Why having a better product mix helps Steel Dynamics

Market Realist

A must read overview of Steel Dynamics (Part 4 of 11)

(Continued from Part 3)

Operations overview of Steel Dynamics

Steel Dynamics consists of three primary operating segments which are Steel operations, metals recycling and ferrous resources operations, and steel fabrication. Its primary facilities are located in Indiana, but it has a customer base across the U.S. Let’s look at the product mix at its steel operations, which is the biggest segment for Steel Dynamics.

Key Products of Steel Dynamics

Steel Dynamics (STLD) supplies various steel products like flat rolled, structural, rail, and merchant bars to its customers. The steel industry is characterized by commodity type undifferentiated products, but major steel companies have been moving away to more value added and specialty steel products. An example is ArcelorMittal (MT) which develops specialty products for the automotive industry. These value added products generally sell at higher prices compared to standard steel products and help steel companies like United States Steel Corporation (X), and Nucor Corporation (NUE).

Why value added steel is a key driver for Steel Dynamics

The chart above shows the product mix for Steel Dynamics. As you can see value added steel accounted for 59% of its steel segment sales in 2013. While 74% of its steel sheets sales came from value added steel.

Value added steel products add to the competitive advantage of a company. As we have discussed steel is a commodity product where all producers supply similar products. Customers can switch between steel companies without much cost and effort. Value added and specialty products increase customer stickiness for steel companies. This helps a company to retain its customer base. Product mix is one of the reasons Steel Dynamics has been able to generate profit margins which are higher than industry average. We will discuss the profit margins for Steel Dynamics in greater detail going ahead.

Please not we are presenting an overview of Steel Dynamics which is a major steel producer in the U.S. Investor can also consider SPDR S&P Metals and Mining ETF (XME) to gain access to the steel industry

Continue to Part 5

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