Nucor Corporation was incorporated in Delaware in 1958. Nucor and affiliates are manufacturers of steel and steel products, with operating facilities and customers primarily located in North America and, increasingly, internationally. In February 2008, Nucor acquired The David J. Joseph Company (“DJJ”) and its affiliates. Through DJJ, Nucor also brokers ferrous and nonferrous metals, pig iron, hot briquetted iron (“HBI”) and direct reduced iron (“DRI”); supplies ferro-alloys; and processes ferrous and nonferrous scrap. Additionally, the Company’s operations include international trading companies that buy and sell steel and steel products.
Nucor is North America’s largest recycler, using scrap steel as the primary material in producing our products. In 2009, we recycled approximately 13.4 million tons of scrap steel.
Nucor reports its results in the following segments: steel mills, steel products and raw materials. Net sales to external customers, intercompany sales, depreciation expense, amortization expense, earnings (loss) before income taxes and noncontrolling interests, assets and capital expenditures by segment for each of the three years in the period ended December 31, 2009 are set forth in Note 22 of Notes to Consolidated Financial Statements of the 2009 Annual Report, which is hereby incorporated by reference.
Principal Products Produced
Principal products from the steel mills segment are hot-rolled steel (angles, rounds, flats, channels, sheet, wide-flange beams, pilings, billets, blooms, beam blanks and plate) and cold-rolled steel. Principal products from the steel products segment are steel joists and joist girders, steel deck, fabricated concrete reinforcing steel, cold finished steel, steel fasteners, metal building systems, light gauge steel framing, steel grating and expanded metal, and wire and wire mesh. The raw materials segment produces DRI from Nucor’s facility in Trinidad; brokers ferrous and nonferrous metals, pig iron, HBI and DRI; supplies ferro-alloys; and processes ferrous and nonferrous scrap.
Hot-rolled steel is manufactured principally from scrap and scrap substitutes, utilizing electric arc furnaces, continuous casting and automated rolling mills. Cold-rolled steel, cold finished steel, steel joists and joist girders, fabricated concrete reinforcing steel, grating and expanded metal, cold drawn wire and steel fasteners are manufactured by further processing of hot-rolled steel. Steel deck, light gauge steel framing and wire mesh are manufactured from cold-rolled and cold drawn steel.
Markets and Marketing
In the steel mills segment, hot-rolled and cold-rolled sheet steel are produced to customer orders. In addition, other hot-rolled and cold-rolled steel are manufactured in standard sizes and inventories are maintained. In 2009, approximately 86% of the steel mills segment production was sold to non-affiliated customers; the remainder was used internally by the steel products segment. Hot-rolled steel and cold-rolled steel are sold primarily to steel service centers, fabricators and manufacturers throughout the United States and, increasingly, internationally. In 2009, approximately 30% of our sheet steel sales were made to contract customers with the balance of sales made in the spot market at prevailing prices at the time of sale. These contracts permit price adjustments to reflect changes in prevailing raw material costs and typically have terms ranging from six to twelve months.
In the steel products segment, steel joists and joist girders, and steel deck are sold to general contractors and fabricators throughout the United States. Substantially all work is to order and no unsold inventories of finished products are maintained. The majority of sales contracts are firm fixed-price contracts and are normally competitively bid against other suppliers. Longer term contracts may permit price adjustments to reflect changes in prevailing raw materials costs. Reinforcing products are sold on a construction contract bid basis. Product applications include highways, bridges, reservoirs, utilities, hospitals, schools, airports, stadiums and high-rise buildings. Cold finished steel, steel fasteners, steel grating, wire and wire mesh are manufactured in standard sizes and inventories are maintained. Cold finished steel and steel fasteners are sold primarily to distributors and manufacturers throughout the United States and Canada.
Products from the steel mills and steel products segments are marketed mainly through in-house sales forces. The principal competitive factors are price and service. The markets that Nucor serves are tied to capital and durable goods spending and are affected by changes in economic conditions. Considerable competition exists from numerous domestic manufacturers and foreign imports.
In the raw materials segment, ferrous and nonferrous scrap metal is processed and sold to domestic and international consumers. Additionally, brokerage of scrap substitutes, supply of ferro-alloy, and transportation, material handling and other services are provided to users of scrap metals. The primary customers for ferrous scrap are steel mills and foundries that use scrap as a raw material in their manufacturing process. Nonferrous customers include aluminum can companies, secondary aluminum smelters, steel mills and other processors and consumers of various nonferrous metals. Scrap products and services are marketed through in-house sales forces. In 2009, approximately 18% of the ferrous and nonferrous scrap tons sold by the raw materials segment were to non-affiliated customers.
