Nucor (NUE -3.83%) is one of the best-run steel mills in North America -- and, perhaps, the world. There are some nuances in that statement that investors need to understand. One of the most important is highlighted by its recent investment in NuScale Power, which is working on small-scale nuclear power plants. The relationship between these two companies has just deepened, showing that there's a potential dual benefit for Nucor over the long term.
Getting back to its roots?
Nucor wasn't always a steel company. At one point, it made products that were sold to nuclear power plants. However, it shifted to steel when it realized that its electric arc mini-mills were a more profitable business. That transition occurred over 50 years ago at this point, so Nucor's ties to the nuclear power industry aren't material today. And investors have no reason to complain given that they have been rewarded very well. A key highlight on that front would be the fact that Nucor is a Dividend King.
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You don't string together 50 years' worth of annual dividend increases without doing something right. One of the main factors backing that streak is the mini-mill technology that underpins Nucor's operations. When it shifted to steel, mini-mills were new. They remain superior to blast furnaces through the ups and downs of the cyclical steel industry even today. However, electricity is a vital input into Nucor's steelmaking process.
That's one of the reasons why it is so interesting that it has partnered with NuScale Power. NuScale is trying to build small-scale nuclear power plants. Nucor and NuScale have just agreed to explore using one of NuScale's power plants at a Nucor steel mill. That would essentially allow Nucor access to dedicated and potentially low-cost electricity to run this mill. And if that works out well, the steelmaker could add small-scale nuclear power to more mills over time.
To be fair, building a nuclear power plant, even a small one, is costly up front. But the power is relatively cheap to produce on an ongoing basis, with production lives for current nuclear power plants measured in decades. So a small nuclear power plant tied to a steel mill could be a way to both control costs and ensure electric power is always available since there wouldn't be any other customers for the power plant. That's a solid win for Nucor.
More to the story
That, however, is just the beginning of the good news. Nuclear power plants do not produce greenhouse gases, making them clean energy providers. Steel has a long history of being a fairly dirty industry. Electric arc mini-mills are a step above blast furnaces, which use metallurgical coal to remove impurities from iron ore, but they still require a lot of power. Pairing a mill with a small nuclear power plant would allow for an even greater reduction in emissions. Reducing the environmental impact of steel production is something that Nucor is trying to take a leading role in, pushing for the entire industry to get greener.
The company has already produced a net-zero steel product called Econiq. It recently developed what it calls "sustainable" steel for windmills. And it is working on adding carbon capture technology to existing mills. Nucor clearly wants to be an ESG leader and is taking steps to achieve that goal. Using small-scale nuclear power plants could be an attractive addition to this effort.
Then there's one even more simple fact: Nuclear power plants are made with steel, among other things. So if small-scale nuclear power plants turn out to be a viable product that can be used for more than just powering a steel plant, Nucor is also helping to build a source of long-term demand. More demand for steel is clearly a win for Nucor and the entire steel industry.
Early days
It is far too early to know whether Nucor's return to the nuclear industry via its investment in and partnership with NuScale will work out as hoped. But this has the potential to be a very important business move, and, while a minor story today, it is one that investors should keep an eye on. Nucor could be a cleaner, more self-sustaining company with a new market to sell into if the NuScale investment works out.
