Why Nucor’s Louisiana DRI plant could be a game changer

Mohit Oberoi, CFA - Author

Nov. 21 2019, Updated 4:56 p.m. ET

Louisiana DRI plant

In the previous part of this series, we analyzed the strategic importance of Gallatin Steel. We also learned how Nucor could possibly ship direct-reduced iron (or DRI) to Gallatin. Nucor produces DRI through its plant in Louisiana. Let’s first take a look at what DRI is. Also known as sponge iron, DRI is an alternative raw material for electric arc furnaces (or EAF). Nucor produces steel through electric arc furnaces.

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Steel Dynamics (STLD) is another company that produces steel through EAF. The supply of steel scrap is limited compared to larger global reserves of iron ore. Producing DRI will give Nucor more flexibility over its raw material requirements. Let’s see why the Louisiana plant could be a game changer for Nucor.

Nucor expects production to increase at Louisiana plant

Nucor has made several adjustments to equipment at its Louisiana plant. These adjustments will increase the yield and conversion costs. Nucor has produced 1.2 million tons of DRI this year at the Louisiana plant. The company expects to produce another 0.5 million tons in the next quarter. This would mean that the Louisiana plant will achieve a 70% utilization rate in the first year of operation itself.

Why production should increase at the Louisiana plant

The previous chart shows the movement in iron ore prices. As you can see, iron ore prices have fallen almost 40% this year. On the other hand, prices of steel scrap have been relatively stable. This makes DRI, which is produced through iron ore, a better alternative to steel scrap. Nucor can take advantage of falling iron ore prices by using more DRI to produce steel.

This opportunity opens up another growth arena for Nucor. The company can possibly acquire iron ore assets for its DRI plants. We’ll discuss this in greater detail in our next part.

U.S. Steel (X) has also made investments in DRI plants. Currently U.S. Steel is among the top ten holdings of the SPDR S&P Metals and Mining ETF (XME).


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