Business
Executive Summary
Problem Statement
Nucor needs to build traction for improved profitability in a slowly recovering steel industry amidst continued challenges of price volatility, cheap foreign imports and global steel oversupply.
Analysis
Improving Global Steel Outlook
The global steel industry is slowly recovering while the global economy is edging away from recession. In the forthcoming year, the World Steel Association forecasts that global steel production will increase by 3.3% to 3.4%. For the first time since 2011, all major steel consuming countries have shown positive growth. For the first time since 2006, the growth rate in China (about 3%) would be exceeded by the growth rate in the rest of the world (about 3.5%). This pattern is likely to continue as China shifts gradually to a service and consumer-driven economic growth model and growth in other emerging economies take hold (Lichtenstein, 2014).
Lesser Disruption to Steel Industry
Improved Capacity Utilisation. There will be improved capacity utilization as China begins to close ageing steel plants (Lichtenstein, 2014).
Lesser Disruption. There is likely to be lesser disruption in the steel industry as Chinese imports slow down due to anti-dumping rulings in many countries (Lichtenstein, 2014).
Softening of Raw Material Prices. Further softening of raw material prices is expected as new suppliers enter the market (Lichtenstein, 2014).
Challenges
Volatility. Volatility in terms of sudden spikes in raw materials and sudden drops in steel prices cannot be ruled out in the event of regional or global political, economic or natural disruptions (Lichtenstein, 2014).
Austerity. Subdued government spending is likely with public-sector austerity programs in place (Lichtenstein, 2014).
Excess Capacity. Large amount of excess capacity in the industry would challenge existing steel manufacturers (Lichtenstein, 2014).
Imported Steel. Despite anti dumping duties, US market’s share of imported steel has increased to 30% in 2013 from 25% in 2009 and is still on the rise (Zacks, 2014).
Alternate Materials. Steel will have to compete with alternate materials such as aluminum, cement, composites, ceramics and glass as they become increasingly viable to be used in lieu of steel (Zacks, 2014).
Nucor’s Specific Advantages
DRI Facility. Nucor’s direct reduction iron (DRI) facility in Louisiana came online in 2013. This would be a source of competitive advantage (Zacks, 2014).
Diversified Client Base. Nucor’s diversified client base would be a hedge against major disruptions (Zacks, 2014).
Alternatives
- Option A. Diversification into composites and alternate materials to offset potential losses to industries moving away from steel.
- Option B. Leveraging value added products for greater profitability amidst volatility.
- Option C. Consolidating back end operations by acquiring more iron ore plants.
Recommendation
Amidst the alternatives, it would be prudent to exploit Option B, ie to leverage value added products for greater profitability. This option would require little disruption in Nucor’s current business model and would serve to focus the company on its core strength of innovation.
Implementation
Just as Nucor has begun production of galvanized steel plates and structures, the company could do the necessary market research to identify the requirements in the industry for other value added products. Nucor would benefit from a first mover advantage in the market for value added products as most imports are only of basic steel products. Nucor would have to sell a lesser proportion of value added products to retain profitability, and this would offset price and demand spikes in volatility.
References
Lichtenstein, J.E. (2014). Steel industry outlook: Growth, opportunity and cautious optimism. Retrieved 12 Dec 2014, from http://www.accenture.com/us-en/blogs/cnr/archive/2014/03/05/steel-industry-outlook-growth-opportunity.aspx
Zacks. (2014). Nucor Corporation. Retrieved 11 Dec 2014, from http://www.zacks.com/ZER/free_report.php?free_report=free_report?ALERT=zrmodule&ADID=ZACKS_PFP_TOP_ZRMODULE&t=NUE&d_alert=rd_final_rank&ticker=NUE
