Steel Dynamics (STLD 0.53%) had a relatively good third quarter compared to its domestic steel peers. The mill's third-quarter earnings were higher year over year, while its closest competitors posted year-over-year declines. That said, one of Steel Dynamic's divisions was a particularly weak spot. Here's the rundown of the quarter and why the weakest link is still super important to the company's long-term future.

Holding up really well

Nucor (NUE -0.21%) is the most comparable company to Steel Dynamics because they both focus on electric arc mini-mills. Mini-mills are generally more flexible and cost-efficient through the cycle than older blast furnace technology. Nucor's third-quarter earnings declined 10% year over year. Steel Dynamics' earnings rose nearly 4%. While 4% may not sound impressive, comparatively it's pretty darn good, noting that blast furnace-focused United States Steel and Cliffs Natural Resources both did much worse.

A person pouring molten steel in a steel mill.

Image source: Getty Images.

A big piece of the strength at Steel Dynamics came from its metal fabrication business, which uses steel the company produces to create higher-margin products. This group posted record results, more than offsetting weakness in its commodity steel operations. There is an important relationship here, noting that the commodity steel business was hampered by lower steel prices, thus reducing the income it generated. That, however, means that the steel fabricating division benefited from lower costs, thus improving profitability. Expanding the steel fabricating business has been a long-term focus for management because of its generous margins.

That said, the real laggard in the quarter was the company's scrap operations. To put some numbers on this, the steelmaking business' operating income fell about 50%, while the steel fabricating business saw operating income increase from $89.4 million in the third quarter of 2021 to $676.7 million this year. And the scrap business' operating income declined to $9.9 million in the third quarter of 2022 from $46.9 million in the same stanza of the previous year, a nearly 80% decline.

Everything works together

Here's the thing: Steel Dynamics has built an integrated business model. That means that it has its fingers in every step of the steelmaking industry. The interplay between the bulk steel business and the fabricating operation is just one example. There's a similar relationship between the steel and the scrap operations. 

One of the reasons why electric arc mini-mills are so flexible is that they make extensive use of scrap steel. So, even though the scrap business had a bad quarter, it still plays an important role in the company. Notably, it ensures that Steel Dynamics has access to the key inputs it needs to keep its mills running. Lower scrap prices and lower demand were the big headwinds, with scrap prices declining 30% in the third quarter alone. But lower prices here help to keep costs in check in the steel operations, which, in turn, helps to keep Steel Dynamics' highest-margin business, fabricating, operating at the lowest costs possible.

This isn't a unique model in the steel industry, with peer Nucor basically operating in the same manner. That said, being vertically integrated is a key factor that has helped Steel Dynamics string together over a decade of annual dividend increases, making it a Dividend Achiever. That's not as impressive as Nucor's nearly five-decade-long streak, putting it on the cusp of becoming a Dividend King, but Steel Dynamics is a much younger company that's growing quickly. Notably, Steel Dynamics' dividend has grown at an annualized clip of around 12% over the past decade compared to the roughly 3% growth at Nucor.

If you are looking for growth

Steel Dynamics had a standout quarter, even though it faced material weakness in its scrap operations. This, however, helps to show the important interplay between the many parts that make up the company. Jettisoning the scrap business would likely make the whole weaker. All in, if you are looking at the steel sector, Steel Dynamics is probably the most growth-oriented name in this highly cyclical industry, and its integrated model is a key piece of the success story.