Nucor Corporation (NYSE: NUE) managed through a steep steel industry downturn better than most peers, including United States Steel Corporation (NYSE: X) and AK Steel (NYSE: AKS). But it did more than just survive, and that sets Nucor up for a bright future.
A painful recession
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Not surprisingly, demand for steel dipped after the 2007 to 2009 recession, pushing most major U.S. steel makers into the red. That included Nucor, which lost $0.94 a share in 2009. Shortly after that, foreign imports started to flood into the market at prices that U.S. mills believed to be below production costs (also known as dumping). That prolonged the steel downturn despite relatively solid domestic steel demand.
Some of the largest U.S. steelmakers have had a hard time competing. For example, AK Steel has lost money every year since 2009. U.S. Steel has lost money in all but one year since 2009. But Nucor handled the downturn much better, largely because of its use of electric arc mills, which are more flexible than older blast furnace technology, and its variable pay structure. Nucor has made money every year since 2009.
Focusing on the right strategy
Nucor's profitability was especially important because during the downturn many of the biggest industry players were forced to retrench. That meant selling assets and cutting costs. A recent example was U.S. Steel's agreement to sell its U.S. Steel Canada division to Bedrock Industries. In fact, U.S. Steel spent so much time and effort on surviving the downturn that it didn't spend enough preparing for the next upturn.
That fact became painfully clear after first-quarter earnings were announced and then-CEO Mario Longhi explained, "This remains a cyclical industry and we will not let favorable near-term business conditions distract us from taking the outages we need to revitalize our assets in order to achieve more reliable and consistent operations, improve quality and cost performance, and generate more consistent financial results." The stock sold off sharply and the CEO stepped down shortly thereafter.
Nucor was, basically, at the polar extreme. It entered the downturn in solid financial shape and used the industry's pain to invest in its business and expand via acquisition. Here's a short list of what was accomplished: Nucor built a new direct reduced iron ore facility. It purchased steel foundation distributor Skyline Steel, flat rolled steel mill Gallatin Steel, cold finished bar mills in Georgia and Ohio, a plate mill in Texas, and three pipe and tube mills to build a new business segment. In addition to these moves, it also expanded operations at multiple facilities and is building new mills in Canada and Mexico (through a joint venture). Believe it or not, that's not the full list.
Nucor used the downturn to prepare for the next upturn. But it goes beyond just getting bigger, Nucor's moves are strategic. For example, the direct reduced iron ore investment will help ensure it always has access to high quality and low cost iron ore for its mills. And the three tubular steel acquisitions create a division that produces value-added products that are, to some extent, insulated from cheap foreign imports. Basically, Nucor is a larger and better positioned company coming out of the downturn than it was when it entered the downturn.
The best is yet to come
That explains why Nucor's future is so bright, and this isn't a one-off event. Using downturns like this is a key piece of Nucor's business model. The goal is to emerge stronger after every downturn in the highly cyclical steel industry. Good things are likely in the short term, but the real reason the best is yet to come for Nucor is because the steelmaker is already planning to repeat this process when the next downturn inevitably arrives.
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