Erdemir, the Turkish steel giant, appears to be riding a wave of success. After weathering the storm of the 2023 earthquake, their latest earnings call paints a picture of resilience and renewed strength. Production is back to historical averages, capacity utilization is robust, and they're projecting 8.2 million tons in sales for 2024. But beneath the surface of these optimistic pronouncements lies a hidden current that could threaten to capsize their carefully constructed narrative.

The most recent earnings call reveals a peculiar trend buried within Erdemir's cost of sales breakdown. While everyone focuses on the decreased share of coal in their cost structure, a far more significant shift is occurring with "imported semi-finished products." This obscure line item, representing primarily imported steel slabs, has dramatically decreased in Q1 2024 compared to the same period in 2023. At first glance, this seems logical. Isdemir, Erdemir's subsidiary heavily affected by the earthquake, is back online, meaning Erdemir is once again producing its own slabs rather than relying on imports.

However, the magnitude of this decrease raises red flags. In Q1 2023, Isdemir was effectively offline for three months. Yet, the share of imported semi-finished products in Erdemir's cost structure has dropped far more than a simple three-month recovery would suggest. This implies that Erdemir is using significantly fewer of its own slabs, even though its production capacity is back to normal.

Why the Shift from Internal Slab Production?

Why would a steel producer with robust capacity choose to reduce its reliance on internally produced slabs? The answer, I believe, lies in a phenomenon I call the "hidden steel tsunami." While analysts fret over the obvious increase in finished steel imports from China, a stealthier wave of semi-finished steel imports is washing ashore, potentially drowning out Erdemir's profitability in the long run.

Let's delve into the numbers. In 2023, Turkish flat steel imports surged despite a sharp decline in exports. This points to a significant oversupply of flat steel products within Turkey, the very market Erdemir dominates. While Erdemir's earnings call emphasizes anti-dumping investigations against finished steel products, there's no mention of similar protections against imported slabs. This creates a perverse incentive for Erdemir. It's cheaper for them to buy readily available imported slabs at potentially dumped prices, rather than utilize their own production capacity, incurring higher costs.

The Danger of Cheap Imports

This strategy, while appearing beneficial in the short term, could have devastating long-term consequences. Erdemir's reliance on internally produced slabs is a key factor in their competitive advantage. It allows them to control quality, optimize production processes, and react quickly to market fluctuations. By surrendering this advantage to chase short-term cost savings, Erdemir risks eroding their market position and exposing themselves to the whims of global slab suppliers, particularly China.

The 'Hidden Steel Tsunami' and Erdemir's Future

The "hidden steel tsunami" is more than just a clever metaphor; it's a potential harbinger of a perfect storm brewing for Erdemir. Increased competition from cheap Chinese imports is already squeezing finished steel prices, and now, the influx of cheap slabs threatens to undermine Erdemir's cost structure and operational efficiency.

This hidden dynamic might explain why Erdemir, despite projecting a sales increase, is cautiously forecasting an EBITDA per ton of around $100 for 2024, significantly lower than the $124 achieved in Q1. The question is, are they underestimating the potential impact of this "hidden steel tsunami?" Or are they quietly acknowledging a reality they're not yet ready to publicly confront?

Erdemir's future hinges on navigating this treacherous current. Will they maintain their commitment to internal production, even if it means sacrificing short-term profitability? Or will they be swept away by the allure of cheap imports, potentially sacrificing their long-term success on the altar of immediate cost savings? The answer to this question could determine whether Erdemir's current success story morphs into a cautionary tale of a giant brought low by a hidden tsunami.

Erdemir's Financial Performance

Here's a breakdown of Erdemir's key financial figures from the Q1 2024 earnings call:

Reference: https://seekingalpha.com/symbol/ERELY

Cost of Sales Breakdown

The following chart illustrates the shift in Erdemir's cost of sales structure, highlighting the dramatic decrease in "Imported Semi-Finished Products" in Q1 2024 compared to Q1 2023.

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