© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to Ternium Second Quarter 2019 Results Conference Call. [Operator Instructions]. Thank you. Mr. Sebastián Martí, you may begin your conference.
Good morning, and thank you for joining us today. My name is Sebastián Martí, and I am Ternium's Investor Relations Director. Ternium issued a press release yesterday detailing its results for the second quarter and first half 2019. This call is complementary to that presentation. Joining me today are Mr. Máximo Vedoya, Ternium's CEO; and Mr. Pablo Brizzio, Ternium CFO, who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, we will open up the call to your questions.
Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation.
With that, I'll turn the call over to Mr. Vedoya.
Thank you, Sebastián, and good morning, everyone, and thank you very much for your participation and your interest in our company. As we always do, I'll make a brief description about the drivers of our results and the latest developments in our market. And then Pablo will go through the webcast presentation regarding the results in the second quarter, and we will close the call with a Q&A session.
In the second quarter of 2019, we reported a good set of results. We had an increase in shipments in Argentina, the first after 6 consecutive quarters of volume decline in this market. And we also had higher sales of slabs to third party, while shipments in Mexico remained stable. We managed to finance, in the quarter, a significant increase of CapEx with our own cash generation, as net debt increased slightly in the period when we paid our annual dividend and the balance of 2018 income taxes, which was high after an exceptional year in Mexico. Interesting to note is that our net debt in the first half of the year remained stable after this quite high requirements of cash. Our investment projects are developing as expected, time- and budget-wise. The new painting line at the Pesqueria facility in Mexico has already produced its first coil, and the next one to enter into operation should be the new galvanized line at the same site towards the end of September. Meanwhile, we continue the construction of the new hot rolling mill and the works of a new steel bar and coil mill in Colombia.
Now let's go to the latest development in Mexico. Since our last call, there has been a couple of good news. First, Mexico's Congress approved the USMCA, a further step towards the new NAFTA. To replace the current NAFTA, the USMCA has now to be approved by the Congress of Canada and the U.S.
Another positive development has been the exception the U.S. granted to Mexico and Canada from Section 232 tariffs. This is a very good news as it helps normalize trade flows among Mexico and the U.S. and lift an unfair distortion trade in these markets.
Now going specifically about the main markets in Mexico. The construction market continued to show a weak performance, as private nonresidential activities and government infrastructure projects are not showing an improvement yet. The industrial market is stable, mostly supported by good exporting activity. On the other hand, after a period of destocking, service centers and steel distributors in the country has relative low inventory levels.
Steel prices in the U.S. market continued to decrease during the second quarter. They have recently bottomed out and began to rise, and we believe there could be further room for recovery. The significant year-over-year decrease in steel prices in this market is putting some pressure on our margins in Mexico. In spite of recent rebound in the market price, realized prices in Mexico will continue decreasing in the third quarter of the year are a result of a lagged reset on contract price. This should be partially offset by the rising price in the commercial market driven by the recent steel prices rebound.
Overall, even though we are working in a challenging environment in Mexico, we anticipate a gradual recovery in shipments, which should take volumes in the second half of 2019 to higher levels than what we've shown in the second half of last year. In addition, a further recovery in steel prices should help on margins towards the end of the year.
In Brazil, we successfully continued improving production facility utilization during the first half of the year. But the club market situation has turned difficult year-to-date. During the last quarter, seaborne slab market prices decreased. In addition, realized prices of contract slab sales in the U.S. are also affected by the downturn in the U.S. price environment, as we just discussed. As a result, we should see lower prices on sales of slabs in the third quarter. This situation and a significant increase in iron ore prices created a tough slab market with significant pressure on margins. As a result, we are currently reconfigurating the amenity utilization and renegotiating certain supply contracts to achieve a lower cost of production.
In the third quarter, slab shipments to third party are going to decrease considerably, mainly due to higher internal sales, but also due to a slightly lower production level, as I have just mentioned.
Turning now to Argentina. After an unusual long period of destocking in the value chain related to a softening steel market and a very high interest rate in the economy, shipments began to recover in the second quarter, and we believe this will continue so -- doing so in the third one. The automotive industry is -- in the country remain subdued. On the other hand, current bright spot in Argentina are the agribusiness sector with a record harvest in this season and the energy industry with the shale oil and gas reserve development of Vaca Muerta.
