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Nucor’s Louisiana DRI Plant Could Finally See Turnarounds

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Nucor’s Louisiana DRI plant

Direct iron ore reduction—a process whose byproduct is DRI (direct-reduced iron), also known as sponge iron—is an alternate method for making steel. Last year, Nucor Corporation (NUE), the largest steel company in the US, commenced production at its DRI plant in Louisiana, one of the largest plants in the world, with an annual capacity of 2.5 million tons.

DRI provides a low-cost environment and, thus, operational flexibility to Nucor, enabling the company to use iron ore as an input, without the large capital expenditures of setting up a blast furnace. Not only do DRI plants have low operating costs, but also they’re more energy-efficient, because they operate at a lower temperature compared to blast furnaces.

The United States Steel Corporation (X) has also hinted that they might look into investing in DRI technology.

Together with the U.S. Steel, Commercial Metals Company (CMC) and Allegheny Technologies (ATI) make up ~11.3% of the SPDR S&P Metals and Mining ETF (XME).

Challenges for Nucor’s DRI plant

However, Nucor’s DRI plant in Louisiana has faced a number of operational challenges during the last several quarters.

The chart above shows Nucor’s raw material segment’s pretax income. As you can see, it has posted losses for several quarters in a row—partially due to the poor operating performance of the Louisiana DRI plant.

Is the plant turning around?

Another issue facing Nucor’s Louisiana plant has been the persistence of high-cost inventories. Because Nucor was not able to work through the high-cost inventories, the plant shut down for an extended period of time. But now that the plant has resumed operations, unit production costs should start falling progressively.

According to Nucor, the Louisiana plant should see a positive cash flow by the end of 2015. But we should still note that the DRI plant would be a long-term, rather than short-term, driver for the company.

In the next part of this series, we’ll explore what other factors could drive Nucor’s long-term performance.

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