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Nucor’s Potential Long-Term Performance Drivers

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Nucor’s long-term performance

Previously in this series, we discussed how DRI (direct-reduced iron) could be a long-term growth driver for Nucor Corporation (NUE), particularly at its new DRI plant in Louisiana. We also talked about how, among other short-term drivers, falling steel scrap prices could indicate that Nucor will use more scrap—as opposed to DRI—in its steel plants.

But the ability to produce using the DRI method brings operational flexibility to Nucor when it comes to choosing raw materials for its plants. With DRI, Nucor can choose between iron ore and steel scrap, depending on the prevailing prices of each.

In this part of the series on Nucor’s overall survival during the slowdown in the steel industry, we’ll explore a few factors that could drive Nucor’s long-term performance.

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Automotive foray

Nucor, the largest steel company in the US, is also the market leader in the non-residential construction industry and the leading rebar supplier in North America. Gerdau SA (GGB) is one of its leading competitors in the US rebar market.

But Nucor hasn’t so far been a major player in the US automotive industry like leading suppliers such as ArcelorMittal SA (MT) and AK Steel Holding C0rporation (AKS) have been. As the chart above shows, vehicle sales in the US have been strong—the outlook for the automobile industry also looks bright.

Steel companies have continued to work with automobile manufacturers to develop innovative lightweight steel products. These products help automakers reduce the vehicle weight and help them increase their vehicles’ fuel economy.

Higher profit margins

Manufacturing value-added steel products help increase steel companies’ profit margins as well. Moreover, value-added steel products are more immune to imports than standard steel products, and so new forays into value-added products would be a key long-term driver for Nucor.

In 2015, Nucor expects its automotive shipments to rise by 20%, reaching 1.4 million tons. Over the next couple of years, the company expects its automotive shipments to reach 2 million tons. This would mean Nucor would gain market share at the expense of other steel companies.

For this reason, perhaps, Nucor has been marketing its “financial stability” to its prospective customers. Nucor currently makes up 2.73% of the Materials Select Sector SPDR ETF (XLB).

In the next part of this series, we’ll analyze why Nucor’s balance sheet is so much healthier than those of most other steel companies.

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