Must-know: An investor’s guide to Nucor’s supply chain

What are the key components of Nucor’s supply chain?

For a steel company like Nucor, the supply chain consists of both inbound and outbound logistics. The inbound chain consists of securing raw materials like steel scrap, direct reduced iron (or DRI), and natural gas for its plants while outbound logistics manage the delivery of steel to its customers. We’ll start by analyzing the raw material security for Nucor.

Why David J. Joseph (DJJ) was a key strategic acquisition for Nucor

We saw earlier that Nucor acquired DJJ in 2008. DJJ is a global leader in steel scrap brokerage. It has helped Nucor secure critical raw materials for its plants. Also, DJJ has scrap processing facilities that add to the existing Nucor facilities.

Access to Brazilian iron mines

To fulfill its iron ore requirements, Nucor has a DRI plant in Trinidad. It’s located off the coast of Venezuela. Through this plant, Nucor has access to cheap iron ore from Brazil and natural gas from Venezuela. This facility also has easy shipping access to the U.S.

Why Nucor is protected against volatile natural gas prices

Natural gas remains the second major input for Nucor. Natural gas prices have been quite volatile lately. To secure the supply of natural gas along with protecting itself from the volatility in the prices, Nucor has entered into long-term contracts with Encana Oil and Gas Inc. The deal is structured to protect Nucor from the changes in natural gas prices. In case natural gas prices fall, Nucor can stop the production of natural gas. If prices increase there is a provision to sell natural gas in market to offset the increased costs for its steel plants. As a result, Nucor gets protected from both downside and upside movement in natural gas prices.

Outbound logistics

To manage the supply of steel to its customers, Nucor has a well spread network of 200 operating facilities. These facilities are strategically located to meet customers’ requirements.

Supply chain management is a key driver for steel companies and exchange-traded funds (or ETFs) like Nucor Corporation (NUE), ArcelorMittal (MT), U.S. Steel Corporation (X), Reliance Steel & Aluminum (RS), and the SPDR S&P Metals and Mining ETF (XME).