IM Business Models &TrendsMetals

Tom McKeown

Franklin Hamilton

How does the Industry Work? 4 Basic Layers1) Primary metals: AK Steel, U.S Steel Sells to: 2) Metal Service Center: Reliance Steel,

Ryseron Steel. Sells to: 3) Fabricator/Finisher: Cabbot, Metallico Sells to: 4) Retail stores: Home Depot/Lowes/hardware

Primary Metals SIC Group 33

Sourcing companies make: Steel, iron and copper foundries.

MAIN TYPES OF METALS In chemistry, a metal (Greek: Metallo, Μέταλλο) is an

element, compound, or alloy characterized by high electrical conductivity Base Metal- In chemistry, the term 'base metal' is used informally to refer to a metal

that oxidizes or corrodes relatively easily, and reacts variably with dilute hydrochloric acid (HCl) to form hydrogen. Examples include: iron, nickel, lead and zinc. Copper is considered a base metal as it oxidizes relatively easily, although it does not react with HCl. It is commonly used in opposition to noble metal. Relatively inexpensive metal.

Ferrous metal-The term "ferrous" is derived from the Latin word meaning "containing iron". This can include pure iron, such as wrought iron, or an alloy such as steel. Ferrous metals are often magnetic, but not exclusively.

Noble metal-metals that are resistant to corrosion or oxidation, unlike most base metals. They tend to be precious metals, often due to perceived rarity. Examples include tantalum, gold, platinum, silver and rhodium.

A precious metal is a rare metallic chemical element of high economic value. Chemically, the precious metals are less reactive than most elements, have high

luster and high electrical conductivity. Historically, precious metals were important as currency, but are now regarded mainly as investment and industrial commodities. Gold, silver, platinum and palladium

Metal Extraction and Creation

Extraction: Metals are often extracted from the Earth by means of mining, resulting in ores that are relatively rich sources of the requisite elements. Ore is located by prospecting techniques, followed by the exploration and examination of deposits. Mineral sources are generally divided into surface mines, which are mined by excavation using heavy equipment, and subsurface mines.

Once the ore is mined, the metals must be extracted, usually by chemical or

electrolytic reduction. How Metal is made: 1)Pyrometallurgy uses high temperatures to convert ore into raw metals,

2)hydrometallurgy employs aqueous chemistry for the same purpose. The methods used depend on the metal and their contaminants.

Metal Service Center SIC Group 33

This type of firm buys the metal (steel, iron, copper, aluminum, etc) from the Source (U.S Steel, AK steel).

Metals service centers : 1) Acquire products from primary metals producers and then process carbon

steel, aluminum, stainless steel and other metals to meet customer specifications, including specified lengths, widths, shapes and surface characteristics. These service centers save time, labor and expense for customers, thereby reducing their overall manufacturing costs.

2) They have Specialized equipment used to process the metals requires high-volume production to be cost effective. Many manufacturers are not able or willing to invest in the necessary technology, equipment and inventory to process the metals for their own manufacturing operations.

Accordingly, industry forces have created a niche in the market to allow metals service centers, such as Reliance, to purchase, process and deliver metals to end-users in a more efficient and cost-effective manner than the end-user could achieve in dealing directly with the primary producer or with an intermediate steel processor.

Metals service centers and distributors purchase approximately 30% of all carbon industrial steel products, 36% of all aluminum sold in the mill/distributor shared markets (which excludes that sold for aluminum cans, among other things), and 45% of all stainless steel produced in the United States.

Metal Service Center (Precision)Products

Made From: Alloy Steel, aluminum, stainless steel, magnesium, Nickel/titanium, brass and copper.

- To make: coil, plate, wire, sheet, tube Services Performed The pre-production processing services performed by half or more of the Top 100 metals

distributors include: cut-to-length (75%) shearing (63%) cutting and sawing (59%) slitting (59%) leveling (54%) blanking (50%) The availability of machining services has seen an uptick over last year; 28% of companies offer

it. Both smaller and larger companies are both offering this service equally. Coating and plating, heat treating, bending, leveling and polishing are value-added processes that are more likely to be provided by larger distributors (those with sales of $175 million or more) than smaller companies. 

Metal Service CenterTarget sector for FH

A primary trend in the metals service center industry has been the consolidation of the metals service centers. This consolidation has been driven by high costs of maintaining state-of-the-art processing and distribution equipment, lack of access to low-cost capital, economies of scale in purchasing, increased information systems requirements and a generational turnover in ownership.

Number of service center locations decreased to approximately 3,400 at the end of 2000 from an estimated 7,000 in 1980.

M&A Activity for Metal Service Centers (Deloitte & Touche)As metal processors and distributors, service centres are seeing

a convergence of three key M&A drivers: Shifting industry dynamics. Service centres are working to maintain margins

and fuel long-term volume growth through strategic acquisitions. Yet, rising competition from the steel mills comes at a time when many service centre owners are contemplating retirement. Taken together, these trends have created a wave of motivated buyers and sellers.

