EUR 850.00 For Business Accounts Only

Morningstar | Nucor Announces $1.35 Billion Greenfield Plate Mill Project; Production to Commence in 2022

Nucor announced plans to construct a new plate mill with 1.2 millions tons of annual production capacity at a cost of $1.35 billion. The location will be selected in early 2019, with the facility becoming fully operational in 2022. The mill will primarily serve plate demand in the Midwest, the country's largest plate-consuming region with demand reaching roughly 2 million tons in 2018.

The significant investment associated with this project aims to capitalize on the steady decline of plate imports since 2014 and ongoing trade protection. During the company's analyst call to discuss the project, management indicated that they expect section 232 tariffs as well as recently enacted countervailing and anti-dumping duties to support a favorable market position for the mill going forward.

Having updated our valuation model, we now include a downward enterprise value adjustment of just above $100 million based on the economics of this project. However, this adjustment is not enough to lower our fair value estimate, which is unchanged at $50 per share. Our no-moat rating also remains intact. Because the project economics are captured solely via an enterprise value adjustment in our model, our explicit forecast period does not consolidate associated cash flows into the company's flagship steel segment. We will incorporate the impact directly into the steel mills segment (and remove the enterprise value adjustment) once project details and timeline are finalized.

We believe current market conditions represent a cyclical peak, with metal margins likely to contract by the time the mill is operational. Although Nucor's earnings before tax margins were just above 20% for the steel mills segment in the third quarter, we forecast only a 10%-11% midcycle margin by 2022. Second, we are concerned that incremental supply will limit potential pricing upside. Even with recent tariff protection, U.S. steelmakers are not immune to the persistence of global overcapacity.

We currently assign an Exemplary stewardship rating to Nucor's management team based on its track record of disciplined capital allocation. However, the history of the global steel industry is rife with cautionary tales about overinvestment during cyclical peaks, and we are concerned that this might reflect such an investment. This announcement follows Steel Dynamics' November announcement that it will construct a $1.7-$1.8 billion new flat-roll mill with a production capacity of 3 million tons per year.