Steelmaker Steel Dynamics (NASDAQ:STLD) reported second-quarter earnings that beat analyst estimates on the top and bottom lines, helped by capacity utilization rates that exceeded the company's expectations. The company said that construction-related demand held up reasonably well throughout the pandemic, and the reopening of economies has boosted customer demand, as well as scrap supply, which will help downstream operations' results. 

The stronger utilization rates will likely be mirrored by rival Nucor (NYSE:NUE), as both operate with similar "mini-mill" business models. Nucor reports second-quarter earnings Thursday, July 23, and the Steel Dynamics report provides investors with a clue of what to expect. 

freshly produced hot rolled steel coil on mandrel

Image source: Getty Images.

Demand holds up through pandemic

Steel Dynamics said that second-quarter steel shipments of 2.5 million tons were only 12% lower than its record shipments from first quarter 2020. This is strong, considering the various pandemic-related suspensions of customer plant operations during the quarter. That figure is backed up by the 80% capacity utilization it reported, including 79% at its steel mills, and 89% specifically at its flat-rolled mills. 

These figures bode very well for Nucor, as it was already operating at an 89% rate at its steel mills in the first quarter of 2020. The Steel Dynamics operating rates exceeded expectations, as the company said in its first-quarter conference call that it was targeting 80% rates at its flat-rolled mills. Both companies' business models stand out among industry peers, as the rest of the domestic industry was running at an estimated 55% capacity during the second quarter, according to Steel Dynamics. 

Markets with strength

Nucor and Steel Dynamics both share a similar customer base. But levels of exposure to specific markets differ somewhat. Steel Dynamics said that "[c]onstruction related steel demand was steadier than industrial manufacturing throughout the second quarter," and that it is seeing an increase in demand as the automotive sector, including the related supply chain, has restarted production. Nucor should show a benefit from the relative strength in both the construction and automotive sectors. The table below shows the comparison of percentage of sales for those end markets based on 2019 sales. 

Sector Nucor Steel Dynamics
Automotive 15% 12%
Construction 49% 37%*

Table by author. *Includes Light Commercial/Residential, Heavy Non-Residential, and Metal Building

Nucor's larger position in both markets should be reflected in its upcoming earnings results.

Strong cash position

Steel Dynamics' report also highlighted strong cash flow for the recent quarter. Its cash flow from operations actually increased sequentially from Q1. This was helped by more conservative capital management driven by the uncertainties caused by the pandemic crisis. But capital investment continued enough to still allow the plans for its new Texas $1.9 billion flat-rolled to remain on schedule, and to mark the start-up of operations at a new galvanizing line at its Columbus, Ohio mill. 

Nucor should see similar results, as it announced throttled-back capital spending plans in its first-quarter earnings report, lowering 2020 estimates from $2 billion to $1.5 billion. 

Expectations should be raised

Nucor already put out mid-quarter guidance that was above its previous qualitative estimates. It had initially said that it was "likely" that it would report a loss for the second quarter. But in its more recent quantitative guidance update, it said that second-quarter earnings will be in the range of $0.10 to $0.15 per diluted share.

Based on Steel Dynamics' results and discussion, it seems likely that Nucor could exceed those estimates. These companies operate in a cyclical industry. It can be difficult to predict economic swings in normal times, let alone with the ongoing pandemic disruptions. But with details from Steel Dynamics on its most recent quarter, Nucor investors should look for some relatively promising results and commentary when it reports earnings this week. 

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