Industry Insights

Supply Chain Synthesis

Originally published: 

Monday | 26 January, 2015 | 11:51 am

By Corinna Petry

Supply chain synthesis

Producers reshape, diversify and strengthen capabilities by integrating assets

January 2015 - 2014 evolved into a banner year for merger and acquisition activity in global metals. Companies sought to secure raw material supply, enter new product lines, expand their geographic reach, climb up the value chain or simply draw their networks closer.

Modern Metals tracked 65 transactions (as of Dec. 31, 2014), spanning materials and processes from copper mining to aluminum die casting to steel fabrication.

The prominent North American steel deals closed last year (see Sampling of M&A Activity table below) were the divestiture of Severstal assets to AK Steel Holdings Inc. and Steel Dynamics Inc.; the sale of Gallatin Steel to Nucor Corp.; and ArcelorMittal’s and NSSMC’s acquisition of the 5.3-million-ton Calvert, Alabama, complex from ThyssenKrupp USA Inc.

In aluminum, Constellium bought Wise Metals, Alcoa purchased Firth Rixson, Aleris acquired Nichols Aluminum and Century Aluminum took over Alcoa’s Mount Holly, South Carolina, smelter.

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Titanium producer RTI International Metals Inc. made two acquisitions in 2014. There were also myriad asset swaps in red metals, steel and copper pipe and tubing, steel and copper wire, oilfield supplies, foundries and copper and nickel mining. Deal activity was muted in the service center space.

Steel’s game plan

In steelmaking, all the deals last year involved strategic buyers, says Christopher Plummer, managing director of consultancy Metal Strategies, West Chester, Pennsylvania. “It was an unusually big year,” particularly for sheet production.

“You can look at the steel deals from a couple angles,” he says, but the major impact on domestic steel buyers is the fact that the top flat-rolled producers each have gained control over greater slices of U.S. market share.

This trend has been ongoing. Metal Strategies compared the number of carbon steel flat-rolled producers in 2000 versus 2015 (see Flat-Rolled Steel Market table below). The North American market is dominated by only 10 producers now, less than half the 23 that supplied demand 15 years ago.

One paramount factor dictating the integration of steel assets is that large manufacturing customers continue to winnow their supplier list.

“They want to deal with fewer and fewer suppliers, and work with them to help develop new products, improve and optimize products and improve delivery performance,” says Plummer. With the chosen few, OEMs want “closer, more cooperative relationships.”

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In addition, many metal-consuming manufacturers are growing globally. “You see them diversifying across different products they make and developing a global footprint. Yet they still demand seamless, world-class quality and customer service performance.”

As a result, “it’s a good idea” for metals companies to own and operate a wider range of assets upstream and downstream from their core activities.

“The industry is morphing and positioning itself for rationalization of older facilities. The more facilities they own, the more control they have of the market, and when necessary, they will gear their capital expenditures to their best-performing assets and be able to shut down some facilities permanently when they become uncompetitive,” Plummer says.

That won’t happen immediately while demand from automotive and construction remain on the rise. However, “in the next decade, we should see some rationalization of facilities, not dramatic, but enough to find the [North American and global metals] industry in the hands of still fewer owners,” Plummer predicts.

Philip Gibbs, vice president and equity research analyst at Keybanc Capital Markets Inc., Cleveland, says 2014 was the “first year in quite some time we saw this level of M&A activity. During the boom years of 2006-2008, the dealmaking was crazy. What I see now is not reminiscent of that, when companies were trying to get bigger in scale at almost any cost. Instead, companies have become more strategic. They aren’t out to get bigger but to make the industry more disciplined. Even as imports remain a concern, they are controlling what they can control,” including raw material flow, melting, rolling and finishing capacity.