Additionally, the Company’s other operations include international trading companies that buy and sell steel and steel products manufactured by Nucor mills as well as other steel manufacturers.
Due to the global economic crisis that began in the second half of 2008 and continued through 2009, there has been a widespread weakening of global economic conditions resulting in decreased capital spending. Because of this deterioration, the related demand for our products has diminished. Looking forward into the first quarter of 2010, we believe that steel market conditions will remain extremely challenging. One indicator of general economic conditions is the unemployment rate. In December 2009, the Bureau of Labor Statistics released the U6 real unemployment rate of 17%. The U6 rate includes total unemployed plus workers who want to work full time but are employed part time for economic reasons. Another indicator of market conditions for our industry is the capacity utilization rate. According to the American Steel Institute, industry capacity utilization rates for 2009 were 51% compared to 81% in 2008 and 87% in 2007. As a result, we believe that any increased demand in the North American steel markets will be part of a long, slow recovery.
We anticipate that global demand in 2010 will bring the steel industry close to production levels experienced prior to the current economic recession, with North America and Europe trailing behind growth in other parts of the world. Any sizeable increase in demand in North America will primarily come from replenishing inventory following the destocking that occurred in late 2008 and early 2009. Additionally, we expect moderate growth in global demand over the next five years, primarily related to the continued building of infrastructure in China, India and other industrializing nations of the world.
In the midst of this economic crisis, Nucor has been active in calling on policymakers to enforce global trade agreements and address the jobs crisis in the United States. The illegal trade practices of some of our trading partners, particularly China, continue to be an important concern for the company. In mid-2008, in response to the global economic crisis, China returned to its practice of pegging its currency to the dollar. Chinese currency manipulation has contributed to huge U.S. trade deficits and the shrinking of our country’s manufacturing base. The Obama Administration has begun to take positive steps toward enforcing trade agreements. The Commerce Secretary and U.S. Trade Representative have both stated that enforcement of trade agreements is essential. The President has also acknowledged the role that the currency policies of our competitors can play in creating competitive disadvantages. The Administration put this acknowledgement into action when it imposed duties on tires and oil country tubular goods from China during November 2009.
In order to jump-start economic growth, Nucor has urged lawmakers to increase spending on our country’s outdated and deteriorating infrastructure. According to the American Society of Civil Engineers, we need $2.2 trillion in spending over the next five years to repair and update our infrastructure in order to keep the nation globally competitive. The stimulus package passed in early 2009 allocated only $110 billion out of the total $787 billion package for infrastructure, of which less than half of the funds allocated to infrastructure have actually been spent at the date of this filing. We have also encouraged efforts to replace foreign sources of energy with domestically-produced energy as a way to reduce our trade deficit and secure reliable, affordable sources of energy. Traditional and energy-related infrastructure projects would help create the jobs needed to offset the 8.4 million jobs lost during this recession.
We continue to increase our presence in the steel mills segment through greenfield projects such as our special bar quality (“SBQ”) mill in Memphis, Tennessee, which has an estimated annual capacity of 850,000 tons. Complementing our mills in South Carolina and Nebraska, the Memphis mill positions Nucor to provide the most diverse, highest quality and lowest cost SBQ offering in North America. At the start of 2009, we began shipping SBQ from the Memphis mill to our customers.
Another greenfield project is the Castrip facility in Blytheville, Arkansas, which began production in late 2009. Nucor began operations of its other Castrip facility in Crawfordsville, Indiana, in 2002. These facilities use the breakthrough technology of strip casting, to which Nucor holds exclusive rights in the United States and Brazil. Strip casting involves the direct casting of molten steel into near final shape and thickness with minimal hot or cold rolling, allowing lower investment and operating costs, reduced energy consumption and smaller scale plants than can be economically built with current technology. This process also reduces the overall environmental impact of producing steel by generating significantly lower emissions. We continue to explore potential new joint ventures utilizing the Castrip technology.
In November 2009, we commissioned the previously idle Kingman, Arizona, rolling mill that we acquired in 2003. Operations will begin in the second quarter of 2010 with initial output of straight-length rebar, coiled rebar and wire rod slated for production of more than 100,000 tons with the ability to increase annual production to 500,000 tons. Also during 2009, we commenced operations at the new galvanizing facility at our sheet mill in Decatur, Alabama. The addition of the Decatur galvanizing line will increase Nucor’s value-added coated flat rolled products annual capacity by one-third to two million tons per year.
