netrashetty
Netra Shetty
Numark Industries is a global DJ equipment brand. It makes DJ mixers, turntables, and DJ CD players. Recently, it introduced DJ DVD mixing consoles. Numark has also started to build upon the world of computer DJing through its own mixing software called Cue.
Numark has launched a second brand, ION Audio for their consumer line products including many electronics that plug in to computers via USB, and recently extended its portfolio with the acquisition of Alesis and Akai. All ION Audio turntables force the user to use iTunes to successfully complete the conversion process.
Nucor is the world's 4th largest steel producer by market capitalization as of 2009. The rankings are: 1) POSCO (PKX) 2) ArcelorMittal (MT) 3) Gerdau S.A. (GGB) 4. Nucor (NUE) 5. US Steel (X). Over the last 5 years, Nucor (NUE) stock has returned 123.21%, outperforming both US Steel (X) and ArcelorMittal (MT) but underperforming POSCO (PKX) and Gerdau S.A. (GGB). [1]
Nucor Corp. is different because it uses scrap steel from recycled steel products instead of iron ore. As opposed to traditional large mills, Nucor runs mostly mini-mills that utilize modern steel making techniques that have given Nucor a Return on Assets (ROA) of 16.7% from 2004-2009, far exceeding the industry average of 10%. Nucor also has a very conservative financial position as of Summer 2009, with a current ratio of 5.2 as opposed to the industry average of 1.8. The company anticipates the steel industry to recover slowly, and is bracing itself by staying relatively debt free. [2] .
Due to the extreme consolidation of the steel industry, and monopolistic industry conditions, major steel producers did not cut their prices much in response to lower demand in 2009. Nucor's decline in net sales was primarily attributable to selling less steel, and not lowering prices. Major steel producers do not like cutting prices, because increasing prices back up to previous levels tends to create a demand drag during a recovery. Also, the long-term nature of big-steel contracts encourages steel companies to inhibit steel price volatility The only growth area for Nucor from 2008-2009 was in its ‘fabricated concrete reinforcing steel’ sales, which saw a 10% increase primarily driven by infrastructure spending. Overall, the company believes that steel will be subject to a long, slow recovery. [3]
Contents
1 Company Overview
1.1 Business Financials
1.1.1 Q4 FY 2010 Quarterly Summary
1.1.2 Q3 FY 2010 Quarterly Summary
1.1.3 Q2 FY 2010 Quarterly Summary
1.1.4 Q1 FY 2010 Quarterly Summary
1.1.5 FY 2009 Annual Earnings Summary
1.2 Business Segments
2 Trends & Forces
2.1 Rising Steel Prices Will Positively Affect Nucor's Financial Performance
2.2 Massive World Steel Over-Capacity Could Depress Steel Prices
2.3 Indian Industrialization will benefit steel producers
3 Market Share
4 Competition
5 References
Scrap steel prices are influenced heavily by international demand, especially by a currently flourishing China; record international demand has driven scrap steel prices to historic highs, along with overall steel prices. The steel industry has experienced unprecedented success during the past five years due to this increased demand, but also faces turbulence in the domestic economy, including trouble with the domestic automobile makers and problems in the housing construction industry, both of which are key steel customers.
