Nerds of Steel

It used to be the case that minimills (scrap buyers) and integrated mills (iron ore buyers) had very different cost structures. Integrated steel producers’ costs were relatively fixed because iron ore and coking coal were sold on an annual contract basis and did not change much year to year. Scrap prices on the other hand, moved up and down with steel demand end helped minimills maintain their margins across the cycle. That was then and this is now.

The raw materials used to make steel are in short supply globally, causing much greater volatility in all raw material prices and different purchasing behavior by steel producers. From the few time series which are available to compare the two, scrap and pig iron prices track each other. See the chart below.

So it’s not really fair to fault EAF producers for reacting to iron ore price hikes or integrated producers for reacting to scrap price shifts. Iron is iron and, if priced efficiently, the two commodities will price an iron unit about the same. If you don’t believe iron is iron, check out the recent announcement that Nucor, the largest minimill in the country, plans to build a blast furnace to make the stuff.

And it’s the surcharge, another undoubted frustration for steel buyers (and producers), that has driven steel prices most. There are a number of different flavors of surcharge depending on the product you’re buying and who you’re buying from. But in all cases the surcharge mechanism is relatively transparent, at least enough to show how the supply/demand tensions of the raw material compare with the supply/demand tensions of the finished product.

To make that comparison, just take the calculated surcharge of hot roll sheet or plate from any of the US producers and subtract it from the Purchasing Magazine monthly spot price for those same commodities. You will see that after an initial run up in the base price (i.e. the price excluding the surcharge) in 2003/4, most of the price changes since then have come from the surcharge mechanism alone. It’s only in recent months that the supply/demand dynamics of the finished steel product markets have also started to put upward pressure on prices.

Nucor’s fourth quarter and 2007 full year operating income/ton and EBITDA/ton have been added to our quarterly results spreadsheet.

The spreadsheet is hosted on the Editgrid site, which allows people to share spreadsheets on the web.

When you’re looking at my post on quarterly financial results, you can open the online version of the quarterly results spreadsheet by clicking on the words “Editgrid spreadsheet” directly above the spreadsheet itself. This will take you to the nerds of steel page on Editgrid. You can then download a copy of the spreadsheet to your PC and save it on your hard drive. You can also look at the other spreadsheets we make publicly available.

EBITDA ($/Ton) for the first 9 months of 2007. This was created using fusion charts.  I may update this in the future but I think it probably makes more sense to create a shared spreadsheet to track quarterly results.

Looks like Nucor’s EBITDA per ton in 2007 will be similar to the last few years and much higher than it was in any year prior to 2004.  This is the new steel industry!

If you want to go to look for some of Nucor’s information files yourself you can go to this page. Some of the more useful files are available right here:

The Q4 2006 Investor Presentation describing the company at that point: Q4_2006 Investor Presentation.ppt
Tons & sales data 1998 through Q3 2007: Sales, Earnings, Tons data
Tons & sales data 1966-2006: Sales, Earnings, Tons data
Historical financials 1966-2006: Historical Data 1966-2006

Downloading any one will allow you to download the others.