Nucor 2015 Annual Report Download - page 25

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OUR CHALLENGES AND RISKS
Sales of many of our products are largely dependent upon capital spending in the nonresidential construction markets in the United
States, including in the industrial and commercial sectors, as well as capital spending on infrastructure that is publicly funded, such
as bridges, schools, prisons and hospitals. Unlike recoveries from past recessions, the recovery from the recession of 2008-2009 has
not yet included a strong recovery in the severely depressed nonresidential construction market. While we have experienced a continued
slightly positive trajectory in capital spending on nonresidential construction projects since 2009, we do not expect to see strong growth
in our net sales until we see a more sustained increase in spending on these types of construction projects. Congress did pass a five-year
surface transportation funding bill at the end of 2015, providing $305 billion for highway and public transportation projects. This is the
first major transportation funding bill Congress has passed in a decade.
The continued onslaught of artificially cheap exports by some of our major foreign competitors into the United States and elsewhere
reduces our net sales and adversely impacts 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. In 2015, the U.S. Congress and
the president approved legislation strengthening domestic trade laws. These updates to the country’s trade laws, the first update in more
than 20 years, will give the U.S. government stronger trade enforcement mechanisms. We have been encouraged by preliminary findings
in three flat-rolled trade cases involving corrosion-resistant, cold-rolled and hot-rolled steel products. All three cases are expected to be
finalized in 2016. We continue to believe that assertive enforcement of world trade rules must be one of the highest priorities of the United
States government.
Another important trade issue in 2016 is China’s continued treatment as a non-market economy in trade disputes. China was a
government-run, non-market economy in 2001 when it entered its Protocol of Accession to the World Trade Organization (Protocol), and
China remains a government-run, non-market economy today. The main objective of the Protocol was to encourage, and in some cases
to require, China to make market-based economic reforms. However, over the past 15 years, China has failed to take the required steps
to establish that it is a market economy under U.S. law. Therefore, the U.S. has no reason to change its treatment of China as a non-
market economy when only one of the relevant provisions of the Protocol expires in December 2016. By treating China as a non-market
economy in antidumping cases, the Commerce Department can assume that Chinese prices and costs are distorted, and uses other
methodologies to calculate antidumping duties. This often results in appropriately higher duties against Chinese products, in order to
offset its unfair trade practices.
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 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. 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 mitigate the scrap price risk by managing scrap inventory levels at the steel mills to match the anticipated demand over
the next couple of 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. Continued successful implementation of our raw material strategy, including key
investments in direct reduced iron (DRI) production coupled with the scrap brokerage and processing services performed by our team
at the David J. Joseph Company (DJJ), give us greater control over our metallic inputs and thus also help us to mitigate this risk.
During periods of stronger or improving steel market conditions, we are more likely to be able to pass through to our customers, 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 global 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 pricing, which increases the likelihood that Nucor will experience lower gross margins.
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 60% of our sheet sales were to contract customers in 2015 (50% and 65% in 2014
and 2013, respectively), 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