Jefferies:  Margin Headwinds May Weigh on NUE/STLD Guides, But Market Inflection Has Come

Key Takeaway

Q4 guidance from NUE/STLD expected this week may be weighed down by modestly worse than hoped metal spread compression, though STLD should fare relatively better given product mix. CMC may emerge as best positioned when it reports fiscal 1Q18 given leading exposure to improving rebar spreads. With spot steel prices-margins having recently inflected higher, the outlook for Q1 is improving and any Q4 drag should be a buying opportunity for mini-mills.

Spreads Favour Rebar, Flats & SBQ: Sequential metal spread expansion in 4Q17E was most notable for rebar (+$27/t), followed by HRC (+$22/t) and SBQ (+$22/t). Conversely, spreads contracted on beams (-$62/t), plate (-$38/t) and MBQ (-$25/t). All US steel product prices exhibited downward trends QoQ, sans rebar (+$12/t), most notably OCTG (-$146/t) and beams (-$77/t) while scrap inputs also ceded ground with shred off -$14/t and busheling down -$31/t. Declining flat rolled steel prices, coupled with some contraction of higher value spreads (CRC), is a modest headwind for integrated producers X/MT, to a lesser degree AKS, partially offset by lower scrap costs. On metal spreads, expansion on HRC and SBQ should most benefit STLD followed by NUE during Q4. Rebar spread expansion is most beneficial for CMC, followed by NUE, though both will see offsets from MBQ compression. Beam spread compression is negative for both NUE and STLD, while plate erosion will hit NUE and SSAB. While the October scrap price retreat was initially a key headwind, stable to improved pricing thereafter should likely aid a recovery in recycling margins (CMC, STLD, and NUE).

Southern Markets Gain as Imports Cede Share in 4Q17: Weekly US steel production 4Q QTD into early December is down only -2% sequentially, surpassing normal seasonal weakness and comparatively better last year when the sequential change was -6%; notably, production grew +8% YoY as imports cede share. Regionally QTD, production has been trending lower in the mid-single-digits across the Northeast (-6%), Great Lakes (-4%) and West (-6%), with Southern bucking the trend and moving +3% higher. In October Southern states (ex-TX) exhibited double-digit gains (+11-15%) MoM, being mindful this was post significant September declines (-8-12%), with hurricanes likely having some influence on the trends. Estimated 4Q17 finished steel imports are down -10% QoQ with flats relinquishing most ground and off -14%, with broad-based declines across most other products (ex-plate).

NUE Likely Guides Below Expectations, but Q1 Outlook Improving (Ex 1-2): We expect NUE’s 4Q17 EPS guidance to fall within $0.47-0.70 ($0.60 most probable), which is below our $0.78 est and cons of $0.76. This may also come in below mgmt’s prior expectations for level to slightly lower results QoQ. Metal spread compression QoQ is likely greater than initially anticipated, specifically for plate and select longs (beams, MBQ), and NUE’s unplanned DRI outage (Nov-Dec) is also a probable headwind. Conversely, positive Southern production QoQ may result in better relative volumes.

STLD Likely to Hit Expectations (Ex-3-4): We estimate STLD’s 4Q17 EPS guidance will fall within $0.49-0.62 ($0.55 most probable), which brackets our $0.61 est and cons of $0.55. We remain mindful of STLD’s prior $25M QoQ expense associated with planned outages, but beyond that, highlight its more favourable product mix vs. NUE for the quarter (though still impacted by greater than initially expected metal spread compression) and less dominant Southern footprint where production has been positive.

CMC’s Fiscal 1Q18 Has an Opportunity to Beat (Ex 5-6): We estimate CMC’s EPS for fiscal 1Q18 ending in November may fall within $0.10-0.26 ($0.17 most probable), which exceeds our $0.13 est, but brackets cons of $0.20. While most likely bracketing cons, we highlight that robust rebar spread expansion within Europe and a recent recovery in the US presents opportunity for a beat, despite seasonal demand headwinds in both regions and likely continued compression in downstream.

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