Nucor SWOT and PESTLE Analysis

Strength

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Weakness

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Opportunity

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Threat

1. Global overcapacity and unfair trade practices: High levels of steel imports have a significant impact on Nucor’s earnings. US market is a prime target for foreign steel imports because of weak economic conditions in Europe, slow growth in China and a strong U.S. dollar relative to other foreign currencies.
While the steel industry has historically been characterized by periods of overcapacity and intense competition for sales among producers, we are currently experiencing an era of global overcapacity that is unprecedented. Despite ongoing domestic and global steel industry consolidation, the extraordinary increase in China’s steel production in the last decade, together with the excess capacity from other countries that have state-owned enterprises (“SOEs”) or export-focused steel industries, have exacerbated this overcapacity issue domestically as well as globally. China is the world’s largest producer and exporter of steel, accounting for almost half of the steel produced annually in the world. Chinese producers continue to benefit from their government’s manipulation of foreign currency exchange rates and from the receipt of government subsidies, which allow them to sell steel into Nucor’s markets at artificially low prices. Many of these Chinese producers are government-owned in whole or in part. Imported steel and steel products continue to present unique challenges for it because foreign producers often benefit from government subsidies, either directly through SOEs or indirectly through government-owned or controlled financial institutions. Foreign imports of finished and semi-finished steel increased more than 15% in 2017 compared to 2016, remaining excessive with imports of finished steel products alone capturing 27% of the U.S. market despite significant unused cost-competitive domestic capacity. The surge comes from numerous countries and cuts across many product lines. Countries that contribute significantly to the import total include South Korea, Turkey, Japan and China. China is not only selling steel at artificially low prices into its domestic market but also across the globe. When it does so, steel products that would otherwise have been consumed by the local steel customers in other countries are displaced into global markets, compounding the issue.

2. Cyclical nature of the steel industry and challenging global markets: Although the nature of steel industry has always been cyclical, manufacturers of steel and steel products in North America are witnessing very challenging global market conditions. From 2015 through 2017, approximately 71% of the average domestic industry capacity utilization rates have lost steam. These rates compare unfavourably to capacity macro-level uncertainties in the world markets which continue to weigh on global and domestic growth in 2018.
During economic booms, steel demand increases and during recessions, it drops. Steel industry went through a consolidation phase at the end of fiscal 2014. Due to overproduction, a low steel demand phase was experienced in the steel industry from 2014 to 2016. One of the reasons for this low demand could be long life of steel products, a minimum of 10 years. Thus, the industry gets pushed to go through a cyclic phase once every 5 to 6 years. Overproduction of steel by China aggravated this situation. It dumped its excess steel at low prices in other countries because of low domestic demand. To compensate for these low-priced imports from China, manufacturing operations were stopped internally by some major producers such as those in Europe and the United States. Fall in steel price was one of the outcomes of oversupply of steel by China. As a result, several thousands of employees lost their jobs in Luxembourg’s ArcelorMittal, South Korea’s Posco, and US Steel, etc. just to highlight a few names. It is still unclear how the industry is going to resurrect from these setbacks.

3. Price fluctuations of raw materials: The price of Nucor’s principal raw material, ferrous scrap, is volatile and often increases or decreases rapidly in response to changes in domestic demand, unanticipated events that affect the flow of scrap into scrap yards and changes in foreign demand for scrap. Electricity and natural gas usage are significant costs to Nucor. Total energy costs increased approximately $1 per ton from 2016 to 2017, primarily due to higher electricity and natural gas unit costs.
In its attempts to mitigate the scrap price risk, the Company undertakes managing scrap inventory levels at the steel mills to match the anticipated demand over the next several weeks. Certain scrap substitutes, including pig iron, have longer lead times for delivery than scrap, which can make this inventory management strategy difficult to achieve. It gets greater control over its metallic inputs and helps in mitigating the risks by successful implementation of its raw material strategy, including key investments in direct reduced iron (“DRI”) production coupled with the scrap brokerage and processing services, which are performed by its David J. Jospeph Company‘s team. Nucor is more likely to protect its gross margin from significant erosion by passing relatively quickly the increased costs of ferrous scrap and scrap substitutes to its customers during periods of stronger or improving steel market conditions.
During weaker or rapidly deteriorating steel market conditions, including the global steel market environment of the past several years, weak steel demand, low industry utilization rates, the impact of imports create an even more intensified competitive environment. All the factors discussed above have an effect on pricing, which increases the chances of lower gross margins been experienced by Nucor.

Political

1. Change in tax rate: The effective tax rate in the US in fiscal 2017 was 21.1% compared with 30.7% in 2016. The decrease in rate between 2016 and 2017 was primarily due to the provisional net tax benefit of $175.2 million the Company recorded in 2017 related to the enactment of the Tax Cuts and Jobs Act (the “Tax Reform Act”), which the President signed into law on December 22, 2017. The Tax Reform Act created two new U.S. tax base-erosion provisions, the global intangible low-taxed income (“GILTI”) and the base erosion and anti-abuse tax provisions. The Company has elected to account for GILTI tax in the period in which it is incurred. The recently passed tax reform legislation will reduce Nucor’s tax burden, increase earnings and incentivize additional investment so that it can continue to grow Company for the long term.

2. Anti-dumping and anti-subsidy orders: In 2017, the U.S. Department of Commerce made favorable rulings in trade cases involving steel plate, rebar and wire rod. At the end of the year, the Department issued a very important decision to combat circumvention of trade duties, which has been a problem for some time. It made a preliminary determination that corrosion-resistant and cold-rolled steel from Vietnam that originated in China evaded U.S. anti-dumping and anti-subsidy orders. The Trump administration has shown that it is willing to aggressively use all the tools at its disposal to take meaningful action against unfairly traded imports.

3. Unfair trade practices: The steel industry has always been cyclical in nature, but North American producers of steel and steel products have been facing, and are continuing to face, very challenging global market conditions. The average domestic industry capacity utilization rates have languished around 71% from 2015 through 2017. These rates compare unfavourably to capacity utilization rates that reached as high as 87% in 2007. Although domestic demand for steel and steel products is expected to remain healthy in 2018, we believe it is unlikely that average capacity utilization rates will increase significantly unless the U.S. government and world trade organizations continue to address global overcapacity and unfair trade practices. Nucor’s net sales and financial results will continue to be adversely affected by these general global economic factors as well as the global steel production overcapacity issue.

Economic

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Social

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Technological

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Legal

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Environmental

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