Company Overview
Business Financials
Q4 FY 2010 Quarterly Summary
Nucor posted a net loss of $11.4 million for Q4 FY2010 as compared to net earnings of $23.5 million for the previous quarter.[4] Net earnings were $58.9 million in year ago results.[4] However, Nucor posted net earnings of $134.1 million for FY 2010 as compared to net losses of $293.6 million for the previous year.[4] Losses were primarily driven by the costs of opening new facilities as well as decreased inventory values.[4]
Fourth quarter sales decreased 7% when compared to last quarter's sales, totaling $3.85 billion. When compared to last years sales, however, Nucor's fourth quarter sales indicate a 31% increase. Sales prices decreased by 2% when compared to last quarter but increased by 14% when looking at year-ago comparisons.[4] Net sales increased by 42% for the full year, totaling $15.84 billion.[4]
Q3 FY 2010 Quarterly Summary
Nucor posted quarterly earnings of $23.5 million for the third quarter of 2010.[5] Earnings for the third quarter of 2010 represent an increase from net losses of $29.5 million in year-ago results.[5] Earnings were down, however, when compared to the previous quarter's results of $91.0 million.[5] Net sales increased 33% when compared to year-ago results, totaling $4.14 billion for the quarter.[5] These sales reflect a 1% decrease from the second quarter, however, when sales were $4.20 billion.[5]
Sales prices increased from Q3 FY2009 by 20% but decreased by 3% compared to Q2 FY2010.[5] Similarly, shipments to outside customers increased when compared to both Q2 FY2010 and Q3 FY2009 postings, increasing by 1% and 10% respectively.[5] Steel shipments also increased in Q3 FY2010 when compared to both last quarter and year-ago results, increasing 2% and 9% respectively.[5]
Q2 FY 2010 Quarterly Summary
Nucor announced net earnings of $91.0 million for the second quarter of 2010, an improvement from a net loss of $133.3 million in the second quarter of 2009.[6] Net sales totaled $4.20 billion for the quarter, a 69% increase from $2.48 billion the previous year.[6] Sale prices similarly increased for the second quarter of 2010, improving by 25% from year-ago prices.[6] Scrap metal prices increased by 20% to $373 million in the second quarter of 2010 as compared to $312 million the previous year.[6]
Q1 FY 2010 Quarterly Summary
Nucor posted net earnings of $31.0 million for the first quarter of 2010.[7] These earning reflect improvement from the first quarter of 2009, where Nucor reported losses of $189.6 million, but a decline from the fourth quarter of 2009 in which Nucor reported earnings of $58.9 million.[7] Net sales increased to $3.65 billion, a 38% increase as compared to year-ago quarterly earnings.[7] These sales was driven by a 48% increase in total tons shipped to outside customers.[7] Net sales also increased by 24% as compared to fourth quarter sales of $2.94 billion in 2010.[7] Earnings were impacted by a 7% decrease in the average sales price of its products along with a 15% increase in the cost of scrap and scrap substitute materials.[7]
FY 2009 Annual Earnings Summary
Nucor posted net earnings of $58.9 million for this past quarter, marking gains from all previous quarters in FY2009, but a decrease from $105.9 million the previous year.[8] Nucor posted a net loss of $293.6 million for FY2009, as compared to net earnings of $1.83 billion for the previous year.[8] Fourth quarter sales decreased to $2.94 billion, a drop of 6% from $3.12 billion the previous quarter, and a drop of 29% from $4.15 billion the previous year.[8] Average sales price per ton, however, increased by 4% from the previous quarter but still reflected a 35% decrease from Q4 FY2008.[8] Yearly figures reflect drops for both net sales and average sales prices. Nucor's net sales dropped 53% from $23.66 billion for 2008 to $11.19 billion for this past year.[8] Average sales prices (per ton) dropped 32%, along with a 30% decrease in tons shipped to outside customers.[8]
[9]
Nucor, while substantially less financially competitive than the industry giant Gerdau S.A. (GGB), has a strong balance sheet and admirable 5 year performance especially relative to the S&P 500 from 2004-2009.
Its Earnings Per Share (EPS) has been growing at 29.27% for the last 5 years, beating the industry average of 11.96%. This has made Nucor a more profitable investment, with a 5 year of Return on investment (ROI) of 22.2% as opposed to the industry average of 16%.
Nucor's superior steel harvesting techniques combined with its position in the United States account for many of its financial ratios. Nucor routinely has a lower Net Profit Margin than the steel industry due to higher costs associated with maintaining US operations. However, its ability to harvest scrap metal from junk allows it to position itself in places where mining steel companies would have difficulty. This accounts for its high Asset turnover ratio (TTM) of 1.7, as opposed to the steel industry's .7.
Profitable assets has allowed Nucor to expand faster than most competitors. Nucor has had a 61.73% 5 year capital expenditure growth rate, as opposed to an industry average of 43.74%. It is useful to note that both numbers are extremely high, reflecting world-wide industrialization since 2004.
