In the build up to this SMU Summit we spoke to Mark Millett of Steel Dynamics, who will once again be a join us at the SMU Steel Summit.
Steel Dynamics Inc. (SDI) sees a “myriad of opportunities” on the M&A front but disagreements over valuations have prevented some of those deals from moving forward, the company’s top executive said.
“It’s a matter of determining what is a great strategic fit at a reasonable value. … People’s aspirations of value are a little steep right now,” SDI co-founder, chairman and CEO Mark Millett told Steel Market Update.
He made the comments in an exclusive interview with SMU along the side lines of the annual joint meeting of the American Iron and Steel Institute (AISI) and the Steel Manufacturers Association (SMA) last week in Washington, D.C.
Deal or No Deal
Disagreements over what assets are worth come on the heels of a two-year period that saw hot-rolled coil prices fall as low as $440 per ton ($22 per cwt) in August 2020 and then rise to an all-time high of $1,955 per ton in September 2021, according to SMU’s interactive pricing tool. HRC prices stood at $1,290 per ton when this article was filed, 34% lower than 2021’s peak but still among the highest steel prices seen in the last 20 years.
Company profits followed a similar pattern, busting following the initial outbreak of the Covid pandemic and then booming to record highs over the last 18 months. That volatility has made it difficult for buyers and sellers to come to a middle ground on what assets are worth.
What is SDI looking for? Millett said he couldn’t talk about specific opportunities. But the broad strokes are familiar – downstream, value-added products. As for price, the company looks at what “normalized” earnings would be and what premium might be justified by growth potential and synergies such as “first freight.”
Take a coating line, for example. Building a paint line next to a mill eliminates the initial freight that customers would otherwise pay shipping to an outside coater. There are also yield improvements as well as capital improvements because less material is required in the supply chain. “You can take a lot of dollars out and share those savings with the customer,” Millett said.
SDI has followed that strategy at its Heartland steel mill in Terre Haute, Ind., where it is installing a paint line and a galvanizing line, as well as at its new, $1.9 billion electric-arc furnace (EAF) sheet mill in Sinton, Texas.
Lower freight costs are one reason the Sinton campus is home to seven customers representing 1.8 million tons per year of steel processing and steel consumption. “We will deliver that steel to them free of charge,” Millett said. “So, again, we’re eliminating that first freight.”
That’s possible because it makes no difference to SDI from a cost perspective whether that steel is taken off the line and put in storage or delivered to a third-party customer on the Sinton campus. The campus also allows SDI to collect scrap from those customers, effectively creating a closed-loop system that is not only more efficient but also helpful from a decarbonization standpoint, he said.
SDI started up the new coating lines at Sinton last year and made the first coils from its hot strip mill and caster earlier this year. The company continues to ramp up the hot end at Sinton and to test the limits of the equipment there.
Case in point: Sinton has made 84-inch-wide hot-rolled coil in diameters as thin as 0.053 inches. That’s notable because few mills are able to do that. “There are 84-inch mills in America. But that’s only for the roll face. You can’t make an 84-inch coil on an 84-inch mill, as crazy as that sounds. We’re able to actually produce a true 84-inch coil,” Millett said.
That extra wide width matters because it will allow SDI to supply substrate for 26-inch-diameter line pipe, which is more valued by oil and gas transmission companies than traditional 24-inch-wide material. The cost difference between laying a 24-inch pipe and a 26-inch pipe is miniscule. “But if you just look at a cross-sectional area, the 24 vs the 26, the amount of flow that you can get that through that extra 2 inches of diameter is massive,” he said.
SMU asked Millett whether Sinton was seeing competition from imports and, in particular, from Ternium, which installed a new hot-strip mill in Pesquería, outside of Monterrey, Mexico, last year. Pesquería is approximately 220 miles from Sinton as the crow flies. “No matter who has capacity, there is competition. We’re competition for them,” Millett said.
The focus at Sinton in the meantime is not selling steel. “We can sell anything we make right now. The focus … is getting it commissioned and ramped up,” he said. “We want it to run at 100% of capacity, and we ain’t there yet.”
Differentiators like being able to make 84-inch-wide coils will help SDI get closer to that goal of running flat out. “If you look at the utilization rates, at any point in the cycle we tend to be substantially higher than the industry,” Millett said. “When you have very, very capital intense assets, volume is absolutely critical to dilute the fixed costs.”
SDI announced the Sinton mill in July 2019 and had initially hoped that it would begin operations by mid-2021. But the startup of the hot end was delayed for various reasons, including severe flooding in the region last year.
“Any ramp up or start up, it’s two steps forward, one step back. Three steps forward, two steps back. It’s a little erratic. But it’s going in the right direction,” Millett said. “The team is doing a phenomenal job of commissioning all the attributes of the caster and the rolling mill.”
And all told the project has been a success. “It’s incredibly exciting that our vision of a campus of consumers happening so quickly,” he said. “They had people ready to process steel before we were producing steel. … And I think that just speaks to the opportunity, why it’s unique, why Sinton is unique versus the current capacity elsewhere.”