Currency matters when transacting deals across borders, he continues. Before the recession, a lot of U.S. acquisitions were made by foreign entities, “when emerging markets like India and Russia [boasted currencies that] were at a premium to the dollar. Compare that with what happened with Severstal this year: As Russia’s currency was going through the floor, they sold. They divested probably because they foresaw the ruble getting weaker. And the Russian government forecast a recession for 2015,” says Gibbs.

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Aluminum’s diversification

Major transactions in the aluminum industry seem to be making integrated companies out of entities that weren’t integrated before. Alcoa’s acquisition of Firth Rixson, manufacturer of jet engine components, illustrates the trend.

The mergers also help to diversify companies, says Plummer, likewise citing Alcoa, “which is getting into forging and aerospace alloys. Companies are broadening. Alcoa is a classic example: widening markets and products like nickel alloys and superalloys, via acquisition. It’s becoming a one-stop shop for the aerospace industry.”

The driver here, he says, is that it is extremely difficult to get materials qualified for the demanding applications aerospace manufacturers require.

“The military side of aerospace requires full-line pedigree from melt to finish.” The U.S. military “just had a huge issue with titanium. Some imported material was off spec. That’s always dangerous. Boeing and Airbus cannot afford that kind of an issue.”

Supplying accurate specified parts for engines and landing gear is not negotiable. What qualified aluminum and steel producers find is that major customers return for more because “they are comfortable with the quality and performance and they can take delivery anywhere in the world and know what they are getting,” Plummer says.

For automotive aluminum producers, “the conversion of the Ford F-150 was like a watershed” for expansion policies, including acquisitions, says Jim Forbes, global metals leader for PwC, Hamilton, Ontario.

“We expect the luxury car market will expand above the overall car market in China. Given the propensity for aluminum already there in electric vehicles, for frames and components, there might be a shift to increasing aluminum content in Japan and China and leading to developing countries.”

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There are a lot of forecasts out there estimating what percentage of weight aluminum might obtain in future vehicles, with most projecting in a range of 20 to 25 percent between the years 2020 and 2025, says Forbes.

While it is critical to keep track of whether oil prices stall, “a lot of [material selections] are based on corporate average fuel economy targets and most people think that will continue to drive decisions to aluminum.”

Forbes also sees demand push from beverage containers. Producers are going for a 100 percent aluminum can, he says, and as they see opportunity to expand sales volumes in the packaging industry, they will make acquisitions meant to expand capacity in that product line. “It makes economic sense.”

2015 deal outlook

Analysts speaking with Modern Metals hedged their bets as to whether the number and scope of transactions this year would exceed those of 2014. One wonders if opportunities are dwindling or increasing.

“What can still be done?” asks Plummer. “The prize that’s still out there is North Star BlueScope Steel (in Delta, Ohio). North Star has backed away from steel and raw material holdings and that mill would find a number of buyers very quickly. It has run smoothly, is pretty much sold out every year and it’s very profitable. Nucor and SDI might love to get their hands on it.”

He also suggests that TimkenSteel, now a stand-alone operation separate from the bearing and other manufacturing operations, “could be ripe for possible acquisition.” In spite of doing well during 2014 serving energy and automotive customers, its stock price was “hammered recently.”

Gibbs expects more M&A activity this year. “The pace of it and length of it is largely dependent on do we have a carbon copy of momentum in 2014? If the U.S. economy is resilient, that would continue; if not, deals will dry up.”

The U.S. is now several years into positive, if gradual, economic growth and some late-cycle end markets have room to grow, like construction. But oil and gas are “near pinnacle,” and he is concerned that although automotive sales continue growing, that it is near its peak and a full third of car loans are subprime quality even as interest rates remain low. “That’s pretty telling about how weak things are” for consumers.

The crystal ball is still hazy, Forbes says, but despite “a bit of uncertainty, well-capitalized companies will still look for the right deal at the right price, like always.” He predicts the first half will probably produce fewer deals than the same period in 2014, but then, “the latter half of the year will pick up.” MM

Source: Modern Metals