As we saw in the previous part of this series, both Nucor Corporation (NUE) and Steel Dynamics (STLD) produce steel through EAFs (electric arc furnaces). These companies also primarily use steel scrap to produce steel. Conversely, the United States Steel Corporation (X) and ArcelorMittal SA (MT) use mainly iron ore for steel production.
Falling raw material prices
Both iron ore and steel scrap prices have fallen over the last year. Theoretically, these declines should bring down unit production costs for steel companies. However, both ArcelorMittal and U.S. Steel have integrated operations and operate captive iron ore and coal mines, and so as these companies acquire most of their own iron ore, they haven’t been able to take full advantage of lower seaborne iron prices.
Steel Dynamics and Nucor, on the other hand, have metal recycling operations in addition to steel operations. The sudden and steep fall in steel scrap prices earlier this year negatively impacted their metal recycling operations. The margins of metal recycling operations went down when scrap prices declined—as they typically do—while these companies also struggled with high-cost inventories.
Further declines in unit production costs ahead
Unit production costs for bothNucor and Steel Dynamics could come down even more in the coming quarters. As the chart above shows, steel scrap prices have traded weakly over the last month.
Average scrap costs for Nucor and Steel Dynamics also fell $53 and $57 per ton, respectively, in 2Q15, compared to the previous quarter. And so, when we look at such a recent trend, it’s safe for us to assume that average scrap costs could come down even further in coming quarters. If scrap prices stay low, Nucor’s and Steel Dynamics’ profit margins could increase.
Moreover, looking at the two steel companies’ 2Q15 performance, Nucor and Steel Dynamics seem to be gaining market share at the expense of their integrated peers. Nucor currently makes up 2.73% of the Materials Select Sector SPDR ETF (XLB).
Meanwhile, Nucor’s DRI (direct-reduced iron) plant in Louisiana finally appears to be running well. We’ll discuss more on this particular plant in the next part of the series.