Nucor at a Crossroads

1986 – CEO Kenneth Iverson. Company Nucor wants to invest in a new mill using SMS’s
technology for thin-slab casting.
Cost of the mill: US$280 M. Plus stat-up expenses and working capital of US$30 M each.
Total cost expected: US$340 M.
Pros: this investment would let Nucor enter the flat sheet segment (50% of the US market for
steel).

US MARKET

1986: total domestic market was 90 M tn. Production was 70 M, imports 21 M and exports 1 M.
Domestic shipments and demand had been decreasing since 1979.
Decline in demand was due to stagnation of industries, particularly automotive. But there was a
general agreement in 1986 that the market would not decline further in near term.
Flat sheet was the most important group of steel products: 52% of domestic shipments in 1986.
Main customer groups: 1) service centers and distibutors 2) automotive sector 3) construction
and 4) appliance and equipment industries.
Main purchasing criteria: 1) price 2) quality 3) dependability (not so important).

US STEELMAKERS

Three groups of steelmakers 1) integrated firms – 107 M tn. 2) Minimills – 21 M tn. 3)

Specialty steelmakers – 5 M tn.

Integrated steelmakers
Was an oligopoly. Performance was lower in the last years since they didn’t invest in
technology at the same rate of other countries.
1970s restructuring of capacity and less employment.
1982 labor costs higher than minimills translating in huge losses for the companies.
Built to last 25-30 years.

Minimills
They used scrap as input. They had a better scale of production and less capital cost per ton of
product. They were built to last 10 years.
Initially selling for low-end structural products. They began pursuing regional strategies,
locating within 200-300 miles from the market, looking for cheap electricity.
1975s, market was saturated. Started to expand geographically and to new products. But profits
shrank and some of them closed.
1986 they accounted for 16% of the local capacity.
43% of the minimills were controlled by five competitors
1)NorthStar – 2.4 M tn 2)Nucor – 2.1 M tn. 3)Northwestern Steel – 1.8 M tn. 4) Florida Steel –
1.6 M tn. 5)Chaparral – 1.1 M Tn.

NUCOR CORPORATION

History
1960 Nuclear Corp started to be a small conglomerate with no positive results.
1962 they hired Iverson. He divested the worst businesses of the company and focused on
Vulcraft steel plants in South Carolina and Nebraska.
In 1969 they built a minimill in South Carolina to make steel from scrap. Costed $6 millions.
Renamed Nucor in 1972 and expanded steadily.

Administration
Best characteristics of the company according to the top management: they knew how to build
steel plants economically and operate them efficiently. They also supported free trade.
Only 5 layers of management, with about 275 employees per plant. The decentralized as many
decisions as they could. Headquarters managed the cash decisions and demanded each plant to
achieve an annual contribution of 25% of the net assets employed.
They also managed a compensation system based in cash rewards. Also, employees had stock
ownership. Iverson had 1.3%, other officers 4.8% and all other employees 3.9%. No other
shareholder owned as much as 5% of Nucor.
There were policies of “equality” in terms of holidays, insurance, clothing. No differences
among employees.

Operations
End of 1986: 16 steelmaking plants at 10 locations in the US. Nucor Steel’s production was 1.7
million tons. Was the second most productive steelmaker in the world.
Nucor sold 2/3 of its output to external customers and 1/3 internally. Its four steelmills were
dispersed geographically but sometimes their work was complementary. Primary customers:
service centers and distributors. No quantity discounts.
Vulcraft 3/4 internal sales. 6 plants. Sourced 95% of steel bars from Nucor at a discount of $10
per ton relative to market prices.

Very good management of employees, training and recruiting. Employee turnover was 1-5% per
year.

Investment
Had invested steadily and heavily in upgrading its capacity. Investment levels are, in average,
2.9 times its depreciation charges (vs. 1.6 the competition).
Capital budgeting was an informal process. All expenditures higher than US$40.000 had to be
approved by the top management.
Criteria for investments: 1) will it perform technically as advised? 2) will it be able to get the
ROA planned? 3) do previous capital expenditures constrain our ability to commit 100% to the
project?
New plants were supposed to achieve a 25% ROA within five years. Investment in equipment
were evaluated on the basis of payback periods: longer payback were allowed for investments
that increased capacity rather than for the ones that reduced costs. Restriction: debt to capital
ratio less than 30% and not able to issue new stocks.
New plants: designed with the intention of expanding. But 500 of employees as ceiling. Located
in rural areas with railroads, low electricity rates and water. They acted as their own
constructors.
Record in starting of operations in a new minimill: 18 months.
1986 commitment with Yamato Kogyo for a joint venture 51/49% to produce wide flange
beams. The factory 650.000 tn of capacity, meaning 1/5 of the market. Cost US$175 M. They
would contribute with construction and management skills.

THIN-SLAB CASTING
SMS began to promote another thin-slab casting technology (alternative to the Hazelett) called
CSP (Compact Strip Production).
No one contracted SMS yet.
SMS’s preliminary design for a CSP installation was a plan with 800.000 – 1M tons of capacity
at a cost of $300-400 per ton. Savings: relative to conventional castings, because they would
require only four rolling stands and labour and energy savings.
Continuous operation was key for success.

THE DECISION
Nucor had already spent US$6 M in a Hazelett equipment. But in 1896 CSP showed more
potential.
They studied feasibility of CSP plant with 1 M tons of capacity in a place close to steel and
scrap markets.
All the equipment was to be new but SMS offered one second-hand machinery at US$1M and
could be renovated at US$10M.
At first adopters, they would secure a US$10-20M discount on the US$90M in core machinery.
The CSP plant would cost in total US$280M, take 2 ½ years to complete and 2 more to reach
capacity.
Start-up costs and working capital would be US$30M each.
Pro: first adopter – 2 or 3 years until new followers get the technology.
Cons: when others start the business, they would be facing a rise in the price of scrap.
If scrap prices rose above US$140 per ton, they would switch to direct reduced iron, but they
would need to change some facilities.
Marketing: confident about reaching the low-end market (construction applications). Low price
was key. They would also have to target the high end eventually.
Resource constraints: the joint venture was already agreed. The two projects would virtually
coincide. Capex US$100 simultaneously.
Yields of 10-year bond 7.26% and A-rated corporate bonds 9.41%.
Cash and short-term securities available US$185M
This would become obsolete in 10-12 years