Nucor 2015 Annual Report Download - page 26

DIVERSIFIED PRODUCT MIX
Total Tons Sold to Outside Customers in 2015
36%
21%
10 %
8%
13%
12%
Sheet
Bar
Structural
Plate
Downstream products
Raw materials
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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 and the U.S. manufacturing base.
Finally, due to our natural gas working interest drilling programs with Encana, a substantial or extended decline in natural gas prices
could have a material adverse effect on the value of Nucor’s investment in these programs. In the fourth quarter of 2013, we announced
a joint decision with Encana to temporarily suspend drilling new wells until there is a sustained improvement in natural gas pricing.
A substantial or extended decline in the price of natural gas could result in further delays or cancelation of existing or future drilling
programs or curtailment in production at some properties which could have an adverse effect on our revenues, profitability and cash
flows. In addition, natural gas drilling and production are subject to intense federal and state regulation as well as to public interest in
environmental protection. Such regulation and interest, when coupled, could result in these drilling programs being forced to comply
with certain future regulations, resulting in unknown impacts on the programs’ ability to achieve the cost and hedge benefits we expect
from the programs.
OUR STRENGTHS AND OPPORTUNITIES
We are North America’s most diversified steel producer. As a result, our short-term performance is not tied to any one market.
Since 2009, we have made investments of more than $6 billion on projects that are not only diversifying our product offerings but
also the markets that we serve. These investments will grow our long-term earnings power by expanding our product portfolio into
higher value-added offerings that are less vulnerable to imports, improving our cost structure and further building upon our market
leadership positions. The pie chart below shows the diversity of our product mix by total tons sold to outside customers in 2015.
Nucor’s raw material supply chain is another important strength. Our investment in DRI production facilities and scrap brokerage and
processing businesses provides Nucor with significant flexibility in optimizing our raw materials costs. Additionally, having a significant
portion of our raw materials supply under our control minimizes risk associated with the global sourcing of raw materials, particularly
since a good deal of scrap substitutes comes from regions of the world that have historically experienced greater political turmoil.
Our highly variable, low-cost structure, combined with our financial strength and liquidity, has allowed us to successfully navigate cyclical
severely depressed steel industry market conditions in the past. In such times, our incentive-based pay system reduces our payroll costs,
both hourly and salary, which helps to offset lower selling prices. Our pay-for-performance system that is closely tied to our levels of
production also allows us to keep our work force intact and to continue operating our facilities when some of our competitors with greater
fixed costs are forced to shut down some of their facilities. Because we use electric arc furnaces to produce our steel, we can easily vary
our production levels to match short-term changes in demand, unlike our blast furnace-based integrated competitors. We believe these
strengths also provide us further opportunities to gain market share during such times.