Good day, and welcome to the Nucor Corporation fourth quarter and year-end 2013 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 10-K and subsequently filed 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, President, and Chief Executive Officer of Nucor Corporation. Please go ahead, sir.
Good afternoon. This is John Ferriola, Nucor's Chairman, Chief Executive Officer, and President. Thank you for joining us for our conference call. As always, we appreciate your interest in Nucor. With me for today's call are Nucor's Executive Vice Presidents, Jim Frias, our Chief Financial Officer, Jim Darsey, responsible for our bar mill, cold finish, and fastener businesses. Keith Grass, responsible for our scrap business and energy investments. Ladd Hall, responsible for our sheet mills and direct reduced iron facilities. Ray Napolitan, responsible for our fabricated construction product businesses, and Joe Stratman, responsible for our beam mills, plate mills, sheet piling, and business development work. First, and most importantly, we want to thank everyone on our Nucor, Harris Steel, The David J. Joseph Company, Duferdofin, NuMit, Steel Technologies, and Skyline Steel teams for your excellent work taking care of all of our customers.
Each and every day, the more than 22,000 men and women of the Nucor team are building a stronger Nucor by working safely, working smart, and working together. That has been the case since our company's founding nearly five decades ago. Nucor's employees, the right people, are our company's greatest asset and our greatest competitive advantage. Throughout Nucor, our teammates have been working hard to grow long-term earnings power. We have invested significant capital in recent years that we expect to convert into higher highs in profits over the next upcycle. Two key drivers to the anticipated profit growth will be reducing our raw materials cost and expanding our product mix to include more value-added, higher-margin offerings. In the fourth quarter, we reached a number of significant milestones implementing these organic growth initiatives.
I will discuss these achievements after our CFO, Jim Frias, reviews our fourth quarter results and financial position. Jim?
Thanks, John, and good afternoon. Fourth quarter 2013 earnings of $0.53 per diluted share included favorable out-of-period tax adjustments totaling $0.07 per diluted share. A lower-than-expected LIFO charge also benefited earnings by about $0.03 per share. Excluding these items, our results exceeded our guidance range of between $0.35-$0.40 per share by approximately $0.03 per diluted share. This performance largely resulted from better-than-expected December profitability at our sheet and plate mills. Nucor continues to benefit from its position as North America's most diversified manufacturer of steel and steel products. A comment about our tax rates, since it can be confusing due to the impact of profits from non-controlling interests. After adjusting out profits belonging to our business partners and the out-of-period tax adjustment, the effective tax rate was 31% for the fourth quarter and 33% for the full year of 2013.
Balance sheet strength remains an important attribute of Nucor's business model. Nucor is the only steel producer in North America to enjoy the extremely important competitive advantage of an investment-grade credit rating. Our financial strength allows us to invest aggressively during the downturn to grow our long-term earnings power. At the end of 2013, Nucor's total debt-to-capital ratio was 36%. Cash, short-term investments, and restricted cash totaled $1.5 billion. Further to Nucor's strong liquidity, our $1.5 billion unsecured revolving credit facility is undrawn, and it does not mature until August 2018. We have no commercial paper outstanding, and our next significant debt maturity is not until 2017. Nucor's cash flow generation remained very healthy in 2013's challenging steel market conditions.
$1.1 billion. Our balance sheet liquidity and cash flow have allowed us to grow stronger during the current downturn. We have invested aggressively for profitable growth. 2013 capital expenditures exceeded $1.2 billion. That was more than double last year's depreciation expense of $536 million. Since the last cyclical peak reached in 2008, Nucor has invested $8 billion in our businesses, $4.4 billion of capital spending, and $3.6 billion of acquisitions. This broad range of strategic investments enhances Nucor's key competitive strengths. Those include a low-cost production situation, a diversified product mix, and market leadership. We have posted a slide package on our website that summarizes some of our major growth initiatives implemented during the current downturn. In his remarks, John Ferriola will provide updates on some of our more current projects. With these investments, the Nucor team is preparing for the inevitable steel industry cyclical upturn.
Our unrelenting focus remains on realizing attractive returns on Nucor's invested capital, which now exceeds $9 billion at the end of 2013. We expect to build upon Nucor's long tradition of being an effective steward of shareholders' valuable capital. Return on invested capital for Nucor averaged 15.5% over the 10-year period ended in 2013. That 10-year period includes the most recent five years of the current down cycle, as well as the five-year upcycle that ended in 2008. It is interesting to note that Nucor's return on invested capital averaged 25.5% during that last upcycle in the steel business. We expect significantly lower capital expenditures for 2014, as the majority of our growth projects will be completed in the first half of this year.
Also, we recently announced a joint decision with our natural gas working interest investment partner, Encana, to temporarily suspend drilling new wells until there is a sustainable improvement in natural gas pricing. Cessation of drilling will reduce Nucor's 2014 capital spending by about $400 million. As a result, we estimate our 2014 capital spending will be approximately $600 million. The suspension should significantly improve our free cash flow position this year. It also highlights the strong relationship we enjoy with Encana and how flexibly this investment is functioning to provide Nucor a capital-efficient hedge against high natural gas prices. For the first quarter of 2014, Nucor's earnings are expected to be similar to the fourth-quarter level, excluding the tax adjustment. Our steel mills will benefit from having no major planned outages, and we expect improved performance at our Louisiana DRI facility.