Concluding, we expect the developments with prices and costs I just described in our different markets, and particularly with our slab operation in Brazil, will take Ternium steel margin in the third quarter 2019 to a level below historical long-term trend. We believe the steel market is currently going through a transition period and that a combination of steel price recovery, our efforts to adapt to a more challenging environment and the eventual normalization of the iron ore market should support a margin recovery as a result.
Okay. I'll let Pablo go ahead with his comments about the results in the quarter. Pablo?
Thanks, Máximo, and good morning to everybody, and thank you again for participating in our conference call. Let's review our performance in the second quarter of this year, starting on Page 3 of our webcast presentation. As you can see in the first chart, in the second quarter, we reported EBITDA of $410 million, lower sequentially and roughly in line with our expectation for the quarter back in April, considering the prices in North America resumed a downturn during the second quarter after having stabilized for a while during the first quarter of the year.
As you can see on the slide, Ternium's EBITDA margin in the second quarter decreased to $123 per ton or 15% of net income. As for net income, in the second quarter, we reported $206 million or 90% per ADS. When compared to the first quarter, earnings per year decreased $0.19, mainly reflecting the decrease in operating income, partially offset by other results that we will analyze with more details in the following slides. Let's now review in the next page our shipments performance in each quarter and in the regions. As you can see in the first chart, shipments in Mexico in the second quarter of 2019 were similar to those records in the first one but decreased year-over-year, mainly as a result of the soft commercial market in Mexico during this year as well as a strong base of comparison shipments in the first half of last year were boosted by the share price in steel prices back then. Looking forward, we expect slight increase in shipments in the third quarter of this year.
In the air market region, in the upper right-hand chart, shipments increased 5% in the second quarter, mainly due to a record strong level of slab shipments to third parties. The shipments increased 70,000 tons on a sequential basis and 290,000 tons year-over-year. Looking forward to the third quarter and the second half of the year, the shipment -- the slab shipments to third parties are expected to decrease with lower shipments to the U.S. market and higher internal shipments to our own operations in Mexico.
In the southern region, shipments increased 15% sequentially, reflecting some positive developments in the Argentine market, including a growing improvement in steel demand at the end of the destocking process in the value chain. Looking forward to the third quarter shipments innovation are expected to continue recovering, as Máximo mentioned. Turning to Page 5. You can see in the first chart that the combination of this development resulted in consolidated steel shipments in the second quarter increased 4% sequentially, and that remained relatively stable year-over-year. Looking forward, considering what we have discussed, we expect the shipments in the third quarter to sequentially decrease mainly to the lower club shipments to the third parties, partially offset by slightly higher shipment, as mentioned, in the Mexican and the Argentine market.
What we now do realize steel prices, in the upper right-hand chart, you can see that our actualized price continued decreasing in the second quarter of the year. This downtrend that has been going on during the last 3 quarters, mostly driven by a significant decline in steel prices in the U.S. market since mid-last year as well as last prices. The steel price downturn in North America recently reached a bottom, with several announcement of price increases being made by the main U.S. needs. Despite this positive development, realized price in Mexico in the third quarter will continue to decrease. And more than half of our sales to industrial customers are made under contracts that have a lag of about 3 or 4 months to reach to changes in prevailing market prices. This should be partially offset by the higher prices in the commercial market. Now the lower left-hand side chart shows that net sales increased sequentially just a little. The 4% increase in shipment volume was partially offset by the 3% decrease in consolidated revenue per ton.
Let's turn now to Page 6 to review in more details the drivers of EBITDA and net results in the second quarter. Regarding EBITDA, the main change was a decrease in EBITDA per ton mainly related to softening prices that we just showed. This was partially offset by higher shipments. In the third quarter, we expect to report a lower EBITDA level mainly as a result of the steel margin that will decrease below long-term trends as well as lower shipments of slabs that we have just described. The main drivers of the expected decrease in EBITDA will be significantly lower shipments of slabs to third parties together with a lower margin on these sales. Our realized slab prices will decrease, while iron ore prices remain relatively high. In addition, the expected decline in steel realized price in Mexico, as was mentioned, will put further pressure on margins in the third quarter of the year.
On the second chart, we can see the main factor behind the decrease in second quarter net income. The decrease in operating income was partially offset by a slight improvement in financial results and a lower effective tax rate due mainly to the application of inflation adjustment for tax purposes in Argentina.
