Demand is strong, steel prices are high, and the U.S. is on the verge of passing a massive infrastructure spending bill. These are all good things for steel giant Nucor (NYSE:NUE). But this industry leader doesn't just ebb and flow along with the world around it -- it actively looks to be ahead of the curve. And right now it has an innovative product that could give it an edge over the competition.
Giving the customer what they want
Nucor is always looking to hold a leadership position in the industries it serves. So it doesn't simply get into a space for the sake of it -- it wants to "win" in the space. It has been inching its way into the auto sector for a while at this point. That can be a slow process, since companies need to earn the trust of automakers before they are added as major suppliers.
But the current environmental zeitgeist may have given Nucor the edge it needs to grab material market share now that automakers have become comfortable with it as a supplier. That's because Econiq, a brand new steel that Nucor is set to introduce, is carbon neutral.
In Nucor's third-quarter 2021 earnings conference call, CEO Leon Topalian explained:
Our use of recycled scrap-based EAF technology enables us to operate at 70% below the current GHG intensity for the global steel industry. Econiq steel will further advance our leadership position by applying credits from 100% renewable electricity and high-quality carbon offsets to negate any remaining Scope one or two emissions from our steelmaking process.
The first big customer for this new line of steel? General Motors, with the initial shipments slated for early 2022. And if it goes well, look for more automakers to jump aboard as they, too, try to clean up their environmental acts.
To be fair, this isn't a game changer for Nucor per se, it's just one more product in its highly diversified basket of offerings. But it gives the company a new wedge to use as it seeks to gain market share in autos. Today this business makes up 6% of its customer base, but it was around 20% of competitor U.S. Steel's (NYSE:X) business in 2020 and 45% of Cleveland-Cliffs' (NYSE:CLF) business. So there's definitely some room for Nucor to up its game, and its new, cleaner steel offering could be just the ticket.
It's a commodity, mostly
The thing is, the price of steel largely fluctuates with supply and demand, like most commodities. That's the core of Nucor's business, but it isn't the only thing going on here. Nucor not only makes bulk steel, it also works hard to create higher margin products. For example, it uses its own commodity steel to create more complicated offerings like building structures and pipes. This business makes up 19% of the company's steel sold, and is a focus when it comes to long-term growth. While Econiq wouldn't exactly fall into this category, it is another example of Nucor looking for a way to increase its margins and gain an edge over its peers.
It's also worth highlighting that Nucor's steel mills are electric arc mini-mills. When the company was founded, this was new technology that offered lower costs and more flexibility than older blast furnace production. Put another way, from day one, Nucor has looked for an edge. Mini-mills still offer the company advantages, which show up in more consistent and generally higher operating margins than those recorded by peers that still rely on blast furnaces.
All in all, the company has a number-one or number-two position in 11 North American industry segments. Now, it's looking to expand that list to include the auto sector, a major user of steel, and it's hoping that environmentally friendly Econiq will help it do that.
One of the many things that sets Nucor apart from its peers is that it is always looking to invest in itself to ensure that it has higher highs and higher lows, given that steel is a cyclical industry. That capital spending is a competitive advantage that has led to nearly five decades worth of annual dividend increases (it's a Dividend Aristocrat, and it's just two years away from being a Dividend King) despite the cyclical nature of the steel space.
Although the company's Econiq steel is first going into the auto space, it could eventually find its way into other sectors (windmills, for example) that are looking to improve their environmental footprints. And that could mean an even bigger advantage for Nucor over the long term.
In other words, this new steel offering is worth monitoring pretty closely as it rolls out in the months ahead.