However, these positive factors are likely to be largely offset by this year's unusually harsh winter weather, exacerbating the typical seasonal first-quarter slowdown in our construction-related businesses on both the fabrication side and the steel mill side. Overall, the outlook continues to be tempered by excess global steel capacity and the threat of steel illegally dumped into the U.S. Nucor will again follow our practice of providing quantitative guidance in the final month of the quarter. Our team is committed to executing on the opportunities we see ahead to reward Nucor shareholders with very attractive long-term returns on their valuable capital invested in our company. Our strong focus on growing long-term earnings shareholder value is evidenced by Nucor's dividend record, 41 consecutive years of increased base cash dividends paid to our shareholders, effective with the upcoming quarterly payment on February 11th of 2014. John?
Thanks, Jim. Nucor's fourth quarter of 2013 performance was noteworthy for several important reasons. Our teammates delivered solid profitability in what are still very challenging markets. They achieved this while undertaking significant planned downtime for major capital projects at several of our largest steel mills. Those outages included four weeks at our Nucor Steel Berkeley sheet mill, two weeks at our Nucor-Yamato Steel structural steel mill, and four weeks at our Nebraska bar mill. We also absorbed the costs of starting production at our new direct-reduced iron, or DRI, plant in Louisiana. Further, I am pleased to report a number of impressive achievements in the ongoing implementation of our capital projects. These initiatives grow Nucor's long-term earnings power by providing us new higher-margin product offerings, cost reductions, and quality improvements. Our Nucor Steel Louisiana team began producing DRI on December 24th.
Within the first 24 hours of operation, output quality reached the world-class levels consistently achieved by our DRI plant in Trinidad that has been running since 2006. In fact, Louisiana's carbon content has recently exceeded Trinidad's best-in-class performance. Most importantly, the initial output from the Louisiana plant has performed very well at the Nucor mills that have consumed it. I would like to thank everyone on our team in Louisiana for their hard work and ongoing commitment to getting the job done. Start up of the Louisiana DRI plant is a huge step forward in the implementation of our raw materials strategy. We view our expanded DRI capacity, paired with our low cost and long-term natural gas supply, to be a game changer for Nucor's cost structure for the high-quality iron units we need to expand our share of the higher value-added sheet, SBQ bar, and plate markets.
It is also a game changer by improving Nucor's operating flexibility with a significantly shorter Nucor supply chain for high-quality iron units. As Jim mentioned, in December, we announced agreement with Encana to temporarily suspend drilling for new natural gas wells given the current gas price expectations for 2014. The drilling pause demonstrates the flexibility of our partnership to adapt to changing natural gas market conditions. This flexibility is allowing us to make the best capital allocation decision for the current natural gas price environment. Suspending drilling in today's gas markets is a win-win situation for Nucor. By the middle of 2014, when all in-process wells are completed, we will have just over 300 producing wells, providing a full hedge for our Louisiana DRI plant's expected consumption into 2015.
The cost structure of our drilled wells is such that they generate a modest positive return in 2013's low natural gas pricing environment. But with the gas requirements of the Louisiana facility hedged into next year, it is not a wise decision to use our valuable capital to invest more dollars in drilling for modest returns. At the same time, we retain the valuable option to resume drilling in a higher natural gas pricing environment where drilling provides an attractive return on our investment, and we need to continue to hedge our gas consumption. Nucor and Encana will jointly decide when the time is right to resume drilling new wells. In December, Nucor Steel Berkeley completed the installation of all caster and hot mill upgrades for its Wide-Light project. This nearly $100 million investment provides Berkeley with the capability to produce wider and lighter gauge sheet steel.
New product offerings will include 72-inch wide hot-rolled pickled and oiled, 72-inch wide cold-rolled, and gauges as thin as 0.042 inches. The expanded product portfolio will allow Nucor to move up the value chain in agricultural, automotive, heavy equipment, machinery, and pipe and tube applications. On January 21st, our Berkeley team made history as the first Nucor flat-rolled mill to produce 72-inch wide coils. This successful start-up is timely, as there is already strong customer interest in our new wider and lighter products. During the fourth quarter, our bar mill group achieved major progress implementing key components of its strategy to grow Nucor's participation in higher-margin SBQ products. Expanded SBQ product breadth will support profitable growth for Nucor in energy, automotive, heavy equipment, as well as other markets. Our Nebraska mill successfully started up its upgraded rolling mill that includes new shears and straightening equipment.
The significant improvement in length control and quality of shear cuts already being experienced will allow us to move up the value chain in SBQ markets. It also improves our cost structure as a result of gains in rolling mill yield. in 2015, Nucor Steel Nebraska will complete its product expansion program with an upgraded electric arc furnace power system and the addition of a fifth caster strand. Our Memphis, Tennessee team has completed the installation and commissioning of a new quality assurance line, which allows us to provide engineered bars for the most demanding applications. I would also like to congratulate and thank the Memphis team on achieving record earnings in 2013. Consistent with the Nucor culture, the team's can-do attitude and high energy level has allowed them to overcome many obstacles since their production start-up at the onset of the current Great Recession in September of 2008.
