Steel Dynamics CEO Talks Imports, Scrap, Columbus and Energy Markets

Regarding Foreign Steel

“It’s worth noting, despite high imports and if you exclude Columbus shipments, our pre-existing steel mills achieved a record shipment level this year. Imports as a percentage of domestic consumption increased from 23% in 2013 and 28% in 2014. Despite this wave of additional material, domestic steel production utilization remain generally unchanged between 77% and 78%. This depicts the increasing demand for steel in a growing domestic economy as new steel companies produced roughly the same amount of steel, while domestic consumers were also buying a large quantities of foreign products.”

“… Import are the second one, I would suggest the most important headwind. While domestic demand remains robust, global economy are battling slow and inconsistent growth resulting in weak global steel consumption. Global over-capacity, strong dollar and lower raw material costs have being driving historically a wide process disparity between U.S. and foreign mills and unfair trading practices only continue to companion [ph] the problem.

“Although now receding with the recent erosion in domestic pricing, with the large price spread drilled imports to a peak of 11.4 million tons in Q4 and we’re near record 43.1 million tons for the year. A historical high of 28% of total demand. The combination of seasonally lower demand and elevated imports resulted in increased customer inventories particularly for our distributors and consequently decreased selling prices. We believe this overhang can be resolved in the first quarter 2015 with customers reportedly coming back to the market in strengthened March. However, this had a dramatic effect on our order entry rate in the quarter, with mills throwing back production to match the respective order books and this has continued into January.”

Regarding SDI Columbus

“It is also becoming more obvious that [adding the Columbus] mill was an incredible opportunity for Steel Dynamics. Creating a single Flat Roll Group provides us a platform to fully utilize our core competencies. It is allowing us to develop strong relationship to our existing and new customers, maximizing logistical benefits, the boarding our steel sheet product capabilities through width gauge and strength diversity, by complementing or current product portfolio with further exposure to high growth markets and we’re also diversifying geographically into the Southeastern, U.S. and Mexican regions. Leveraging synergies across two highly efficient flat roll steel mills and eight coating lines provides us an unique opportunity to significantly increase value for all our stakeholders.”

Rebound of Energy Markets

“…with two current headwinds, one the deteriorating energy market but more importantly imports. Firstly energy with a growth of shale actually makes the OCTG goods consumption around the 10% of our domestic demand. With a sharper drop in oil price, OCTG consumption has fall in the rig count. Inventory is being reduced throughout the supply chain and imports of both skelp and pipe are still in the system. The associated reduced demand has had a marginal effect on the [indiscernible] sheet mill is only a small percentage of the shipments are energy related. At Columbus as far as 20% of the shipments were related to energy products such as OCTG and line pipe and they’re seeing a greater impact. If you look at this companywide, exposure to energy markets approximates 8% in our steel business. We will further diversify the product mix of Columbus through 2015 and into 2016, so that we can move from market to market to optimize return.

“The remaining reviews concerning the timeline for recovery in oil process but the constant is that oil pricing cycles up and down and is inevitable that stronger processing will return. It’s just a question of when. Past cycles have demonstrated return for the 70% of the prior peak after approximately 12 months from that peak. Therefore, suggesting a recovery beginning in Q2 of this year.”

Regarding Ferrous Scrap

“Through November 2014 ferrous scrap exports remained 16% lower than the prior year. Export scrap levels have actually fallen in the past two consecutive years to volumes significantly lower than recent historical norms. The continued significant over capacity of traders particularly in the Southeast and the U.S., compounds volatility and continues to constrain margin as processors are all competing for the same material.

“Although the ferrous market has remained essentially flat in the last three months the reduced export pressure, additional imports, ample scrap flow and the recent softening of mill utilization is causing a substantial supply over lag with the likely results that the scrap market and according to [indiscernible] phase that the scrap market will hit a reset button in February and March and will bring scrap closer to its historical relationship to iron ore.”

“The associated low mill utilization, ample scrap flow and subdued export market will likely result in a drop in scrap pricing in the coming months. The anticipation of lower scrap pricing has already helped erode hot band price reducing it’s split to levels that will begin to dissipate the attraction of imports.

“However, as the inventory overhang subsides, the underlying market demand will give support to product pricing while scrap trends lower totals historic relationship with iron ore. As raw material prices declined the price support will provide opportunity for improved margin. In short the first quarter may be challenging as the markets fine themselves but we believe that fundamentals are supportive of a strong economic growth in 2015. We believe that the current global growth rate expectation combined with global production over capacity will be a headwind to steel pricing for the foreseeable future but as raw material prices reset sharply there is a margin expansion opportunities.”