On Page 7, you can see the drivers of the first half year-over-year changes in EBITDA and net results. The decrease in EBITDA in the first half of 2019 was mostly related to a decrease in EBITDA per ton. And the decrease in net income was mainly due to lower operating income partially offset by better financial results and a lower effective tax rate.
Let's turn now to Page 8. This is the last page in the presentation, where you can see the performance of free cash flow, capital expenditure, net debt and dividend. Free cash flow in the first half of 2019 reached $264 million. In this period, the decrease in working capital contributed $203 million and capital expenditure were a strong $485 million. Of course, as expected, and shall remain high in the second half of the year, with a target of between $900 million to $1 billion for the full 2019.
After dividend payments during the first half of 2019 of $233 million to shareholders and $300 million to noncontrolling interest, borrowing net debt remained at $1.7 billion at the end of June versus the end of December 2018. This is equivalent to a comfortable level of 0.8x last 12-month EBITDA.
On the lower-right corner, you can see how Ternium's dividend payment to shareholders has been increasing consistently over the year. While the latest dividend, which was paid in May 14, at $1.20, representing today a dividend yield of around 5%.
Now focusing in the second quarter, I would like to say that Ternium operating generation was a significant amount of cash. Although the mentioned increase in CapEx, coupled with 2 specific items, I will explain further on, took free cash flow to around 0 in the quarter. One of the specific effects that impacted the free cash flow in the quarter was tax payments. Usually, the second quarter of the year is when in the balance of the previous year income tax has to be paid. In 2019, the cash effect of the payment of the balance of 2018 income tax was higher than in previous year, reflecting the very good results our Mexican subsidiaries have in 2018.
Another item that impacted free cash flow in the second quarter was the payment of profit share in Mexico as required by Mexico laws. Again, we had a very good result in 2018. The profit share payment in the second quarter 2018 was high. None of these items, the tax and the profit-sharing payment should happen in the third quarter of the year. CapEx, on the other side, will remain high.
All right. Thank you very much for your attention. We are now ready to take your questions. Please, operator, proceed with the Q&A session.
[Operator Instructions]. Your first question comes from the line of Caio Ribeiro from Crédit Suisse.
So my first question is regarding steel prices in the U.S. and consequently, in Mexico. Over the past month, there has been a few rounds of price hikes announced for flat steel in the U.S. So I wanted to get your opinion on whether you think these are clear signals that prices could be bottoming out and whether you expect to start seeing this benefiting fourth quarter results already. And then secondly, on the cost and expenses front for the steel business. I just wanted to see if you could talk a little bit more specifically about what drove the increase in these figures for the quarter, particularly in the SG&A line. Any more color you can provide and how you see this evolving going forward would be very helpful.
Thank you very much. I'll take the first one. And then you're right about the cost expenses. And Pablo will explain it very detail because it was very -- it was things of the second quarter. Yes, we are seeing the increase. And as I said in the remarks, I think these increases are real. And we are already pushing prices up in Mexico. So I don't remember when we talked last conference call, most of the decrease in prices in the U.S. was because the competition or the production among U.S. producers, imports in the U.S. and a little bit in Mexico are coming down and the decrease in prices in the U.S. was not because of imports coming but because of more production coming from the U.S. and the competition between U.S. producers. I think that this has changed. There has been a couple of announcements where the production utilization has come inevitably down in the U.S., and this is driving prices up. Consumption is good in both markets. So I think that prices are going to go further up, and this will be reflected in our fourth quarter. Regarding the second one, I'll let Pablo.
So you're right, there was an important increase in SG&A during the second quarter in comparison to the first. And let me explain the reasons why and how are we looking at this number for the coming quarter. The first important difference between the two quarters is the amortization of intangible assets in relationship to contracts of slab sales that we acquire when we bought the assets in Brazil. And that depends on the amount of sales of slabs to the U.S. market. As we mentioned during the presentation, the second quarter reflected an important amount of tonnage of slabs to the U.S. market. So the difference in amortization from one quarter to another is $5 million. So $5 million of that increase is related to this amortization. Clearly, as we also mentioned and Máximo was very explicit on, the reduction of slabs to third party will reduce this number for the third quarter. So this is one item. The second one is also related to this level of shipments to third parties, specifically slabs, which is logistic cost. That increased significantly in the second quarter in relationship to sales of slabs, take to -- our product to different markets and some increase in the logistic cost in Mexico.
