Testing Nucor's Mettleby
Bill Clinton first knocked on the doors of Nucor Corp. in the mid-1980s, when, as governor, he wanted to lure a steel mill to Arkansas. Clinton befriended Nucor executives and last April even invited President John D. Correnti to the White House. After a state dinner, the two men talked shop until 2 a.m. "He wanted to know why the government couldn't run like Nucor," Correnti recalls.
Clinton is hardly Nucor's only fan. For two decades, the Charlotte (N.C.) minimill king has stormed through the American steel market, earning a growing stream of profits and delighting its stockholders--all while burly competitors such as U.S. Steel, Bethlehem, and LTV shuttered mills and lost billions. With its skeletal headquarters staff of 23 and a nonunion workforce tied into profit-sharing, Nucor has become the very model of a lean, low-cost company. "We benchmark against Nucor," says LTV Corp. Chairman David H. Hoag.
Now the company everybody loves to follow is stumbling. After 20 years of breathless growth, Nucor faces difficult challenges. A crucial new Trinidadian iron carbide plant has been plagued by breakdowns and delays. "It's a problem a month," admits Correnti, heir-apparent to legendary 69-year-old chairman and CEO, F. Kenneth Iverson. At the same time, a passel of new minimills challenging Nucor's dominant position is coming on stream. And at Nucor's key Crawfordsville (Ind.) plant, an exodus of managers has unsettled operations.
WALL STREET JITTERS. Boil it all down, and some industry observers see signs that the company's explosive growth may finally be stretching Nucor's lean management too far. Although revenues have more than quadrupled since 1986, to $3 billion, Nucor hasn't significantly increased its headquarters staff. Yet the company is now pursuing growth projects aimed at making it the biggest American steelmaker within five years, up from fourth place. At the same time, it is navigating its first executive transition since 1965 as Iverson, recovering from heart surgery, prepares to hand over the reins. The question now, says one former Nucor executive, "is whether Correnti can keep running it as the same tight-knit company."
The result: Wall Street no longer believes Nucor merits top dollar. The stock sold for more than 50 times earnings two years ago--the highest multiple in the industry. With trouble now on several fronts, Nucor's stock looks decidedly average. Shares have fallen 27%, to around 51, since September, and today the stock trades for just 17 times earnings. "Their premium has been too high," says Howard F. Ward, manager of the Gabelli Growth Fund, which recently sold its Nucor stake.
Certainly, Nucor is in no danger of going into a tailspin. Thanks to plant expansions and a 25% hike in flat-rolled steel prices, the company's sales rose 32% in 1994, while earnings jumped 83%, to $227 million. Analysts expect earnings to rise an additional 39%, to $350 million, this year. But to keep the company growing at 15% to 20% a year--Iverson's goal--he is diversifying into new products and markets. And that's what's giving investors the jitters. Although cyclical worries are hurting all steel stocks, Nucor has been among the hardest hit.
Part of the problem stems from Nucor's success: The ease with which the low-cost producer has come to dominate markets for commodity-grade steel coils has spawned new competitors. While ceding the more exacting auto and appliance markets to big integrated steelmakers, Nucor has prospered, selling "plain vanilla" steel to manufacturers of auto parts and tools.
Now newcomers are borrowing Nucor's technology and barreling into those markets. A Canadian joint venture, Gallatin Steel, started up a Nucor clone in Kentucky in April, while a team of Nucor veterans is nearing completion of a similar plant in Indiana. Minneapolis-based North Star Steel and its Australian partner, BHP Steel, are building in Michigan, while LTV, with British Steel and Sumitomo, are scouting the Deep South for a minimill site. All told, seven new plants will flood the U.S. with some 14 million tons of new capacity--more than a quarter of current production. Much is targeted at Nucor's core market. Gallatin CEO Milan Kosanovich claims that with more advanced equipment and a better educated workforce, he'll top Nucor's products. "We'll be taking [quality] to a higher level," he says.
Nucor executives scoff at the challenge. "There's a question of how good the new mills are going to be," says Iverson. "You get a bunch of green guys together, you're going to have startup problems." Rather than hurting Nucor, he argues that the new American mills will primarily supplant high-cost U.S. steel and imports, which topped 30 million tons last year. He also says that Nucor will begin selling to new customers, such as the BMW auto plant in South Carolina and Mercedes-Benz in Alabama. Meanwhile, he expects the company's exports, particularly to Southern Europe and Asia, to increase.
