Steel scrap prices
In the previous part of this series, we looked at movement in iron ore prices. However, Steel Dynamics (STLD) and Nucor (NUE) use steel scrap to produce steel, as they produce steel through electric arc furnaces (or EAFs). Currently, each of these companies form ~3.7% of the SPDR S&P Metals and Mining ETF (XME). Reliance Steel & Aluminum (RS) forms 4% of XME.
US Steel (X) produces steel through traditional blast furnaces. The company has recently announced an investment of $230 million to construct an EAF at its facility in Fairfield Works, Alabama. The construction will begin in 2Q 2015, and is expected to be completed by 3Q 2016. EAFs will provide US Steel with operational flexibility, as it’s much easier to adjust production levels in an EAF.
Scrap prices stabilize
The previous chart shows the movement in steel scrap prices. Scrap prices fell by almost 25% in February. This was preceded by a 20% decline in steel scrap prices towards the latter part of 2014. However, steel prices have stabilized after the steep decline in February. Steel scrap prices have largely traded sideways in March.
Impact on steel companies
The falling steel scrap prices will have a mixed impact on companies like Steel Dynamics and Nucor. These companies also have scrap processing operations. These operations hold a significant amount of scrap inventories.
In 1Q 2015, these companies might be negatively impacted by the fall in steel scrap prices, as they dispose of higher cost inventories first. However, if scrap prices continue to stay at these levels, both these companies would benefit in the coming quarters.
Investors should also analyze the trend in steel production. We’ll discuss this in more detail in our next part.