While SMS's thin-slab technology would offer operating advantages for Nucor (a minimill firm), these advantages are narrowed significantly by the need for Nucor to price its thin-slab products lower than thin-slab products from the integrated mills (i.e., the big competitors) because of the perceived lower quality of minimill steel.

Nucor's competitors include integrated steelmakers with modernized and unmodernized integrated mills. While estimates vary, let's assume that 40% of integrated steel capacity was in modernized plants. Exhibit 12B shows that Nucor would have a large cost advantage over unmodernized integrated mills ($225/ton versus $300/ton for Hot Rolled) if it adopted SMS's technology. However, the cost advantage over modernized mills is much lower. In fact, Nucor might find it difficult to compete head-on with a modern integrated mill that decided to price very aggressively.

This leads to two questions for you to answer.

1. Based on the"CF analysis-Modernize"and"CF analysis-Unmodernized"Excel worksheets, determine if we should expect the integrated steelmakers to modernize mills that are currently unmodernized. Why or why not? Assume they follow traditional investment criterion (NPV or IRR) rather than Nucor's ROA.

1. Given your answer to the previous question, how concerned should Nucor be about competing against integrated steelmakers with modernized mills when it opens its first thin-slab technology mill, if it does so?

Please observe the following assumptions and conventions.

• Don't change any of the figures I have input.
• Use 6.45% as the growth rate for the price of steel, not the historical 6.84%
• Assume the entire construction cost of modernizing a mill is incurred in 1986
• Depreciate the modernization evenly over 25 years, starting when it comes online in 1987. Assume the unmodernized plant has already been fully depreciated.