Nucor Steel

A 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

Porters 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 pressure Lower margins for high-cost producers Benefit 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

Nucors Competitive Strategy

Low-cost provider
Incentivized workforce Advanced technology and processes Minimill Castrip HIsmelt Quality measures BESTmarking Environmental measures ISO 14001

Nucors 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

Nucors 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

Nucors 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

Nucors 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

Nucors 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

Nucors 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

Nucors 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

Nucors SWOT Conclusions

Nucor is superbly managed and in a good competitive position External risks are tolerable and manageable Nucors overall situation is attractive and future prospects seem promising Of course, a Great Recession could change all that

Nucors 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

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

Nucor COGS as % of Net Sales

120 100 80 60 40 20 0 COGS % 2000 2001 2002 2003 2004 2005 2006

Nucor SG&A as % of Net Sales

4.5 4

3.5
3 .5 000 001 00 003 004 005 006

1.5 1 0.5 0 SG&A %

Nucor Debt/Equity Ratio

45 40

35
30 5 0 15 10 5 0 D/E Ratio 000 001 00 003 004 005 006

Nucor Cash Flow & CAPEX

2500 2000 1500 1000 500 0 2006 200 2002 2000 2000 2001 2002 2003 200 2005 2006

Nucor ROE and ROA

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

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