Steel Dynamics foresees ‘significantly lower’ profitability in Q4

Steel Dynamics Inc. (SDI), Fort Wayne, Indiana, has provided fourth-quarter 2022 earnings guidance that is lower than its sequential quarterly earnings and its year-over-year earnings. For the fourth quarter of this year, the company says it is expecting earnings in the range of $3.34 to $3.38 per diluted share. Excluding the impact from the following items, the company expects fourth-quarter 2022 adjusted earnings to be in the range of $4.10 to $4.14 per diluted share:

• additional performance-based companywide special compensation of $24 million, or 10 cents per diluted share, awarded to all nonexecutive, eligible team members in recognition of the company's exceptional record annual performance; and
• costs of approximately $167 million, or 66 cents per diluted share, associated with startup of the company's Sinton Texas Flat Roll Steel Division.

SDI says it also expects to realize a benefit of approximately $17 million, or 10 cents per diluted share, related to state and federal prior-year return to provision reconciliations.

Comparatively, its sequential third-quarter 2022 earnings were $5.03 per diluted share, and adjusted earnings totaled $5.46 per diluted share, excluding costs of 43 cents per diluted share associated with startup of Sinton. Prior-year fourth quarter earnings were $5.49 per diluted share, and adjusted earnings were $5.78 per diluted share, excluding costs of 18 cents per diluted share associated with Sinton’s construction, additional performance-based companywide special compensation of 8 cents per diluted share and a contribution to the company's charitable foundation of cents 4 per diluted share.

SDI says it expects fourth-quarter 2022 profitability from its steel operations to be significantly lower than sequential third-quarter results based on seasonally lower shipments and metal spread compression, particularly within the flat-roll operations. Metal spread compression was amplified by higher raw material costs as the flat-roll operations work through higher than current market priced pig iron inventories ordered in early 2022 in reaction to the Ukraine and Russia supply chain disruptions, the company notes. SDI adds that it believes flat-roll steel prices have bottomed and expects them to increase into 2023 as underlying steel demand and corresponding order activity remain intact from the automotive, nonresidential construction, industrial and energy sectors with some weakness in the residential sector.

A recent report from Fitch Ratings's London office seems to support that conclusion, with the agency saying the United States, India and Southeast Asia are likely to consume more steel in 2023 than in 2022. Fitch says it expects “incremental growth in steel consumption” in those three markets in the year ahead.

As ferrous and nonferrous scrap prices have stabilized, SDI says fourth-quarter 2022 earnings from its metals recycling operations, which primarily operate under the OmniSource name, are expected to moderately improve compared with sequential third-quarter results based on increased volume more than offsetting lower average price realization.

SDI says it expects fourth-quarter 2022 earnings from its steel fabrication operations to be strong and remain steady with third-quarter results, with expanding metal spreads more than offsetting slightly lower seasonal volumes. The nonresidential construction sector remains steady as evidenced by customer order activity supporting a continuing historically strong order backlog, which the company says it anticipates will continue through 2023.

The company says that based on the resilience of its circular business model and continued confidence in its earnings outlook and cash flow generation, SDI repurchased $338 million, or 2 percent, of its common stock during the fourth quarter through Dec. 15.