Steel Dynamics 2Q16 Earnings Call Notes

Steel Dynamics (STLD) Mark D. Millett on Q2 2016 Results

Supply side dynamics have led to much improved market dynamics in steel industry

“The steel platform performed well in the second quarter. 2016 has certainly provided a changing landscape to the domestic flat roll market. Several positive macro shifts have resulted in significantly improved flat roll product pricing. Year-over-year, first half flat roll steel import levels have declined and customer inventory levels are better aligned to actual consumption, all supporting higher domestic sheet mill utilization. While demand has remained steady, these supply side drivers have led to much improved market dynamics. Our flat roll steel mills operated at full capacity during the second quarter, supported by the automotive and construction sectors.”

Weak sectors should remain weak, strong sectors will remain strong

“Relative to the macro environment, the steel-consuming sectors that were weak in 2015 such as energy, heavy equipment, and agriculture will likely remain so in 2016. However, those that have been strong or recovering are expected to continue this path, such as automotive and construction. 2016 forecast for these two largest domestic steel-consuming sectors remains positive. Automotive has continued forecasting strength. And overall, construction spending continues to improve with additional forecasted growth in 2016.”

Import levels are ticking up but not going to return to levels that imploded the market

” I think import levels are down about 25% year-to-date. But we do, indeed, see activity picking up a little bit. The global spread for hot band is in excess of $200 a ton today. And so, it’s natural for that to occur. But I think it’s been amazing that the import pricing, though, remains pretty resilient, I would say, unusually resilient and maybe there is import offers now about 50 bucks off in the domestic market. And as I said, that’s a little unusual, a little more resilient. The trade constraints have totally eliminated China and the other primary importers from the marketplace. And import offers are coming in through what we would consider somewhat non-traditional sources, Vietnam and others. And those are a little less accessible, and the network from a customer base importing those steels is a little less reliable at this moment in time. And in any event, import pressure is not going to materialize in any great form in Q4. And I am somewhat confident that it’s not going to return to the levels that really imploded on markets at the end of whenever that was, 2014 and early 2015″

Obviously the elimination of China has buoyed the market

“Obviously, the elimination of China has buoyed the market currently. I do think that the coated and cold rolled sheet spreads, which are at historical highs, will probably remain so as long as China has shut out. As long as the trade cases are in place to impede, they are not going to eliminate, but they will impede the import pricing. So I think those spreads are not just an aberration. I think they are going to be around for a while. Ultimately, longer term and when I say longer term, years out – over the years, I think some of that material will somehow look 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. So, seriously, I’m not smart enough to know long term what the impact is. ”

Theresa E. Wagler – Chief Financial Officer & Executive Vice President

Shipments increased 9%

“For the second quarter, steel shipments increased 9% to 2.5 million tons, as volumes improved across all divisions except in special bar quality products. The SBQ market continues to be challenged by weak demand dynamics.”

Platform utilization in flat roll was 95%

“Conversely, domestic flat roll steel utilization is strong, as imports have declined and customer inventory levels are better balanced with actual demand. Even though second quarter platform utilization was 95%, it’s a bit misleading as the Flat Roll Group produced over the theoretical quarterly capacity, offsetting lower utilization at the structural and engineered bar divisions, which operated at 82% and 53% respectively.