During Q3, metals recycling and fabrication improved, but profitability of steel operations declined due to an 8 percent decrease in shipments.
Steel demand declined in Q3. There was a substantial decline of 32 percent in the company's special bar products, which is a high margin product. The expected growth in the transportation and manufacturing sectors, which use these products, did not occur.
In Q3, steel mills operated at 79 percent capacity versus 83 percent last quarter. The industry utilization rate for Q3 was 75 percent. The Structural and Rail division increased utilization to 54 percent. Rail shipments for Steel Dynamics have increased in 2012 and were 14 percent of the company's sales. Steel Dynamics continues to outperform the industry in steel operations by being the lowest cost producer.
In the recycling market, there was an oversupply of ferrous scrap metal because exports declined, leaving more supply in the United States. Moreover, domestic steel mill utilization declined, reducing demand in the United States. Accordingly, prices for scrap metal declined significantly. However, at the end of August, scrap metal prices increased dramatically as exports picked up and there was a perceived shortage at steel mills. Ferrous scrap shipments for Q3 declined by 10 percent. Although the scrap metal market is pressuring all players, Steel Dynamics is not seeing companies go out of business.
In an effort to reduce the economic impact on the recycling markets, Steel Dynamics opened several retail yards to increase the flow of metals with higher margins. It is also developing new technology to recover nonferrous materials from its shredding operations, which should begin in 2013.
Steel Dynamics has eliminated the need to rely on foreign sources of pig iron due to production at its Minnesota facility. It does not expect to need any further third-party purchases of pig iron.
At its nugget facility, Steel Dynamics began an outage in mid-September to implement quality and productivity improvements. It expects to re-open the facility in November. The company's Minnesota iron concentrate facility began its first shipment to the nugget factory in September. The start of such shipments should reduce the cost of producing the nuggets.
Production at the fabrication plants is weak due to the weakness in nonresidential construction. Volumes, however, are improve due to gains in market share and the backlog in September was greater than the backlog at the end of June.
Steel Dynamics has expanded its steelmaking capacity to 7.4 million tons since 2008 and it is not fully utilizing that capacity.
Evaluation of markets.
The steel market in the United States is still "tepid" due to a number of factors: (1) uncertainty in Europe, (2) slower growth in China, and (3) the near-term economic and political environment in the United States. Customers are still buying only enough to meet near term needs and are not building inventories.
Steel prices declined about 5 percent during Q3, or $45/ton.
Nonresidential construction is still very slow, although there was a slight uptick in activity over the summer. Nonresidential construction is strongest in the South and the West.
The automotive and manufacturing sectors are positive, but transportation and agriculture are soft. The natural gas sector has also been pressured as there is less drilling as a result of low natural gas prices.
Financials.
Gross margin decreased by 51 basis points from Q3/2011.
Net income for Q3 was $.06/share versus $.19/share last year. The decrease in EPS for Q3 was the result of: (1) a refinancing expense of $.07/share, and (2) a noncash impairment charge of .02/share related to the termination of two small joint ventures of which the company had a majority interest. One joint venture related to the manufacture of composite type and the other joint venture related to the production of abrasive materials.
Copyright 2012 Jaygo's Earnings Conference Call Summaries
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