Healthy construction, fewer imports boost CMC: Update

Adds color from earnings call

Long products producer Commercial Metals (CMC) expects a seasonal dip in shipments in the coming months, but remains bullish on US construction demand after growing steel shipments by 15pc in its fourth quarter.

"Our outlook for the coming months remains very positive as we believe the current demand for construction steel will be sustained," CMC chief executive Barbara Smith said in the earnings release.

Smith cited elevated levels of architectural billing activity as monitored by the American Institute of Architects (AIA) is supportive of US construction growth forecasts. Non-residential construction spending is up by 5pc in 2018 compared with the prior year, she said.

CMC is also benefiting from reduced competition from foreign producers in the wake of the 25pc tariff on imported steel imposed by the Trump administration in March. US rebar imports fell by 18pc through August to 956,808st.

Still, first-quarter shipments are expected to seasonally decline in the coming months as winter slows construction activity. Heavy rains in Texas and Hurricanes Florence and Michael have also impacted shipments in recent weeks.

The Irving, Texas-based company, which operates mills in the US and Poland, shipped 841,000st of steel from its US mills in its fourth quarter ended 31 August, up from 710,000st in the same quarter a year earlier. Rebar shipments rose by 8pc to 482,000st, while shipments of merchant bar and other products rose by 35pc to 359,000st.

The increase on the year was partially driven by the ramp-up of CMC's Durant, Oklahoma, micro mill, which began producing rebar in the spring. The company said that the mill generated positive earnings in the quarter.

Shipments in the coming fiscal year are also expected to benefit from the previously-announced acquisition of four US rebar mills from Gerdau. Smith said she expects the deal to close by the end of the 2018 calendar year.

The average selling price across all of its Americas steel mill products rose by $137/st to $674/st on the quarter. The scrap-based producer's average ferrous scrap input cost rose by $69/st by comparison, pushing the metal margin up by $68/st from the prior year to $348/st.

Higher metal margins helped more than double earnings in CMC's Americas mills to $107mn from the same quarter a year earlier.

Strong finished steel demand also boosted ferrous volume and prices in CMC's US recycling segment. Shipments of ferrous scrap rose to 644,000st at $298/st from 583,000st at $255/st. Non-ferrous shipments were little changed at 138mn lbs as selling prices ticked up to $2,155/st from $2,134/st.

Americas recycling segment earnings rose to $17mn from $9mn.

The company's international mill segment in Poland also benefited from healthy long products demand. Fourth-quarter rebar shipments rose to 145,000st from 129,000st in the prior-year period, while shipments of merchant bar and other products increased to 289,000st from 266,000st.

The average selling price across CMC's steel products in Poland rose by $79/st to $555/st, while ferrous scrap input costs rose by $36/st to $305/st. This pushed metal margin up by $43/st to $250/st, which helped drive international mill segment earnings up to $37mn from $22mn.

A six-week planned maintenance outage at its mill in Poland is expected to reduce shipments by 30,000-50,000st in the coming quarter. But the company plans to invest $80mn in finishing assets that will allow the segment to continue to expand into higher margin wire rod and merchant bar products and more fully utilize existing melt capacity as it boosts overall capacity by 400,000st by the end of fiscal 2020.

Fabrication segment volume also rose along with selling prices. The segment shipped 307,000st at $843/st, up from 286,000st at $773/st. But higher input costs drove a loss of $25mn in the segment from a $1mn profit a year earlier. Still, the company said it expects the segment to turn a profit by the end of fiscal 2019 should rebar and scrap prices remain stable as sales prices are contracted at a lag to input costs.

Across all segments, CMC swung to a profit of $52mn on sales of $1.3bn in the quarter, up from a loss of $30mn on sales of $1.1bn in the same period a year earlier.

The company in the full fiscal year recorded its best results since the great recession ended in June 2009. Profit rose to $139mn on sales of $4.6bn in fiscal 2018, up from profit of $46mn on sales of $3.8bn in the prior year.

Steel mill shipments in the US rose by 11pc to 3mn st for the year on higher shipments across its long product offerings. Ferrous scrap shipments in the US were up by 22pc at 2.4mn, while non-ferrous scrap shipments rose by 12pc to 526mn lbs.