel that there is excess or there is not a need for additional rebar in the United States, we are confident that based on the location that we are putting them, the geographical locations that we are going to select, and our channel to Harris, through Harris, these are going to be very good investments with good returns for Nucor.
Yeah. Thanks, John. That is exactly it. This is a big logistics play. We have always approached these markets regionally, and we feel that this technology that is proven will allow us to expand on that regional approach and focus in where we have scrap available to us and where there are markets already existing.
Tim, can I ask you to repeat the third part of the question? I know it had something to do with mergers and acquisitions.
Yeah. Sorry, it was a long question. Yeah. So I was just asking about capital allocation broadly, and then if you had any more comments about how you are thinking about M&A options or priorities.
Oh, I can answer that one without even getting help from Jim. How are we looking at growth opportunities and our capital investments going forward? I tell you what, we've got a full pipeline of opportunities. There's a lot of things that are taking place in the world today. I'm sure you're on top of most of them. There's a lot of things happening both in the global marketplace and in the United States, a lot of changes. Some companies are more challenged than others, and that provides opportunities. We're going to continue to invest in our downstream businesses to improve our channel. We're looking at additional upstream opportunities to invest in. So we're in a great cash position. This is, again, one of those cases we're having a very strong balance sheet, gives us opportunities to continue to build upon our five drivers of profitable growth.
We've got a lot of opportunities out there. One thing that I would tell you that we'll look at in every area that we invest, and that is value-added investments. Investments that are going to improve the value added. We think that the higher we move up the value chain, the higher the margin and the more sustainable the business. So the investments that you see us make going forward will all be in the area of improving our value proposition, providing higher valued products to value-appreciative customers, okay, who are willing to pay for that higher value, is what we will be focusing on.
Thanks a lot.
Our next question will come from Curt Woodworth of Credit Suisse.
Yeah. Good afternoon, everyone.
Good afternoon.
I wanted to drill down into the rebar market as well. It's been somewhat perplexing from my perspective this year, in that metal spreads seemingly continue to trend lower, yet you have the Turkish tariff. It seems like a lot of this excess inventory in the Gulf has been absorbed, and the arb is pretty close. I think Turkey's selling at 520, 530 metric, which is, I think, about what the price is on a landed basis in the U.S., around like 550, 560 short ton. Can you comment on how you see this market sort of evolving into next year? Then I know you've been in Washington, it seems like from some of the interviews you've given, John, with respect to 232.
Do you think that, from your discussions recently, I think you've said this to the press, that Section 232 is still going to happen, and do you see rebar playing into that? Thank you.
Let me start, Dave, and then you can add on, because basically, your question is, if I am hearing it correctly, is look, there is a lot of things that seem to be changing in the marketplace, but still the margins on rebar are low and pricing continues to drift down. What I think you have to consider is what happened at the beginning part of the year. The surge of imports that came into this country. There were months where we saw 30% of the market share, slightly higher than 30% of the market share, going to imports on rebar. There is a little bit of a lag in the effects. So we are still seeing some of the negative consequences or the negative impacts, the adverse impacts of that surge of imports that was totally out of control in the beginning of the year.
Yes, we have won trade cases, but frankly, we did not get the kind of remedies that we felt were justified given that surge. We are going back in Washington, as you noted, and we are going to continue to fight, and we are going to continue to win cases and continue to appeal them if we do not get the right outcomes. It is really the story of the rebar in the United States this year is all about, can be summed up in a single word, and that is, well, two words, illegally traded imports. I guess that is three. Illegally traded imports and the need to stop them and get this situation under control. I am confident, again, that given the actions that we are taking in Washington, we will see those positive results. Dave, did you want to add anything to that?
Yeah, just demand is decent. You really hit it. Illegally traded imports are the thing that really hit us in the beginning of the year. There was record levels of imports. We are working our way through that. The import level is down about 21% now since we have got the relief. But now we are starting to see rebar come in from other areas besides Turkey. But it is down. We feel the demand is decent and moving forward.
I guess on the brighter side of all of that, as we look forward going into the end of the fourth quarter, the end of the year, and into next year, because of the decrease in imports now, it is going to take a while for that surge to work its way through the system. No doubt about that. But we believe we will continue to see imports lower. Since demand has been holding steady and possibly may be improving a little bit, again, if we see that infrastructure build and other things that are happening, some of the results, frankly, as sad as it was, the devastation from the hurricanes, that might result in a little bit more of demand on rebars as they rebuild parts of areas devastated.
