Question

What are the primary competitive forces impacting U.S. steel producers in general and the producers like Nucor that make new steel products via recycling scrap steel in particular? Please do a five-forces analysis to support your answer.

Answer 1

The steel industry in US is one of the largest producers in the world after China and Japan. The industry has many Steel Giants including Carpenter Tech, Nucor, Steel Dynamics, and U.S Steel etc. The major forces affecting the competitive market can be analyzed using the five force model provided by Porter. Porters five force model is used to analyze the competition and understand the industry components, along with various factors affecting it. The major forces are as given below:
• Threat of new entrants
• Threat of substitutes
• Bargaining power of customers
• Bargaining power of suppliers
• Industry rivalry

In general, the US Steel industry have following patterns and trends:
• High cost of switching to substitutes
• Low substitutes
• Very high industry rivalry
• Slow rate of technology growth to support the industry
• Very high number of loyal customers

Focusing more on Nucor, they are a Steel giant who became prominent by the use of throw away scrap material. They have changed the way the world looks at the scrap metal usage. They provide value added products with high appeal to the consumers with excellent vertical integration, economies of scale and high use of technology. Due to the customer focused approach, they are able to pass on many benefits to the end customers too. The main success factors for Nucor are constant innovation, cost reduction methods and high capacity utilization.

The five forces models can be analyzed as follows:

Threat of new entrants
• High capital investments would be needed to setup a new plant and setup an efficient supply chain
• Advanced technologies are required to setup plants to focus on recycled materials and scraps
• There is high switching cost for customers too, so new entrants would take time to gain market share

Threat of substitutes
• Since the products given by Nucor are highly specialized in nature, there are no to very few alternatives for the product
• For a well-established customer supply chain, it is difficult for customers to switch between product alternatives

Bargaining power of suppliers
• There are very few high volume suppliers of scraps, so bargaining power is high

Bargaining power of customers
• There are no major competitor for Nucor, so bargaining power of customer is very low
• There are no immediate alternates and substitute to customers will tend to stick with same supply chain.

Industry rivalry

• There are very few competitor who can provide the same product mix as Nucor
• Government controls many regulations to ensure all steel giants have equal prominence in the market
• Exit barriers are high due to high investment costs