Nucor at a Crossroads

Topics: Steel, Steelmaking, Pig iron Pages: 8 (2758 words) Published: January 25, 2013
Nucor at a Crossroads
On December 7, 1986, F. Kenneth Iverson, chairman and chief executive officer (CEO) of Nucor Corporation, awaited a delegation from SMS . Iverson had to decide whether to commit Nucor to a new steel mill that would commercialize thin-slab casting technology developed by SMS. Preliminary estimates indicated that the mill would cost $280, and that start-up expenses and working capital of $30 million each would push the total cost to $340 million. Successful commercialization of thin-slab casting would let Nucor enter the flat sheet segment that accounted for half the U.S. market for steel. The U.S. Market for Steel

In 1986, U.S. producers shipped 70 million tons of steel mill products. Subtracting exports of one million tons and adding imports of 21 million tons implied 90 million tons of domestic consumption of steel that year. Relative to the most recent peak year, 1979, domestic shipments had decreased by 30% and domestic demand by 22% (see Exhibit I). The decline in demand derived from the stagnation of many steel-intensive industries, particularly automobile manufacture, efforts to use steel more efficiently and the emergence or substitute materials such as aluminum, plastics and advanced composites. Shipments could also be classified by customer group. The four most important ones, ranked by volume, were service centers and distributors, the automotive sector, construction, and the appliance and equipment industries. Service centers and distributors were intermediaries Price, quality and dependability were the three most important buyer purchasing criteria. Uncompetitive pricing was probably the major reason U.S. steelmakers had lost ground to imports. U.S. Steelmakers

There were three groups of steelmakers in the United States in 1986: integrated firms with the capacity to produce 107 million tons of steel by reducing iron ore, minimills with 21 million tons of capacity to produce steel by melting scrap, and specialty steelmakers with 5 million tons of capacity to produce stainless and other special grades of steel.

Integrated Steelmakers
Integrated steelmakers had long operated as a stable oligopoly led by U.S. Steel. U.S. Steel was formed by merger in 1901 in a transaction that capitali7xd its value at $1.4 billion, or about 7% of U.S. GNP. The merged entity pursued a policy of price leadership that brought stability to a cyclical industry and healthy profits to its shareholders. By World War II, U.S. Steel's share of the U.S. steel market had slipped from two-thirds at the time of its formation to one-third. In the aftermath of World War II, U.S. integrated mills as a whole accounted for about half of the world's raw steel production. Integrated U.S. steelmakers' after-tax return on equity (ROE) had exceeded h e average for U.S. manufacturing in only one year. 1974. This decline in performance was attributed in large part to the failure of the integrated U.S. steelmakers to commit quickly to new technology. They continued to invest in open hearth furnaces through the early 1960s despite the advent of the basic oxygen furnace, which reduced the cycle time for converting iron into steel from 10 hours to 30 minutes, and ended up, as one source put it with 40 million tons of the wrong kind of capacity. Their share of the flat sheet segment had been slightly lower, reaching 18% in 1986. IAs the 1970s ended, integrated U.S. steelmakers began a dramatic restructuring of their operations. They cut steelmaking capacity from 145 million tons in 1979 to 107 million tons by 1986, with the largest of them shouldering a disproportionately large share of the cutbacks. Labor productivity nearly doubled as a result. U.S. Steel, LTV Steel and Bethlehem Steel were the three largest U.S. integrated steelmakers in 1986, with 59% of total integrated steelmaking capacity and 49% of integrated flat-rolling capacity. Minimills

Although small, nonintegrated steel plants had existed in the United...
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