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SDI mill to be an 'import killer,' Millett says [corrected]

Jul 23, 2019 | 04:26 PM | New York | Muyao Shen

Tags  Steel Dynamics, Mark Millett, steel, prices, flat-rolled steel, galvanized, Mexico

The goal of Steel Dynamics Inc’s (SDI) new $1.9-billion electric-arc furnace (EAF) flat-rolled steel mill, to be located in Sinton, Texas, is not to add more pressure to flat-rolled steel capacity in the United States, the company’s top executive said.

Rather, it aims to challenge foreign products in both the Gulf and West Coast regions in addition to domestic integrated steel models, SDI president and chief executive officer Mark Millett said during the company’s second-quarter earnings call on Tuesday July 23.

“[The new mill] is only bringing a combination of technologies and dimensional capabilities that [are]… largely unavailable in the US today... I would tell you that the mill isn’t just adding domestic capacity, it’s more of an import killer,” he said.

Sinton, located approximately 30 miles northwest of the port of Corpus Christi, Texas, was selected as the site for the new EAF mill, the company said on Monday. Construction is expected to begin in early 2020 and will include an estimated 550,000-ton galvanizing line and a 250,000-ton paint line, Millett said.

The company expects to gain “significant competitive advantages” due to the location of the mill, including its geographic proximity to the company’s targeted customer markets.

While domestic flat-rolled mills have been criticized for their expansion plans and blamed for the softening in market prices, Millett repeatedly emphasized during the earnings call that the primary intention of the company's investment in the Sinton mill is not to add capacity.

“Sinton lies just 190 miles from the large steel-consuming city of Houston and 300 miles from the growing Monterrey, Mexico, region,” he said.

The company has previously said that the mill will target northern and central Mexico, where SDI sees the most growth potential thanks to that country's growing automotive industry and the limited capabilities of its mills.

Furthermore, Sinton would give the new mill easy access to rail, road and both shallow- and deep-water ports, leading to a “significant delivery time and working capital advantage,” Millett added.

HRC, one of the sheet products to be made by the mill, is the substrate necessary to produce energy tubulars such as welded line pipe and oil country tubular goods.

Customers in the region are currently supplied either by imports - most of which arrive via the port of Houston - or from domestic mills that charge a significant freight premium. A local mill will allow customers to avoid the two- to three-month lead times associated with imports as well as the three- to four-week transit times necessary to barge material in from existing US mills, Millett has said previously.

Optimistic outlook on steel prices despite challenging first half
The steel pricing environment during the first half of 2019 has been challenging, Millett acknowledged.

“A weak scrap environment, coupled with continued inventories destocking, led to steel buying hesitancy throughout the quarter,” Millett said. “[Due to this,] hot-rolled indices have fallen approximately $200 per ton since December 2018.”

At the same time, though, Millett said that HRC prices might have dropped too fast and too much, based on his discussions with customers over the past few months. 

“People have been a little surprised [by the price declines],” he said. "Because underlying demand, we believe - and as our customers believe - is generally intact and... very, very constructive.”

Millett noted that HRC prices have increased by at least $40 per ton since June due to domestic mills’ recent efforts to raise flat-rolled steel product prices. 

Fastmarkets’ daily steel hot-rolled coil index, fob mill US, was calculated at $28.31 per hundredweight ($566.20 per short ton) on July 22, up by 10.8% from the more than two-and-a-half-year low of $25.54 per cwt on June 21.

Also on Monday, ArcelorMittal led a third wave of mill price increases, setting a base price of $630 per ton for spot hot-rolled coil orders effective immediately. The move was followed by Nucor and U.S. Steel Corp.

Also supporting an upward trend on prices for the coming months, the Nasdaq Futures Exchange’s HRC contract - which is underpinned by Fastmarkets' pricing - settled on Monday at $615 per ton for September, up by $7 from the previous close.

In addition to solid underlying demand and the stabilization and improvement in flat-rolled pricing, steady scrap prices would help the company’s performance in the third quarter, Millett said, noting that it would result in increased order activities and improved backlogs across the flat-rolled platform.

Furthermore, Millett expects the US trade position to help the company attract consumers in Mexico, specifically pointing to the US-Mexico-Canada Agreement.

“We believe both US and Mexican steel consumption will continue to improve in the coming years, with Mexican growth outpacing that in the US based on [a] meaningful increase in their manufacturing base,” he added.

But KeyBanc Capital Markets analyst Philip Gibbs expects SDI’s third-quarter results to decline “strongly” quarter on quarter due to “lag[ging] pricing effects in sheet [against rebounding scrap prices] and declining/compressing spreads in special bar quality (SBQ steel) products,” he said in a research note dated July 22.

SDI also admitted that prices for structural, merchant bar and reinforcing bar will remain "pressured from domestic and import market competition," it said in its quarterly earnings report on July 22.

Fastmarkets' price assessment for steel bar hot-rolled SBQ 1-inch round 1000 series (carbon), fob mill US, at $37 per cwt on July 12, down by 5.1% from $39 per cwt previously and off by 17.8% from $45 per cwt at this time last year.

Editor's note: The first paragraph in this article was updated on Tuesday July 23 to correct the cost of SDI's new EAF mill. 


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