Steel Dynamics Seeks Security

Even though Steel Dynamics (Nasdaq: STLD  ) had telegraphed its expected quarterly results in late August, investors were clearly tickled to see earnings come in at the high end of guidance. Even more pleasing was SDI's outlook, which was likely the most significant contributor to the stock's greater than 7% pop.

The company foresees svelte scrap prices, insignificant import incursions, and persistent prices for its products. Such tranquility after a previously turbulent sea saw domestic competitor Nucor (NYSE: NUE  ) rising with the tidings. Whatever the reason, Gerdau AmeriSteel (NYSE: GNA  ) was left adrift amid the raft of good news.

I think the most important thing to note about SDI today is the company's proactive moves in the face of industry headwinds. Let's look at two major activities during the quarter, both of which are all about security of supply.

You may recall that soaring scrap steel costs slammed Nucor's earnings last quarter. Steel Dynamics got serious about securing scrap by laying out more than $1.3 billion for OmniSource, a private processor of ferrous and non-ferrous resources. Given scrap's subsequent slide, the move may seem hasty, but over the long haul it looks like a very prudent purchase. This move incidentally came right around the time that Sims Group mingled with Metal Management (NYSE: MM  ) .

Although talks with Cleveland-Cliffs (NYSE: CLF  ) broke down late last year, Steely Dyn continued to look for a partner in an iron ore project in Minnesota's famed Mesabi Range. Mesabi Nugget, as the project is known, is now moving forward with a Japanese partner.

I've touched on the outlook for iron ore in my recent take on Posco's (NYSE: PKX  ) position. Even though mining isn't set to begin until 2009, this move to tighten Steel Dynamics' supply integration looks like an equally smart safeguard.


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