Nucor surprised analysts with earnings significantly higher than expected for the second quarter of 2020. Earnings for Q2 totaled $108.9 million or $0.36 per diluted share despite Nucor’s own guidance for $0.10-0.15 per share and analyst forecasts of $0.12 to $0.14. The company admits poor forecasting ability resulted in the welcome discrepancy, along with strategic cost savings and the resilience of the nonresidential construction market during the pandemic.
During the second quarter, pandemic challenges disrupting customer production and a weak oil and gas market resulted in a weaker performance for Nucor’s sheet and plate mills.
Nucor is pushing ahead with its expansion projects at Gallatin and at the new plate mill in Brandenburg despite uncertainty in overall market conditions.
“The normal cyclicality of the plate market, or in general, the steel market, is something we have grown accustomed to and lived with for 50 years. However, this black swan event of the pandemic has certainly given us some pause. But we believe we are at the trough of the market and things will begin to improve as we enter Q3 and Q4,” said CEO Leon Topalian. “Our decision is guided by the incredible market opportunities these investments afford us, our strong operating cashflow, and the adjustments we have been able to make across the company in response to the pandemic.” Nucor claims to be the market leader in about 9 of the 13 markets its serves.
The Brandenburg mill is expected to start up in the late fourth quarter of 2022. “Brandenburg provides the widest, most diverse product mix offering of any plate mill in North American and being located in the largest plate-consuming region in the Midwest is going to afford us a freight advantage over the current mills that are supplying that market,” he said. The Gallatin modernization will likely be delayed a couple of months and be completed mid-year 2021, he added.
When asked about supply and demand and new and returning steel capacity, Topalian expressed skepticism that all capacity will return. “We think by August we will see 13-14 blast furnaces come online. We also saw shedding of 20 million tons of supply come out of the market very, very quickly. We are forecasting somewhere near 10 million tons of restart. With 10 million tons still offline, all in flat, most in sheet, we anticipate that projects that Nucor has and some of the other market expansions are still going to be well under the 10 million tons that I am not sure will ever restart. I don’t want to predict that, but I will tell you the ultimate driver is that the low-cost producer wins.”
Although some integrated mills have recently increased steel prices, Topalian passed on the expectation to follow. “Our pricing decisions are going to remain independent of what are competitors are doing. We will evaluate for ourselves where we believe the market is at and determine when it is right to raise pricing.”
Mary Emily Slate, executive vice president of sheet and tubular products, added, “Seventy percent of our sheet market is contracts, so we have 30 percent of books associated with spot pricing. That 70 percent is divided between metrics, so there will be some lag in pricing. But we also feel that with oil and gas as low as it been, which drives a lot of the hot rolled price, we are at a bottom and there is an inflection point coming, and we will see some correction in this market.”
Nucor’s Louisiana DRI plant is performing at its best since its shutdown in the second half of last year to improve reliability. It now claims a record 57 days of 24/7 continuous operation.
Nonresidential construction is expected to continue to improve in the third quarter and benefit the company’s bar and structural mills. Backlogs for Nucor’s downstream products are almost 10 percent higher year-to-date than in 2019, said Topalian. Shipping rates continue to be encouraging. Inventory levels are relatively low, with distributors still somewhat cautious about adding inventory.
The steel segment performance in Q3 is expected to be similar to that of Q2. Market conditions for sheet and plate mills remain challenged and average selling prices remain depressed. Additionally, depressed pricing for raw materials is expected to negatively impact Nucor’s raw materials segment in the third quarter.
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