There are industries where a leader starts out, sets a very profitable path, and others follow to great success. It might surprise you to learn that the steel industry is one of them, but one division of Steel Dynamics (STLD 0.25%) is using the playbook of rival Nucor (NUE 0.06%) to great effect.
Lessons learned
Steel Dynamics CEO Mark Millett co-founded the company in 1993. He held various management positions within the steelmaker until being named to the top job in 2012. Prior to co-founding Steel Dynamics, however, Millett spend 12 years at Nucor, the U.S. steel industry's largest company. So, he cut his teeth at Nucor and, unsurprisingly, Steel Dynamics looks a lot like Nucor.
Image source: Getty Images.
That starts with the very basis of the company's steelmaking approach, electric arc minimills. These steel plants are more flexible than older blast furnace technology and can more easily adapt to demand dynamics in the highly cyclical industry. While blast furnaces tend to be highly profitable during industry peaks, their elevated operating costs lead to red ink during industry downturns. Steel Dynamics' use of electric arc minimills generally allows it to be profitable in both good and bad periods, leading to a smoother overall performance through the cycle. That was basically the path Nucor blazed when it pivoted to the steel industry around 50 years ago.
However, this isn't the only similarity between Nucor and Steel Dynamics. For example, both companies are also vertically integrated, owning steel mills and scrap metal operations. And, directly to the point here, they both have steel fabricating operations.
Using what you make
Steel Dynamics' fabricating business basically takes the commodity steel it creates and makes higher-margin products with it. This both supports its own mills and allows it to earn more from the steel it produces. The benefit of this division was on clear display in the fourth quarter of 2022.
Specifically, operating income in the company's relatively small scrap steel operations was down 67% year over year in the fourth quarter of 2022 and the steelmaking business was off by 87%. But the steel fabricating division saw a year-over-year gain of 187%. Year-over-year demand in the fabricating division was up a modest 2%, but prices were up a huge 57%.
While that outperformance is pretty incredible, don't get too excited. The division is doing basically what it is expected to, as it helps to smooth out the company's overall performance. And, it's important to note that the division also benefited from the lower steel prices (an input cost for the fabricating division) that hampered the company's steelmaking operations. All of this shows just how valuable this division is to Steel Dynamics. And it's why investors should be watching steel fabricating closely.
This is going to be important to remember over the next couple of years because Steel Dynamics is in the early stages of diversifying into aluminum via a $2.5 billion flat rolled aluminum plant it plans to have online by 2025. The company's move into aluminum is, indeed, important news and is likely to garner a lot of attention. It actually sets it apart from Nucor, which hasn't looked to diversify in the same way.
But you shouldn't lose sight of the company's core and its very important diversification within the steel industry while it is spending heavily on a new metals business. Indeed, the company's steel fabricating business has increased its shipments in each of the last five years, with material growth over the last two years. Steel fabrication is still an important, and high-margin, growth platform for this steelmaker.
Riding the ups and downs
Steel Dynamics is a fast-growing name in the steel industry and a key part of that is its vertically integrated model. Steel fabricating's higher-margin profile proved just how valuable it is to the story in the fourth quarter of 2022. While Steel Dynamics spends heavily to diversify outside of steel, investors should make sure not to lose sight of the business model that has been so successful for Steel Dynamics. And a very important part of that story is fabrication.
