SDI Reports Continued Growth in Construction, HR Weakest Product

Written by Sandy Williams

Steel Dynamics’ struggling recycling segment widened the company’s net loss to $253 million in fourth quarter 2015. It was determined that the book value of the metals recycling segment recorded $435 million in non-cash goodwill and other related asset impairment charge. Excluding the metals recycling charges, adjusted net income was $22 million on net sales of $1.6 billion. In comparison, net sales were $2.5 billion in Q4 2014 and $2.0 billion in Q3 2015.

“The fourth quarter 2015 market environment was one of the most challenging in recent history for our steel and metals recycling operations,” said Mark D. Millett, Chief Executive Officer. “The domestic steel industry operated at production rates below 65 percent in November and December, representing the lowest levels this year caused by ongoing pressure from unfairly traded steel imports, customer destocking and seasonally lower demand. Enabled by our diversified and value-added product portfolio, our steel operations were again able to maintain a higher than industry average production utilization rate at 73 percent for the fourth quarter 2015. The automotive market remains strong and construction continues to show incremental improvement, as current industry forecasts suggest additional year-over-year growth in 2016.

SDI reports continuing growth in the construction industry. Its acquisition of additional deck assets resulted in a 10 percent boost the Q4 fabrication shipments. Fabrication achieved record annual 2015 operating income of $116 million in fourth quarter—more than double the previous annual record of $52 million earned in 2014.

Operating income from sheet products decreased 43 percent from Q3 as quarterly shipments fell 10 percent. Hot rolled products were most severely impacted by high import levels. Long products shipments fell 13 percent resulting in a decrease of 47 percent in long product operating income. Average steel product selling price decreased $51 to $614 per ton in Q4 The average ferrous scrap cost per ton melted decreased $47 to $205 per ton.

Metals recycling operations recorded an adjusted fourth quarter 2015 operating loss of $16 million(excluding non-cash goodwill and asset impairment charges), compared to third quarter 2015 operating income of $463,000. Ferrous scrap shipments declined 12 percent reducing margins 34 percent from third quarter.

Commenting on the scrap industry during the conference call, Millett said, “The recycling environment remains challenging. Many regional players in the industry are either for sale or headed to bankruptcy. They continued significant overcapacity of shredders, particularly in the Eastern United States, continues to constrain margin as processes are all competing for the same material.”

SDI is expecting low scrap export volumes due to the strong dollar. A stable scrap market will have ample scrap supply without any drivers for significant increase in scrap prices, said Millett.

Cash flow of $330 million was generated from fourth quarter operations bring the total for 2015 to $924 million after fixed asset capital expenditures. Total liquidity, including revolver and available cash of $727 million, was $1.9 billion at the end of 2015. CEO Mark Millett said during the company conference call that “there will be opportunities for acquisition growth; we just have to be careful and make sure they are the right ones.”

Full year 2015 results

Annual 2015 net sales fell 13 percent to $7.6 billion due to significantly lower product pricing. Including non-cash asset impairment and other charges related to the company’s metals recycling and ferrous production operations and first quarter 2015 refinancing costs, annual 2015 net loss was $130 million.

Said SDI in its earnings report, “The dramatic drop in global commodity prices caused the average full-year 2015 selling price for the company’s metals recycling operations to decline over 36 percent year-over-year. Additionally, due to sustained high levels of unfairly traded steel imports during the year, the average full-year 2015 selling price for the company’s steel operations decreased $152 per ton, or 18 percent. As a result, annual 2015 revenues for the company’s metals recycling and steel operations fell $794 million and $338 million, respectively. The average full-year 2015 ferrous scrap cost per ton melted decreased $105 to $255 per ton, resulting in meaningful metal spread compression.”

Groundbreaking took place Monday, Jan. 25, for the Paint Line and Galvalume addition at the Columbus campus. The $100 million investment will add 250,000 tons of annual coating capability for SDI. The line will accommodate higher quality, 72” wide steel and will target customers in construction and appliances.

Steel imports were the primary headwind in 2015, said Millett, driven by a strong U.S. Dollar, low iron cost and global overcapacity.

“Excessive steel import volume combined with high customer inventory levels limited U.S. steel mill utilization and pressure domestic steel pricing. While SDI’s production utilization remains well above our peers and the industry, there’s certainly more to be achieved. And we believe the fundamentals are supportive of a continued positive trend in economic growth and for us and the U.S.”

Lead times are lengthening, said Millett. The weakest is hot band with Butler at two weeks stretching into three weeks. The stability in raw materials brought customers back into the market as well as strength in automotive and construction. SDI notes tightening in lead times for cold rolled sheet and coated. Lead times are at about five weeks in Columbus, and six weeks in Butler. Lead times in Texas are six to seven weeks.

“We are seeing two slight diversions both the typical spread between hot band and other products. I think hot band near-term will be kind of flattish, whereas as I said, cold sheet and coated are likely to appreciate.”

Richard Teets, COO of steel operations, commented on the trade cases: “I think the most important thing on both the CVDs and the AD that we could say to date is that when you look at the percentages, huge percentages on the Chinese, 255 on the AD and 235 on six firms on the CVDs, 28% to 34% of the total imports of coated products came from China, and the lowest pricing was driven by the Chinese products. And so by taking out really a non-market-driven competitor, I think it’s a tremendous advantage to the rest of the market and to all of us in the domestic field.”

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