Commercial Metals FY 1Q16 Earnings Call Notes

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Commercial Metals’ (CMC) CEO Joseph Alvarado on Q1 2016 Results

Steel imports pose a threat to the domestic steel industry

“steel imports continue to pose a threat to the domestic steel industry. The trend in rebar imports into the US has not changed materially since our last earnings call in October.”

China is dumping steel on US markets

“China’s economic slowdown and unwillingness to adjust steel output to meet current demand impacted steel markets throughout the world with a significant negative impact on global steel pricing. China’s on pace to export 125 million net tons of steel to other markets around the world with a significant portion coming to the US, thereby impacting US production rates. Domestic mill utilization rates have recently been reported as low as 61%.”

Demand remains good in the markets that we serve

“the drop in volumes is definitely related to import volume more than any other factor. Demand remains good in the markets that we serve. Being Sun Belt oriented much of the construction activity and strength in construction is south and west oriented.”

The overcapacity is being exacerbated by producers and distributors working together to sell at uneconomic prices

“I might add one other thing and this is with regard to the global over capacity situation. There is significant disintermediation that’s taking place today, which is different than in past scenarios. So it’s an additional pressure that exists where state sponsored companies and state sponsored trading activities will work together to move product at what we would view to be unreasonable, not only margins, but unreasonable risk. So we elect not to participate in that kind of activity. We don’t believe that it’s in our best interest or that of our shareholders, and, again, it’s part of the overall glut of capacity related to what’s going on in China.”

Scrap metal prices are still fairly high relative to iron ore prices

“And today there is still some differential between what scrap sells for and what iron ore sells for and even though there is historically some correlation between those two, ferrous scrap prices are still fairly high relatively speaking.”

It would be great to see some improvement in pricing coming out of China

“It would be great to see some improvement in pricing coming out of China because there really isn’t any discipline there and it goes back to what I said earlier about disintermediation. Some of the government-sponsored traders are – they are driving what prices are, and many of the producers just have to meet that in order to book with those traders.”

There’s no doubt that the dollar has an impact on all of our activities

“there’s no doubt that the strength of the dollar has a significant impact on all of our activities from recycling to fabrication. And it’s one of the disadvantages of having a stronger dollar, there are a lot of advantages to a strong dollar. But it opens up the door for imports and in an environment where there’s global over capacity. So it’s a bit of a magnet to ship product to the United States when there’s a stronger dollar.’

Did see a drop-off in the Houston market, but that recovered. Other markets not affected by energy

“over the course of the year, we did see a bit of a dip in the Houston market in construction activity and bidding. I think it was just caution to what was going on, but that has since recovered. So we’re feeling even optimistic about the Houston market. The other markets didn’t really fall off. We have a diversity of industry in North Texas from automotive to sports complexes to insurance, businesses relocating processing centers here. And the San Antonio market is not at all an energy market. And Austin has got other influencing factors.”