SDI Flat Rolled Shipments Drop by 20% in Q1

Steel Dynamics Inc. reported high levels of steel import and customer inventory reduced shipments for first quarter resulting in a 44 percent drop in consolidated operating income compared to fourth quarter.

SDI adjusted net income was $40 million for first quarter 2015 with $2 billion in net sales. The adjusted income excludes $17 million in finance charges associated with the March 2015 senior note repayment. In comparison, Q1 2014 net income was $39 million on $1.8 billion in sales. Compared to the previous quarter, sales were down from $2.5 billion with adjusted net income of $31 million.

Steel shipments were hit hard by the influx of steel imports. Operating income for SDI’s steel operations decreased 45 percent sequentially to $114 million due to a 16 percent quarterly reduction in steel shipments of 1.8 million tons. Selling price per ton dropped $53 to $763 per ton. Average ferrous scrap cost per ton melted decreased $34 to $312 per ton.

Reduced shipments and dramatic declines in scrap pricing (25-30 percent) resulted in an operating loss of $480,000 for SDI’s metals recycling operations.

Shipment of flat rolled steel decreased 20 percent sequentially to 1.29 million tons due to imports and high customer inventory levels. Long product operating income was down 28 percent as shipment declined 7 percent. The decline was partially offset by an improved product mix. SDI’s steel production utilization rate was 73 percent in Q1 compared to 84 percent in Q4 2014.

SDI’s steel fabrication operations posted another strong quarter with operating income of $21.4 million.

“We believe the reduction in both steel and scrap prices, coupled with continued strength in domestic steel consumption from the automotive, manufacturing and construction sectors, should support a stronger domestic steel industry later this year, predicated upon the expectation of reduced levels of imported steel, sustainable lower raw material costs and increased orders, as customer inventory overhang dissipates,” said CEO Mark Millett.

“An important barometer for domestic steel consumption is the strength of the construction industry. Historically, the construction industry has been the largest single domestic steel consuming sector, and it is continuing to strengthen this year. For the first quarter 2015, our fabrication operations achieved its second highest quarterly financial result, despite a seasonal decline in shipments. Strong demand has allowed for increased product pricing, while order inquiries and bookings remain robust, confirming the positive trend in the non-residential construction market.”

Mesabi Nugget remained idled during the quarter and its status will be reviewed at the company’s May meeting. When asked during the conference call if SDI would be interested in building a DRI facility, the answer was no. SDI has an additional iron source at Iron Dynamics which is a profitable entity.

Millett said there is opportunity for upper price movement as inventories subside. Right now there is an excessive inventory overhang that needs to be worked through. The spread between foreign and domestic pricing has dissipated making the risk of foreign orders less attractive. Demand has picked up, lead times are getting longer and order input rates are up significantly. SDI reports receiving larger orders and has been working in Columbus on regaining markets they have been absent from.

The benefit of lower scrap prices is yet to be realized as higher price inventory is just now being consumed. Benefits will be seen later in the quarter.

On the subject of trade cases, SDI is actively looking at many different products that are “under siege” in the steel industry. A trade case will not be filed until legal counsel thinks the time is right to show dumping or subsidy. In the meantime, SDI is supporting legislation for modification of injury calculation and considers it tragic that it takes a “catastrophic collapse” in the industry to prove injuries.

Cap ex investment is possible later in the year as productivity improves, said Millett. The company is looking at some internal projects and acquisition opportunities focused on the steel part of SDI’s business going forward.

When asked if mills will be more mindful of global markets in the future when setting prices, Millett responded, “You would ideally say, yes they would be more mindful of global markets, but the nature of capitalism gets away from you from time to time.”