Steel Dynamics, Inc. announced second quarter net income of $44 million, or $0.20 per diluted share, on net sales of $1.9 billion. By comparison, prior year second quarter net income was $99 million, or $0.43 per diluted share, on net sales of $2.1 billion and sequential first quarter 2012 net income was $46 million, or $0.20 per diluted share, on net sales of $2.0 billion. In the first half of 2012 net income was $90 million, or $0.40 per diluted share, on net sales of $3.9 billion. By comparison, in the first half of 2011 net income was $205 million, or $0.89 per diluted share, on net sales of $4.1 billion.

"Overall steel demand remained steady in the second quarter with volumes increasing about 5%," said CEO Mark Millett. "Stability in demand from the automotive, energy, construction equipment and agricultural sectors supported volumes. However, decreases in flat roll pricing related to both supply-side pressure caused by increased imports and increased domestic capacity, resulted in somewhat decreased margins as compared to both the first quarter of 2012 and certainly the second quarter of 2011 — a timeframe when historically high margins were achieved.

"Our overall financial performance was commendable in this environment which continues to be a challenge," stated Millett. "During the second quarter, we achieved stable sequential financial results in our steel and fabrication operations. However, earnings from our metals recycling operations were severely impacted as margins and volume fell. The ferrous scrap market was oversupplied as the export market weakened and demand decreased as U.S. steel mill utilization declined."

Second Quarter Review
Aside from metals recycling and ferrous resources, second quarter volumes in each of the company’s operating platforms increased when compared to the sequential first quarter of 2012, while consolidated operating income decreased $16 million, or 13 percent. The decrease in sequential quarterly operating income was the result of weakness in both ferrous and nonferrous recycled metal margins. Ferrous metals spreads declined by approximately 10 percent in the second quarter 2012 compared to the first quarter of the year. Copper volumes declined and margins compressed as indexed copper prices decreased $0.33 per pound during the second quarter. Operating income for OmniSource was $5 million in the second quarter of 2012, a decrease of $20 million compared to the first quarter of 2012.

The company’s steel operations overall second quarter margins and operating income remained relatively consistent in comparison to first quarter 2012 quarterly results. The average selling price per ton shipped decreased $21 per ton to $854, and the average ferrous scrap cost per ton melted decreased $22. There was a change in sequential quarterly earnings mix as operating income attributable to sheet operations increased 12 percent based mostly on volume increases and long product operations decreased 10 percent based mostly on pricing declines. However, in spite of continued non-residential construction market weakness, the company’s fabrication operations reported positive quarterly operating income for the first time since the first half of 2009, based on increased volumes and better utilization of manpower brought on to support expanding backlogs.

The impact of losses from the company’s Minnesota operations on second quarter 2012 consolidated net income was $11 million (net of tax), or approximately $0.05 per diluted share, as compared to $8 million for the second quarter of 2011 and $10 million for the first quarter of 2012. Additional maintenance expenses were incurred during a planned five week outage in April and May 2012. The company made numerous equipment modifications to improve the percentage of time the plant is available to operate each month. After restarting, availability for the month of June increased to just over 80 percent—a significant improvement. This improvement supports the attainability of the target rate for plant availability of over 90 percent. Operating rates, or productivity, also showed improvement post outage. Operating at higher rates for longer periods of time has allowed for the identification of a number of key process optimization opportunities that are necessary for further improvement in both productivity and product quality. The company has identified several possible solutions which it is currently evaluating and intends to implement within the next twelve months, based on equipment delivery lead times and subsequent installation and startup.

The company’s iron concentrate facility in Minnesota is on schedule to begin supplying the nugget facility with lower-cost iron concentrate later in the third quarter of 2012, although higher priced third-party material remains in inventory for use through the remainder of the year. If commercial pig iron prices (the index used to determine the nugget sales price) do not decrease from current levels, second half 2012 losses associated with the company’s Minnesota operations could be similar to those recorded in the first half of the year.

The company’s liquidity position remains strong with $1.5 billion in unrestricted cash, short-term commercial paper and available funding under the revolving credit facility at 30 June, 2012.

2011 Comparison
Despite increased volume, first half 2012 net sales of $3.9 billion were 5 percent less than those achieved in the first half of 2011 and operating income decreased 43 percent, as margins decreased within the company’s flat roll steel and metals recycling operations. During the first half of 2011 the industry recorded historically high flat roll and metals recycling margins which were not repeated during the first half of this year. The average selling price per ton shipped for the company’s steel operations in the first half of 2012 was $864, a decrease of $54 per ton compared to the same period last year. The average ferrous scrap cost per ton melted remained unchanged for the same comparative period.

Outlook
"Looking ahead," Millett said, "we anticipate continued demand in such sectors as automotive, manufacturing, energy and construction equipment, while transportation and agriculture appears to be tempering. We believe order rates could be somewhat uneven throughout the third quarter, as fluctuations in immediate product needs and hesitancy for customers to carry inventory persists. Ferrous scrap pricing fell further in July, which could further challenge our metals recycling operations. We should see the benefit from these lower raw material costs for our steel operations early in the third quarter, but if the scrap market firms due to potential resumption in exports and mill buying, margins could moderate over the quarter. The U.S. and world economies remain challenging; although, we believe we are uniquely equipped to capitalize on the opportunities ahead, supported by our superior, low-cost, highly-variable cost structure, our diversified, value-added product mix, our vertical integration and our exceptional team of employees."