Market liquidity. An increase in available capital from both global mills and private equity firms has resulted in significant market liquidity.

Valuations at long-term average. Notably, valuations of service centres are also near the long-term average, which means the expectations of both buyers and sellers are closely aligned.

Metals Fabrication SIC Group 34

The fabricated metal products industry comprises facilities that generally perform two functions:

1) forming metal shapes

2) performing metal finishing operations, including surface preparation. The Standard Industrial Classification (SIC) code 34 is composed of

establishments that :

1)fabricate ferrous and nonferrous metal products and

2) those that perform electroplating, plating, polishing, anodizing, coloring, and coating operations on metals.

The main processes associated with this industry can be divided into three types of operations:

1)metal fabrication

2) metal preparation

3) metal finishing

                                               

Metals Fabrication Industry Statistics Metal Fabrication Industry Financial Summary Size-The US fabricated metal products industry

consists of about 50,000 companies that generate $200 billion of annual revenue.

Nature-Large companies in specialty segments include Ball Corporation and Snap-On. Because of the special manufacturing processes involved, most companies make a limited range of products.

Fragmentation-The industry as a whole is fragmented: the largest 50 companies hold just 20 percent of the market, but concentration can be high in industry segments like cutlery, boilers, springs, and metal cans.

NAICS NAICS Description Establishments

Sales, Receipts, or Shipments

($1,000)

Annual Payroll ($1,000)

Paid Employees

332111 Iron & steel forging 377 $4,335,585 $894,106 22,087

332112 Nonferrous forging 71 $1,805,260 $415,098 9,719

332114 Custom roll forming 446 $4,068,186 $644,652 17,391

332115 Crown & closure mfg 64 $907,968 $145,319 3,521

332116 Metal stamping 1,789 $8,998,603 $2,400,015 65,969

332214 Kitchen utensil, pot, & pan mfg 80 $1,553,147 $216,935 6,015

332312 Fabricated structural metal mfg 3,781 $19,715,238 $4,162,346 109,172

332313 Plate work mfg 1,027 $3,211,718 $923,759 25,503

332321 Metal window & door mfg 1,322 $11,210,134 $2,273,541 73,378

332322 Sheet metal work mfg 4,416 $15,338,818 $3,868,471 113,666

332323 Ornamental & architectural metal work mfg

2,338 $5,355,978 $1,302,361 37,137

332410 Power boiler & heat exchanger mfg 330 $3,859,596 $912,645 21,686

332420 Metal tank (heavy gauge) mfg 666 $4,795,601 $1,187,909 31,070

332439 Other metal container mfg 414 $3,162,652 $622,178 18,269

332510 Hardware mfg 902 $10,406,332 $2,081,612 60,986

332611 Spring (heavy gauge) mfg 117 $728,378 $155,767 4,050

332612 Spring (light gauge) mfg 358 $2,426,515 $553,838 16,815

332618 Other fabricated wire product mfg 1,672 $5,879,897 $1,311,984 42,314

332721 Precision turned product mfg 2,885 $8,717,999 $2,805,418 76,121

332722 Bolt, nut, screw, 964 $7,789,758 $1,802,045 44,955

Metals FabricationProduct Characterization

-The Department of Commerce classification codes divide this industry by product and services. SIC code 34 is further divided as follows:

SIC 341 -Metal Cans and Shipping Containers

SIC 342 -Cutlery, Handtools, and General Hardware

SIC 343 -Heating Equipment, Except Electric and Warm Air, andPlumbing Fixtures SIC 344 -Fabricated Structural Metal Products

SIC 345 -Screw Machine Products, and Bolts, Nuts, Screws, Rivets, and Washers SIC 346 -Metal Forgings and Stampings SIC

347 -Coating, Engraving, and Allied Services

SIC 348 -Ordnance and Accessories, Except Vehicles and Guided

Missiles

SIC 349 -Miscellaneous Fabricated Metal Products.

Metals Fabrication Target sector for FH??

Limited M&A activity 3 main trends1) Varying Demand CyclesDemand for metal products is affected by varying demand in customer

industries. In the last five years, US production increased 11 percent for industrial equipment, 16 percent for household appliances, 31 percent for automobiles and light trucks, and 25 percent for defense and space equipment.

2) Customers Moving OverseasMany metal products customers, like auto companies and appliance

manufacturers, have moved production abroad to take advantage of lower labor costs and position themselves to sell products to a growing international market. Unless their US suppliers move with them, these customers buy from local manufacturers, especially if they use just-in-time inventory management.

3) Low ConsolidationConsolidation hasn't occurred in this industry except among producers of common

products. It is difficult to achieve economies of scale with specialized products.