Strategic Analysis of Nucor Steel

1. Nucor Steel
A Business Analysis

2. 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. "

3. The Steel Process

4. Porter’s Five Forces

5. 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

6. 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

7. 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

8. Threat of Substitutes - Moderate
• Buyers have increased choice in
material selection (aluminum,
plastics, ceramics, etc.)
• New materials technologies may
increase substitute pressure

9. 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

10. 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

11. Driving Forces
• Increasing globalization
• Steel technology and processes
• Entry or exit of major firms
• Advances in materials technology
Boost competitive pressure
Lower margins for high-cost producers
Benefit foreign steel producers

12. 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

13. Nucor’s Competitive Strategy
• Low-cost provider
– Incentivized workforce
– Advanced technology and
processes
• Minimill
• Castrip
• HIsmelt
– Quality measures
• BESTmarking
– Environmental measures
• ISO 14001

14. 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

15. 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 strategy
Great execution
Great strategic leadership

16. 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

17. 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

18. Nucor’s Weaknesses
• Limited global presence
• Lack of control over feedstock
– Scrap steel
– Iron ore

19. 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

20. 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

21. 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

22. 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…

23. Nucor’s Chief Rivals
• Mittal Steel
• U.S. Steel
• AK Steel
• Foreign competitors
– China
– India
– Japan
– European imports

24. 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

25. Nucor Current Ratio
0
0.5
1
1.5
2
2.5
3
3.5
Current Ratio
2000
2001
2002
2003
2004
2005
2006

26. Nucor COGS as % of Net Sales
0
20
40
60
80
100
120
COGS %
2000
2001
2002
2003
2004
2005
2006

27. Nucor SG&A as % of Net Sales
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
SG&A %
2000
2001
2002
2003
2004
2005
2006

28. Nucor Debt/Equity Ratio
0
5
10
15
20
25
30
35
40
45
D/E Ratio
2000
2001
2002
2003
2004
2005
2006

29. Nucor Cash Flow & CAPEX
2000
2001
2002
2003
2004
2005
2006
0
500
1000
1500
2000
2500
2000
2001
2002
2003
2004
2005
2006

30. Nucor ROE and ROA
2000
2001
2002
2003
2004
2005
2006
0
5
10
15
20
25
30
35
40
ROE ROA
2000
2001
2002
2003
2004
2005
2006

31. 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?

32. 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