The third item is in the relationship to some specific taxes that we have to pay. There are -- one, which is an asset tax in Argentina, that due to the latest tax reform in Argentina, the company has not to paid during the last 2 years. But this nonpayment is over, so we will have to pay this year and it came here in this line this quarter. There are some other specific taxes that were raised in Brazil in relationship to the state of Rio de Janeiro, and the new taxes in Argentina on exports. So we have a lot of specific issues affecting this number during this quarter that we are expecting to review significantly in the coming quarter.
Your next question comes from the line of Thiago Lofiego from Bradesco BBI.
I have two questions. The first one about the volume recovery you mentioned for both regions in the second half. What are the drivers behind that view? And what are the risks to that view as well? So in other words, what prevents us from seeing a flattish second half versus the first half? The second question is regarding margins. You mentioned that third quarter margins are going to be below the historical long-term trend. When you say that, what kind of a margin level are you assuming for this historical long term? And considering all the variables, should we assume that the third quarter is going to be the bottom and an inflection point in terms of margin?
Thank you, Thiago. Volumes in the second half -- I mean we are seeing increases in Argentina compared to these quarters because the recovery in Argentina is continuing in the market of Argentina. We expect the third quarter volumes to be, I think, at least 10% higher of the volumes of the second quarter. If you remember, the first quarter was kind of a bottom in Argentina. And this quarter, we increased 14% and next one, probably 10%. In Mexico, you remember, the second half of last year, saw the decline in consumption in Mexico. The first half of this year is a -- it's higher than the second half of 2018, and we're expecting at least the second half of this year to be the same as the first half of 2019. So it's increased regarding what we saw last year in that second half.
Regarding margins, as you know, we have guided that the EBITDA margins range between 15% to 20% as our target in the long term. In the third quarter, we are going to reflect the current imbalanced situations in the market. So it is -- it would be a little bit below that margin. This situation should revert once the relationship between the steel prices and the input costs rebalance. If you ask me, we think that third quarter is the bottom? Yes, it is for us probably the bottom, as we are seeing now an increase in the prices. And to be honest, iron ore prices should come further down in the fourth quarter.
That's great. If I may, just back on the volume question. You mentioned third quarter in Argentina should be around 10% higher versus second quarter, right? Exactly what is the consolidated outlook for the second half in Argentina? And maybe I'm not sure if a year too far, but if you could mention maybe what's your outlook for 2020, that would be interesting for us to understand as well.
Well, that's a great question, Thiago. I think Argentina has a lot to do with what will happen in the elections, to be honest. I mean we are seeing a recovery in the market. People are consuming more. There are some business, as I said, they are going great. Vaca Muerte development is amazing. Agribusiness is doing very good. But the rest of the market, construction and industry as a general, I think what will happen in the election will define a little bit where the market goes in the fourth quarter and where the market goes in 2020.
Your next question comes from the line of Rodolfo Angele from JPMorgan.
Can you just elaborate a little bit more on the effects of the problems with the Vale accident and how that affected your iron ore costs? And how -- if Brucutu coming back can eventually improve the situation on the cost side for you, et cetera?
Well, the situation of Vale was only general because we have first -- the problem with Vale in January, then we have the climate problem in Rio Tinto in Australia in March. And then we have the decline of the stock in China's port. That started a decline in April and ended up in the middle of July. I think all these three effects has an impact in the increase of iron ore that went from 60-something to 100 -- almost 120 that is today. So that clearly has an effect directly in the cost of production in the Brazilian unit. I mean the main issue of the cost has been the increase in prices. There has not been much more increases yet in cost because of the Vale accident but mainly because of the increase in prices, and that's the effect. As I said, the production is coming slowly back to the production before these 3 events. I mean stocks in China recently has increased a little bit. And Rio Tinto, I think, it's producing again the same volumes as -- it's going to produce the same volumes as it produced in the second quarter of 2018. And Vale has said that they are going to increase -- or they're increasing the northern production, and they're increasing Brucutu this quarter. So I think prices are going to stabilize and decrease in the near future.
Okay. And if I may ask a second question here on the supply of slabs into the U.S. We discussed in earlier calls about the story of quotas into the U.S. Can you just discuss a little bit how things are going? And how that fits into your idea of selling less slab volumes in the second half of the year, please?
Yes. Rodolfo, that's a good question. The quota in the U.S. is going to be fulfilled. I think it's already fulfilled for the third quarter. And in the fourth quarter, it's going to be a very small amount of slabs that can enter it. So our slab shipments to the U.S. will decrease in the second half of the year, and we are going to return the shipments probably in October -- in November. Those shipment will enter the U.S. in December and January.
