Steel Market Update reviewed the Nucor earnings conference call from earlier this week. Nucor discussed the flat rolled steel market and what they saw as a potential saving grace for steel prices for the 3rd Quarter 2011.

Steel Market Update went through the Nucor 1st Quarter earnings conference call transcript over the weekend. Nucor reported earnings of $.50 per diluted share, substantially higher than the loss of $.04 per share reported in 4th Quarter 2010. James Frias, CFO for Nucor reported the gains as being due to “…volume gains and expanding metal margins at our steel mills, as well as a solid contribution from our David J. Joseph Company’s raw materials business,” He went on to state, “The metal margins for the month of March, 2011, was at the highest level that came since 2008.”

Flat rolled sheet shipments increased by 23% during the quarter as compared to the 4th quarter 2010. At the same time the steel mill utilization rate (all products) reached 79.6% and improvement from the 68.2% rate posted during the 4th Quarter and better than the industry average of 73.6% according to statements made by Mr. Frias.

John Ferriola, President and COO for Nucor, reported steel buyers as being “more cautious” as market prices rose during the 1st Quarter 2011. “On the other hand, service center inventories through March remain at relatively low levels and we continue to see evidence of improvement in real demand in several markets important to Nucor. These include energy, heavy equipment, agriculture, truck trailers, and bridge building markets. While nonresidential construction activity remains week, the bottom in that important market appears to be behind us.”

Scrap Markets

During the question and answer section of the conference call, Keith Grass, Executive Vice President for Nucor reported they see a “…downward bias, or downward trend, more impacting the absolute scrap market than the prime scrap market as we head into a time of stronger seasonal scrap flows into the scrap processing yards.” Mr. DiMicco, CEO of Nucor, added they believe over the next 45-60 days changes in scrap prices would be, “…more moderate in nature than we saw on the way up in latter part of last year.”

More Steel Capacity

Nucor officers, Dan DiMicco and John Ferriola spoke about the new flat rolled sheet capacity coming online with RG Steel, ThyssenKrupp Steel USA and the new caster at Severstal Columbus. However, in Mr. Ferriola comments the mill feels the pent-up demand from the lack of automotive components from Japan will help release steel demand during the 3rd Quarter when demand is normally weaker due to automotive retooling.

Mr. Ferriola told the analysts on the conference call, “…Now, this year it’s going to be much more difficult to predict the impact of that. In fact, we feel the impact will be mitigated because of what’s happening today, as Dan mentioned, with the supply of non-steel critical components into the automotive market from Japan.

As a result, both the domestic and the new domestics production rates currently are down, as they are waiting for those key raw materials. And when you look at, as we look at, the dealer inventory days on hand, we see that they are dropping low; they’re going down and they’re continuing to go down. When you look on the domestic side, the domestic production side, you’re looking at about 54 days, dealers’ days on hand, which is a low number. With the new domestics, the number is even lower than that.

So we see some pent-up demand in the automotive sector which will release as these non-steel components become more available, and we believe that that will mitigate the impact of the traditional seasonal slowdown that we see at the end of the second quarter going into the third quarter.”

Nucor CEO also put a shot across the bow of foreign steel trading companies promising to take, “…swift and decisive action when they occur, if they occur, at levels that could impact the market dynamics.” Later in the call Mr. DiMicco did say, “…import pressures still remain to be seeing as to what extent they’ll occur to and whether it’s in the rebar or in the sheet market. We have seen some uptick and whether they get out of control or not is another matter. That has not happened as of yet….”

Steel Pricing & Inventories

The Nucor management team focused the analysts attention on the lean inventory levels reported earlier this week by the Metal Service Center Institute (MSCI) which had flat rolled at a 1.9 month inventory level based on the March shipment rate out of domestic service centers. “…our customers are keeping their inventories very lean, and for good reason: they were burned severely when this recession started and they have decided to maintain a lean inventory structure. The lead-times on imports are an issue, the potential for movements in scrap prices over the next couple of months, our customers are -as much aware of that as we are.

So there are things that will cause our customers to think about importing too much flat-rolled, or what have you, going forward. And so we think that between keeping our eye on things and top the mindset of our customer base…” Mr. DiMicco told the analysts.

A service center executive told Steel Market Update late last week they intended to keep their inventories at low levels – however they are higher than the 1.9 months supply reported by the MSCI (our SMU service center inventory level is at 2.24 months as of earlier this week – the MSCI number is based on inventory on the floor as of the end of March). This service center steel buyer told SMU they did not have to worry about placing orders with extended lead times as they were able to still buy some “April tons on hot rolled.” Most of the mills are reported as being in early to mid-May with their hot rolled lead times or, 4 to 5 weeks. If this is the case, and a service center has 1.9 months worth of inventory (or about 7 weeks) then there is no “panic” to buy heavily.

If imports start becoming an issue due to attractive pricing – and our sources have pegged several foreign sources as having very competitive prices as compared to today’s domestic hot rolled selling prices – and buyers begin purchasing more foreign this would promote inventory growth and begin to squeeze the domestic steel mills whose lead times are at 7 weeks or less for hot rolled.

Nucor, and other domestic steel mills, are counting on continued demand growth to offset any growth in imports as well as the new flat rolled capacity coming online out of RG Steel, ThyssenKrupp Steel USA and Severstal Columbus here in the United States.

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