SDI’s operating rate in Q3 exceeds the overall US steel operating rate

SDI’s operating rate in Q3 exceeds the overall US steel operating rate

The EAF steelmaker achieved an 85 percent operating rate compared with 64 percent for the overall domestic steel industry.

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October 23, 2020

Steel Dynamics Inc., the Fort Wayne, Indiana-based electric arc furnace steelmaker, has announced its financial results for the third quarter of this year, which include net sales of $2.3 billion and net income of $100 million, or 47 cents per diluted share. Its adjusted net income for the quarter was $108 million, or 51 cents per diluted share, excluding the impacts from costs associated with the construction of its Sinton, Texas, flat-roll steel mill of approximately $11 million, or 4 cents per diluted share.

In the third quarter of 2019, the company’s net sales were $2.5 billion and its net income was $151 million, or 69 cents per diluted share, while in Q2 of this year net sales were $2.1 billion and net income was $75 million, or 36 cents per diluted share, including refinancing costs of 8 cents per diluted share and costs related to the construction of the Texas steel mill of 3 cents per diluted share.

In a news release about the company’s quarterly earnings, Mark D. Millett, SDI president and chief executive officer, says, “The domestic steel demand recovery has been strong, with automotive representing the most meaningful improvement and construction continuing to be resilient. Flat-roll steel spot prices rebounded during the third quarter, as customer inventory levels were extremely low and demand steadily improved. We expect to see continued price strength and customer demand throughout 2020 and into 2021.”

He adds that SDI’s steel mills operated at 85 percent of their production capability during the third quarter of 2020, while the company’s flat-roll group achieved a rate of 99 percent. “This contrasts to the domestic steel industry rate of 64 percent. Our continued market share gains coupled with support from our fabrication and steel processing businesses reinforced our higher operating rates,” Millet says. “In addition, our metals recycling platform provided a competitive advantage in sourcing ferrous scrap to support our steel mills."

As noted in the slide deck that accompanied the company’s Q3 earnings call, 71 percent of its ferrous scrap volumes were sold to SDI mills during the quarter.

The company's nonferrous scrap shipments increased from 167 million pounds in Q2 to 267 million pounds in Q3.

SDI’s steel operations reported $144 million in operating income in the third quarter of this year, which was 17 percent lower than sequential second-quarter results. The company attributes the decrease to metal spread compression caused by lower realized selling values in its flat-roll business mostly related to lagged contract arrangements. The average external product selling price for the company's steel operations decreased $21 sequentially to $734 per ton in the third quarter, while the average ferrous scrap cost per ton melted at SDI’s steel mills decreased $7 sequentially to $259 per ton.

SDI says scrap flows “dramatically improved” in the quarter as states rescinded shelter-in-place mandates and manufacturing businesses, specifically the automotive sector, restarted. Additionally, domestic steel production increased, increasing the company's metals recycling volumes and earnings. Third-quarter operating income from SDI’s metals recycling operations was $15 million compared to an operating loss of $6 million in the sequential second quarter.  

Its steel fabrication operations achieved record quarterly operating income of $39 million, based on record quarterly shipments and metal spread expansion as average selling values improved and steel input costs declined, according to the company. SDI adds that its steel fabrication platform's customer order backlog is higher than in 2018 or 2019, saying customers remain positive concerning nonresidential construction projects. 

For the first nine months of the year, SDI’s net income was $363 million, or $1.71 per diluted share, with net sales of $7 billion as compared to net income of $550 million, or $2.47 per diluted share, with net sales of $8.1 billion for the same period in 2019.

Year to date, SDI’s net sales decreased 14 percent, and its operating income declined 27 percent to $588 million when compared with the same period in 2019. Lower earnings were primarily the result of steel metal spread compression, as significantly lower average steel selling values more than offset average ferrous scrap cost reductions across the steel platform, the company says. Compared to prior-year results, the average year-to-date external product selling price for SDI's steel operations decreased $108 to $755 per ton. The average year-to-date ferrous scrap cost per ton melted at the company's steel mills decreased $45 to $264 per ton. Even though year-to-date steel shipments were only 1 percent lower than 2019 results, the negative impact related to COVID-19 in the second quarter of 2020 contributed significantly to the year-over-year decline in earnings, the company says.

Also in the first nine months of 2020, SDI generated cash flow from operations of $849 million and invested $855 million in capital investments, of which the new Sinton mill represented $640 million. During this period, the company also paid cash dividends of $157 million and repurchased $107 million of its common stock while maintaining liquidity of $2.5 billion as of Sept. 30.

"We entered 2020 in a position of strength with ample cash and available liquidity of $2.8 billion, and we remain in a position of strength at the end of the third quarter 2020," Millett says. "Our differentiated business model and performance-driven culture have proven our ability to generate strong cash flow during the most challenging environments. We entered 2020 prepared for the capital investment requirements related to the construction of our new state-of-the art, electric-arc-furnace flat-roll steel mill. We are excited about this transformational strategic project and the associated long-term value creation it will bring through geographic and value-added product diversification.”

He adds that the new EAF mill is designed to have product size and quality capabilities that exceed those of existing EAF flat-roll steel producers, enabling SDI to compete “even more effectively with the integrated steel model and foreign competition, as well as providing a much more environmentally friendly steel production alternative for our customers.”

Millett says construction on the Sinton mill is going well and the company plans to begin operations in the middle of next year.  

"We have targeted specific regional steel consuming markets,” he says of the mill. “Our facility is located and designed to have a meaningful competitive advantage in these regions and in the displacement of imports. We have signed long-term agreements with three customers to co-locate on our site, and they plan to represent annual steel consuming and processing capability of between 800,000 to 1 million tons of flat-roll steel.”

Millett also refers to the company’s August acquisition of Zimmer, a Mexican metals recycling company, saying it is “an important part of our raw material strategy for the facility.”

Regarding the domestic economic recovery from the pandemic, he says, “The automotive sector has seen the strongest improvement, and the construction sector has remained resilient. We are seeing pent-up demand as steel service center inventories were extremely low and still remain low compared to historical norms. Energy remains the weakest end market.”