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This Moat Has Steel Walls

Low-cost production and a top-line facility provide a positive moat trend to this narrow-moat company.

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Andrew Lane: Given that steelmakers mainly produce undifferentiated commodified products, a steel company's most likely route to establishing an economic moat is by entrenching itself as a definitive low-cost producer. As a narrow-moat company, we believe Nucor has done just that.

Additionally, we have assigned a positive moat trend to Nucor, indicating that the company's moat is widening due to our belief that the company is likely to improve its positioning on the industry cost curve in the years to come.

Now, given that steel is an alloy of iron and carbon, the steel industry comes down to a competition to see who can procure iron units at the lowest cost. In late 2013, Nucor began production of direct reduced iron, or DRI, at its new production facility in southeastern Louisiana. At this facility, Nucor reduces iron ore by use of low-cost natural gas to produce direct reduced iron, a high-iron-content feedstock that the company pairs with ferrous scrap metal to produce steel in its fleet of electric arc furnaces.

Nucor's DRI facility is the largest such facility in the world and the only such facility in the United States. Early results regarding product quality and yield have exceeded even the company's own expectations.

Our view that Nucor's DRI project will materially reduce the company's iron-related unit costs in the years to come points to a positive moat trend for the company. We have assigned $58 fair value estimate to Nucor shares, so we think there is additional upside at this point.

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