Despite heavy expansion, Nucor has managed to keep its balance sheet extremely clear of debt. Its current ratio of 5.2 is 188% higher than the industry average of 1.8. A current ratio of 4 is considered extremely conservative. This reflects Nucor's view that the steel industry will be slow to recover.[9]
Nucor's increasing conservativism can be seen its high dividend payouts. A company tends to pay more dividends when it believes it does not have good immediate growth opportunities. As Nucor has grown it has paid increasing dividends, with a dividend growth rate of 63% over the past 5 years, more than doubling the industry growth rate of 27%. [9]
Nucor's steel production, 2000-2009[10]
Business Segments
Nucor breaks its net sales into 4 main segments: Steel Mills, Steel Products, Raw Materials, and All Other.
[11]
Steel Mills: Carbon and alloy steel in sheet, bars, structural, and plate, and Nucor's equity investment in Duferdofin-Nucor.
Steel Products: Steel joists and joist girders, steel deck, fabricated concrete reinforcing steel, cold finished steel, steel fasteners, metal building systems, light gauge steel framing, steel grating and expanded metal, and wire and wire mesh.
Raw Materials: The David J. Joseph Company, the scrap broker and processor that Nucor acquired on February 29, 2008. Nu-Iron Unlimited, a facility that produces direct reduced iron used by the steel mills and other equity investments.
All Other: Novosteel S.A., a steel trading business.
Nucor makes the lion's share of its profits in the Steel Mills and Products Segments. Some details about the specific types of steel they produced follow:
Steel Sheet is produced primarily for the automotive, appliance, pipe and tube, and construction industries.
Steel Bar is produced primarily for automotive and construction industries, farm machinery, metal buildings, furniture and recreational equipment.
Structural Steel is produced primarily for fabricators, construction companies, manufacturers and steel service centers.
Steel Plate is produced primarily for manufacturers of heavy equipment, rail cars, ships, barges, refinery tanks, pipe and tube, pressure vessels, and construction.
Downstream Steel Products are essentially steel that is further processed and are produced primarily for the construction and manufacturing industries.[12]
Trends & Forces
Rising Steel Prices Will Positively Affect Nucor's Financial Performance
Steel Futures Prices are recovering.[13]
Steel prices peaked in Summer of 2008, before collapsing in the September 2008 recession. Steel prices are considered a leading economic indicator, because houses, cars and infrastructure needs to be built up with steel before an economic boom. Industrial companies need to purchase steel at least 3 months before an economic recovery to meet potentially explosive demand.
As of Fall 2009, 15 month steel futures trading on the London Metal Exchange show that steel orders are picking up and driving up prices, at least in the short term. An uptrend in steel prices will benefit steel producers like Nucor.
Yet, despite present optimism in contract prices, a longer-term steel price graph maintains its severe down-trend. Furthermore, 2009 demand increases are being driven by European and Asian markets which does not benefit Nucor as much due to its position in the United States.
Steel prices have fallen substantially from even 2006 levels, perhaps indicating the presence of a long-term down-trend.[14]
Massive World Steel Over-Capacity Could Depress Steel Prices
Chinese Steel capacity increasing rapidly.[15]
Mature markets will use less steel as technology improves (less replacements and repairs), and emerging markets will use far less steel as they become mature. Yet, steel plants will remain that can easily produce steel, causing an over-supply problem in the long-run.
Obsolescence and repair, not massive new projects, define steel demand in the industrialized world. For example, Nucor's business model would not function if American cars did not fall apart every few years, because Nucor melts down old cars and sells the steel to car companies to make new ones. If cars break down less often, Nucor pays more for scrap, and car companies make less money selling new cars and pay less for Nucor's steel. Nucor's business model will become less and less sustainable as technology advances causing cars, machinery, and infrastructure to improve in quality and break down less often.
In the meanwhile, China will eventually finish its massive industrialization project. Only India would remain as a massive potential growth market for the steel industry, but even then, China has the capacity to produce 5-8 times the amount of steel as the United States and is far geographically closer to India.