Your next question comes from the line of Juan Tavarez from Citi.
Just my first question, just actually a follow-up on the long-term margin or your view of normalized margins. Is there any assumption in that 15% to 20% EBITDA margin that you mentioned about what the long-term iron ore price is? And then second, maybe if you can give us an update on just capacity growth in your projects in Mexico. And maybe how do you see the pipeline of new capacity growth versus demand over the next few years given that we've seen announcements out of the U.S. for some more capacity there that could potentially enter Mexico as well? So just your view on supply-demand essentially over the medium term.
Yes. Juan, iron ore, our long-term prices -- long-term margin with what prices of iron ore, we said. I mean the iron ore prices we are seeing in the long term are the same that the analysts are putting that are around $70 for the Eurex. Nevertheless, it depends on the difference between steel prices and iron ore. What happened today is that there was a decrease in prices of slabs and a huge increase in prices of iron ore that created an imbalance. That was not -- it's not usually the case. And if you see also, there is a big debalance -- or imbalance between scrap prices and iron ore. I mean scrap prices decreased and iron ore increased. That hasn't happened, I think, for the last 3 or 4 years, where the difference is so low between scrap and iron ore. This has two ways of correcting, and both are happening. Iron ore prices will have to decrease, and steel prices are increasing. So I think that's what is going to happen.
Regarding capacity growth. I mean, Mexico, as you know, and the U.S. also has a big part of imports. A significant part of the markets are covered by imports. And I think what our increased capacity is doing is we are going to supply that import. I mean we are going to substitute a big part of that important import areas. We are not seeing our capacity or increased capacity to increase our size to the U.S. You know the U.S. and Mexico has made an agreement regarding 232, where there's going to be a balance between what we export and what the U.S. is exports. So our capacity is going to attract all that imports are going to the market. And as you know, the consumption in Mexico, the consumption per capita in Mexico is still very low compared to the U.S. or compared to a lot of countries. And so we expect that consumption in Mexico is going to increase. Demand is going to increase. And that's how we are seeing the increase of our capacity.
Your next question comes from the line of Carlos De Alba from Morgan Stanley.
Gentlemen, could you give us perhaps an update on the progress of the different projects in Mexico? I expected the galvanized base line to be already running. But if you can confirm that and give us any update as how the prices are doing in terms of budget and timing, that'd be great.
Carlos, with pleasure. The projects in Mexico are doing very well. As you recall, painting line is already -- I mean we said that it was going to start the trials in July. It produced the first coil a couple of days ago. So I think in August, it's going to start producing commercial quality and start selling, of course, in not a very big volume, but it's running okay. Galvanized line is going to start at the end of September. That was the plan, the original plan. And we are seeing no delay on that. Both of them are going with the budget we set. The coil trim mill is going to start the 1st of December, the first coil, the 1st of December of 2020. Again, this project is going on time and on budget. Although we think that a little bit -- of course, we're going to be able to cut a little bit of cost, although we are not, I mean, saying yet the amount, it's not huge. But we are seeing some savings in what we set of the $1.1 billion investment in that coil trim mill.
Perfect. And any other -- or any initiatives on cost that you can mention that would help, hopefully, make the third quarter the bottom in terms of profitability?
Well, the main thing that we are doing are in Brazil. I mean in Brazil, as we are reducing our marginal -- I mean you know that when you charge the platform is you have different qualities and different type of products. We are reducing the more expensive ones in the third quarter, which is 25 more expensive to produce than our average cost. So we are going to reduce 10% of production in Brazil with higher costs, with a marginal cost. That was one. And of course, we are seeing in Brazil, a delay in some of the maintenance stoppage that we had -- although because of the decrease. So in the third quarter and fourth quarter mainly, we are going to have a little bit less cost there in Brazil.
Your next question comes from the line of Thiago Ojea from Goldman Sachs.
So my first question is related to steel prices, if you can speak more broadly. What's your view about the steel prices in China? And specifically in U.S., there is -- there are no concerns about the removal of Section 232 that this could further depress steel prices. I know that in the short term, you're hiking prices. But thinking long term, what do you think about global surprises and the impact of the removal of Section 232?
