SDI bullish on demand, sees bottom for HRC prices

US steelmaker Steel Dynamics (SDI) expects domestic steel demand to rise in 2019 and hot-rolled coil (HRC) prices to bottom after a sharp decline through the second half of 2018.

"We believe the market dynamics are in place for domestic steel consumption to increase this year," chief executive Mark Millett said today.

Millett cited the continued pace of automotive momentum, growth in construction activity and energy customers that remain bullish despite "a little hesitation here and there" in the sector.

SDI expects growth in the Mexican market to outpace the US in coming years, supporting the company's recently-announced greenfield 3mn st/yr flat-rolled mill in the southwest US. The company has optioned potential sites for the $1.8mn investment and expects to finalize a location within about eight weeks.

Millett also called a bottom on HRC prices following a 23pc slide through the second half of 2018. Argus' weekly midwest hot-rolled coil index fell to $693.75/st this week, down from a 10-year high of around $920/st in early July as buyers retreated amid expectations that prices would continue to fall.

"I would suggest that we're at the bottom," Millet said. "There's a tendency for everyone to jump out of the market, and then all of the sudden everyone jumps back in. We are getting to that point."

HRC lead times at the company's flat-rolled mills were heard to remain in the 3-4 week range, but Millet expects the order rate to pick up in the coming weeks. Sales agents from the company were heard to have echoed similar sentiment to buyers this week.

The Fort Wayne, Indiana-based company in the fourth quarter shipped more flat and long steel products, pushing overall steel shipments to external customers up to 2.3mn st from 2.2mn st in the same prior-year period.

Flat-rolled shipments rose by 6pc to 1.8mn st as incremental output from the company's 1mn st/yr Heartland cold mill acquisition in June offset maintenance outages at the company's two sheet mills that reduced shipments by an estimated 70,000-80,000st on the quarter.

Long product shipments jumped by 17pc to 827,727st.

Overall production across the company's mills rose to 2.7mn st to 2.4mn st a year earlier.

SDI's average steel selling price rose by $179/st to $940/st. The average ferrous cost/st melted rose by $43/st to $343/st by comparison, pushing metal margin up by $136/st to $597/st.

Still, buyer resistance in the HRC market helped push the average selling price down from $988/st in the third quarter. Long product prices generally increased quarter-over-quarter, the company said.

Millett pegged the drop in HRC prices to buyer caution around raw materials prices.

"When there is an expectation of continued downward pressure on scrap pricing, the steel consumer expecting lower pricing tends to lower their buy to just what they need," Millett said.

Higher steel input costs from the prior year compressed margins in SDI's fabricated steel products segment along with a reduction in shipments, which ticked down to 162,292st from 165,338st. Operating profit in the segment fell to $15mn from $22mn.

Still, SDI said its order backlog for fabricated products is even stronger now than it was last year, which it suggested is a positive growth indicator for the non-residential construction sector.

Operating profit in the company's metals recycling segment Omnisource also fell even as volumes rose, dropping to $17mn from $22mn in part on lower non-ferrous selling prices.

Stronger demand for ferrous scrap from SDI's steel mills boosted Omnisource's ferrous scrap shipments up by 4pc to 1.2mn gt from the same period a year earlier. The share of sales to external customers fell to 34pc from 37pc.

Non-ferrous scrap shipments ticked up to 278mn lbs from 271mn lbs.

SDI's revenue across its segments rose to $2.9bn in the quarter from $2.3bn in the prior year, but a higher income tax expense pushed profit down to $270mn from $303mn.

For the full year 2018, external steel shipments ticked up by 7pc to 10mn st from the same period a year earlier. Profit on the year jumped to a record $1.3bn from $806mn as selling prices rose to $922/st from $765/st, widening metal margins by $109/st to $581/st.