Steel Dynamics Sees Stability in the Market

Written by Sandy Williams

Steel Dynamics announced second quarter 2016 net income of $142 million on net sales of $2.0 billion. In comparison, net sales in Q1 totaled $1.7 billion with net income of $63 million and year ago sales were $2.0 billion with adjusted net income of $53 million.

A decline in imports of flat rolled steel and stronger pricing in the steel operations drove improved results. Operating income attributable to SDI’s sheet product segment increased 159 percent from first quarter. Total operating income from the steel division was $277 million, up from $101 million a year ago. Average product selling price for the company’s steel operations increased $66 to $640 per ton. The average ferrous scrap cost per ton melted increased $43 to $227 per ton.

President and CEO Mark Millett noted that year-over-year flat rolled steel imports declined 25 percent and, although activity is beginning to pick up a little bit, he does not see imports returning to “levels that really imploded our markets and the end of 2014 and early 2015.” Pricing is remaining quite resilient, said Millet, and people are not likely to get overly excited over a $50 a ton difference.

Customer inventory levels are now better balanced with current demand requirements, said Millett. SDI’s steel production utilization rate rose to 95 percent in second quarter from 88 percent in Q1. Flat rolled operated at full capacity during second quarter supported by automotive and construction. Long products were at 75 percent capacity with engineered bar being the most challenged. The industry average for Q2 was less than 75 percent.

Total steel shipments at SDI, including long product shipments, were 2,491,363 tons, up from 2,242,408 tons in Q2 2015. Steel production increased to 2,561,354 tons from 2,344,895 tons.

Flat rolled shipments were up 8 percent with an improved metal spread as price improvements outpaced increased scrap costs. Flat rolled shipments improved year-over-year in all three of SDI’s divisions:

Butler: 773,823 tons from 721, 115
Columbus: 804,406 tons from 693,772 tons
The Techs: 209,469 tons from 182,239 tons

The breakdown in flat rolled shipments was: hot rolled and P&O combined, 872,000 tons; cold rolled 166,000 tons; and coated, which will include painted, galvanized and Galvalume, 750,000 tons.

Commented Millet on pricing, “From a pricing standpoint, cold-rolled sheet and coated, they remain very, very strong. Lead times are around about eight weeks. In the hot-rolled coil arena, you’re right, the market seems a little hesitant, and I think they’re uncertain of its direction. There are lead times perhaps down to two to three weeks today, and I think it’s because some are anticipating softening, given that the high global spread and the recent deterioration in scrap pricing. And so they’re not placing orders today. They really are just placing exactly what they need.”

Long products income jumped 25 percent on a 14 percent improvement in shipments. Millet said that except in the construction sector, long product steel demand is generally challenged, and selling values are under pressure from excess domestic production capability. The jump in sales was due to buyers in second quarter buying ahead of the significant scrap cost increase in May which may lead to lower shipments in third quarter, offsetting any margin gains.

SDI’s metal recycling operating income increased 150 percent from first quarter to total $15 million. Ferrous metal margins improved by 30 percent and higher shipments due to increased domestic steel mill utilization.

Fabrication operating income of $24 million declined from $32 million in first quarter. Shipments were flat in second quarter and suffered from metal spread compression as product prices dropped while raw materials costs increased.

As far as market conditions are concerned, SDI characterizes domestic steel demand as “relatively unchanged and steady.” The heavy equipment, agriculture and energy markets continue to be weak, while automotive and construction continues to be strong. A downturn was noted in the Class A truck market in the last few months.

In his outlook remarks Millet commented, “Steel customer inventory levels have moderated and import levels have declined. When combined with steady underlying demand, the result has been an improvement in domestic flat roll steel producer utilization, and we anticipate improved flat roll metal spreads in the third quarter 2016.”

“However, aside from the construction sector, long product steel demand is generally challenged, and selling values are under pressure from excess domestic production capability. The robust increase in second quarter 2016 long product group shipments was due, in part, to customers buying ahead of the significant scrap cost increase in May. While we also anticipate metal spread expansion for our long products group in the third quarter 2016, lower shipments related to the customers buying ahead could offset related margin gain.”

Columbus achieved record six month production level in the first half while continuing to improve and diversify its value-added production capability. The new paint line is on schedule and shipments are expected to begin in the first quarter 2017. The new line will provide 250,000 tons of annual coating capability and increase access to southern markets and Mexico. Columbus will be down for maintenance and in third quarter.

The new flat rolled pickling line at Butler began operating in January and has already achieved 75 percent utilization. The $22 million investment will add 600,000 tons of pickling capability at the division. Butler will have a maintenance shutdown in fourth quarter.

When asked to comment the “new normal” is in sheet market dynamics relative to trade and pricing, Millett commented:

“Obviously, the elimination of China has buoyed the market currently. I do think that the coated and coated sheet spreads, which are historical highs, will probably remain so as long as China is shut-out, as long as the trade cases are in place to impede. There are not going to eliminate but they will impede import pricing. So, I think those spreads are not just an aberration, they are going to be around for a while. Ultimately, longer term, I think some of that material will somehow find its way back into the American market either through other converters or through manufactured goods. There is a good portion of imported steel in refrigerators and cars, and other things.”

He added, “Obviously, we’re in a commodity market. There’s a supply and demand equation. You take supply out, it’s going to benefit and bode well for the market environment and for pricing, and for your profitability profile.”

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