Cutting Edge Steel Maker

After years of falling behind in the world steel market, American steel has once again taken a leading position. Efficient, scrap-fed steel minimills are the driving force in this renaissance, and Nucor Corp., Charlotte, N.C., is at the head of the pack.

There’s a dynamic synergy between the U.S. ferrous scrap industry and the minimills, which use almost 100 percent scrap to make new steel.

Out of the approximately 60 million tons of ferrous scrap purchased annually by domestic and foreign mills, Nucor bought about seven million tons last year and expects to buy more in 1995.

Rather than exploding onto the steelmaking scene, Nucor has evolved into the industry, gradually gaining strength and market share, and taking big risks calculated to result in big payoffs. The company expanded from the nuclear instruments business into steel joist fabrication, and then into steelmaking. More recently, Nucor has ventured into the brand-new iron carbide business (see sidebar on Nucor’s history).

Now the fourth largest steel producer in the U.S. by tonnage, Nucor’s minimills produced seven million tons of steel in 1994, according to Kenneth Iverson, chairman and CEO of Nucor. The company is aiming for eight million in 1995 "if everything goes well, and the economy doesn’t fall apart," he says. About 80 percent of Nucor’s steel is sold on the open market, and the other 20 percent supplies Nucor’s fabricating plants.

Nucor built its first steel minimill in 1969 in Darlington, S.C., on the philosophy that a manufacturer paying high raw material costs should have control over those raw materials, explains Iverson.

"In the steel joist business, about 55 to 58 percent of your sales dollar is the cost of steel," he says. "And being an old businessman, I always remembered that whenever your raw material cost is more than 50 percent of your sales dollar, you’re going to have a problem, and you’d better assure that it’s going to be okay."

At that time, says Iverson, Bethlehem Steel was also in the joist business, and could sell the joists at a lower price than raw steel, which made it difficult for Nucor to compete. So building its own steel mill was "just a question of survival," he explains.

Nucor’s goal was to produce steel as cheaply as it could buy imported steel, which made up the majority of its steel purchases, says Iverson. Building a blast furnace was too expensive. A scrap-fed electric arc furnace in a minimill was cheaper and more efficient. After the facility was built, the workers trained and the kinks worked out, the company achieved its goal.

"We were so surprised we could do this, we decided we could be in the steel business and sell steel outside the company," he explains.

The company proceeded to build six more mills during the next twenty years.

"We’re very simple, -- we just kept building steel mills," says Iverson.

Nucor is similarly motivated today, with the cost of scrap so high, to assure its raw material costs by siting an iron carbide production plant in Trinidad, says John Correnti, president and chief operating officer of Nucor.

"The iron carbide replaces a lot of the higher-price, low-residual scrap," he explains. "And unfortunately, that type of scrap is generally located in the steel triangle where industrial America is -- Chicago, Cleveland, Detroit, Pittsburgh, St. Louis.

"So in order for us to expand to the West Coast or the East Coast, we had to come up with some type of scrap steel substitute. We looked at all types of things -- HBI, DRI, Corex -- and we also looked at iron carbide, and we thought that iron carbide would suit our company the best."

Some critics contend that the iron carbide process is not a sure bet, and point out it has only been tried on a pilot basis in Colorado and Australia. But Iverson and Correnti clearly feel that it’s a sure enough bet, with a potentially high payoff.

"You’re never sure! We aren’t sure!" Iverson says with characteristic vehemence. "It is a risk, but it’s no venture company deal. We’ve got $90 million into it, and we’re currently losing about $1 million a month, but we can afford to take that type of risk. We’re sure that it will work eventually. We’ve just got to work through everything to do it."

"There’s no downside, other than the $90 million," adds Correnti. "But it’s got upside potential that is unlimited once we’ve got it working to our satisfaction."

If the price of scrap ever dropped to $110 or less, says Iverson, there would certainly be a downside, as the cost of scrap would be lower than the cost of iron carbide. Given the cyclical nature of the scrap industry, this is a very real possibility.

"But we think this is a hedge, because if scrap continues high, we could have a business for Nucor," he says. "And if we have a cyclical period when scrap goes down, it could turn into a tough business. But we’re in the steel business, so we’re used to tough businesses."

Nucor’s iron carbide facility in Trinidad has already been down for repairs twice since its startup late in 1994, says Correnti, but this is only to be expected, since the process has only been tested in small pilot operations thus far.

"We’ve had a lot of small problems, but most of the problems have been with the auxiliary equipment, such as the gas cleaning systems, the ore feed system into the reactor -- mechanical problems," he explains. "But the heart and soul of it, which is the fluidized bed, has worked fine for us. So of the material that we have made, the quality is very, very good. And the reaction time for it to reduce has been very good -- better than we expected."