All said, we think it will pick up a little bit, and we will have to continue to fight to keep the imports down. Now, you asked a question about 232, so I think if I can take just a minute of your time, I will share with you my thoughts. You summed it up well. I have said this many times, I am getting a little concerned about the length of time it is taking for this to be implemented, and I am concerned about the surge of illegally traded imports that are coming as a result of the delays. That said, I am still confident that President Trump will fulfill his commitments to our industry and that we will see a 232, hopefully early part of next year at the absolute latest.
Maybe it will be a nice Christmas gift to the industry, and we will see it at the end of this year. But it is certainly needed, and we have a commitment to get it. I think as you look at some of the things that are happening even outside of our industry, for example, with Whirlpool 201, which is a different action, of course, but still it points to the severity of the imports and the type of holistic remedies that can be offered by Washington, and we are counting on getting one for the steel industry.
Great. I appreciate it. Thanks, guys.
We will take our next question from Novid Rassouli, Cowen and Company.
Hey, John and Jim. Thanks for taking my questions. Just to stay on imports for another minute. Are you guys surprised to see imports, I guess, as high as they are, given that the import arb is pretty much nonexistent now? When do you expect imports to return back to a more normalized level as a percentage of the U.S. market?
We're not surprised at all at this surge. Not at all. The reason is that we see all of the countries and companies that are looking to beat what they know will be some form of trade relief. They're looking to get every ton in that they can get in before we either go to the 232 or we continue to win these trade cases that we're winning. Whether we get 232 or not, we are going to continue to prosecute trade cases with the same vigor that we have over the last 12, 18 months. I am confident we're going to continue to see the types of wins that we have seen. Apparently, so are these countries that are breaking our laws because they're doing everything they can to get their product in here before that goes into effect.
I'm not surprised to see this surge. I think it's a direct result of a commitment that was made by the President early in the year, a belief that it was going to go into effect sometime in the June time period, as was indicated. With every month that passes that it doesn't go into effect, all we see is a continued surge to get their products in before something goes into effect. Now, the one thing that we've been talking of lately in Washington, and certainly I've been sharing with the administration, is our belief, and they should be vocal about the fact, that any results of 232 should be applied retroactively to the time period when the President made his first commitment back in the early part of the spring of this year. We think that that, frankly, is the right thing to do.
Also, we believe that if he were, or the administration were, to make that kind of a commitment, it would put an immediate end to the surge, and therefore, we would not see the damage occurring to the industry while the administration took the time it needed to complete the study of the 232. So that's something I want to mention because that's something we've been pushing very hard in Washington. I don't know if we'll get it, but we're pushing it very hard with the administration.
John, that would be similar, essentially like critical circumstance on the AD and CVD duty side. I think those are the rules for critical circumstance.
It would be exactly the rules for critical. I probably could have said it easier by just saying we want the same rules applied to 232 that do exist for critical circumstances. I got to tell you, this is critical circumstances. Even the G20 has come out and they call the crisis in steel today a crisis that needs immediate action. That is the G20. The OECD has made a very similar comment.
I will just point out that this is not the United States that is suffering through this surge and results from overcapacity in China. It is Europe. Europe is frankly quicker at taking action than we are. They are moving much quicker to get relief for their steel industry, as well as other regions. India, just recently, a few months ago, put tariffs on all of the Chinese products that come into the country. It is a global problem.
Other regions are reacting much quicker than the United States, sadly, which means that we remain the market that they can get into while our government is dealing more slowly with the issues that other governments have dealt with more quickly.
Right. If you do not mind, one quick follow-up. So switching to pricing, we have been seeing HRC prices weakening recently, I would assume, as you said, primarily due to this high level of imports. Can you just walk us through the fundamental drivers and what you are seeing from your seat as to maybe why the market will accept and enable the recent price hikes to stick? Thanks, John.
I'm assuming you're talking about the price hikes on sheet products and—
Yes. Correct.
Yes. We watch the demand curves very carefully here, and we believe that we've seen it bottom out. A couple of things that are coming into effect here, we see the imports on HRC are kind of drifting down while demand remains constant to drifting up a little bit. At the end of the day, it's always about supply and demand, and we see the market picking up. Order entry over the last two weeks we've seen increase significantly. We feel good about the demand level going into the fourth quarter and particularly into 2018. One area that I would mention in particular is in the oil and gas. The energy market has improved much more quickly than we expected it to. That's a particularly strong dynamic for Nucor after our acquisition of Gallatin, which serves that market very heavily.
