We mentioned yesterday that we felt there was a good chance Steel Dynamics (STLD) would guide lower this week and that's what happened today (see 17:01 comment last night for details). Recall that yesterday fellow steel producer Nucor (NUE) guided lower. Nucor is seen as a bellwether for the steel industry so what it's seeing is what others are seeing.
Steel Dynamics is parroting what Nucor said to a large degree. Basically, overall end user steel demand remains intact. That's not the problem, although NUE said it's seeing some softening in automotive and STLD says non-residential construction has seen some delays due to wet weather. The issue is that steel buyers (primarily steel service centers which act as middlemen) are serving customers through inventory destocking by servicing customers from steel already on hand rather than buying new steel.
There is also some general hesitancy from these buyers about buying more steel. This along with the inventory destocking are clear signals that service centers believe steel prices will fall further in the coming months.
Something that a lot of investors may not be aware of but should be: A key metric these service centers watch is the price of scrap, which is a key raw material used to make new steel. Mini-mills like NUE and STLD melt scrap in large EAFs to create new steel. If buyers see scrap prices falling, they are going to expect finished steel prices will fall as well.
As we mentioned last week in our SCHN story stock, if investors want a good sense of the scrap market they should monitor Schnitzer Steel's (SCHN) earnings/comments. SCHN has "steel" in its name and it does produce some steel, but it mostly buys/sells scrap steel and iron mostly from auto salvage yards, industrial manufacturers, and metals brokers. It then processes the scrap and sells it to other steelmakers so they can make steel, or it uses it in its own steelmaking operations.
In sum, the stock is trading higher despite the downside guidance. Steel stocks have been weak in recent months, it seems investors have been expecting some weak Q2 results. Also, the overall market is strong today. The good news is that service centers will be working off some excess inventory. They will need to buy a higher amount of new steel at some point. However, we think it's likely steel prices will fall further in the coming months, so we'd be cautious on the group in the near term.