The potential for profitable growth at Memphis in the years ahead is sizable and very exciting. Our Nucor Steel Hertford County plate mill continues to successfully execute our strategy to expand Nucor's participation in value-added plate markets. During the downturn, Hertford County has invested in a heat treat facility, a vacuum tank degasser, and a normalizing line. These investments are already paying off. During the fourth quarter, Hertford achieved record heat treat shipments. Our Hertford team also received approval to produce naval armor and API plate for energy markets. Our Nucor-Yamato Steel structural mill is on schedule for a mid-2014 start of an approximately $115 million project to expand its sheet piling production capabilities. These offerings will increase the single sheet piling widths by 22% and provide a lighter, stronger product, resulting in lower installed costs.
This initiative both moves Nucor-Yamato Steel up the value-added chain in the piling business and allows us to realize more synergies from our highly successful 2012 acquisition of piling distributor Skyline Steel. The Nucor team's work to build sustainable long-term profitability requires that we take a proactive role in our nation's trade policy debates. Global steel production overcapacity is the greatest threat to Nucor and to our entire industry. Illegal government subsidies from China and other countries have allowed large amounts of cost-inefficient capacity to stay in production and dump steel into the global marketplace. To this point, imports have significantly increased their share of the U.S. market since 2009, while the domestic industry's capacity utilization remains stuck in the mid-70% range. On some products, such as rebar, domestic industry capacity utilization is even lower, in the mid-60% range.
With the U.S. industry's capacity utilization this low, imports are not needed in the U.S. market. They come here not because of demand, but because of foreign producers' excess capacity and unfairly traded prices. Nucor is working hard to bring attention to the need for our government to enforce rules-based trade. We applaud two rulings in recent months by the U.S. International Trade Commission. In December, the U.S. ITC voted in a five-year sunset review to keep in place existing anti-dumping and countervailing duty orders on hot-rolled sheet steel imports from China, India, Indonesia, Taiwan, Thailand, and Ukraine. In November, the U.S. ITC preliminarily determined that there is a reasonable indication that imports of rebar from Mexico and Turkey have materially injured or threaten with injury U.S. rebar producers.
While these rulings are encouraging to us, we understand that much work remains in the fight for effective and timely enforcement of our nation's trade laws. Supporting our fight is the undisputable fact that American producers are among the lowest cost producers of steel in the world. We enter 2014 with great confidence and optimism about Nucor's future. Our team has invested significant capital during the current downturn to grow Nucor's long-term earnings power. Our balance sheet strength is unrivaled by any of our competitors. Our cash flow generation remains healthy throughout the cycle and will benefit from 2014's expected decline in capital spending. Our industry-leading product diversity continues to grow as we move up the value chain in all of our businesses. Our low-cost structure will benefit from the implementation of our raw material strategy and increased DRI production capacity.
Most importantly, Nucor's culture remains as strong as ever. In closing, I would like to comment on Dan DiMicco's retirement on December 31st from his position as Nucor's Executive Chairman. Those of you who follow Nucor regularly know that we enjoyed unprecedented growth in profitability and shareholder value over his 12-year tenure as our CEO and leader. Dan's record for Nucor under his leadership is simply incredible. Dan, thank you. Your leadership has positioned Nucor well to continue our journey of climbing up the mountain with no top. We would now be happy to take your questions.
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, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Sal Tharani with Goldman Sachs.
Hello, Sal. How are you?
I'm very well, thank you. How are you?
I'm doing well, thank you.
I wanted to ask you a couple of things. First, on how are things going on your automotive strategy, and what do you see over the next few years? The second thing will be on a little bit more color on your natural gas. Let's just start with the auto strategy.
Well, as I've mentioned several times in previous calls, Nucor continues to develop and get qualified for advanced high-strength steels in applications in automotive, with particularly a focus on, as I mentioned in the past, on exposed applications. I'm happy to report that the qualification process is continuing, and we're doing quite well. In both cold-rolled and galvanized, we're moving well into the qualification period, and we expect imminent supply contracts. In fact, I can tell you that as we speak, we do have already in use in exposed applications, steel products on cars in production and out on the roads today.
Yeah. I was wondering-
Sorry?
No, go ahead. I'm sorry.
On the sheet side, we continue to progress well in the qualification and implementation phase of moving into exposed automotive and other automotive applications. In SBQ, we continue to move up the value chain also. We're currently producing crankshaft steel for several drive shafts. We produce axle steels at our Nucor Steel Nebraska plant. As we mentioned in the script, we've made a lot of investments during the past downturn to continue to get better at that with the degasser. Our Wide-Light project at Nucor Steel Berkeley will help us continue to move up into the automotive exposed arena. Of course, we have our automotive-rated galvanizing line in Decatur. We feel pretty good about Nucor continuing to move into more automotive applications, and that's a focus of ours. Obviously, automotive is very strong now. We believe it will continue to be strong for a while.
Our focus will be to continue to move into more automotive applications.
John, I was just wondering that this space is getting crowded with aluminum now entering the sheet market on the automotive side and Thyssen plant finally going to get sold to somebody who probably will be able to qualify soon. I'm just wondering, is it worth really pursuing that? Because historically, you had shied away from that end market. Of course, this end market is doing very well right now because construction is down. But how much effort and money are you still willing to put in this thing, to get where you should have a critical mass in your hand?
I'm not sure that we're going after a major component of the business. And frankly, given the investments that we've already made, Sal, we don't see the need to make many more large investments in any of our facilities to move further into automotive. We're pretty happy with where we're positioned from an equipment perspective. As I mentioned before, the qualification period in automotive is a very long process. It usually runs about two years. And given where we are in that process right now, we're pretty happy with the amount of business we've got. We do believe it will continue to grow. We're targeting in 2014 to increase it by about 5%. And I want to comment on your question about aluminum. Let's take a look at aluminum.
