During the April 21 Steel Dynamics Inc. (SDI) earnings call, the company’s executives spoke about the advantages of SDI’s vertically integrated operations and the rising role that obsolete scrap is playing at its electric arc furnace (EAF) steel mills.
Tapping into scrap
“The team continues to effectively lever the strength of our circular manufacturing operating model, benefiting both our steel and metals recycling operations by providing higher quality scrap, which improves furnace efficiency and by reducing companywide raw material working capital requirements,” SDI Executive Vice President and Chief Financial Officer Theresa E. Wagler said.
Chairman, President and CEO Mark D. Millett added, “In today’s environment, our advantage of having our metals recycling platform is even greater. In the last 18 months, our recycling and steel teams have worked closely in developing a higher quality shredded scrap that can be used in place of prime scrap. The combined efforts resulted in our Butler flat-roll steel division reducing its need for prime scrap from 65 percent of its mix to only 40 percent while achieving the same steel qualities. We are currently rolling this out to our Columbus [Mississippi] and Sinton [Texas] steel divisions, allowing for a lower cost, readily available lower scrap supply. Additionally, given the historically high spread between prime and obsolete grades, which is around $170 a ton today, the reduced prime scrap requirement has provided a significant cost savings.”
However, SDI does have plans to close the loop on prime scrap generated by the customers purchasing steel from its Sinton mill. Millett said, “We have seven customers locating on our site, representing up to 1.8 million tons of annual flat-roll steel processing and consumption capability. Four are already operating, and the other two have broken ground—other three have broken ground, actually. This represents a unique closed loop process as we provide them on-site steel and, simultaneously, we claim their scrap to be rerouted into new steel products.”
Additionally, SDI’s purchase of Zimmer, a Mexican metals recycling company, in 2020 “provides a critical source of prime scrap supply to the Sinton mill, he said.
Regarding SDI’s Sinton mill, Millett said, “This electric arc furnace steel mill represents next-generation, lower carbon-emitting steel production capabilities providing differentiated products and supply chain solutions.” He added that the site “provides us with a more diverse value-added steel product portfolio and benefits our customers with an even broader climate-conscious supply option. Sinton’s strategic location is centralized in an underserved consumer region that represents over 27 million tons of relevant flat-roll steel consumption in the U.S. and Mexico. We offer shorter delivery lead times, providing a superior customer supply chain solution for the region. We also effectively compete with steel imports arriving in Houston and the West Coast.”
Millett added, “We currently expect 2022 shipments from Sinton to be over 1.5 million tons, achieving utilization of approximately 80 percent by the end of the third quarter and over 90 percent before year-end.”
Alternative iron units
Regarding how direct-reduced iron (DRI) and hot-briquetted iron (HBI) fit into SDI’s raw material strategy, Millet said SDI has been procuring and using HBI for many years. “For us, it tends to be what we call value-in-use kind of economic calculation. If it makes financial sense to put it in the mix, then we will buy it. HBI tends to be an inferior product to the electric arc furnace. It slows productivity down, it’s low yield and increases energy consumption. So, it’s never a preferred material. But at the right price, it makes sense.”
Millett mentioned how global pig iron supply chains have been disrupted by the invasion of Ukraine. “Our flat-roll steel operations have reduced the amount of pig iron usage while maintaining the highest level steel quality through changes in our operating practices and the help of our metals recycling team in sourcing alternative inputs. We have sufficient resources for our steel production to continue operating uninterrupted. Additionally, of particular note, our Butler Flat Roll Division has the advantage of Iron Dynamics, an on-site liquid pig iron production facility that supplies almost all the Butler’s pig iron requirements. Forging liquid pig iron into the electric arc furnace also significantly increases productivity and reduces smelting cost. We developed the technology years ago, and it’s the only existing facility of its kind today. We are currently in the process of pursuing opportunities to become even more pig iron self-sufficient for the future.”
He added that the Iron Dynamics’ run rate is about 260,000 tons.
Millett said SDI’s mills historically have used about 22 percent pig iron inputs but are close to 14 percent now.
The company posted net sales of $5.6 billion and net income of $1.1 billion, or $5.71 per diluted share, in the first quarter of 2022, which ended March 31. Excluding costs of approximately $84 million, or 31 cents per diluted share (net of capitalized interest), associated with the startup of its Sinton flat-roll steel mill SDI’s first quarter 2022 adjusted net income was $1.2 billion, or $6.02 per diluted share.
"The team delivered another tremendous performance, achieving record quarterly operating and financial performance, including record sales, operating income, cash flow from operations and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization," Millett says in a news release regarding Q1 earnings. "Our first-quarter 2022 operating income was $1.5 billion, with adjusted EBITDA of $1.6 billion. This record performance displays the power of our highly diversified, value-added, circular manufacturing model—as the strength in our steel fabrication operations more than offset moderation in our flat-roll steel business, as realized hot roll coil selling values declined from peak 2021 levels during the quarter. Flat-roll steel prices have recently firmed with extending delivery lead times related to strong demand dynamics, coupled with higher input costs and global flat-roll steel supply disruptions. The automotive, construction and industrial sectors continue to lead steel demand. We are also starting to see a significant increase in steel demand from the energy sector.”
First-quarter 2022 operating income for the company's steel operations totaled $1.2 billion, which was lower than record sequential fourth-quarter results of $1.4 billion. The decline in earnings resulted from metal spread compression within the company's flat-roll operations, as hot-roll coil pricing moderated, SDI says. Alternatively, pricing and metal spreads expanded within the company's long product steel businesses. First-quarter 2022 average external product selling price for SDI’s steel operations decreased just more than $100 sequentially to $1,561 per ton. The average ferrous scrap cost per ton melted at the company's steel mills decreased $16 sequentially to $474 per ton.
First-quarter operating income from the company's metals recycling operations was $48 million, slightly more than fourth-quarter sequential results, based on improved metal spread offsetting modestly lower shipments, SDI says.
Its steel fabrication operations reported record operating income of $467 million in the first quarter, almost double sequential fourth-quarter results as significantly higher selling values and strong shipments more than offset marginally higher steel input costs. The nonresidential construction sector remains strong, according to SDI, resulting in a record order backlog with record forward pricing for its steel fabrication platform. SDI says it anticipates this momentum to continue through 2022 based on these dynamics.
SDI generated cash flow from operations of $819 million during the quarter, invested $159 million in capital investments, paid cash dividends of $51 million and repurchased $389 million of its outstanding common stock, representing 3 percent of its outstanding stock, while maintaining liquidity of $2.4 billion as of March 31, 2022.
"We remain confident that market conditions are in place for domestic steel consumption to continue to be strong this year and into 2023," Millett says in the news release. "Order entry activity continues to be robust across all of our businesses. We believe steel prices will remain supported by strong demand, balanced customer inventory levels and elevated raw material costs. We believe the automotive, industrial and energy sectors will remain solid steel consumers this year, with demand from the construction sector at the lead. Our steel fabrication operations order backlog remains at record volume and forward-pricing levels. This combined with continued robust order activity and broad customer optimism supports strong overall demand dynamics for the construction industry. We believe this overall momentum will continue and that our second quarter 2022 consolidated earnings should represent another record quarterly performance.”