Nucor also began construction on a plate heat treating facility at our plate mill in Hertford County, North Carolina. The heat treat line will have an estimated annual capacity of 120,000 tons and will have the ability to produce heat treated plate from 3/16” to 2” thick.
We recently began a project to expand the capacity of our Nu-Iron DRI production facility in Trinidad. This project will increase Nu-Iron’s production capacity of high-quality iron units. The project is expected to be complete in late 2010. The Trinidad site benefits from a low-cost supply of natural gas and favorable logistics for receipt of Brazilian iron ore and shipment of DRI to the U.S.
In May 2008, Nucor applied for a permit to build an iron-making facility in St. James Parish, Louisiana. This project has been significantly delayed while we continue working through an extended permitting process and monitor the status of proposed climate change legislation. We remain committed to our goal of controlling one-third of our iron inputs via pig iron, direct reduced iron or other iron-making technologies and have several options under development to complement or replace our Louisiana blast furnace project if the consequences of climate change legislation makes that project unviable.
Nucor’s acquisitions over the past few years have strengthened our position as North America’s most diversified producer of steel and steel products. This diversity has been a significant factor in Nucor’s increased profitability through 2008 and added market share across multiple product categories. Although our acquisition initiatives were put on hold in late 2008 because of the economic crisis, we did add to our rebar fabrication footprint with the acquisition of Free State Steel in 2009. We continue to meet with potential acquisition targets and joint venture partners as we evaluate opportunities in the economic downturn to grow Nucor’s long-term earnings power for our shareholders.
The annual capacity of Nucor’s downstream value-added products has more than doubled since late 2006 to over 4.5 million tons. We have done this with our very successful acquisitions of Verco Manufacturing Company in steel decking; Harris Steel Group Inc. in rebar fabrication, cold finished bars and metal grating; LMP Steel & Wire Company in cold finished bars; Magnatrax Corporation in metal buildings; and Nelson Steel, Inc. in wire mesh. Harris Steel has been a growth platform for Nucor over the past three years, having completed numerous acquisitions in the months following Nucor’s initial acquisition in 2007. With the acquisition of Ambassador Steel, Inc. in 2008, Harris increased our rebar fabrication capacity to over 1.5 million tons.
In February 2008, Nucor announced the acquisition of SHV North America Corporation, which owns 100% of DJJ and certain affiliates. Since scrap is our largest single cost, this strategic investment provides an ideal growth platform for Nucor to expand its direct ownership in the steel scrap supply chain and further our raw materials strategy. By the end of 2008, Nucor added approximately one million tons of scrap processing and 23 locations via four scrap processing acquisitions executed by DJJ’s management team. Although the economy precluded our team from pursuing acquisitions in 2009, we expect to add additional scrap capacity in 2010. Nucor’s total scrap processing capacity is now approaching five million tons. Additionally, DJJ brokers ferrous scrap, ferro-alloys and non-ferrous metals and internationally sources scrap, pig iron and scrap substitutes. The DJJ Mill and Industrial Services business provides logistics and metallurgical blending operations and offers on-site handling and trading of industrial scrap. The DJJ Rail Services business oversees a large private fleet of rail cars dedicated to scrap movement and offers complete railcar fleet management and leases for third parties. All of these businesses have strategic value to Nucor as the most diversified North American steel producer.
In 2008, Nucor opened a European office and entered into a joint investment with Duferco S. A. In July 2008, Nucor acquired a 50% equity interest in Duferdofin Nucor S.r.l. for approximately $671.3 million (including $4.3 million paid in 2009 as an adjustment to the purchase price). Duferdofin Nucor operates a one million ton-per-year steel melt shop with a bloom/billet caster in Brescia, Italy. The Company also operates four rolling mills located throughout Italy—two beam mills, one track shoes/cutting edges mill and a new merchant/rebar mill. The rolling mill capacities include 1 million metric tons for beams, 55,000 metric tons for track shoes/cutting edges and 450,000 metric tons for bar. The new merchant/rebar mill was commissioned in late 2009. Duferdofin Nucor’s customers are primarily steel service centers and distributors located in Italy, Southern Europe and North Africa.
Nucor has a simple, streamlined organizational structure to allow our employees to make quick decisions and be innovative. Our organization is highly decentralized, with most day-to-day operating decisions made by our division general managers and their staff. Only 90 employees are located in our executive office. The majority of Nucor’s 20,400 employees are not represented by labor unions.