We recognize Ford's move into the aluminum arena with the F-150, but we still believe that steel long-term will be the material of choice for automotive production. When we compare it to aluminum is two to three times the initial cost of the steel. There's a significant cost to retool the automotive production facilities. And the repair and insurance cost for car owners with aluminum, we believe, will be significantly higher. So we still see a major role for steel in automotive. And Nucor, and frankly, as well as the rest of the industry, continue to focus on developing advanced high-strength steels that will result in light weighting for the vehicles that's similar to aluminum and do it more effectively.
Great. Thank you very much. I'll get back in the queue.
We'll take our next question from Meredith Bandy with BMO Capital Markets.
Hi, good afternoon, guys. I wondered if we could just go a little bit bigger picture. There's been a lot of talk in the market generally about a manufacturing renaissance in the U.S., and I was wondering what your take on that is. Do you see data to support a renaissance, or would you say that it's more anecdotal at this point? How do you think about it?
Well, we agree very strongly with the statement that the shale gas revolution will in fact result in a manufacturing renaissance in the U.S. I don't have the data at my fingertips, but there is quite a bit of data out there supporting that position. The amount of investment in manufacturing over the last two to three years is measured in the billions of new projects. We see it all the time as we visit with our customers, and we get it in form of customer feedback. Caterpillar, for one, is moving back into the States, moving some production back into the States. Several of the large equipment manufacturers are moving production facilities back into the States. So we think it is very real. We think it's very significant, and we're investing in our company to be ready for that renaissance when it occurs.
That's what the $8 billion of investment we've made over the last couple of years is all about. We believe it's coming, we believe we'll be ready for it, and we believe we will be best positioned to take advantage of it.
Okay, what is the potential upside to Nucor? If you looked at your total, what's the ability to move in terms of either the number of shipments you can get or perhaps also the widening of margin that I think you talked about in your prepared remarks?
As it relates specifically to the renaissance in manufacturing, it's hard to quantify that number. I think I'll leave it with the fact that we've invested heavily. We've grown not only our volume, but more importantly, we've grown our value-added offerings to the marketplace. As manufacturing comes back, you need those higher valued, qualified steels, advanced high-strength steels and others, to fill the needs of the production that will be returning to the U.S.
Meredith, this is Jim Frias. One other comment on that. We've been operating the last few years in the 70% steel mill utilization rate. Historically normal markets in the past, not just the cyclical peak we saw in 2004 through 2008, we more typically operated in the low to mid-90s of our capacity utilization. So that would suggest to you that there's a 20%- 25% upside just in the volumes on top of whatever the margin benefit is.
I might also just add to Jim's comments that as manufacturing moves back in, it's going to need buildings. Those buildings are going to need foundations. We have rebar. We have foundation rebar formation, forming companies. We have rebar placing companies. We have metal buildings that we can supply to them. As you see them moving back in, you'll see our downstream businesses benefit from that renaissance also, as well as our steel-producing divisions.
All right. Thank you very much.
Our next question is from Luke Folta with Jefferies and Company.
Hey, Luke. How are you?
I'm well. Yourself?
I'm doing good.
Great. First question on the DRI plant. It sounds like, besides the storage tank issue that has gone as good as you can expect, as good as you can hope. Now that that's starting to ramp, can you give us an idea of when you think you can ramp the plant to full capacity? Also, I thought it was kind of interesting, you pointed out that it reduces your supply chain on the iron unit side. That makes full sense. Is there a working capital release that you expect this year as you ramp that plant up?
I'll take the working capital part and then let John Ferriola answer the first half of the question. The working capital benefit is going to be relatively small because it depends on how much we shift away from pig iron as the year goes on versus maybe using less prime scrap. I shouldn't say it's small. It's a fairly broad range is the way I should describe it. What do we currently carry? We're going to look up while we're on the call how much inventory we typically carry in pig iron and maybe give you a little tighter answer on that.
Yeah. One thing that I would want to remind you of is that one of the real benefits of the DRI facility is flexibility as well as a shorter supply chain. We will have the ability to switch iron units as pricing changes for the various commodities. That's a really important point. Jim, you'll look that up. I want to mention a couple of things about the startup at the DRI plant. First of all, I want to again thank our team in Louisiana. A great bunch of guys. They did a great job working under very difficult circumstances. We had, as you mentioned, the dome situation, which was a setback. Our team found a workaround for that in the typical Nucor way. We like to say at Nucor, when we have a crisis, we run towards it. We don't run away from it.
Certainly when we had the dome failure, there was a need to run towards that situation, and we did it, the team did a great job in coming up with a phenomenal workaround. That DRI facility is the largest DRI facility anywhere in the world. As such, it's a complex operation, there'll be some bumps in the road. But I'm happy to say that in addition to the phenomenal quality that I've mentioned earlier, within 24 hours to be up to quality levels that we've been achieving in world-class quality levels that we're achieving in Trinidad, that's an outstanding performance. We're currently running just slightly above 80% of capacity. That's pretty much right on track with our startup curve that we expected. Frankly, probably a little bit ahead of it.
We've had short periods of time when we've been able to ramp up for short periods of time to about 90%-95% of capacity. So all of that gives us a good deal of confidence in the plant's technology and in our teammates' ability to run that plant efficiently and effectively.
