Steel Dynamics’ 4Q15 earnings
Previously, we saw that Steel Dynamics (STLD) expects fewer 4Q15 shipments. US steel production fell steeply in December 2015, as most steel companies cut their spot sales. Lower spot sales could have an impact on Steel Dynamics’ earnings.
Lower capacity use
As Steel Dynamics has cut its production, this should lead to lower capacity utilization use. Capacity utilization rate affects a company’s operating leverage. Steel Dynamics’ capacity utilization use fell in 3Q15, as can be seen in the graph above. Steel Dynamics has historically enjoyed higher capacity utilization ratio as compared to other steel companies, including ArcelorMittal (MT), AK Steel (AKS), and Nucor (NUE).
A lower capacity utilization rate in 4Q15 could have a negative impact on Steel Dynamics’ earnings. Cutting spot sales should support the average steel selling prices as spot prices in 4Q15 fell to historical lows.
However, steel prices have been falling across the board. Even cutting spot sales might not help Steel Dynamics’ 4Q15 average steel selling prices by a major extent. The dual impact of lower capacity use and falling steel prices would weigh heavily on Steel Dynamics’ 4Q15 earnings.
Will Steel Dynamics beat estimates?
Most negatives seem to be priced into Steel Dynamics’ (STLD) 4Q15 earnings estimates. The company could provide a favorable 1Q16 outlook as spot steel prices have recovered somewhat over the last couple of weeks. Overall, 2016 looks challenging for Steel Dynamics as well as the entire steel space.
In the next part, we’ll discuss what analysts expect from AK Steel’s 4Q15 earnings. You can also consider the Materials Select Sector SPDR ETF (XLB) to get a diversified exposure to the materials sector. Metal producers currently comprise ~9% of XLB’s portfolio.