Nucor may enjoy a halo effect from global industrialization, but will simply not benefit as much as Chinese integrated steel giants. As capital goods break down less often in the industrialized world, Nucor will hurt. [16]
Indian Industrialization will benefit steel producers
Despite having a population on par with China's, India only produces about 1/10th of the steel. Currently producing about 55.2 million tonnes anually, India would need to produce about 300 million more tonnes annually to achieve the normal per-capita steel consumption of most industrialized countries. Despite its relatively low production, the Indian steel market has grown rapidly over the last 20 years.[17]
In 1991, India only produced about 14 million tonnes annually. Indian Steel Minister Ram Vilas Paswan predicts that his country's steel production will grow 400% to 275 million tonnes per annum by 2012, making India the second largest steel producer behind China. [18]
This prediction necessarily assumes that China will continue on its same intensive industrialization through 2012. China has slowed its infrastructure projects in 2009, and it remains to be seen whether or not it will resume aggressive industrial expansion. If China does not industrialize further, it would generally be cheaper for India to import Chinese steel.[19]
Despite somewhat poor positioning to benefit from India's industrialization, Nucor will benefit from increased steel demand because it will be able to sell some of its product to Indian markets. However, it will not benefit nearly as much as integrated Chinese steel companies unless it manages to build substantial operations in India.
Market Share
Global Steel Industry Market Share by Crude Steel Production (Q2, 2009)
Manufacturer Crude Steel Production (Thousands of Tons) Market Share[20] YOY % Change in Production
US Steel[21] 3,023 .96% -60%
Nucor[22] 2,808 .89% -53%
SCHN[23] 1,037 .33% -19%
Steel Dynamics[24] 886 0.28% -45%
AK Steel[25] 740 0.23% -57%
CMC[26] 435 0.14% -42%
Competition
Nucor distinguishes itself from the rest of the steel industry with its use of scrap steel, a fact that makes Nucor the largest recycler in the nation.[27] Furthermore, the company uses modern steel making techniques allowing Nucor to employ fewer workers. The workers that Nucor does employ are all independent of unions; these workers have a vested interested in the productivity of the company because a significant portion of their compensation is based on their own productivity.[28] In addition, Nucor has recently focused heavily on acquisitions to increase production capacity and to make the company more competitive in the global market.[29]
Total Global Steel Production Total Sales Cost of Sales Operating Income % Gross Margins
(mmt) (bil) (bil) (bil)
Nucor 22.12 $14.75 $12.05 $2.7 18%
US Steel (X) 21.63 $15.72 $13.93 $1.79 11%
Arcelor Mittal (MT) 110.5 $58.87 $51.37 $7.50 13%
Numark has launched a second brand, ION Audio for their consumer line products including many electronics that plug in to computers via USB, and recently extended its portfolio with the acquisition of Alesis and Akai. All ION Audio turntables force the user to use iTunes to successfully complete the conversion process.
Nucor is the world's 4th largest steel producer by market capitalization as of 2009. The rankings are: 1) POSCO (PKX) 2) ArcelorMittal (MT) 3) Gerdau S.A. (GGB) 4. Nucor (NUE) 5. US Steel (X). Over the last 5 years, Nucor (NUE) stock has returned 123.21%, outperforming both US Steel (X) and ArcelorMittal (MT) but underperforming POSCO (PKX) and Gerdau S.A. (GGB). [1]
Nucor Corp. is different because it uses scrap steel from recycled steel products instead of iron ore. As opposed to traditional large mills, Nucor runs mostly mini-mills that utilize modern steel making techniques that have given Nucor a Return on Assets (ROA) of 16.7% from 2004-2009, far exceeding the industry average of 10%. Nucor also has a very conservative financial position as of Summer 2009, with a current ratio of 5.2 as opposed to the industry average of 1.8. The company anticipates the steel industry to recover slowly, and is bracing itself by staying relatively debt free. [2] .
