Nucor 2015 Annual Report Download - page 24

22 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
STEEL INDUSTRY CONDITIONS
In spite of extremely turbulent global economic and steel industry conditions, the economy in the United States continues to experience
modest growth, and steel demand in this country is stronger than in many parts of the world. After several years of growth in nonresidential
construction markets (the sector to which we are most closely tied and the largest end market for steel), there was a small decrease in
nonresidential building demand in 2015. The domestic automotive market, which is the second largest end market for steel, had a record
year, with 17.5 million vehicles sold. This eclipsed the previous record set back in the year 2000. With an improved labor market and low
gasoline prices, vehicle sales are expected to continue to be strong in 2016. A steep drop in oil prices in 2015 had a significant negative
impact on demand for energy-related steel, which is the third largest end market for steel in the United States. Oil prices are expected to
remain low in 2016 due to significant oil inventories globally, which will likely keep demand depressed for energy-related steel products.
Long-term, we believe that the domestic economy can benefit from globally competitive energy prices.
Nucor’s earnings decreased in 2015, impacted significantly by continued extremely high levels of steel imports. Our industry remains
greatly constrained by the impact of global overcapacity. Weak economic conditions in Europe, slow growth in China and a strong dollar
relative to other foreign currencies have made the U.S. markets a prime target for foreign imports. 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 the bankruptcies of numerous domestic steel companies and ongoing 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. According to the American Iron and Steel Institute, global steel overcapacity in 2015 was estimated at
approximately 700 million tons per year, with China’s overcapacity being the largest piece at over 370 million tons. The Chinese
overcapacity alone is estimated to be three times greater than the entire U.S. annual demand for steel.
Imported steel and steel products continue to present unique challenges for us 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 were down slightly compared to 2014, but still remain 27% higher than they were in 2013. Total imports
captured 34% market share in 2015, matching a record level set in 2014, despite significant unused cost-competitive domestic capacity.
The surge comes from numerous countries and cuts across all product lines. Our products that experience the greatest amount of
imports include: semi-finished steel, reinforcing bar, plate and hot-rolled, cold-rolled and galvanized sheet steel. Countries that contribute
most significantly to the import total include South Korea, Turkey and China.
China continues to pose a major challenge in particular. It is the world’s largest producer and exporter of steel, accounting for approximately
50% of the steel produced globally. China exported a record 123 million net tons of steel in 2015, a 20% increase over a previous record
set in 2014. We believe Chinese producers, many of which are government-owned in whole or in part, 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 our markets at artificially low prices.
China is not only selling steel at artificially low prices into our 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. In a more indirect manner, but still significant, is the import of fabricated steel products, such as oil country tubular goods, wind
towers and other construction components that were produced in China.
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 some of the most arduous global market conditions they have experienced in history. The average capacity utilization
rate of U.S. steel mills was at a historically unprecedented low of 52% in 2009. The average industry capacity utilization rate increased to
approximately 77% in both 2014 and 2013, but dropped to 71% in 2015. These rates compare unfavorably 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 2016, it is
unlikely that average capacity utilization rates will increase significantly due to the continued flood of steel imports into the U.S. The average
utilization rates of all operating facilities in our steel mills, steel products and raw materials segments were approximately 68%, 63% and
56%, respectively, in 2015, compared with 78%, 64% and 63%, respectively, in 2014. In spite of challenging market conditions and lower
utilization rates in 2015, several of our product groups realized improved performance over the prior year, including our bar and structural
steel divisions as well as our steel products group. Unfortunately, our sheet and plate divisions did not fare as well compared to 2014.
Macro-level uncertainties in world markets should continue to weigh on global and domestic growth in 2016. We believe our 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.