The company expects to replace about 20 percent of its current scrap use with iron carbide, says Correnti. "But that’s conservative. It may turn out to be 30 percent, or as high as 40 percent."

Nucor’s Trinidad facility is expected to be producing at capacity by August, says Correnti. The plant is designed to produce 330,000 metric tons per year, with considerable expansion potential.

"We’ve got land down there to put in another three units, four units total, and we’ve got access to a heck of a lot more land for more units," he explains. Nucor could then sell iron carbide on the open market.

"People all over the world have shown interest," says Correnti.

Always on the lookout for new and better technology, Nucor has signed a letter of intent with USX and Praxair to study the feasibility of building a furnace that could convert iron carbide and oxygen directly into steel, without a blast furnace or an electric arc furnace, says Correnti.

"Right now, it’s sort of what I call science fiction," he quips. "It will probably take us four to eight months to do the feasibility study. If it looks promising, then we’ll do a joint venture to build a furnace -- just a furnace, not a plant. The venture would be 45-percent owned by USX, 45-percent owned by Nucor, and 10 percent by Praxair."

If this venture came to fruition, adds Correnti, the furnace would be built in Hickman, Ark., adjacent to Nucor’s existing flat-rolled mill. He estimates the possible facility would take a year and a half to build, plus two or three years to work out any problems.

"It’s really far out technology right now," says Correnti. "It’s four years to eight years -- if at all -- from today."

Although such as technology would revolutionize the steelmaking industry, it is far from sure, Correnti emphasizes.

If it seems out of character for hard-driving, fast-moving Nucor to take such a slow approach to a new technology, it isn’t. The company watched and researched thin slab casting for about six years before actually building its Crawfordsville, Ind., minimill, and it took another year for that plant to be really profitable, according to Iverson.

"There was a lot of pre-development before that time," he says.

Although Iverson and Correnti foresee a strong future for scrap substitutes such as iron carbide, they are certain that the scrap market will also remain strong, and advise scrap processors against excessive involvement in the scrap substitute business.

"I think scrap dealers should stick to their knitting and do what they do well," says Correnti.

"For a scrap dealer that has a yard, his business is scrap," Iverson adds. "His business isn’t DRI or pig iron or iron carbide. That material goes through a different marketing route than most scrap, at least looking at the average scrap processor."

The future of the scrap industry is very bright, says Correnti, with increasing numbers of electric arc furnaces coming on line, increasing the demand for scrap. And the amount of scrap substitutes currently produced does not compare with the amount of scrap produced in the U.S.

"In other words, DRI, HBI, Corex and iron carbide are not going to put the scrap dealers out of business," says Correnti.

Although they are smaller businesses than the company’s steel mills, Nucor’s steel fabricating plants, producing products such as steel joists, serve as the base business for the company, says Correnti.

"The economy goes up and the economy goes down, but the base business of those fabricating plants never goes away," he explains. "It might get a little bit smaller, but we make sure we run every division as a profit center."

This means that the fabricating plants have the ability to buy steel from Nucor’s competitors if they can get a better price and a better deal.

"This is a big incentive for our steel mills to stay very, very competitive so that they can retain that business," says Correnti. "We don’t have one business subsidize another."

"But it’s very important to the steel mills too, because about a million tons of the seven million we produce goes into our downstream operations," adds Iverson.

As for the rest of Nucor’s steel, about 50 percent is purchased by the construction industry, "and the rest is pipe and tubers, automotive appliance and machinery builders and everything else," says Correnti.

"We probably make a wider variety of steel products than any steel company in the United States, because a lot of the other ones have gotten out of the bar business and the wide flange business and the rebar business," says Iverson. "It’s an advantage, because you’re not tied to any one segment of the economy, or any one market."

All seven of Nucor’s minimills employ electric arc furnaces, so the company buys scrap from sources all over the country -- probably from every state, according to Correnti.

"We’re very fortunate in this country to have a scrap processing industry that’s as good as it is," Iverson adds. "It’s certainly the best in the world. And you don’t have, even in Europe, processors that do it as well or do the grading system as well as we do in this country, and that’s a blessing for the steel industry. They can supply a quality product at a reasonable price. In lots of countries, scrap is just plain junk."

Part of the company’s philosophy is to buy scrap every month from each of its suppliers, says Correnti.

"We don’t speculate and buy a whole bunch of scrap one month when we think it’s very low and then sit on the sidelines and don’t buy anything for the next three and a half months," he explains. "So the scrap suppliers who supply Nucor know we’re going to buy scrap every single month."

