April 2007: Feature
BIG DEALS OF THE YEAR
2006
Hot metals
Acquisitions, innovations and market demand fire up a stalwart
Oregon industry.
By Jon Bell
To say the past year was an active one for Portland-based
Precision Castparts Corp. would be something of an
understatement.
The complex metal parts manufacturer announced no fewer than
three out-of-state acquisitions in 2006. Thanks to strong
demand from the power-generation market, general industry and
the aerospace sector, Precision saw its sales for the quarter
that ended Dec. 31 soar to $1.4 billion, up a whopping 62% over
the same quarter the previous year.
The year ahead is also looking good. Two more acquisitions
already have been announced this calendar year, and Peter
Arment, an analyst who covers Precision for JSA Research in
Newport, R.I., recently told investors they would be wise to
make Precision stock “a must-own in 2007.”
While Precision’s financial successes — it’s
the state’s second-largest public company in terms of
market capitalization, behind Nike — don’t
necessarily mirror Oregon’s metal industry as a whole,
its strategies and its level of activity certainly do. From
mergers and acquisitions to product innovations and workforce
improvements, the metals industry in Oregon is seeing a flurry
of activity that bodes well for one of the state’s larger
and oft-overlooked economic forces.
“There’s certainly a lot of activity going
on,” says Chandra Brown, vice president of Oregon Iron
Works, a Clackamas metals firm that has its hands in everything
from bridges and dam equipment to streetcars and unmanned
aircraft for the military. “In my opinion, people
haven’t realized how active and how big the metals and
transportation industry is in the state of Oregon. It’s a
very big cluster. Luckily people are starting to take notice,
because we’re a pretty big portion of the overall
economy.”
Indeed, in Portland alone, according to the Portland
Development Commission, metals companies provide family-wage
jobs for nearly 27,000 workers and contribute approximately
$4.2 billion in sales to the local economy on an annual
basis.
Add on some of the peripheral businesses that the metals
industry crosses into, such as transportation and energy, and
total employment around the state tops 55,000 jobs at 1,700
companies, according to the Oregon Metals Initiative, a
consortium of companies and research institutions established
in 1990 to help boost the competitiveness of the industry.
Despite such numbers, however, the metals industry in Oregon
has long been upstaged by its hipper high-tech counterpart.
“It’s been overshadowed by high tech and the
display clusters,” says Brown. “It’s not as
glamorous, but I think there’s a ton of innovative things
going on here.”
Among some of the innovations at Oregon Iron Works garnering
attention: The company recently entered the realm of streetcar
manufacturing, it’s developing prototype products for
wave energy, and it continues to work on highly sophisticated
marine and aerospace craft for the defense industry.
Also making the headlines for Oregon’s metals industry
of late has been a series of high- and low-profile acquisitions
and mergers that reflect market trends around the country and
the world.
Most notably was the November 2006 announcement that the Evraz
Group, a Russian steel company, was buying Oregon Steel Mills
for $2.35 billion. Through the acquisition, which was approved
in January, Evraz gains not only a valuable end user for its
steel slabs, but also a foothold in the American steel market.
Oregon Steel, on the other hand, will benefit from a steady
supply of raw materials and the vast financial resources and
market connections of the Russian firm.
“One firm has access to a lot of markets but maybe
doesn’t have the best technology; the other hasn’t
had historical access to markets but it’s technologically
a very efficient firm,” says Bruce Blonigen, a professor
of social science in the economics department at the University
of Oregon. “Combining these assets can lead to a much
more profitable enterprise.”
Evraz was also looking to consolidate its business to help
weather the volatility of the steel market, much as other steel
firms around the world have done.
“We’re starting to see a lot of consolidation
now,” Blonigen says, adding that demand for steel in
places such as China and India remains strong.
Other recent acquisitions in Oregon’s metals industry
include Precision’s snapping-up of five companies that
produce specialty metals parts for the aerospace industry, and
the two metals recycling firms that Schnitzer Steel Industries
picked up in 2006. Such acquisitions, Blonigen says, help
companies internalize their input and output markets, giving
them more control over fluctuating supply sources and
consistent access to end users.
In Schnitzer’s case, the company simply needs more scrap
metal to feed its business — and its mega-shredders,
which are capable of ingesting 2,500 tons of scrap metal a
day.
“This is a business based on volume,” says Eric
Glover, an equity research analyst with Canaccord Adams in San
Francisco. “The more volume you can put in, the more
revenue you generate, the greater the profits you
realize.”
He says that through the acquisitions, Schnitzer is trying to
take advantage of the current high prices of nonferrous metals
such as aluminum and nickel, which are widely used in the
aircraft and home appliances industries, respectively. A strong
auto industry outside the U.S. and non-residential building
booms in places such as the Middle East and Europe also are
fueling a huge demand for the metal Schnitzer produces.
Glover says that consolidation is also under way in the scrap
metal industry as the owners of mom-and-pop scrap yards across
the country near retirement. Acquiring such yards allows
companies like Schnitzer to have more control over the quality
and volume of metal they provide to steel mills, which in turn
gives them more leverage in negotiations with their mill
customers.
Glover expects to see more consolidation in the “very
fragmented” scrap industry, and he also wouldn’t be
surprised to see Schnitzer grow its self-service and
full-service auto parts business in the near term. Not only
would Schnitzer like to expand its presence in the auto parts
business, but the company also benefits whenever it acquires an
auto parts business or scrap yard by securing yet another ready
source of scrap metal.
For all the good news in Oregon’s metals industry of
late, some negativity lingers. For starters, Evraz has promised
to keep Oregon Steel’s management and nearly 700 Oregon
employees intact for one year; after that there are no
guarantees.
Markets for many of Oregon’s metal products, especially
steel, are volatile as well. Just seven years ago, Oregon Steel
was nearly bankrupt, its shares bottoming out at $1. Defense
spending, foreign affairs and the strength — or weakness
— of the U.S. dollar also impact Oregon’s metals
industry, as does foreign demand.
And, like so many industries and professions, metals in Oregon
faces a looming workforce shortage, the result of aging workers
and diminished training opportunities for younger
prospects.
Brown, however, is hopeful that continued innovation, support
from the state and advocacy groups such as Manufacturing 21,
and improved education for new workers will burnish the metals
industry in Oregon to a hearty shine.
“I think we’re finally getting the attention we
deserve,” she says, “but we’re just at the
start.”
Jon Bell is a Portland-based
journalist who frequently reports for Oregon Business
magazine.
Have an opinion? E-mail feedback@oregonbusiness.com
