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Nucor to Gain From Strategic Measures Amid Headwinds

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On Nov 18, we issued an updated research report on steel maker Nucor Corporation (NUE - Free Report) .

Nucor’s revenues and profit for third-quarter 2015 fell year over year on lower pricing and shipments. Earnings, however, topped the Zacks Consensus Estimate. Revenues fell by double-digits and missed expectations. Nucor anticipates lower earnings in the fourth quarter compared to the third owing to continued challenges in the global steel industry.

While Nucor’s strategic investments in a number of projects coupled with its efforts to expand capacity should support results moving ahead, challenging steel market fundamentals continue to weigh on its prospects.

Nucor continues to see strength in the automotive market. Demand from this key end-market remains healthy. Nucor's shipping rate into the automotive market has climbed 20% year over year this year. The acquisition of Gallatin Steel Company has also reinforced Nucor’s foothold in the key Midwest market, the biggest flat-rolled consuming region in the U.S.

Nucor also remains committed to expand its higher margin product portfolios and improve its cost structure. Nucor’s Louisiana direct reduced iron (DRI) facility, its largest project, came online in Dec 2013. The $750 million plant is expected to produce 2.5 million tons of DRI annually when the operations are in full swing.

In addition, sheet piling production capabilities expanded at Nucor-Yamato structural steel following the completion of a roughly $115 million expansion project. The Nucor-Yamato joint venture is expected to continue to grow its share in the steel pilings market over the next few years. The joint venture remains focused on broadening its value-added offerings.

However, the steel industry is still going through a difficult phase and market fundamentals remains challenging in the U.S. Nucor, like other steel makers, remains plagued by surging domestic steel imports.

Consumers in the U.S. are importing cheaper steel from China, forcing domestic steel producers to sell at lower prices. Slow economic growth in China has been creating further overcapacity, resulting in considerable high levels of steel imports into the U.S. market.

Weakening demand at home due to a sluggish economy has forced China to push up steel exports to attractive overseas markets with the U.S. being a prime target market. China’s steel exports swelled 27% year over year to 83.11 million tons in the first nine months of 2015, per the General Administration of Customs. The country’s steel exports are expected to top 100 million metric tons in 2015.

The estimated market share for finished steel imports was 30% of the U.S. market in first nine months of 2015. High import levels are affecting the performance of Nucor’s steel mills unit.

Moreover, demand for steel is expected to remain subdued in energy markets in the near-term given lower oil prices. While non-residential construction activities are improving, the market remains below its peak levels.

Nucor is a Zacks Rank #3 (Hold).
Stocks to Consider

Some better-ranked companies in the steel and metals space include NSK Ltd. , Worthington Industries, Inc. (WOR - Free Report) and Norsk Hydro ASA (NHYDY - Free Report) . While NSK sports a Zacks Rank #1 (Strong Buy), both Worthington and Norsk Hydro carry a Zacks Rank #2 (Buy).

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