Okay. I guess secondly, it sounds like the experience so far has been really good. Have you gotten any closer to deciding when you might make the decision on the third DRI plant?
Well, I'll say we've gotten a little. First of all, it would be the second one in Louisiana, our third one in the company, just so we're clear on that. Certainly, we are looking at that, I don't want to say that we're any closer to making that decision. We're just a couple of weeks into the startup. We want to continue to evaluate the HYL technology, although we've been very impressed with it to date. Frankly, as with any plant, we went through this with our facility in Trinidad. During that first year of operation, there's going to be some bumps in the road. We expect it, you should expect it. It won't come as any surprise to us when it happens.
We're confident in our ability to overcome those bumps and continue to move forward, but there are going to be hiccups in the operation. It's just a new facility, a complex operation, and there will be some hiccups. We're continuing to evaluate it, and we'll make the decision on the second DRI facility in Louisiana at the appropriate time.
Okay. Just lastly, if I could, on the natural gas drilling partnership, is there an approximate range in terms of what price nat gas has to get to before you think it's worth starting to ramp up drilling there?
Well, I'll repeat what we said in the script. At last year's pricing, we were able to have a modest, profitable return. That should give you some indication. We're not going to go any further than that.
Okay, thanks.
Again, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We'll next go to Matt Murphy with UBS.
Hey, maybe just continuing on the nat gas. How does the decision process work going forward? Is this something you kind of evaluate year- to- year, or you need to see the futures curve move to get back to talking about drilling?
Well, as I mentioned, it's something that we'll do jointly with our partners in Encana. I'm not sure that it would be dependent upon the futures curve as such, per se, but obviously, we would be looking for a sustainable price movement before we would make a decision to begin drilling again. Right now, we believe it's in the best interest of our shareholders and the best return for our capital to suspend the drilling. The key here is to remember that we don't lose any of the gas that's still in the ground. It'll always be there, and we have the same amount of access to it. So as pricing increases, it only gets better. So we'll look at it with a very careful eye before we begin drilling again.
We'll want to see a sustainable price move in natural gas so that we get a higher return for our investment. It's just common sense. We have nothing to lose and a lot to gain, and that's how we'll approach it.
Got you. Okay. I guess the other question on it would be, given it was modestly profitable in 2013, will you still be needing to disclose it as a separate segment, or does that get put off until it becomes more meaningful?
This is Jim Frias. To answer that, at 300 and some wells that we'll have in process with what's going to be finished drilling through about the middle of this year, that's not enough at that point to require the separate disclosure. It's not material enough. So it's going to be at some point in time, we don't have a specific number of wells that have to be out there producing that cost crosses over that line. But we're not really anywhere near it with the 300+ small amount that we'll have in 2014.
I would just like to make one more point about the suspension of the drilling. I mentioned it in the script, but it's really a very significant point, and that is that we have covered our needs for the DRI plant in Louisiana. So our desire to hedge our bets on natural gas, which would be the major risk to our DRI facility, we've got that covered. So we've got that covered right now into 2015. So that would also factor into our decision. As we saw a need to continue or to grow the hedge in Louisiana, that would be a factor we would use in deciding to begin drilling again.
That's very clear. Thanks, guys.
Our next question is from Timna Tanners with Bank of America Merrill Lynch.
Timna, hello.
Good afternoon. Hello. Not to go over this $400 million, but when we saw the announcement, our first thought was, what is the other better use of that $400 million that you contemplate? Since the CapEx does fall so substantially, what kind of other investments or alternatives do you have in mind?
Well, frankly, with the state of the economy and with the challenging market conditions in steel, we have been approached with more opportunities in the last six months than we have been in quite a while. I am not going to state anything specific about where they are or what they are, but there are opportunities out there. Now, having said that does not mean just because we have it, we are going to go out and spend it. If it is not an opportunity that provides a great return on that investment, we are not going to move forward with it. Bear in mind what I mentioned during the last call, and I want to reiterate right now, our focus is on execution. We have invested $8 billion of our shareholders' valuable capital over the last, well, since 2008. And our focus this year is going to be on execution.
Having said that, if the right opportunity comes along, whether or not we were able to conserve the $400 million on the gas or not, if the right opportunity came along, our financial strength and our balance sheet position would allow us to take advantage of it. But again, it's got to be the right opportunity with the right return on the investment of our shareholders' valuable capital. Other than that, our focus will be on executing, continuing to focus on being the low-cost producer, driving our costs down, and moving up the value chain in our product offerings.
Okay, so we'll just leave that teaser of the lot of opportunities, I guess. That's interesting. I really wanted to probe a little bit more on the guidance, given that you did talk about all the outages and all the different projects that you kind of finished up in the fourth quarter. I thought most steel mills make the bulk of their money in the first half of the year for the construction season. I'm a little bit confused as to how bad the weather you're contemplating would be to offset some of those normal positives and the switch from outages to normal operations.
Well, we're not very effective predictors of the weather, okay? Let me start by saying that. But given the start of the year and the way that it is looking for at least the first quarter, we think there's going to be some weather challenges out there for the next three months. Also bear in mind that when we talk about the impact of weather on our business, it's not just the downstream. We always tend to focus on the downstream businesses that are impacted. But remember, we're a fully integrated company. So when our downstream businesses are impacted, it impacts our steel production. It impacts our scrap operations, our whole raw material chain. So, weather for us can have an impact on our profitability. Frankly, Timna, we don't know what the weather's going to be.
