Steel Dynamics (STLD), one of the largest steel producers in the US, is trading slightly lower today after the company reported Q1 results before the open. EPS fell 5% yr/yr to $0.91, which was on the higher end of STLD's March 18 guidance of $0.88-0.92. Revenue rose 8.2% yr/yr to $2.82 bln, which was basically in-line with market expectations.
The company concedes that Q1 was a "somewhat challenging flat roll steel pricing environment." Also, the company noted that the "downward trend in flat roll steel prices," which had begun in 2H18, "continued through mid-first quarter 2019, reaching an inflection point in February 2019." To deal with this downward pricing trend, STLD increased shipments, which offset some margin compression.
The good news is that the "continued stabilization and improvement in flat roll steel prices are having a positive impact" on recent business, "resulting in increased flat roll order activity and solid order backlogs." STLD is consequently "seeing strength in the automotive, energy and industrial sectors, and as evidenced by strong steel fabrication backlogs, strength in non-residential construction." Looking ahead, STLD believes that North American steel consumption will experience steady growth in 2019.
What does all of this mean? First of all, it's important to understand that there are many types of steel, and these distinct types have different market dynamics. For example, structural steel and rebar are used more for construction while flat-rolled is used for automotive, appliances, HVAC systems, etc. However, flat-rolled is the most widely consumed variety, and thus it is the most closely watched for the sake of interpreting the health of the steel market.
Overall, it's sounding like the flat-rolled market is finally starting to stabilize and show signs of improvement. There have been reports of price increases from earlier in the year not sticking. However, STLD sounds more optimistic now, heading into the key spring/summer season.
So why is the stock trading lower despite the fairly positive comments from STLD? Our sense is that perhaps investors were hoping for a more full-throated outlook for flat-rolled pricing. With interest rates being held in check by the Fed, we think investors wanted to hear that steel customers have gotten more bullish in terms of steeping up steel purchases. We will get a fuller sense of how the market is doing when Nucor (NUE) reports its first quarter results tomorrow.