Thiago, I don't see any sign of removing the 232 for quite a long time. I mean I am not seeing that. Again, I'm not a specialist in U.S. politics. And maybe that is a question for the U.S. producers. But they are not seeing any sign of removing the 232. So I think 232 will stay a couple of years more. I don't have a concern about that. What is true that China prices are stable. But again, Chinese production has been, with dumping -- with 232, but also with all the dumping and subsidy cases, I mean, China is finding harder and harder to export the excess capacity. Exports in China have been declining for the last 3 or 4 years, and I expect that tendency to continue.
Okay. And if I may, a second question. I'm not sure if you want more or maybe Pablo, regarding the capital allocation. We had an active free cash flow for this quarter. If you can reconfirm your CapEx guidance for this year and dividend levels for this year and probably do you see any different -- any difference from the capital allocation that you had the last year would be good.
Yes. Thiago, let me mention first that we are sustaining our level of CapEx for the year, the same guidance that we gave last year at the end of the year with a level of, let's say, an average level of $950 million, which is what we mentioned at the very beginning, is continuing to be the target for the year. As Máximo mentioned, we are trying to reduce expenditures in order to produce the number, but we will maintain this level of CapEx. We are not changing our views on the dividend payment what we have just said. As we mentioned, we paid May 14, so a couple of months ago. And the tendency for the company should be exactly the same. I already mentioned during the opening remarks that we have some specific issues during this quarter that reduced the total level of free cash flow generation. But clearly, the level of cash flow generation was very important in Ternium during the first quarter.
Basically, the company generated free -- cash flow of around $270 million, which basically was exactly what we invested during the quarter, even taking into consideration the two items that I mentioned that impacted the second quarter cash flow generation, which was an extraordinary high level of taxes paid during the second quarter and the profit share in Mexico. So clearly, the level of cash flow generation in Mexico was -- in Ternium, was very high. And as Máximo mentioned also the very beginning of his opening remarks, we were able to sustain the same level of net debt from December 2018 up to June 2019, basically, exactly the same numbers, a $9 million difference in a semester where we have dividend payment, a CapEx of $485 million, the taxes -- extra taxes that we need to pay and the profit share. So the company continues to generate a very positive level of cash flow. But clearly, we also said that the main driver of the usage of the cash flow for this year will be the CapEx and the dividend payments. And we are going through this as we enter into the second quarter and moving to the third and the fourth quarter. So no changes in the capital allocation and the expectations that we have for the full year 2019.
Okay. Just a follow-up, Pablo. Can you provide the guidance for next year on CapEx? And given what you just said, would we expect maybe the peak on leverage to be on the third quarter of this year given that probably EBITDA will be lower?
Well, the next year, 2020, will be around $800 million to $900 million. And then in 2021, it's going to be back to normal of around $500 million to $550 million of CapEx. The top will be between third quarter, fourth quarter and first quarter of next year. I mean that's when the biggest amount of CapEx for the coil trim mill is coming on board. So it's going to be this following 2 or 3 quarters.
Your next question comes from the line of Gustavo Allevato from Santander.
I have two questions. First one is regarding volume outlook for 2020. So you mentioned for Argentina you depend on the rations. How about for Mexico? Can you give some color what can we expect for 2020 there? And the second question is regarding, kind of, Brazil. You mentioned in the release that you expect lower shipments, large shipments 335. So it just relates to lower exports to United States or lower sales in Brazil as well? And if I may, a third question is can you give us some color what's the margin of state in Brazil with iron ore price around 115, 120. I remember when you guys acquired the facility, the entire margin was around $60 per ton. So be very helpful you could provide some color on this front.
Thank you, Gustavo. I'll start the 2 first one and let Pablo explain the third one. 2020 volumes in Mexico, I think, of course, that will depend on the economy of Mexico. I mean you all have the news that Mexico economy in 2019, we grow almost nothing or very little. But we are expecting that 2020 will change a little bit in the sense that the construction business, the commercial business is going to start improving after several quarters of decreasing. First, because of government expenditures or infrastructure projects; and second, today, because the private sector is also not investing in construction in Mexico. So -- but 2020 should change. And we are not seeing any change in the industrial consumption. That mainly is driven by U.S. economy. So we should see -- or we are seeing today, we're expecting today higher volumes in 2020. Brazil third parties are mainly sales to the U.S., although sales in Brazil are also a little bit lower or will be a little bit lower in the third quarter.
