Fall in steel scrap prices
In the previous part, we saw the movement in iron ore prices. However, Steel Dynamics, Inc. (STLD) and Nucor Corporation (NUE) use steel scrap to produce steel. This is because they produce steel using electric arc furnaces, or EAF.
United States Steel Corporation (X) produces steel primarily using traditional blast furnaces. However, it’s also looking at producing steel using EAFs under its Carnegie way transformation. Currently United States Steel is a top holding of the SPDR S&P Metals and Mining ETF (XME).
Steel Dynamics acquired OmniSource
Steel Dynamics acquired OmniSource in 2010. OmniSource is one of the largest processors and distributors of scrap and secondary metals. Steel Dynamics fulfills almost half of its steel scrap requirements through OmniSource.
Nucor acquired David J. Joseph Company
The David J. Joseph Company is engaged in scrap metal brokerage, ferrous and nonferrous metal recycling, and transportation services. Nucor acquired the company in 2008, and with over 70 scrap recycling facilities, including seventeen shredder locations, it’s a world leader in scrap metal brokerage.
Steel scrap prices fall 15% in 4Q
Steel scrap prices fell ~15% in 4Q so far, which will likely benefit mini mills like Nucor and Steel Dynamics. Their unit production costs are expected to come down in 4Q as a result of falling raw material prices.
Their scrap brokerage operations might suffer because of fall in scrap prices. This is because they hold inventories purchased at higher prices. However, lower scrap prices should be a net positive for Steel Dynamics and Nucor. AK Steel Holding Corporation (AKS) uses both EAFs and blast furnaces for producing steel.
Another key metric that investors in steel plays should watch is the outlook of key end consumers of steel. We’ll discuss this in our next part.