But given our best guess, that's how we see it at this point in time. We'll come back, as we always do, in the middle of the last month of the quarter and give more direct guidance.
If I could, a final piece. On DRI, is it too soon to see the benefit because you're still working down some other inventory, like pig iron that you might have had to have in place as a cushion in case DRI didn't start on time?
Yeah, absolutely. That's part of the factor. Timna, I want to be very upfront about this. We're a couple of weeks into production at our Louisiana facility, and we know that during the course of the next 6 months- 12 months, there are going to be some bumps in the road, some hiccups in our production. So we'll factor some of that in. We'll keep a little bit more on hand to protect against some of those occurrences that we know are out there. We just haven't found them yet. Having said that, I want to reiterate that we have full confidence in our team in Louisiana. They will overcome those road bumps and continue to bring it online and exceed our expectations, I am sure.
Okay, thank you.
Let's take our next question from Evan Kurtz with Morgan Stanley.
Hi, good afternoon, guys.
Good afternoon, Evan. How are you?
Doing well, thanks. Just the first question on rebar. We have seen quite a surge in import licenses in January so far, and I know we have a critical circumstances that is kind of floating out there. I was wondering if you could just kind of walk us through the timing of how critical circumstances affects behavior, what you are seeing in your business. Should we expect some sort of big drop-off in imports in the near term here?
Well, as I mentioned, we are working hard with our government to make sure that that, in fact, happens. There is no doubt in my mind, and in all minds, that rebar is being imported and dumped into the U.S. It is a really good sign when you get the kind of vote in the preliminary hearing that we were able to get. If I recall, I believe it was 5- 1, which is outstanding. The ruling is expected towards the end of April. I think it is April 28th is when we will have the final hearing and the ruling. So, we are confident that at this point, we will get a favorable ruling. We believe that to be the case. And we believe very strongly that it should be a case of critical circumstances and all of the penalties that come along with that. We will be pushing hard for that.
We've got a great team in Washington, a great team Government Affairs here in Charlotte supporting that team, and we're confident it's going to happen.
Great. Maybe just one on currency. We've seen, obviously, some pretty serious depreciation in a lot of the scrap-consuming countries since the beginning of the year, and particularly Turkey. How do you see that impacting the scrap business going forward? Maybe more than that, how do you see that impacting steel in general and perhaps even DRI?
Well, Keith, do you want to comment on scrap? I do note that we have seen that occur with the currency. It's been interesting to see, though, the amount of exported scrap going to Turkey. It seems to have dropped off a little bit in the last couple of weeks.
Yeah. Well, certainly with their currency dropping off, we've seen less activity on the coast. In terms of how it will impact the scrap market moving forward, the scrap market will continue to be regional and based on grades, but we're starting to see certainly cold weather in one part of the country and less demand from an export standpoint on the East Coast, and that scrap's starting to become a little bit more available to consumers here in the U.S. So, to answer maybe two questions, one is we probably see a little bit of softening in the scrap market as a result of reduced export activity and the recent run-up in scrap prices seem to have satisfied some demand.
And in terms of addressing the steel side, we're going to watch that situation very carefully. If we see an increase in the imports of steel products from Turkey that result from that, we'll take the appropriate actions.
Thanks, guys.
Our next question is from Michael Gambardella with JP Morgan.
Yes, hello, Michael.
Hello, Michael.
Hi. Just wanted to touch base on an earlier question in terms of how much capability, unused capability you really have, or earnings power you have with some of the investments that you've made over the years, and the construction market being very weak compared to what it was at its peak say. I know it's improving modestly, but how much earnings capability, if you had a decent construction market in the U.S., do you think Nucor has with the buildup in terms of the capital investment and the acquisitions you've made over the years?
Substantial. You need more clarification than that?
Sure.
Obviously, there's a lot of factors and too many factors to be able to give you a hard and fast number. Again, I'm just going to repeat what I've said. We've made the investments, we've made them to improve not only our volume capabilities, but the value-added product capabilities we can offer to the marketplace. We stand ready and poised to take advantage of the upcycle that's inevitably going to arise. How quickly it arrives, how quickly the economy and the market ramps up will determine the kind of returns that we see on this investment. Will we see them? Absolutely. When we see them is what's a little bit up in the air and is dependent upon how quickly the economy and the market recovers.
One of your competitors this morning on their call mentioned that in terms of non-res construction, the joist business is doing fairly well, and big box type of builders really consuming and pushing up the joist numbers. Are you seeing anything on the non-res construction side other than the joist activity?
Well, we've seen an increase in our backlogs. We've seen a modest improvement in the pricing that we've been able to pricing power we've been able to exercise in those areas. But again, it's been a modest improvement. Just as we began to see things improve, we saw the weather get a lot worse, and that's impacted some of that. But we believe that there'll be an incremental improvement in the non-residential construction market during 2014. How quickly it ramps up is unclear. But if you read all the projections we hear, we read there's anywhere from some of the projections of 5%-10% improvement in 2014 over 2013. So we think that that's probably a reasonable number.
Last question, just in terms of sheet.
Michael, sorry to interrupt. This is Joe Stratman. Let me also add to you, I think you asked a question, have we seen it in any other area than joists, and we have seen it in backlogs in our structural business as well. We've ended the year with stronger backlogs than we've had in quite a while, which is indicative all of that goes into non-residential construction. The other comment I'll add to that, it's a good balance geographically and by sector of the types of projects we're seeing. So that's a good sign.
