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Steel Dynamics Sees Slow Start to Fourth Quarter

Steel Dynamics reports a lackluster third quarter, and gives a lackluster outlook, as the steel industry at large prepares for a slow start to the fourth period.
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FORT WAYNE, Ind. (TheStreet) -- Muted, downcast, soft, restrained: all were adjectives appropriate to Steel Dynamics' (STLD) - Get Steel Dynamics, Inc. Report outlook for the rest of the year, as presented in its third-quarter results, and none of it will likely excite investors looking for a rebound in the steel business.

After Monday's close, the electric-arc-furnace steelmaker reported earnings and revenue that matched analysts'

already scaled-back expectations

. (Steel Dynamics, along with rivals


(NUE) - Get Nucor Corporation Report


AK Steel

(AKS) - Get AK Steel Holding Corporation Report

, issued a profit warning in September.)

>>It's Halloween for Steelmakers

Shares of the Indiana company were falling 2.5% in morning trading Monday to $14.19. As with all stocks in the industry, Steel Dynamics' shares have been stuck in a range since summer, trading 30% below the 52-week high, set way back in January.

"Looking to the fourth quarter, we believe that margin improvement is possible in both our steelmaking and metals recycling operations, which could result in a slightly stronger fourth quarter," Steel Dynamics chief Keith Busse said in a prepared statement. The words "faint praise" rose to mind.

Back in September, Steel Dynamics let it be known that its profit margins would be squeezed in the third quarter by a tax ding and by

further startup costs at the company's Mesabi Nugget project

, a high-tech plant coming on line in Minnesota that the company hopes will produce a low-cost replacement for pig iron, a key steel ingredient.

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The plant spit out 24,600 metric tons of pig-iron nuggets during the third quarter, but the startup has been hampered by "equipment availability and refractory issues," the company said in its press release.

For the third period, Steel Dynamics posted earnings of $19 million, or 9 cents a share, plunging 72% from the $69 million, or 30 cents a share, that the company earned a year earlier. Revenue, however, rose 35% to $1.6 billion from $1.2 billion in the year-ago period.

The tax true-up cost the company 2 cents per share, while the costs from the Mesabi startup came to about $12 million, or 3 cents per share.

Perhaps most ominously, Steel Dynamics' backlogs for flat-rolled steel have fallen off "significantly," noted metals analyst Mark Parr in a report Tuesday morning. Parr, of

KeyBanc Capital Markets

in Cleveland, said that this was not unexpected.

"Recent developments in the steel and scrap markets have already hinted that the 4Q is off to a slow start," the analyst wrote, "which has likely prepared investors for lackluster guidance commentary relative to consensus estimates." Look no further than a

survey last week of steel executives

, which showed rising pessimism in the industry when it comes to pricing.

If there was any good news at all in Steel Dynamics' third-quarter release, it came in the company's long-products segment, where management sees "slight improvement" in orders.

Long products are mostly used in the construction industry, but Steel Dynamics' very modestly brighter outlook likely doesn't mean that the moribund construction business is showing life. Instead, noted Mark Parr in a report Tuesday morning, Steel Dynamics has probably seen a boost in its sales to railroads, since the company's steel recently received approval for use in all domestic train lines.

Other steel stocks declined fairly sharply Tuesday morning, with

U.S. Steel

(X) - Get United States Steel Corporation Report

and AK Steel down by more than 2%. Nucor was off about 1%.

U.S. Steel and AK both are scheduled to report third-quarter earnings before the bell next Tuesday, Oct. 26. Nucor is slated to go on Thursday morning.

-- Written by Scott Eden in New York


>>Steel Dynamics' Mesabi Project

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