Big Deals: Metals fired up by acquisitions, innovations and demand

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Sunday, April 01, 2007

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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.

Big Deals of the Year 2006

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.


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