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Stock Strategist

This Steelmaker's a Steal

DRI production is changing the game for undervalued Nucor.

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In one sense, the steel industry can be considered a competition to see who can procure ready-to-melt iron units at the lowest cost. Whether the iron units are sourced from virgin iron ore, ferrous scrap metal, or high-iron-content complementary feedstocks, iron-related unit costs are a major driver in determining a steelmaker's position on the industry cost curve. Because steel products are largely undifferentiated and commodified products, a steelmaker's most likely route to earning an economic moat is by establishing itself as a definitive low-cost producer. Thanks in part to its direct-reduced iron production in Trinidad,  Nucor (NUE) already has access to low-cost iron units, and we give it a narrow Morningstar Economic Moat Rating. The company is also building out incremental DRI production in St. James Parish, Louisiana, and we believe it will further decrease its iron unit costs over our explicit forecast period.

Nucor manufactures steel using electric arc furnaces, which predominantly rely on ferrous scrap metal to provide iron units. EAFs are significantly less energy-intensive and offer more flexibility than their blast furnace counterparts, which often operate uninterrupted for years at a time and therefore are subject to a high degree of operating leverage.

Andrew Lane does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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