Due to the extreme consolidation of the steel industry, and monopolistic industry conditions, major steel producers did not cut their prices much in response to lower demand in 2009. Nucor's decline in net sales was primarily attributable to selling less steel, and not lowering prices. Major steel producers do not like cutting prices, because increasing prices back up to previous levels tends to create a demand drag during a recovery. Also, the long-term nature of big-steel contracts encourages steel companies to inhibit steel price volatility The only growth area for Nucor from 2008-2009 was in its ‘fabricated concrete reinforcing steel’ sales, which saw a 10% increase primarily driven by infrastructure spending. Overall, the company believes that steel will be subject to a long, slow recovery. [3]
Contents
1 Company Overview
1.1 Business Financials
1.1.1 Q4 FY 2010 Quarterly Summary
1.1.2 Q3 FY 2010 Quarterly Summary
1.1.3 Q2 FY 2010 Quarterly Summary
1.1.4 Q1 FY 2010 Quarterly Summary
1.1.5 FY 2009 Annual Earnings Summary
1.2 Business Segments
2 Trends & Forces
2.1 Rising Steel Prices Will Positively Affect Nucor's Financial Performance
2.2 Massive World Steel Over-Capacity Could Depress Steel Prices
2.3 Indian Industrialization will benefit steel producers
3 Market Share
4 Competition
5 References
Scrap steel prices are influenced heavily by international demand, especially by a currently flourishing China; record international demand has driven scrap steel prices to historic highs, along with overall steel prices. The steel industry has experienced unprecedented success during the past five years due to this increased demand, but also faces turbulence in the domestic economy, including trouble with the domestic automobile makers and problems in the housing construction industry, both of which are key steel customers.
Company Overview
Business Financials
Q4 FY 2010 Quarterly Summary
Nucor posted a net loss of $11.4 million for Q4 FY2010 as compared to net earnings of $23.5 million for the previous quarter.[4] Net earnings were $58.9 million in year ago results.[4] However, Nucor posted net earnings of $134.1 million for FY 2010 as compared to net losses of $293.6 million for the previous year.[4] Losses were primarily driven by the costs of opening new facilities as well as decreased inventory values.[4]
Fourth quarter sales decreased 7% when compared to last quarter's sales, totaling $3.85 billion. When compared to last years sales, however, Nucor's fourth quarter sales indicate a 31% increase. Sales prices decreased by 2% when compared to last quarter but increased by 14% when looking at year-ago comparisons.[4] Net sales increased by 42% for the full year, totaling $15.84 billion.[4]
Q3 FY 2010 Quarterly Summary
Nucor posted quarterly earnings of $23.5 million for the third quarter of 2010.[5] Earnings for the third quarter of 2010 represent an increase from net losses of $29.5 million in year-ago results.[5] Earnings were down, however, when compared to the previous quarter's results of $91.0 million.[5] Net sales increased 33% when compared to year-ago results, totaling $4.14 billion for the quarter.[5] These sales reflect a 1% decrease from the second quarter, however, when sales were $4.20 billion.[5]
Sales prices increased from Q3 FY2009 by 20% but decreased by 3% compared to Q2 FY2010.[5] Similarly, shipments to outside customers increased when compared to both Q2 FY2010 and Q3 FY2009 postings, increasing by 1% and 10% respectively.[5] Steel shipments also increased in Q3 FY2010 when compared to both last quarter and year-ago results, increasing 2% and 9% respectively.[5]
Q2 FY 2010 Quarterly Summary
Nucor announced net earnings of $91.0 million for the second quarter of 2010, an improvement from a net loss of $133.3 million in the second quarter of 2009.[6] Net sales totaled $4.20 billion for the quarter, a 69% increase from $2.48 billion the previous year.[6] Sale prices similarly increased for the second quarter of 2010, improving by 25% from year-ago prices.[6] Scrap metal prices increased by 20% to $373 million in the second quarter of 2010 as compared to $312 million the previous year.[6]
Q1 FY 2010 Quarterly Summary
Nucor posted net earnings of $31.0 million for the first quarter of 2010.[7] These earning reflect improvement from the first quarter of 2009, where Nucor reported losses of $189.6 million, but a decline from the fourth quarter of 2009 in which Nucor reported earnings of $58.9 million.[7] Net sales increased to $3.65 billion, a 38% increase as compared to year-ago quarterly earnings.[7] These sales was driven by a 48% increase in total tons shipped to outside customers.[7] Net sales also increased by 24% as compared to fourth quarter sales of $2.94 billion in 2010.[7] Earnings were impacted by a 7% decrease in the average sales price of its products along with a 15% increase in the cost of scrap and scrap substitute materials.[7]
FY 2009 Annual Earnings Summary
Nucor posted net earnings of $58.9 million for this past quarter, marking gains from all previous quarters in FY2009, but a decrease from $105.9 million the previous year.[8] Nucor posted a net loss of $293.6 million for FY2009, as compared to net earnings of $1.83 billion for the previous year.[8] Fourth quarter sales decreased to $2.94 billion, a drop of 6% from $3.12 billion the previous quarter, and a drop of 29% from $4.15 billion the previous year.[8] Average sales price per ton, however, increased by 4% from the previous quarter but still reflected a 35% decrease from Q4 FY2008.[8] Yearly figures reflect drops for both net sales and average sales prices. Nucor's net sales dropped 53% from $23.66 billion for 2008 to $11.19 billion for this past year.[8] Average sales prices (per ton) dropped 32%, along with a 30% decrease in tons shipped to outside customers.[8]
[9]
Nucor, while substantially less financially competitive than the industry giant Gerdau S.A. (GGB), has a strong balance sheet and admirable 5 year performance especially relative to the S&P 500 from 2004-2009.
