New tariffs "absolutely perfect" for Steel Dynamics

By Paul A. Harris

St. Louis, Mo., March 7 - What do the tariffs that US President George W. Bush imposed for three years on steel produced in the EU, Japan and South Korea mean to the Steel Dynamics, Inc.'s upcoming offering of $200 million notes, currently on the road?

"For Steel Dynamics it's real simple," asserted analyst Steven Oman, senior credit officer at Moody's Investors Services.

"At this point in time the only products the company sells are flat-rolled products," Oman continued, specifying that the new tariffs fit the contour of such a company with near perfection.

"Those duties on flat-rolled product come in over the next three years," Oman added. "They go from 30% in the first year, to 24% in the second, and to 18% in the third year. That will apply across the board for the kinds of products Steel Dynamics makes."

Steel Dynamics, a Fort Wayne, Ind. mini-mill operator, is looking to sell $200 million of seven-year senior notes (B2/B) via Morgan Stanley with pricing expected on March 14.

In a conversation Thursday with Prospect News, an informed source who has been observing the deal commented: "Basically every good thing that could have happened has happened for Steel Dynamics.

"Their main products are hot-rolled steel and hot-rolled derivatives. And those were the products that the government protected most strongly, with quotas up to 30%.

"On top of that, prices are up 20%-30% this year alone in the steel sector because of facility shutdowns and such. Twenty-something steel companies went bankrupt in the past couple of years, and there's a bunch of capacity coming offline.

"So it's just an absolutely perfect fundamental backdrop for a steel company right now."

This source said that the tariff is likely already priced into Steel Dynamics' credit rating.

"The company is like 5.5 times levered right now, which is pretty high for a steel company," the source said. "But the reason why is that they just built a brand new mill. And they haven't started receiving any cash flow from that mill.

"As soon as that cash flow starts the leverage is going to come down. So no matter what the government did I don't think it would have had any impact on their ratings."

Moody's Oman concurred that the company's rating won't likely be impacted, owing to the fact that the industry and the rating agency were anticipating the tariffs.

Both sources said that the high-yield market had effectively been closed to the ailing steel industry recently.

Oman pointed to US Steel's $150 million add-on which priced last September as the last steel credit to price in the high yield.

The tariffs, Oman added, inject an interesting new set of circumstance into the steel sector, which had been in a consolidation mode.

"Now the bigger question will be what might this do to some of the people who were almost knocked out of business?" Oman said. "Will they come back, now?

"There's LTV. The biggest part of their operations are in Cleveland, and secondarily in Chicago. Last week it was announced that Wilbur Ross is supposedly a leading candidate for winning the bid for LTV. And he plans to bring it back up - not at the old high levels but about four million tons a year.

"That's very close to Steel Dynamics backyard."

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