Mm-hmm. Thank you. One last question on the sheet side. How much unused capability do you have on your sheet mills right now?
We're running probably somewhere around the neighborhood of about 75%-80% capacity utilization. It goes up and down a little bit. One of the things that we've been a little bit encouraged by is the fact that we have seen some increase in our order book in sheet, particularly in cold-rolled and in galvanized. The hot-rolled market has been a little bit more challenged, but cold-rolled and galvanized, partially being driven by automotive as well as heavy machinery, are doing very well.
Do you see some opportunities in sheet to pick up some share given the anticipation you have for scrap pricing or your cost to come down?
We always look for those opportunities. I would say it's a combination of those factors and probably more significantly, the fact that we have a broader offering to the marketplace now. The 72-inch product coming off of Berkeley. We'll be able to attack different markets with that. We still have, but balancing against that is there's still overcapacity in the world, and it's coming into the U.S. in the way of imports. Will we gain market share? We believe we will. It's a factor of new products we can offer, but it's also a factor of our performance. Our quality is outstanding, our on-time delivery is second to none, and our service that we provide to our customers is excellent.
In fact, you've heard me mention several times in the past calls, our focus on commercial excellence, and I find it kind of rewarding, to be honest with you, that in listening to some of the other calls from our competitors, the term commercial excellence seems to be coming up more from our competitors today. I guess I'll just say imitation is the most sincere form of flattery when I think about that.
Thank you.
Our next question is from Brian Yu with Citi.
Great. Thank you, and good afternoon.
Good afternoon, Brian. How are you?
I'm doing well. Thanks. Congrats on the startup of the DRI. I know it's been a long time in the works. My question is kind of along those lines. Now that you're having improving success, would you be in a position to help either provide us with a range or guide our thinking in terms of the dollar per ton savings you would expect, maybe in the context of Brazil and pig iron at $385 and you got the pile decks at $125, just how we should think about the dollar per ton savings?
Well, Brian, to help everyone understand that, we do post a kind of a spreadsheet on our website, and you can go onto that website and work through the numbers based upon your best projection on iron ore costs, prime scrap costs, pig iron costs, and all of the rest. I'll leave that to you to go through it. I'll just answer your question by saying, again, we're a couple of weeks into this process. We're just going through the startup now. We're still evaluating what it's going to mean to us. It will change as the pricing of other iron units changes. We've said that many times. In environments where you have high iron unit pricing, it's going to be a very major contributor. In times and environments where iron unit costs are lower, it'll be a positive contributor of a lesser amount.
It's a function of many inputs. You're welcome to go onto the website and work through them, and you can see them at different levels.
Okay, so it sounds like costs are tracking what you would expect thus far?
I'm sorry, what? Costs are tracking what?
Your production costs. Yeah.
Yes. Our production costs are tracking what we would expect to date.
Great. Thank you.
Our next question is from Phil Gibbs with KeyBanc Capital Markets.
Morning. Excuse me. Good afternoon.
Good afternoon, Phil.
I had a question on your SBQ initiatives as far as new capabilities being brought online, then just also how your backlogs in that business are progressing as we enter the new year here.
Well, we kind of gave you a quick update in the script. Jim Darsey heads up our bar mills. Jim, you want to give an update?
Okay. Thank you, John. In 2013, our SBQ shipments were up 18% compared to 2012. We are entering 2014 with a solid backlog, and we have continued to make progress with the start-up of our equipment, particularly at Nucor Steel Nebraska, with the new finishing equipment that improves our quality and packaging. Memphis has continued to make progress. We have just completed the installation and start-up of a state-of-the-art offline quality assurance line that will enable us, as John mentioned in the script, will enable us to produce and inspect bar for the most demanding engineered bar applications. This fits right in with our strategy to grow our SBQ business into the automotive, into the forging industry, into the construction industry, heavy equipment, heavy truck industry, and agriculture industry. We continue to make steady and measured progress in those industries.
I appreciate that. I have got a follow-up on DRI, and I know you have already answered pieces, parts to this, John, but any sense of magnitude you could give us as far as the start-up costs in the fourth quarter? Then I know looking forward, you said you are going to have reduced start-up costs in the first quarter, but getting to a level where you are comfortable, I know you said ups and downs, but comfortable with the profitability and the potential of the assets, when should we be thinking about that sort of contribution? Thanks.
Well, first, just to pre-operating and start-up costs. In the fourth quarter, they were about $16 million, and we're expecting them to be lower by about $10 million in the first quarter. The improvement is largely improvement at Nucor Steel Louisiana, the DRI facility. That's where the improvement is coming from. I'll let John speak further about what we expect from that point going through the rest of the year.
As I've mentioned several times on the call, we're early in the process, so it's hard for me to give too much color to how we're going to play out during the rest of the year. We're confident in the technology. The initial results are outstanding. Our quality is good, our volume is good. The process is stable. Having said all of that, there will be bumps in the road. As I've mentioned, we're expecting them. We're confident we will overcome them, but it makes it very difficult for me to give any kind of projection at this point on the returns. We'll be better prepared to answer that as we get a little bit further down the road with operating that facility.
Thanks, John.
We'll take our next question from Andrew Lane with Morningstar.