With oil and gas picking up a little bit, imports are down a little bit, although automotive has kind of slowed down a little bit. We expect that to frankly pick up again, as a result of some of the sadness associated with the hurricanes coming both in Florida and in Texas. We hear estimates of anywhere from 700,000 to 1 million vehicles that are going to need to be replaced. The one last point that I would make is, we didn't touch upon it too much, but in relation to the automotive market picking up, Nucor's participation in that market and the grades that we continue to develop and offer to that market, I feel confident are going to help our sheet business.
A final point would be that when you look at the MSCI inventories for sheet products, they have been drifting down and are at a fairly low level now, which we again believe bodes well for fourth quarter and first quarter of next year.
Thanks for taking my questions.
We will take our next question from Phil Gibbs, KeyBanc Capital Markets.
Hey, thanks for taking my question. How are you?
Hello, Phil. How are you? I am well, thanks.
Doing well. Thank you. I just have a clarification on the micro mill investments. You mentioned Illinois and Ohio as targeted regions for expansion. Are we talking about both new regions—
Phil, I apologize. I got to correct you there. We talked about those two states as areas where we look to invest to expand our merchant products. We talked about other states, five or six other states, that we are looking at for the rebar. Ohio and Illinois, we are looking at as potential areas to invest to expand our merchant product offerings.
We would be looking at new capacity then in both merchants and rebar, if I am hearing you correctly. And would—
You are hearing me correct.
Okay. Would you expect this to displace other capacity within your system, or is this a thought whereby you want to grow production?
We want to grow production. Now, having said that, we have a complete plan that takes into account all of our facilities. There will be some rearranging of markets. There will be some plants where we shift products as a result of this new capacity in rebar. We have taken a holistic view of this. We have done a study of all of our merchant and our rebar divisions and our markets. I do not want to give too many details out here, and I am not going to. But yes, this is really a function of fully utilizing our melt in each of our areas and better matching the product offerings in each region to the markets in that region.
As we shift things around, we will be taking a. We mentioned the word logistics several times here today because we have kind of done a study and taken a hard look at how do we match our product offerings to the markets from a geographical perspective in which they are located, and how can we rearrange that offering to minimize our logistical costs. At the end of the day, we have said this how many times? Nucor continues to be the low-cost producer in merchant and rebar and frankly, in all of our products, and we continue to drive that cost lower and lower. At the end of the day, especially in a world with excess capacity, the low-cost producer is going to be the winner. Given Nucor's belief in continuous improvement, we continuously look for ways to drive that cost even lower. This is an example of it.
The long product group has done a great job at making a detailed market study, and now we're going to be implementing the changes that result from that study.
Thanks, John. Most of the micro mill investments we've seen have been around, I want to say between 300,000 tons and 400,000 tons. Should that be what we're thinking about here?
Yes, in that neighborhood. We're not going to give out any specifics at this point. But yes, in that neighborhood it would be fair to make that comment.
If I could ask a second here, just maybe it's a good segue in both merchant bar and beam. A few weeks ago, Nucor had severely cut list prices into the fourth quarter. I was just thinking about what the rationale was behind that from a timing standpoint, and should we think that there's going to be a little bit of pressure on pricing in fourth quarter? Thanks.
I think a good question, and I can answer it very simply. The rationale behind it was the fact that our book price had been targeted by our competitors who offered discounts off of our book price, and our book price was becoming not relevant to the market. So we cut it to make it more relevant to the market. As a result of it becoming a little bit less relevant to the market, we lost some market share in the third quarter, and that greatly upset me. Okay? I can tell you the instructions to the team going forward is that we're going to watch discounting off of our book price much more closely and react to any discounting off of our book price much more quickly as we move forward so that we always have a relevant book price.
That pertains to beams, merchant, and rebar. Does that answer your question?
Yes. You confirmed my suspicion. I thought you were unhappy with something, and I was right. Thank you.
Okay. Well, your suspicion was correct. Hello?
I'm all set. Thank you.
Okay, thank you.
Ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the call back over to Mr. Ferriola for closing remarks.
Thank you. Let me close by, as I usually do, by saying thank you. Saying thank you to our shareholders. We appreciate your confidence and your support. Thank you to our customers. We appreciate the opportunity to earn your business every day, and we will continue to work hard to earn your business every day. I also want to say thanks to my Nucor teammates for creating value for our customers, generating attractive returns for our shareholders, and building a stronger future for all of us and our families. Most importantly, thank you all for doing it safely. Thanks for your interest in our company. Have a great day.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.