Nucor & JFE Steel To Serve The Mexican Automotive Market

Zacks Investment Research | Jun 10, 2016 06:56AM ET

Nucor Corporation (NYSE:NUE) and JFE Steel Corporation of Japan have announced a 50-50 joint venture to build and operate a plant in Mexico that will supply sheet steel to the country’s automotive market. The venture, named Nucor-JFE Steel Mexico, is scheduled to start production in 2019. With an estimated cost of $270 million, the plant will have a production capacity of 400,000 tons of galvanized sheet steel per year.

The collaboration will help the companies optimally utilize each other's strengths. JFE Steel is a premier producer of high-quality automotive products and is highly committed toward serving the countries covered under the North American Free Trade Agreement (NAFTA). Nucor on the other hand has a strong presence in this region with an established base as well as expertise in running and managing steel plants. Both the companies will supply an equal amount of substrate to the new plant.

The joint venture is aimed at producing differentiated products in a fast growing economy. NAFTA is the world’s second largest auto market and the Mexican automotive industry is expected to grow from 3.4 million vehicles to 5.3 million by 2020. The region's demand for high quality steel is expected to remain stable and the venture provides JFE Steel with a good manufacturing base in the region.

Nucor on the other hand has got the opportunity to increase sales in a market it deems important, particularly in the high-grade steel segment which it was striving to enter. The companies are still under the process of obtaining the required licenses and conditions to complete construction, including regulatory approvals.

Nucor maintains its strong outlook on the automotive market. It continues to foresee healthy demand from the end-market, particularly for the company’s sheet steel products. This demand is likely to continue, reflected by contract awards by automotive OEM customers. After being received well by automotive producers in the last three to five years, the company aims to grow its presence in the auto market. Nucor's volumes in the market climbed roughly 20% sequentially in the first quarter. The company is focused on achieving greater penetration in this major market in 2016.

h3 NUCOR CORP Price/h3 NUCOR CORP Quote

Nucor saw higher profits in first-quarter 2016. The steel giant recorded a profit of $70.8 million or 22 cents per share in the quarter, up roughly 4% from a profit of $67.8 million or 21 cents recorded a year ago. However, earnings missed the Zacks Consensus Estimate of 27 cents.

Revenues fell around 16% year over year to $3,715.6 million in the reported quarter, hit by lower selling prices. However, sales beat the Zacks Consensus Estimate of $3,648 million. Nucor expects significant improvement in earnings in the second quarter on a sequential basis.

Nucor currently carries a Zacks Rank #3 (Hold).

Better-ranked companies in the steel space include POSCO (NYSE:PKX) and Ryerson Holding Corporation (NYSE:RYI) sporting a Zacks Rank #1 (Strong Buy), and ArcelorMittal (NYSE:MT) carrying a Zacks Rank #2 (Buy).

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Written By: Zacks Investment Research

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