SDI Seeks “Prudence” in Section 232 Tariffs

Steel Dynamics reported a very strong first quarter with record shipments in the flat rolled division and a 94 percent utilization rate, well above the domestic industry average of 76 percent. Demand and product pricing improved across SDI’s entire steel platform.

Net sales totaled $2.6 billion for the quarter and net income was $228 million.

“We remain confident that market conditions are in place to benefit domestic steel consumption throughout the year,” said President and CEO Mark Millett. “Domestic steel inventories remain reasonably balanced and both steel demand and pricing have improved. Based on strong domestic steel demand fundamentals and customer optimism, we believe improving steel consumption will continue throughout the year. We also believe recent trade actions will result in reduced steel imports later in the coming months, despite the first-quarter uptick driven by temporarily exempted countries pushing in material prior to the May 1 deadline. Additionally, we believe tax reform will provide a stimulus for additional fixed asset investment.”

SDI flat rolled steel shipments increased 5 percent to 1.743 million tons. The breakdown by product was flat-rolled 875,000 tons, cold-rolled 134,000 tons and coated steel 734,000 tons. The average steel product selling price for the company increased $61 to $822 per ton.

Metals recycling and fabrication also had solid performances in the first quarter. Metals recycling operating income jumped 24 percent sequentially to $28 million on improved steel mill utilization and strengthening ferrous scrap shipments and metal spreads. SDI reports prime scrap flows have been steady and, with better weather, obsolete scrap flows will improve. 

“Good supply coupled with a weak export environment should sustain stable pricing as the year progresses,” said Millett. “We believe there is more than adequate scrap supply to address the higher domestic steel utilization rates.”

Fabrication operating income of $20 million was slightly lower than Q4 income of $22 million, but improved average selling values more than offset seasonally lower shipments. The fabrication order backlog is strong heading into the summer season. Nonresidential construction is showing a healthy mix of institutional, commercial, and “big box” construction and is expected by SDI to remain steady. CFO Theresa Wagler added that there will be some margin compression for fabrication in Q2 as higher steel costs hit in the second quarter.

Millett said customers are generally calm and accepting of steel pricing at this time, but if the market should tighten dramatically after the tariff exemptions expire on May 1, things could change. “The order book and, obviously, order input rate is strong but no one is really panicking,” said Millett. “I do believe there will be some tightness, both from restraints on the flat rolled side and also restraints on imported pipe and tube, which will certainly tighten the hot rolled/cold-rolled market substantially.”

Commenting on market conditions during the earnings call, Millett said, “The marketplace is very, very strong, in all segments, agriculture perhaps not so much. But in manufacturing, general industrial consumption is strong, off-road equipment is strong, tractor and trailer build is strong. Energy, obviously, has returned with surprising speed and continues to strengthen. Generally, all the auto market sectors show great promise, continued growth and strength. And you’ve seen an uptick in pricing recently. For me, it is kind of a bellwether of the steel-consuming environment out there, and it is a very healthy one right now.”

Costs for electrodes and refractories increased $2 per ton from the fourth quarter. Wagler expects an increase of another $4 with new contracts for the second quarter, followed by stable prices for the balance of the year.

When asked about possible exemptions from the Section 232 tariffs, Millett said he believes “prudence is prevailing.” While Steel Dynamics appreciates the efforts of the Commerce Department and administration, elimination of steel imports was never the goal of the steel industry, said Millett.

“I think it is helpful to step back and understand what we were looking for as an industry,” he said. “We weren’t looking for the elimination of imports, but a fair playing field whereby imports would return to a more normalized level—20 to 23 percent of demand and get away from the 30-33 percent of demand that crushed our marketplace. And in doing it should allow for a more healthy domestic mill utilization rate that would in turn allow the entire industry to have a better profitability profile and exceed their cost of capital so we can reinvest, develop new products, and be a better provider for the customer base.

“To be honest, when the first announcement came out we were a little alarmed by the 25 percent blanket tariff. We actually, along with others, supported one of the other options that Secretary Ross presented, and that was to be punitive on the culprits, so to speak, and levy a more normalized quota on the rest of the world.

“I think as time goes on, prudence is prevailing, and I do believe that even though you talk through the negotiations and perhaps a more compromised position, that is where we should be. A 25 percent straight tariff across the industry, I believe, would really have tightened the industry and perhaps created a steel shortage. And again, that is not what we want. We need a balanced approach so we can have reasonable pricing, reasonable spread, reasonable profitability, yet still have a good supply for the manufacturing base of the U.S.”