Nucor Profit Margins Compress as 1Q15 Capacity Utilization Falls



Nucor 1Q15 profit margins

We’ve already looked at some of Nucor’s (NUE) 1Q15 earnings reported on April 23. Nucor reported a 14% drop in revenues on a year-over-year (or YoY) basis. Nucor’s 1Q15 profit margins were also compressed since its capacity utilization rate fell to 65%, down from 76% in 4Q14.

Operating the plants at less than optimum capacity negatively impacts the profitability of companies in the metals and mining space (XME). The fixed costs get divided among a fewer number of units, driving up the unit cost of production. Nucor’s EBITDA (earnings before interest, taxes, depreciation, and amortization) margins dropped in 1Q15, as you can see in the above chart.

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Gallatin Steel

Nucor acquired Gallatin Steel from ArcelorMittal (MT) last year. The acquisition was expected to increase Nucor’s presence in the tubular goods segment. Demand for tubular goods, which are consumed by the energy industry, was growing at a fast pace until a few months ago. With the steep fall in crude oil prices, steel demand from the energy sector has come down. A slowdown in the energy sector, which accounts for 10% of Nucor’s steel shipments, dragged down its 1Q15 shipments. Tenaris (TS) and Allegheny Technology (ATI) are the other major suppliers to the energy sector.

Variable structure

Nucor has a variable cost structure at its operations. This helps the company protect its profit margins during downturns. According to estimates, around two-thirds of the average pay of a worker at Nucor is variable compared to about 20% at other steel companies. Using electric arc furnaces also provides Nucor with operational flexibility.

Nucor uses steel scrap as its primary raw material. Scrap prices corrected sharply in February. How has this impacted Nucor’s 1Q15 earnings? We’ll find out in the next part of this series.


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