Steel Dynamics Remains Optimistic Despite Challenging Second Quarter
07/18/2013 - Steel Dynamics, Inc. said slower anticipated economic growth in China, suppressed economic growth in Europe, persistent uncertainty in the domestic economy, and domestic oversupply created a challenging quarter as it reported its second quarter earnings results.
Steel Dynamics, Inc. announced second quarter 2013 net income of US$29 million on net sales of US$1.8 billion. By comparison, prior year second quarter net income was US$44 million on net sales of US$1.9 billion; and sequential first quarter 2013 net income was US$48 million on net sales of US$1.8 billion.
"Specific to product pricing, the second quarter proved most challenging for our sheet and structural steel operations," said president and chief executive officer, Mark Millett. "Slower anticipated economic growth in China coupled with suppressed economic growth in the European community influenced near-term market sentiment. The persistent uncertainty in the domestic economic environment continued to influence customer buying patterns as they maintained low inventory levels. Domestic oversupply, coupled with increased quarter-over-quarter steel imports, resulted in decreased quarterly selling values.
"Compared to the first quarter, operating income from our steel operations decreased 28% to US$88 million, driven by metal margin compression caused by declines in average consecutive quarterly sheet and structural steel pricing, which more than offset the benefit of increased overall volume," stated Millett. "We saw meaningful volume improvements for rail, engineered special bar quality products, and galvanized sheet steel from The Techs. Modest growth in the overall construction market continued in the quarter and supported improved shipments and backlog for our fabrication business, which achieved its fifth consecutive profitable quarter.
"We noted in our second quarter guidance that we were anticipating potential challenges in the metals recycling market. Operating income from our metals recycling operations decreased 37% to US$16 million, when compared to first quarter. While ferrous volumes and metal spreads remained somewhat flat, nonferrous volume and margins contracted meaningfully in the quarter, as both copper and stainless steel market prices decreased significantly," said Millett.
Second Quarter Review
Second quarter shipments improved in the company's steel and fabrication operating segments when compared to the first quarter, but were lower for both metals recycling and ferrous operations. Operating income for the company's steel operations decreased as compared to the sequential first quarter, declining 28%, and declined 37% as compared to the second quarter 2012, primarily due to lower steel metal spreads, as declining steel prices more than offset increased volume.
The company's steel mill production utilization rate was 83% in the second quarter, compared to 89% in the first quarter of 2013. Planned maintenance downtime in April at the Flat Roll and Engineered Bar divisions was the primary reason for the decrease. The Structural and Rail Division continued a positive utilization trend as standard rail volume increased 20% over the sequential quarter. The average selling price for the company's steel operations per ton shipped decreased US$8 to US$781 in the second quarter, and the average ferrous scrap cost per ton melted increased US$3 per ton. Operating income attributable to the company's long product operations decreased 20% when compared to the sequential quarter, while earnings from sheet operations decreased 34%.
Sequential operating income for the metals recycling operations decreased in the second quarter of 2013 to US$16 million, as compared to US$25 million of operating income in the first quarter, although contribution to the company's overall operating income was higher than the second quarter 2012 of US$5 million. Nonferrous shipments decreased nine% sequentially, and when combined with generally lower pricing, the nonferrous metal spread decreased ten%. The lower nonferrous volume is primarily attributed to a decrease in copper and stainless shipments, as lower pricing adversely impacted flow toward the end of the second quarter.
The impact of losses from the company's Minnesota operations on second quarter 2013 consolidated net income was approximately US$9 million, or US$0.04 per diluted share, as compared to a loss of US$14 million, or US$0.06 per diluted share, in the first quarter. As previously indicated and according to plan, the installation of additional equipment and other modifications were made at the iron nugget facility in April. The facility resumed production in May and the restart has progressed well. Production is expected to increase steadily and reach a monthly rate of 30,000 metric tons before the end of the year. The company anticipates the impact of losses related to the Minnesota operations for the third quarter 2013 to be similar to somewhat improved compared to those recorded in the second quarter as expected yield and production improvements are realized.
Year to Date Comparison
A decline in average steel prices and decreased nonferrous shipments resulted in net sales of US$3.6 billion for the six months ended 30 June 2013, an eight% decline from the same period in 2012. Operating income decreased 26%, as margins decreased within the company's steel operations. The average selling price per ton shipped for the company's steel operations in the six months ended June 30, 2013 was US$785, a decrease of US$79 per ton compared to the same period last year. The average ferrous scrap cost per ton melted was US$54lower than the comparative period for 2012.
Outlook
"We remain optimistic as the demand for high-quality steel products has not abated," Millett said. "The team is on track to complete the organic growth projects scheduled to start at the end of this year, including the engineered special-bar-quality capacity expansion and the premium rail product addition. The automotive market remains strong, and manufactured goods is strengthening. Housing start data continues to suggest increasingly higher potential for a sustainable recovery in residential construction. We remain cautiously optimistic about the nonresidential construction market in 2013, as the most recent key market indices showed upward improvements. We also view the increase in our engineered special-bar-quality products and fabrication shipments as positive signs of momentum. We are confident that with our exceptional team, and our superior, low-cost operating culture, we are uniquely prepared to capitalize on the opportunities ahead."
Steel Dynamics, Inc. is one of the largest domestic steel producers and metals recyclers in the United States based on estimated annual steelmaking and metals recycling capability, with annual sales of US$7.3 billion in 2012, over 6,600 employees, and manufacturing facilities primarily located throughout the United States (including five steel mills, six steel processing facilities, two iron production facilities, over 70 metals recycling locations and six steel fabrication plants).