Its Earnings Per Share (EPS) has been growing at 29.27% for the last 5 years, beating the industry average of 11.96%. This has made Nucor a more profitable investment, with a 5 year of Return on investment (ROI) of 22.2% as opposed to the industry average of 16%.
Nucor's superior steel harvesting techniques combined with its position in the United States account for many of its financial ratios. Nucor routinely has a lower Net Profit Margin than the steel industry due to higher costs associated with maintaining US operations. However, its ability to harvest scrap metal from junk allows it to position itself in places where mining steel companies would have difficulty. This accounts for its high Asset turnover ratio (TTM) of 1.7, as opposed to the steel industry's .7.
Profitable assets has allowed Nucor to expand faster than most competitors. Nucor has had a 61.73% 5 year capital expenditure growth rate, as opposed to an industry average of 43.74%. It is useful to note that both numbers are extremely high, reflecting world-wide industrialization since 2004.
Despite heavy expansion, Nucor has managed to keep its balance sheet extremely clear of debt. Its current ratio of 5.2 is 188% higher than the industry average of 1.8. A current ratio of 4 is considered extremely conservative. This reflects Nucor's view that the steel industry will be slow to recover.[9]
Nucor's increasing conservativism can be seen its high dividend payouts. A company tends to pay more dividends when it believes it does not have good immediate growth opportunities. As Nucor has grown it has paid increasing dividends, with a dividend growth rate of 63% over the past 5 years, more than doubling the industry growth rate of 27%. [9]
Nucor's steel production, 2000-2009[10]
Business Segments
Nucor breaks its net sales into 4 main segments: Steel Mills, Steel Products, Raw Materials, and All Other.
[11]
Steel Mills: Carbon and alloy steel in sheet, bars, structural, and plate, and Nucor's equity investment in Duferdofin-Nucor.
Steel Products: Steel joists and joist girders, steel deck, fabricated concrete reinforcing steel, cold finished steel, steel fasteners, metal building systems, light gauge steel framing, steel grating and expanded metal, and wire and wire mesh.
Raw Materials: The David J. Joseph Company, the scrap broker and processor that Nucor acquired on February 29, 2008. Nu-Iron Unlimited, a facility that produces direct reduced iron used by the steel mills and other equity investments.
All Other: Novosteel S.A., a steel trading business.
Nucor makes the lion's share of its profits in the Steel Mills and Products Segments. Some details about the specific types of steel they produced follow:
Steel Sheet is produced primarily for the automotive, appliance, pipe and tube, and construction industries.
Steel Bar is produced primarily for automotive and construction industries, farm machinery, metal buildings, furniture and recreational equipment.
Structural Steel is produced primarily for fabricators, construction companies, manufacturers and steel service centers.
Steel Plate is produced primarily for manufacturers of heavy equipment, rail cars, ships, barges, refinery tanks, pipe and tube, pressure vessels, and construction.
Downstream Steel Products are essentially steel that is further processed and are produced primarily for the construction and manufacturing industries.[12]
Trends & Forces
Rising Steel Prices Will Positively Affect Nucor's Financial Performance
Steel Futures Prices are recovering.[13]
Steel prices peaked in Summer of 2008, before collapsing in the September 2008 recession. Steel prices are considered a leading economic indicator, because houses, cars and infrastructure needs to be built up with steel before an economic boom. Industrial companies need to purchase steel at least 3 months before an economic recovery to meet potentially explosive demand.
