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Why the US Steel Industry’s 4Q17 Outlook Is Hazy

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Part 4
Why the US Steel Industry’s 4Q17 Outlook Is Hazy PART 4 OF 9

Lower Scrap Prices Might Please Nucor and Steel Dynamics

Lower scrap prices

In the previous part, we discussed the recent weakness in steel scrap prices. In this part, we’ll see how lower steel scrap prices could impact steelmakers. First, let’s understand steel companies’ business models. Nucor (NUE) and Steel Dynamics (STLD) have steel scrap processing operations that provide steel scrap to their steel mill operations. Nucor’s Raw Materials segment operates steel scrap processing facilities and also produces DRI (direct reduced iron).

Lower Scrap Prices Might Please Nucor and Steel Dynamics

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Scrap processing operations

As steel scrap prices fall, companies’ scrap processing operations tend to be impacted negatively. They get stuck with high-cost inventories. Scrap processing operations usually see margin compression when scrap prices fall.

Looking at these companies’ steel mill operations, the per unit production costs tend to fall when steel scrap prices fall. Nucor and Steel Dynamics expect margin compression in 3Q17 due to the disproportionate increase in steel scrap prices. Import pressure thwarted US steel companies’ price hike plans.

Impact on steel prices

Steel scrap prices also impact the steel pricing environment. In the past, US steel prices have followed steel scrap prices lower as buyers negotiate competitive prices amid falling scrap prices. Looking at the current market scenario, we’re seeing a reversion in steel markets. Steel prices didn’t keep pace with scrap. While falling scrap prices could have little impact on steel prices, it might not be a major drag. Steel companies could see margin expansion in 4Q17.

Meanwhile, U.S. Steel Corporation (X) and AK Steel (AKS) mainly use iron ore as a raw material. In the next part, we’ll analyze the recent movement in iron ore prices and see how it could impact US steelmakers (MT).

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