Steel Dynamics Inc.: Securing Supplies

Manufacturers across all industry sectors are searching for ways to combat escalating raw materials costs. Lately for Steel Dynamics Inc., that has meant acquiring their suppliers. The Fort Wayne, Ind., company completed purchases in the latter half of 2007 of two raw materials providers that the company hopes will provide cost pressure relief along with expansion opportunities.

The first came in October when Steel Dynamics, a 2007 IW 50 Best Manufacturer, finalized its purchase of scrap processing company OmniSource Corp., which prior to the deal had provided the company with approximately 10% of its scrap generation and 14% of scrap purchases. While the $1.1 billion acquisition may result in slightly more scrap being obtained from its OmniSource operation, the company also considers the addition to be an avenue for growth.

"This acquisition creates a significant new business platform for SDI and represents a quantum leap as it would regard strategic expansion into the steel scrap and recycled metals sector, which is an important element of our overall growth plan," said Keith Busse, Steel Dynamics' chairman and CEO, when first announcing the deal on Oct. 1. "Aside from the fact that scrap is a critical resource for our steel-making operations, and Omni has historically been one of our largest suppliers, this acquisition opens the door for further profitable growth in a sector of increasing relevance on a global scale."

Just weeks before the OmniSource agreement, Steel Dynamics said it was purchasing an iron-ore mine from Cleveland Cliffs at the Masabi Iron Range in Hoyt Lakes, Minn. The purchase, which was completed in December, will allow the company to conduct surface mining of iron deposits and construct and operate a facility for the concentrating of iron ore at the 6,000-acre taconite mine. The total project cost is estimated at $165 million, and operations are expected to begin at the site by late 2009 or early 2010. The company's goal is to provide its steel mills with a domestic source of iron that is of equal or higher quality than purchased pig iron at a "favorable cost."

One downside to the company's buying activity was lower fourth-quarter profit from merger costs. Net earnings fell 7% to $97.9 million, or $1 per share, from $105.1 million, or $1.03, per share. Net income for the quarter would have been about 7 cents higher without the OmniSource merger. For the year, profit fell slightly to $395 million from $397 million in 2006.

The company expects lower steel inventories and import levels will keep demand strong in 2008. Some factors that could impact Steel Dynamics' 2008 performance include:

• Capacity expansions that should increase flat-rolled steel production volume
• The start-up of its Jeffersonville, Ind., paint line, which will allow it to enter new markets for painted thin-gauge galvanized steel
• A new rolling mill in Columbia City, Ind., which will double the site's annual structural steel production capacity to 2.2 million tons
• A capacity expansion in Pittsboro, Ind., that will increase engineered bar production by approximately 250,000 tons
• An opportunity to expand the market presence of subsidiary New Millennium Building Systems with three facilities added as part of the Roanoke Electric Steel acquisition in 2006
• The addition of OmniSource, which is expected to contribute to the company's earnings and provide growth in 2008 through expansion in the domestic and global ferrous and nonferrous scrap markets

"Our outlook for 2008 is very positive," Busse said. "Conditions in the U.S. steel marketplace are favorable, absent major events that could severely reduce steel demand."

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