Hi there. Good afternoon.
Hello, Andrew. How are you?
Great. Along the lines of your comment that imitation is the finest form of flattery, some of your peers have discussed an interest in DRI production. I am curious, over time, do you think they will be able to replicate the cost advantage you appear to have established via in-house low-cost DRI production? If not, what factors will allow you to sustain that competitive advantage?
Well, one of the major factors, obviously, one of the largest costs of DRI production, second to iron ore, is natural gas. Our natural gas working partnership agreement is a major factor in us being able to maintain a very competitive position in the production of DRI. I would also point out to you that we have a lot of facilities that can use the DRI. When you build a DRI plant, if you plan to consume it yourself, it has got to be across a multitude of facilities. There is an investment required at each one of those facilities in feeding the material into the furnace, the equipment required to do that.
We're in a position where we have the balance sheet to have been able to do that and do it in the right manner so that we can feed a significant amount of DRI into the furnaces to get the kind of results we're looking to get. For those reasons, we believe that we, frankly, having gotten a head start. The best way to learn about a process is to work with the equipment. We've been working with it now for a while. We'll continue to work with it. If a competitor was to move forward with plans of DRI production right now, it would take them probably a minimum of 2-years-3- years by the time they've added all of the permits and went through the ordering of the equipment and the construction phase of it.
I'm sure they would hit a couple of the bumps that we hit that would slow them down a bit. So we think we would have a 2-year- to- 3-year time advantage, and with that comes a lot of knowledge and a lot of experience that we think would give us a competitive advantage. So we believe that the way we went into this and being first into it and going into it in a big way as we have done, was going to give us a long-term ability to have a competitive position.
Okay. I appreciate that. Thanks. Then a follow-up. How do your DRI production costs in Louisiana compare to your DRI production costs in Trinidad on a per-ton basis? Do you anticipate the spread between the two to change over time?
Well, again, there's different factors there that will impact the overall cost. Let me just say this. What you really have to compare is the conversion cost itself, okay? We think that Louisiana, given the size of these, and we have an advantage of volume, and the technology itself, we think is a little bit better technology. We think we'll be in at least a cost-competitive, if not cost-advantaged position in Louisiana.
Okay. Thanks a lot.
We'll take our next question from David Lipschitz with CLSA.
Good afternoon.
Good afternoon, David.
Quick question on the sheet products. Where do we stand on lead times? Where are you out to right now?
Well, let's go by product.
He said sheet. He wants sheet.
Yeah, I was going to go by hot rolled, cold rolled, or galvanized, okay? So in hot rolled, David, we're out to late February, and then cold rolled and galvanized, we're well into April.
Okay. That's all I have. Thank you.
Is that what you were looking for, David?
Exactly what I was looking for.
Thanks. Okay.
Our last question is from Ignace Proot with Sanford C. Bernstein .
Hello, good afternoon.
Good afternoon. Good afternoon. How are you?
I am good. Thank you. I have two questions. One question is related to your shipments of the fourth quarter, which were actually quite good. They were still above the Q1, the Q2 shipments, which is in contrast to typical seasonal effects. I was wondering, is this driven by fundamental demand that was there, or is this still a bit of a market share change that we had throughout the year given some incidents of competitors? If it was a market share shift, what part of that could stick? That is the first question. The second question is going back to DRI. In the environment where still many iron ore producers cannot produce the DRI grade and several steel makers having more interest in actually buying more, how do you look at the DRI premium, the pellet premium?
Well, let me begin with your first question, and we'll work into the second question. Maybe I'll address the second question first while it's freshest in my mind. You gave me a bunch of questions there at one time. With DRI, it's true that the demand for the pellet is improving, is increasing. But we have multiple sources of the iron ore itself, and in our arrangements with those, we feel confident that we'll be able to get the iron ore pelletized away to a DRI level that we need. We don't see that as a major obstacle going forward. Perhaps you can refresh my memory on the two parts of the first question. The question was, with our shipments in the fourth quarter-
Yes. The question was really, your shipments in the fourth quarter were still very good. I was wondering, is that still fundamental demand, or is it still a bit of the volumes that you took over from some competitors, given some incidents that happened in the third quarter? If so, do you think a part of that market share shift could stick?
First of all, certainly there was a small amount of demand improvement in the fourth quarter. So there certainly was some demand improvement. But we also had a huge opportunity because of some challenges that some of our competitors faced in their production facilities. That gave us an opportunity to grow our market share. Whenever you have that opportunity, you work hard to keep it going forward. You work hard to keep it going forward through your performance. We know that we served those customers well. When some of our competitors, because of various situations, let their customers down, we were able to move in quickly, supply high-quality product on time, great service, phenomenal performance, all at a very reasonable price.
We believe that, as a result of that and as a result of the new products that we've been introducing to the market, we did pick up market share, and we will be able to hold a portion of that market share going forward.
Okay, thank you.
That's all the time we have for questions today. I will now turn the call back over to Mr. John Ferriola for closing remarks.
Thank you, Jamie, and let me just wrap up by saying thank you to our shareholders. We appreciate your confidence and your support. Thank you to our customers. We really do appreciate your business. I want to say thank you to my Nucor teammates for creating value for our customers, generating attractive returns for our shareholders, and building a sustainable future for all of us. Most importantly, thank you all for doing it safely. Thanks for your interest in Nucor. Have a great day.
Thank you for your participation. This does conclude today's call.