As of Fall 2009, 15 month steel futures trading on the London Metal Exchange show that steel orders are picking up and driving up prices, at least in the short term. An uptrend in steel prices will benefit steel producers like Nucor.
Yet, despite present optimism in contract prices, a longer-term steel price graph maintains its severe down-trend. Furthermore, 2009 demand increases are being driven by European and Asian markets which does not benefit Nucor as much due to its position in the United States.
Steel prices have fallen substantially from even 2006 levels, perhaps indicating the presence of a long-term down-trend.[14]
Massive World Steel Over-Capacity Could Depress Steel Prices
Chinese Steel capacity increasing rapidly.[15]
Mature markets will use less steel as technology improves (less replacements and repairs), and emerging markets will use far less steel as they become mature. Yet, steel plants will remain that can easily produce steel, causing an over-supply problem in the long-run.
Obsolescence and repair, not massive new projects, define steel demand in the industrialized world. For example, Nucor's business model would not function if American cars did not fall apart every few years, because Nucor melts down old cars and sells the steel to car companies to make new ones. If cars break down less often, Nucor pays more for scrap, and car companies make less money selling new cars and pay less for Nucor's steel. Nucor's business model will become less and less sustainable as technology advances causing cars, machinery, and infrastructure to improve in quality and break down less often.
In the meanwhile, China will eventually finish its massive industrialization project. Only India would remain as a massive potential growth market for the steel industry, but even then, China has the capacity to produce 5-8 times the amount of steel as the United States and is far geographically closer to India.
Nucor may enjoy a halo effect from global industrialization, but will simply not benefit as much as Chinese integrated steel giants. As capital goods break down less often in the industrialized world, Nucor will hurt. [16]
Indian Industrialization will benefit steel producers
Despite having a population on par with China's, India only produces about 1/10th of the steel. Currently producing about 55.2 million tonnes anually, India would need to produce about 300 million more tonnes annually to achieve the normal per-capita steel consumption of most industrialized countries. Despite its relatively low production, the Indian steel market has grown rapidly over the last 20 years.[17]
In 1991, India only produced about 14 million tonnes annually. Indian Steel Minister Ram Vilas Paswan predicts that his country's steel production will grow 400% to 275 million tonnes per annum by 2012, making India the second largest steel producer behind China. [18]
This prediction necessarily assumes that China will continue on its same intensive industrialization through 2012. China has slowed its infrastructure projects in 2009, and it remains to be seen whether or not it will resume aggressive industrial expansion. If China does not industrialize further, it would generally be cheaper for India to import Chinese steel.[19]
Despite somewhat poor positioning to benefit from India's industrialization, Nucor will benefit from increased steel demand because it will be able to sell some of its product to Indian markets. However, it will not benefit nearly as much as integrated Chinese steel companies unless it manages to build substantial operations in India.
Market Share
Global Steel Industry Market Share by Crude Steel Production (Q2, 2009)
Manufacturer Crude Steel Production (Thousands of Tons) Market Share[20] YOY % Change in Production
US Steel[21] 3,023 .96% -60%
Nucor[22] 2,808 .89% -53%
SCHN[23] 1,037 .33% -19%
Steel Dynamics[24] 886 0.28% -45%
AK Steel[25] 740 0.23% -57%
CMC[26] 435 0.14% -42%
Competition
Nucor distinguishes itself from the rest of the steel industry with its use of scrap steel, a fact that makes Nucor the largest recycler in the nation.[27] Furthermore, the company uses modern steel making techniques allowing Nucor to employ fewer workers. The workers that Nucor does employ are all independent of unions; these workers have a vested interested in the productivity of the company because a significant portion of their compensation is based on their own productivity.[28] In addition, Nucor has recently focused heavily on acquisitions to increase production capacity and to make the company more competitive in the global market.[29]
Total Global Steel Production Total Sales Cost of Sales Operating Income % Gross Margins
(mmt) (bil) (bil) (bil)
Nucor 22.12 $14.75 $12.05 $2.7 18%
US Steel (X) 21.63 $15.72 $13.93 $1.79 11%
Arcelor Mittal (MT) 110.5 $58.87 $51.37 $7.50 13%