And let me take the probably -- your third question, which was also linked to the Brazilian unit. You're right that we mentioned that our target was to generate $60 per ton margin in our Brazilian operation. We were able to overpass this during the first year due to very specific issues like a very good level of pricing. Now what we are going through, as Máximo explained in detail, we are going through an imbalance that will put pressure on these margins during -- specifically during this coming quarter. But clearly, we are still working with this level of margins for the generation of our Brazilian unit in the medium and long term. So we have not changed. Clearly, the imbalance, as Máximo mentioned, happens once a while. And I understand that the last time that happened was 3 or 4 years ago. And we have a reduced margin, too. But then we'll recover and we move back to our normal level of margin. So we'll continue working with the same numbers for the coming year and the following one.
Okay. But is it possible to give us some color, what's the current margin of the facility in Brazil?
Well, it's very difficult to tell you exactly a number. We have moved below this level during this quarter.
The third.
And the third quarter. We understand the most impacted one below that number, clearly, because we will resolve in a reduction in prices and increase in cost. But we are expecting to see a recovery from that level through the fourth quarter and the beginning of next year. So clearly, the margin, we have stated that in our opening remarks, the lowest level will be during the third quarter, the upcoming quarter, and then slowly coming back to more normal levels.
Your next question comes from the line of Andreas Bokkenheuser from UBS.
Just two quick questions from me, just two follow-ups. Number one, on the slab side of things. Obviously, we've seen you increase your slab volumes in recent quarters, and you're mentioning that's going to slow down due to the Brazilian quota into the U.S. Do you have a sense of what's happening to the slabs that you are selling into the U.S. right now? Mostly, are they building up as inventories in the U.S.? Or are rerollers effectively transitioning these slabs into thinner steel? And that's the first question. The second question with HRC prices in the U.S. now just being short of $600 per short ton, what effectively would be your net received price if you were to export from Mexico effectively on an FOB basis? I guess the other way of asking that question is what's your general transportation and other costs to be competitive in the U.S.? Those are my two questions.
Thank you, Andreas. What is happening with the slabs in the U.S.? I think they are both. I mean there are more stock. I mean people have built -- reorders has built a little bit of stock because of the fulfillment of the quotas because they were expecting this. And I think that they are going to reduce a little bit production in the third and fourth quarter. I mean I don't think they have slabs -- the amount of slabs required to reroll at the same level that were rerolling in the first half of the year. But to be honest, that's my view of the market. It has not to be necessary the truth, but it's what we are observing.
The second question, I mean, we are very close to the border, and we usually ship by train. So our logistics costs are not very high, depends on where we go. But you are talking about -- depends on again where you go between $30 a ton -- metric ton to $50 a metric ton. I mean they are not big, huge costs.
Okay. That's very clear. And maybe a follow-up on that. I mean would that basically mean that if you were to sell into the U.S. right now at $600 per short ton, would that be economical for you to do so now that the 25% tariffs has effectively been removed?
For sure, it's economical for us to sell at those prices in the U.S. The question is, if we are going to sell and if we are going to increase. Probably we are selling something, but we are not going to increase our sales to the U.S. much higher than we are doing now.
[Operator Instructions]. Your next question comes from the line of Antonio Elduani [ph] from Bank of America.
We are not hearing you, Antonio. [Technical Difficulty]
Sorry for that. Just a follow-up on the slab question that you're talking about. How would you compare the production costs on the slabs in Brazil and the price that you're currently seeing in the market? And if it would be possible now that you have the facility in Brazil for you to change your slab balance within the Ternium.
Well, that's -- Antonio, thank you very much. That's exactly what we are doing. I mean we are shipping more to Ternium Mexico, and we are not shipping to third parties mainly because of what happened with the U.S. quota. So we are changing the balance for the third quarter. So you are not going to see shipments to third parties, but we are going to ship much more to Mexico. The -- in the third quarter, as I said before, we are going to reduce a little bit production because of these marginal costs when you produce with pellet. But that reduction is lower compared to the volume you're going to see that the third parties -- we don't ship to third parties. I mean the volume to third parties is going to decrease around 300,000 -- yes, 300,000 tons. And production is going to decrease much lower than that.
There are no further questions at this time. I will turn the call back over to the CEO for closing remarks.
All right. Thank you very much to all of you for participating in our conference. As usual, please contact us if you have any additional request for comments or information. And again, thank you very much. Bye-bye.
This concludes today's conference call. You may now disconnect.