And just as the scrap industry has faced increasing environmental regulation over the past few years, so has the steel minimills business, says Iverson.

"The regulation portion of our business has become certainly much more extensive, much more significant, much more time consuming than it was in the past," he says. "We’ve had EPA fines, but most of those were related to the fact that we didn’t get the damn report in on time, or didn’t have the right piece of paper, or something of that nature."

Nucor has also focussed on safety issues, says Iverson, and now has a positive worker’s compensation rating. "Measured against all 25 or 29 steel companies, including minimills and integrated steel producers, we’re about the fourth best ... We have a safety person on every single plant. It’s important nowadays. We have some environmental people -- not in all the plants, but we certainly do in the steel mills."

"It’s like the recycling industry -- the regulations, and the paperwork and the paper flow are getting obscene," Correnti adds. "It hasn’t changed as far as what you actually do, but the paper trail has exploded."

A significant factor in Nucor’s success is its avoidance of unions. This has not caused much of a problem, says Correnti, as Nucor’s steelworkers earn the same or more than their counterparts in Chicago or Pittsburgh.

"Our labor rates are about the same -- about $33 an hour after benefits and everything else," he explains. "Our secret is, though, for our $33, we get a hell of a lot more steel than they do. It’s not what you pay a person, it’s what you pay them in relation to what he or she produces."

The company’s employees have also enjoyed de facto job security, as the company has never had to lay off steelworkers or close down minimills for lack of work, Correnti adds.

"Employees know that if they work hard, they make a lot of money, which is good -- that means that the company is making a lot of money. "

The company also has a strong corporate culture of treating employees fairly, Correnti adds, which includes an emphasis on communication and providing an avenue of appeal if an employee feels he has been treated unfairly.

"If you can meet the basic needs that every employee has in every industry in every phase of life, then you can remain non-union," he explains.

Nucor also offers other attractive benefits, such as $2,000 a year for four years of college for every child of every employee, adds Iverson. For some families, the company has sent four to six children through college. The entire program costs Nucor about a million dollars annually, he says.

"In addition, we don’t have pensions," says Iverson, "but we have profit sharing, which is just what the word implies -- we have to make a profit to make a contribution to it. But we have no unfunded or legacy costs like some of the other companies have."

The company takes 10 percent of pre-tax earnings and turns it over to the employees.

"So that’s their retirement, along with 401Ks and some other things," says Correnti. "We have employees now in Nucor who started in the early days in Darlington back in 1969 who have in excess of $300,000 in their profit sharing account. A couple have $400,000."

Although job security at Nucor is not in writing, it is based on history, he adds. "Everybody knows that it only works as long as the company is working well, and if it ever comes down to survival, all bets are off."

But Iverson and Correnti are placing their bets with Nucor. Both longtime metal industry veterans, Iverson holds a master’s degree in mechanical engineering with a minor in hot metal from Purdue University. He joined Nucor in 1962, when it was still Nuclear Corp. of America. When the company faced bankruptcy in 1965, Iverson became the president and CEO (see sidebar).

Correnti is a civil engineer with a degree from Clarkson University, he explains. He worked for U.S. Steel -- now USX -- for 11 years at various plants around the U.S., and he has now been with Nucor for 14 years.

The most pressing future plan on the minds of Nucor officials at present is to make the company’s iron carbide venture successful, says Correnti. After that, the company is looking to build another flat rolled mill on the East Coast, and has plans to expand its fabricating divisions.

Nucor plans to stay focussed on various facets of steel production.

"We feel that the investor has invested in Nucor because we are in the steel business," says Iverson.

But Nucor officials are planning to diversify the company's product base somewhat by dipping into stainless steel, fabricating stainless steel wire in its Lancaster, S.C., facility as well as producing 409 stainless for catalytic converters in its Crawfordsville, Ind., plant, says Iverson.

Nucor is known for its extremely lean management structure, with only about one manager for every 300 employees. The company has been able to maintain this, even though it now employs 6,000 and its sales for 1994 reached almost $3 billion. The key is decentralization, Correnti explains.

"We have about eighteen or nineteen divisions now, seven of which are steel mills," says Correnti. "Each of them are run by a vice president/general manager. For all intents and purposes he’s the president of that company, and he is responsible for everything."

The officers monitor the divisions and handle the central finances and investor relations.

The company’s no-frills, lean management style is summed up by its corporate headquarters -- a rented office containing only 22 people, including officers and support staff.

"We like to tell people that even though we are a $3 billion company, we like to run, feel, smell, and look like a $300 million company," says Correnti.

But Iverson admits there may have to be some changes in Nucor’s lean style as the company continues to grow.

"Someday we’ll have 23 people in this office instead of 22," he says.