Nucor Sees Bottom on Pricing and Destocking

Operating rates at Nucor slipped to 83 percent in the third quarter as compared to 84 percent in the second quarter and 92 percent in the third quarter of 2018

“After a brief summer rally, plate and sheet market conditions softened in the third quarter. Excess inventories throughout the supply chain have resulted in continued destocking by our customers. Service center industry data indicates that inventories remain low. In addition, our OEM customers have become cautious about buying as we head into the year end. However, we do believe that both our service center and OEM customers will start restocking to meet demand as 2020 gets underway,” said CEO John Ferriola.

The Nucor execs believe pricing for most steel products has hit bottom. Driving that belief is 1) improved pricing in the scrap market, and 2) stronger bookings. Nucor estimates scrap prices will increase next month and be sustained through the rest of the year. “Our best guess on scrap pricing is up $20-40 by the end of the year,” said Ferriola. Nucor’s average scrap and scrap substitute cost per ton used in the first nine months of 2019 was $328, a decrease of 9 percent from $361 in the same period last year.

“Cold rolled and galvanized have always been fairly strong,” added Ferriola. “We haven’t seen much of a decline in those two products. Hot band, as you know, was really challenged for the first part of this year. We’ve talked about this in the past, overstocking of inventory last year, the tough weather conditions at the beginning of this year, the destocking this year. These are all things that contributed to the challenging market. We see that ending.”

Nucor’s downstream products segment improved in the third quarter as nonresidential construction remained strong. Both the joist/deck and metal buildings businesses are on pace for a record year in 2019, said CFO Jim Frias.

“Both of these business groups are benefiting from lower steel prices  and excellent commercial execution,” he added. “The metal building business is also benefiting from a restructuring that has realigned capacity and reduced fixed costs.”

Nucor’s raw material segment reported an operating loss due to further margin compression at its DRI operations and an outage at the Louisiana facility. The average scrap and scrap substitute cost per ton used in the third quarter of 2019 was $299, a 9 percent decrease compared to $330 in the second quarter of 2019 and a decrease of 20 percent compared to $374 in the third quarter of 2018.

The Louisiana DRI plant is in a maintenance outage that began in early September and will last until mid-November. Nov. 14 is the target date for completion of the upgrades at the plant, on time and on budget, the ompany said. Two major projects were undertaken: 1) handling of raw material feed and storage, and 2) replacing the lining in the vessel. The unreliable process gas heater was also replaced. In 2020, the DRI facility will ramp up to 8,000 hours of operation and 2.2 million metric tons of production.

A number of other projects at Nucor mills focusing on defined market opportunities will ramp up during the fourth quarter, the execs added.

The automotive market has slowed, but is still forecast to come in at a rate of 16.8 million to 17.0 million vehicles for 2019. “Pretty good numbers,” said Ferriola, “and the important thing to note for us is that we continue to take a bigger share of that smaller pie.”

“With regard to trade policy, imports continue to supply a shrinking share of U.S. demand thanks to the cost competitiveness of our market-oriented domestic steel industry and effective trade enforcement,” said Ferriola. “At Nucor we will not take this progress for granted and we will continue to press for sensible legislation, regulation and enforcement. We also remain hopeful that Congress will approve the USMCA this year. We see it as a meaningful modernization of NAFTA that will benefit the U.S. economy and the domestic manufacturing sector, in particular.”

Fourth-Quarter 2019 Outlook

Nucor’s earnings in the fourth quarter of 2019 are expected to decrease as lower steel prices at the end of the third quarter affect fourth-quarter results. The profitability of the steel products segment in the fourth quarter is expected to decrease slightly from the third quarter due to normal year-end seasonality. Nucor expects results in the raw materials segment to be impacted by the Louisiana DRI outage along with further margin pressure.

“Looking out further to next year, the pending 2020 elections and current trade issues, such as the unresolved status of the USMCA agreement for North America, are creating more uncertainty in the market. Although it is difficult to predict steel markets that far into the future, we continue to have great confidence in Nucor’s business fundamentals and our long-term strategy,” said Ferriola.

The third-quarter 2019 earnings call was the last for Nucor’s Ferriola before his retirement at the end of this year. Leon Topalian will be the next of head of Nucor Corp.