Nucor is also intent on proving that it can generate a substitute for its raw material: scrap steel. Prices for scrap have already shot up 70% in two years, and when all the new minimills open their doors by 1997, rising scrap
demand will likely drive up prices
CARIBBEAN CONNECTION. To stay a step ahead of the competition, Iverson and Correnti last year earmarked $65 million for an experimental industrial process. At a new plant built in Trinidad, West Indies, Nucor would "cook" Brazilian iron particles with Trinidadian natural gas. The result was to be a steady stream of iron carbide able to replace scrap. Nucor would then load the mineral onto ships and deliver it to barges in New Orleans for around $100 per ton, far less than the current $150 per ton for high-grade scrap.
There was one problem: No one had ever made iron carbide before on an industrial scale. With only limited testing--an approach that had worked for Nucor in the past--Iverson went ahead with a full-scale plant. "This is a $65 million lab experiment," he said as it was going up. Now the Trinidad plant has become a $95 million problem--and counting. Chastened Nucor executives admit that the road has been rockier than expected. Though the crucial chemical conversion in Trinidad is working--"like a jewel," Iverson claims--the plant has been plagued with difficulties. "They tried to [build it] too fast, and without as much engineering as they needed," says J.Clarence Morrison of Prudential Securities Inc.
For starters, Nucor engineers envisioned the iron running down chutes, much like grain. But the corrosive metal promptly opened up gaping holes in the piping. While that has been fixed, the plant has encountered a slew of other mechanical problems since. "It's costing an awful lot," admits Iverson. The Trinidad plant is nearly a year behind schedule, and Iverson concedes that it will lose $15 million to $20 million this year. However, he says, the problems will be resolved by yearend, and he's going ahead with plans to expand. "People say `Hire a consultant,"' says a frustrated Correnti. "I say, `Find me one.' No one's ever done this before!"
Trouble is also afoot at the company's key Crawfordsville (Ind.) plant, which produces more than 25% of Nucor's 7 million tons of steel annually. In 1993, after Keith E. Busse, the highly touted manager of the mill, lost the succession battle to Correnti, he quit Nucor and set up a new company, Steel Dynamics Inc. in Butler, Ind.
To make matters worse, Busse took several key managers with him. When Nucor named Larry Roos as his successor, many workers reacted angrily to the new boss's more authoritarian style. Some invited the United Steelworkers of America to organize the plant. But Roos put out that fire last year by meeting individually with each employee. "Crawfordsville was very nervous for a while," says Iverson. "But it's settled down now."
TALENT DRAIN. Former managers disagree, however. They say the exodus from Crawfordsville has continued--and over the past year, some 20 top managers and technicians have left. The reason: unhappiness with tighter oversight by Roos, combined with lucrative opportunities at the new startups. "It wasn't a friendly place to work; you couldn't have had a more stark change," grouses one former high-ranking manager. Roos dismisses the complaints. "They weren't used to seeing the general manager in the plant," he says. "Their typical reaction was that I was spying."
Many of those who left now fill the management ranks of Nucor's new rivals. The turnover has taken a toll, coming as Crawfordsville has doubled capacity--and as the steel market has begun to soften. Overproduction has forced Nucor to cut prices, and questions have been raised about quality. Sources close to the company say that in April the plant made $6 million in operating profits, well below its $11 million target.
Still, few are counting the industry innovator out. Iverson, who will be 70 in September, says he's fully recovered from heart surgery. He played three sets of tennis one recent Sunday and is expected to turn the CEO's title over to Correnti within the next two years. Both dismiss arguments that Nucor lacks managerial depth. "We can weather the storm because we have a stronger ship," says Correnti. The question is whether shareholders will again pay up for a high-powered speedboat.
-- Nucor's trouble-plagued new iron carbide plant in Trinidad is a year behind schedule and is expected to lose up to $20 million this year
-- Slackening demand for its low-grade sheet steel has forced Nucor to slash prices
-- New competitors are adding huge capacity in commodity steel markets, raising fears that it faces a price war
-- A management exodus
at a key Nucor plant has disrupted operations and raised questions about quality
-- Explosive growth has stretched Nucor's lean management team, even as Chairman F. Kenneth Iverson's recent health problems and eventual retirement are leading to concerns about management depth
As Nucor runs into problems...