Nucor Holding Back on Price Increase While Imports Glut Market

Nucor expects benefits from falling scrap prices in February to be realized in second quarter results. The average scrap and scrap substitute cost per ton was $324 in Q1, a decrease of 11 percent from $363 in Q4.

Repairs were finished on the process gas heater at the Nucor Louisiana during first quarter and the DRI facility is back on line and operating at 85 percent of capacity. The plant is currently consuming higher price iron ore that was on hand during the failure in November 2014.

The reduced operating performance in Q1 was not unexpected, due primarily to lower selling prices, margins, and volumes resulting from exceptionally high levels of imports during the quarter.

In the Q1 earnings report Nucor stated, “It is estimated that imports accounted for 33% of the finished steel market in the first quarter of 2015. Import levels in February and March were lower than the peak in January, but remain at the exceptionally high levels experienced during most of 2014. We anticipate selling prices to remain under pressure as the flood of imports continues in the second quarter of 2015. Global overcapacity built by foreign, state-owned enterprises continues to be a significant risk factor to our business.”

The energy market continues to suffer from low demand due to the collapse in oil prices and oversupply resulting from OCTG imports. When market conditions improve and the inventory is reduced, Nucor expects steel demand to meet or exceed 2014 levels.

Nucor’s Trinidad DRI facility will go undergo a one month planned routine outage in Q2 that will result in an operating loss in second quarter.

Looking forward, Nucor expects margins to improve but remain under pressure due to low selling prices and a continued influx of imports. Pricing pressure will offset benefits of low raw material costs in Q2. A pick-up in nonresidential construct will help improve performance for downstream products and steel mills. As inventory overhang is reduced at service centers, steel pricing is expected to stabilize.

On trade issues during the earning call, CEO John Ferriola took a strong stance as usual stating that imports still remain our number one threat.

“When we fight, we use both fists, okay. So those are the two-prong approach and we’re going to use both of those prongs to achieve a level playing field, so that our teammates can be successful which we know they will be on a level playing field.

“I have mentioned on the last couple of calls that, I felt that we’re gaining traction in Washington on both of those fronts. I still do. We are getting a much better reception, people are beginning to understand – I believe people are beginning to understand the impact of these illegally traded products on our industry, and on our teammates, and steel work is in general. It’s about focusing and pursuing trade cases when that’s appropriate, and moving forward on the legislative front at the same time. We see great opportunity frankly on the legislative front, particularly with the TPA discussions that are going on today. We are pushing very, very hard and getting good reception on both sides of the IL to the concept that if TPA is going to be approved, it must be approved with strong trade language to protect our industries and give us the ability to better and more effectively and more proactively by illegally traded products.

“Let me be clear,” he added, we will continue to assess the market and we will implement a trade case at the appropriate time.”

Ferriola sees the scrap market as flatline on prices for the rest of the year. “Right now, iron ore pricing – it fluctuates a little bit, but it’s been relatively stable also. If there’s a dramatic change in iron ore pricing, it might have the reflection and scrap pricing, but we just – we don’t see that at this time.”

Some scrap collection processing facilities will not make it through these challenging times, said Ferriola, and Nucor will “keep an eye out for assets that become available.” He added, “When they make sense, they fit into our strategic plan for our raw materials, if the locations are right, if pricing is right. I’ll tell you what, we won’t be shy, we’ll be at the table.”

Ferriola noted, “It’s not during the downturn where you see the greatest pressure on these smaller companies, but actually during the upturn, when they have to start replacing inventory. When you’re depleting inventory, you generate cash. When you have to replace inventory, you’re burning through cash. And sometimes, that can be more challenging.”

When questioned about the profitability of the DRI plant in Louisiana with pig iron at $250, Ferriola said Louisiana would be cash positive at those levels but considers $250 as unsustainable.

“However, beside all of that, we said from the beginning when we talk about the DRI project that over the course of the cycles, there’s going to be times when we get singles, times when we bunt, and sometimes when we get grand slams,” he said. When pig iron returns to normal levels, Nucor expects very good returns on its DRI investments.

The million dollar question was why hasn’t there been a price raise announcement? An analyst on the call alluded to a service center that said they would be receptive to a price increase (see SMU’s Reliance Steel article).

“If there is a service center than wants some tons from us guaranteed at a higher price, send them our way,” said Ferriola.

“We said couple of times during the course of the call, that this is probably a transitional quarter,” he continued. “So, we might see something this quarter, but I would ask you to remember that there’s still a tremendous amount of imports that are in the pipeline, that are along their way here to the United States. So, that continues to put pressure on pricing. As I said, we’ll listen, we are not opposed to selling steel at a higher price, we like to do that, but we also have to take care of our customers, maintain our market share, all of those factors that we spoke about, earlier in the call.”