SDI Expecting Margins and Shipments to Improve in Q2

Steel Dynamics expects that a decline in steel shipments caused by inventory overhang, hesitant demand and margin compression will lower first quarter profitability. In the company’s first quarter guidance, SDI noted:

“During the first quarter of 2015, two important industry developments occurred:

– “Domestic steel product pricing declined to levels that are now globally competitive, which the company believes will result in reduced steel import levels beginning in the second quarter 2015. Despite continued solid domestic steel consumption, product pricing decreased meaningfully due to delayed customer orders caused by the volatility in scrap prices and inventory buildup related to excessive fourth quarter 2014 steel imports. The company believes the surplus inventory can be right-sized in the April and May 2015 timeframe, which coupled with continued demand, should result in increased domestic steel mill utilization.

– “Ferrous scrap pricing declined between 25% and 30% during February, which the company believes will benefit metal margin. Ferrous scrap pricing disconnected from iron ore pricing during 2014, as iron ore prices declined dramatically, while scrap prices remained relatively unchanged. Historically these commodities are highly correlated; therefore, a sharp decline in scrap prices was not unexpected.

“The company believes these events, coupled with continued strength in domestic steel consumption from the automotive, manufacturing and construction sectors, should support a stronger second quarter, and second half 2015, based on the expectation of reduced domestic steel import levels, reduced raw material costs, and increased orders as customer inventory levels decline. Historically, the construction industry has been the largest single domestic steel consuming sector. The construction market grew during 2014, improving meaningfully from the lows experienced in 2009 and 2010. Despite the first quarter of each year being historically weaker for the construction industry due to seasonality, the company’s fabrication operations are expected to achieve solid first quarter 2015 financial results. These results could approach those achieved in the third quarter 2014, which is traditionally the strongest construction quarter of a calendar year. The company believes this is evidence of the continued growth in non-residential construction.”

Sheet operations were most affected by the overall volume and pricing reduction, said SDI. Benefits of lower scrap prices will not be realized until second quarter due to FIFO accounting and lower production volumes. Metals recycling is expected to record a loss for the due to low metal spread and domestic steel mill utilization.

Margins and shipments are expected to improve in second quarter and the remainder of the year as imports decline and benefits from low raw material pricing kick in.