Nucor SteelA Business Analysis

Nucor Mission Statement

• "Nucor Corporation is made up of approximately 20,000 teammates whose goal is to "Take Care of Our Customers." We are accomplishing this by being the safest, highest quality, lowest cost, most productive and most profitable steel and steel products company in the world. We are committed to doing this while being cultural and environmental stewards in our communities where we live and work. We are succeeding by working together. "

The Steel Process

Porter’s Five Forces

Competitive Rivalry Basis

• Attractive prices• Producing quality steel products

• Consistency

• Selection and breadth of offerings• Meeting customer requirements

and delivery schedules• Multiple state-of-the-art plants

Rivalry Intensity - High

• Weak domestic demand• Excess global capacity• Maturing industry• Low switching costs• High exit barriers• Rising cost conditions

– Iron ore and scrap steel

• Concentration of players– More than 5 equal competitors

Threat of Entry - Low

• High barriers to entry– EOS– Capital requirements

• Low numbers of entry candidates• Incumbents have the ability to

block• Growth and profitability are modest• Most candidates are already in the

industry and seeking to expand into new geographic markets

Threat of Substitutes - Moderate

• Buyers have increased choice in material selection (aluminum, plastics, ceramics, etc.)

• New materials technologies may increase substitute pressure

Supplier Power - Moderate

• Iron ore (concentrated)– Commodity, market & negotiated– High prices (for now)

• Scrap steel (fragmented)– Commodity, market– High prices (for now)

• Energy– Mitigated with new processes

• Transportation– Customer pays for shipping

Buyer Power –Moderate/Weak

• Strong demand from China• Excess capacity• Low switching costs• Some high-volume buyers, many

low volume customers• But, rising feedstock prices in part

due to speculation

Driving Forces

• Increasing globalization• Steel technology and processes• Entry or exit of major firms• Advances in materials technology

Boost competitive pressureLower margins for high-cost producersBenefit foreign steel producers

Prospects for Future Profitability

• High cost producers face a dim future of weak demand and price concessions

• Low cost producers are poised to succeed, but they must fight foreign firms seeking to dump excess capacity and gain market share

• Expansion in the U.S. steel market should be viewed cautiously

Nucor’s Competitive Strategy

• Low-cost provider– Incentivized workforce– Advanced technology and

processes• Minimill• Castrip• HIsmelt

– Quality measures• BESTmarking

– Environmental measures• ISO 14001

Nucor’s Policies and Practices

• Aggressively pursue and implement cost-saving technologies

• Employ incentive compensation that motivate above-average output

• Empower plant employees• Create a low-cost culture• Offshore joint ventures• Backward integration of supply chain

Nucor’s Success Factors

• Cost control– Automation– Low cost locations

• Organizational behavior• Technology and processes

– Production– Order fulfillment and distribution

• Carefully chosen joint ventures

Great strategyGreat executionGreat strategic leadership

Nucor’s Strengths

• Low prices and high profit margins• Technological expertise and

innovative capabilities• State-of-the-art plants• Strong top management• Proven skills at lowering costs• Productive, well compensated, and

empowered workforce

Nucor’s Core Competencies

• A total corporate commitment to lowering production costs while maintaining quality– Spans management, supply chain,

operations, and technology

• Drive for innovation– Enhance productivity– Generate new revenue streams– Block rivals

Nucor’s Weaknesses

• Limited global presence• Lack of control over feedstock

– Scrap steel– Iron ore

Feedstock Prices

• Some of the price rise may be attributed to supply and demand

• But quite a bit is due to financial speculation in derivatives– Head of Baosteel– CEO of ThyssenKrupp– Vale, BHP Billiton, Rio Tinto now

pricing in quarterly contracts because of rocketing spot prices

Nucor’s Market Opportunities

• Growing sales and share in existing product categories

• Licensing HIsmelt technology• Acquiring high-cost producers and

making them more efficient• Buying ownership rights in

innovative new technologies

Nucor’s External Threats

• Rising prices for scrap steel and iron ore

• Slack demand• Foreign dumping• More foreign competition• Continued excess capacity• Aggressive rivals that are

becoming proficient at cost cutting• Global environmental regulations

Nucor’s SWOT Conclusions

• Nucor is superbly managed and in a good competitive position

• External risks are tolerable and manageable

• Nucor’s overall situation is attractive and future prospects seem promising

• Of course, a Great Recession could change all that…

Nucor’s Chief Rivals

• Mittal Steel• U.S. Steel• AK Steel• Foreign competitors

– China– India– Japan– European imports

Nucor Financials 1970-2006

• Tons sold to outside customers– 1.3% CAGR

• Net sales– 30.5% CAGR

• EBT– 24.5% CAGR

• Net earnings– 23.1% CAGR

Nucor Current Ratio

Current Ratio0

0.5

1

1.5

2

2.5

3

3.5

2000200120022003200420052006

Nucor COGS as % of Net Sales

COGS %0

20

40

60

80

100

120

2000200120022003200420052006

Nucor SG&A as % of Net Sales

SG&A %0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2000200120022003200420052006

Nucor Debt/Equity Ratio

D/E Ratio0

5

10

15

20

25

30

35

40

45

2000200120022003200420052006

Nucor Cash Flow & CAPEX

Op. Cash Flow

CAPEX

0

500

1000

1500

2000

2500

2000

2002

2004

2006

2000200120022003200420052006

Nucor ROE and ROA

ROE ROA

0

10

20

30

40

20002001

20022003

20042005

2006

2000200120022003200420052006

Nucor Management Issues

• Exit certain product categories?– Steel joist and decking

• Make more acquisitions?• Expand in China, Latin America?• Boost the quality of Nucor steel?

– Differentiation strategy

• Set royalty for HIsmelt?– Traditional license or JV?

Strategic Recommendations

• Acquire Mittal Steel– Dominate the domestic market

• Continue BESTmarking– All plants to be ISO 9000/14001

• Continue Foreign JVs– License HIsmelt through ownership

with some operating control

• Innovative backward integration– Reduce dependence on acquired

scrap steel and iron ore

• Divest forward integration