Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of Kuni Chen with Bank of America Merrill Lynch.
Kuni Chen – Bank of America Merrill Lynch
Just to start off the question on utilization rate and sustainability there, three months ago, I think you had seen utilization in the mid 50% range, and you said at the time that you did not see a lot of upside from there, and certainly the way you guys ran in the quarter suggested there was meaningful upside, so perhaps you’re a bit too conservative last quarter, but do you worry at this point that you perhaps overshot the market a bit? Obviously maybe there is some downside here in the fourth quarter, but do you look at 70% as a steady-state utilization as you look into 2010?
Dan DiMicco
Kuni, all along what we said is that with respect to the demand in the marketplace, the apparent demand will continue to increase to meet real demand as we work through this year and customers work down inventories to what they found as acceptable levels in these tight credit markets and with the economic slowdown that we’re all facing. So as far as where the utilization rates ended up at any point in time, we knew that they would be improving, but we did not in all honesty anticipate they would be improving particularly in some products the levels we saw in the third quarter, and we were pleased with that, and our team was able to respond that, and as far going forward, what we stated in our press release and in our conference call notes really should be taken to heart because in the fourth quarter typically you have issues with the holidays and with seasonal shutdown at many of our customers’ facilities. Of course with the economic conditions being what they are, those could be extended or compounded in terms of how many days are actually taken and shut down. In addition to that, we do not believe that real demand, as John had mentioned and I talked about earlier, has really improved much since the end of last year, and we don’t see things in the economy from a flat roll standpoint or long product standpoint whether you’re talking automotive, construction, housing, non-residential construction, oil county goods or what have you, we don’t see that there is a real uptick in the demand there, and a lot will depend on how our customers approach the year-end and their inventories and what they want to be carrying on their books and their order entry rates as to whether or not they continue to order at real demand levels or back off. There is a tremendous amount of uncertainty with respect to the fact that lead times at all mills are very short, and the customers because of the credit crunch, because of their own cash considerations, and again the slowdown in the economy which has not picked up despite what a lot of people like to talk about in the press and maybe Wall Street, the segment of the economy that we serve which is the real core of the economy is not improving, so what we are looking at is a situation where that uncertainty could translate into less volume coming in, lower capacity utilization in the fourth quarter, but it’s just not something that we can forecast because of the short lead times that our customers are taking advantage of and they are smart to take advantage of. It would be exactly the way that we would be running those businesses if we were in their shoes, so that all compounds the situation. We do a significant drop off in raw material costs that we will see in the fourth quarter, but how much benefit we get from that will depend on what the actual volumes are, so when you see that $180 million number that we talked about for third quarter and second quarter with respect to the pig iron additional cost associated with the higher pig iron consumption, that would only be a similar number if we produced and shipped the same number of tons or greater in the fourth quarter than we did in the third quarter. So you have to take the volume and factor into account there, the potential for a slowing in order entry activity because of the situations our customers at year end will find themselves in and the seasonal shutdowns, so we are cautious about that. We’re not going to get out upfront on this thing, and we will update everybody when we get to the later part of this quarter to give you more quantitative sense for where things are at. We certainly at this point in time are feeling better about the profitability in the fourth quarter, but we know that there is still a lot of uncertainty and an opportunity for there to be some reduction in capacity utilization. Whether it is a peak for any period of time or just a short-term peak due to fourth quarter concerns remains to be seen, and we’ll know more about that when we get into next year.
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