Steel Dynamics Delivers Strong Sequential Growth in Quarter

In the third quarter of 2013, Steel Dynamics delivered improved sequential operating results. Companywide operating income increased 64% to $113 million in the third quarter from a base of $69 million in the second quarter. While shipment volume increased across nearly every product line, steel operating income per ton increased to $94, which amounts to the company’s best result since the third quarter of 2011.

This improvement was driven by a slight decline in ferrous scrap costs and an increase in average steel selling prices, which rose to $794 per ton from $781 per ton in the second quarter. The Fabricated Products segment continues to be a bright spot, having delivered its sixth consecutive profitable quarter after being a drag on company-wide operating income from 2009 through 2011. Providing the company with leverage to the nonresidential construction market, this segment would drive significant earnings growth for the company if market conditions associated with nonresidential construction were to improve.

Although Steel Dynamics’ operating performance was strong, management expressed ongoing concern about the ramp-up of the company’s Mesabi Nugget project. A joint venture between Steel Dynamics (81%) and Kobe Steel (19%), the project was intended to manufacture high-iron-content pig iron nuggets at a cost well below market prices. Production began in 2009, and efforts to increase throughput have resulted in lower-than-expected yield and, therefore, higher-than-anticipated per-unit operating costs.

As a result, the business continues to operate at a loss, and it looks increasingly unlikely that the facility will be able to achieve the production run-rate targets that were initially expected. Therefore, while execution risk associated with the Mesabi Nugget project will likely persist in the near term, companywide performance remained solid in the third quarter and Steel Dynamics appears poised to deliver gradual earnings growth in the years to come.

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