Nucor 2013 Annual Report Download - page 24

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Artificially cheap exports by some of our major foreign competitors to the United States and elsewhere reduce our net sales and adversely
impact our financial results. Aggressive enforcement of trade rules by the World Trade Organization to limit unfairly traded imports remains
uncertain, although it is critical to our ability to remain competitive. We have been encouraged by recent actions the United States
International Trade Commission has taken on existing antidumping and countervailing duty orders on hot-rolled sheet steel as well as on
imports of rebar that threaten domestic rebar producers. We continue to believe that assertive enforcement of world trade rules must be
one of the highest priorities of the United States government.
A major uncertainty we continue to face in our business is the price of our principal raw material, ferrous scrap, which is volatile and often
increases rapidly in response to changes in domestic demand, unanticipated events that decrease the flow of scrap into scrap yards and
increased foreign demand for scrap. In periods of rapidly increasing raw material prices in the industry, which is often also associated with
periods of strong or rapidly improving steel market conditions, being able to increase our prices for the products we sell quickly enough
to offset increases in the prices we pay for ferrous scrap is challenging but critical to maintaining our profitability. We attempt to manage
this risk via a raw material surcharge mechanism, which our customers understand is a necessary response by us to the market forces
of supply and demand for our raw materials. The surcharge mechanism functions to offset changes in prices of our raw materials and is
based upon widely available market indices for prices of scrap and other raw materials. We monitor changes in those indices closely and
make adjustments as needed, generally on a monthly basis, to our surcharges and sometimes directly to the selling prices for our products.
The surcharges are determined from a base scrap price and can differ by product. To further help mitigate the scrap price risk, we also
aim to manage scrap inventory levels at the steel mills to match the anticipated demand over a period of the next several weeks for various
steel products. Certain scrap substitutes, including pig iron, have longer lead times for delivery than scrap.
During periods of stronger or improving steel market conditions, the surcharge is generally an effective mechanism that facilitates Nucor’s
ability to pass through, relatively quickly, the increased costs of ferrous scrap and scrap substitutes and to protect our gross margins from
significant erosion. During weaker or rapidly deteriorating steel market conditions, including the steel market environment of the past
several years, weak steel demand, low industry utilization rates and the impact of imports create an even more intensified competitive
environment. All of those factors, to some degree, impact base pricing, which increases the likelihood that Nucor will experience lower
gross margins. During these periods, the surcharge mechanism is less effective at protecting our gross margins; however, there are
typically less frequent and smaller raw material cost increases.
Although the majority of our steel sales are to spot market customers who place their orders each month based on their business
needs and our pricing competitiveness compared to both domestic and global producers and trading companies, we also sell contract
tons, primarily in our sheet operations. Approximately 65% of our sheet sales was to contract customers in 2013 (65% in 2012), with
the balance in the spot market at the prevailing prices at the time of sale. Steel contract sales outside of our sheet operations are not
significant. The amount of tons sold to contract customers depends on the overall market conditions at the time, how the end-use
customers see the market moving forward and the strategy that Nucor management believes is appropriate to the upcoming period.
Nucor management considerations include maintaining an appropriate balance of spot and contract tons based on market projections
and appropriately supporting our diversified customer base. The percentage of tons that is placed under contract also depends on the
overall market dynamics and customer negotiations. In years of strengthening demand, we typically see an increase in the percentage
of sheet sales sold under contract as our customers have an expectation that transaction prices will rapidly rise and available capacity
will quickly be sold out. To mitigate this risk, customers prefer to enter into contracts in order to obtain committed volumes of supply from
the mills. Our contracts include a method of adjusting prices on a periodic basis to reflect changes in the market pricing for steel and/
or scrap. Market indices for steel generally trend with scrap pricing changes but during periods of steel market weakness, including the
market conditions of the past several years, the more intensified competitive steel market environment can cause the sales price indices
to result in reduced gross margins and profitability. Furthermore, since the selling price adjustments are not immediate, there will always
be a timing difference between changes in the prices we pay for raw materials and the adjustments we make to our contract selling prices.
Generally, in periods of increasing scrap prices, we experience a short-term margin contraction on contract tons. Conversely, in periods
of decreasing scrap prices, we typically experience a short-term margin expansion. Contract sales typically have terms ranging from six
to twelve months.
Another significant uncertainty we face is the cost of energy. The availability and prices of electricity and natural gas are influenced today
by many factors including changes in supply and demand, advances in drilling technology and, increasingly, by changes in public policy
relating to energy production and use. Proposed regulation of greenhouse gas emissions from new and refurbished power plants could
increase our cost of electricity in future years, particularly if they are adopted in a form that requires deep reductions in greenhouse
gas emissions. Adopting these regulations in an onerous form could lead to foreign producers that are not affected by them gaining a
competitive advantage over us. We are monitoring these regulatory developments closely and will seek to educate public policy makers
during the adoption process about their potential impact on our business.