Making It Work

Before, during and after the late 1990s consolidation craze, Commercial Metals Co., Dallas, has acquired other scrap recycling operations as part of its long-term strategy.

But corporate officers are quick to point out that acquiring other scrap companies has been just one beam in a much larger structure. (A structure that is primarily made out of steel, it should be pointed out.)

Commercial Metals Co. (CMC) has indeed built an impressive regional network of scrap processing locations, but it has also entered into electric arc furnace (EAF) steelmaking in a substantial way. Perhaps equally important, the company has never grown at a speed that would let its reach exceed its grasp. 

DEEP TEXAS ROOTS

Commercial Metals Co. started as a single scrap yard opened in 1915 by Moses Feldman. Under the leadership of Moses and then his son, Jake Feldman, the company grew to achieve a major regional presence, and by the 1950s became one of the first scrap companies in the U.S. to offer publicly-traded stock.

Current Commercial Metals Secondary Metals Processing Division president Harry H. Heinkele extends credit in particular to Jake Feldman for his guidance in growing the company. “He was the real inspiration behind the company’s growth,” says Heinkele. He basically started the company with his father, and was responsible for a lot of the growth that led to the company going public first on the American Stock Exchange, and then in the early ‘80s on the Big Board,” says Heinkele, referring to the stock’s current home on the New York Stock Exchange.

The company’s headquarters remains in Dallas, and Texas remains the state with the most CMC facilities and employees. In the 1980s and 1990s, however, the company has opened offices and facilities in several other states, including Florida, South Carolina, Louisiana, Alabama and Arkansas.

Acquisition was the primary means of growth for the company’s scrap operations. But Heinkele says that the company purchased facilities with plans in place to make them more competitive within their regional markets. The company has also stayed in a handful of markets where it feels it can compete efficiently. “Basically, we did it more systematically,” he says of the company’s growth. We had no mandate to try to double, triple or quadruple overnight. This allowed us to integrate new operations as we acquired them,” Heinkele adds.

“We basically look at opportunities as they are presented to us,” he notes, “including acquiring more facilities within our own operating sphere. We’re conservative. We’re not trying to be the biggest, but the best,” he adds, noting the motto was one made famous by former Chrysler CEO Lee Iacocca.

“Efficiency is important,” Heinkele says of the way processing facilities are operated. “We have done quite a bit to modernize our facilities and make them more environmentally-friendly. A good example is our Chattanooga, Tenn. facility,” Heinkele continues. “When it was acquired ten years ago, the land was hilly within the scrap yard. Much of the equipment was older and somewhat worn. We leveled the ground, put in some new shears, and basically made it a more competitive facility. We’ve done similar things in Dallas, Fort Worth, Jacksonville and other cities. We do take major undertakings to modernize plants to increase volume and satisfy customers’ requirements. We pay a lot of attention to the logistics of the yards.”

Current CEO Stanley A. Rabin assumed the helm in the late 1980s. “He’s helped keep the company focused,” says Heinkele of Rabin’s tenure. “We’ve stayed established in the metals business. We haven’t, for the most part, branched out in other areas that weren’t related.”

LOOKING BEYOND SCRAP

To say that CMC has moved into steelmaking as an adjunct to its metals recycling business would no longer be accurate.

As 1998 revenues demonstrate, manufacturing is now CMC’s primary activity. 52% of company revenues were generated in the manufacturing segment, compared to 32% in the marketing and trading segment and just 16% in recycling.

That manufacturing segment consists primarily of steel making and steel fabricating, as well as one copper tube manufacturing plant.

The CMC Steel Group includes four EAF mini-mills that operate under the SMI (Structural Metals Inc.) name. The four SMI mills are located in Texas, Arkansas, South Carolina and Alabama. Fiscal Year 1998 was a record production year for the four SMI mills despite the second-half downturn in the steel industry.

The Steel Group has grown dramatically in the 1990s, and Heinkele believes Rabin deserves much of the credit. “There has been a dramatic increase in the steel division during his tenure,” he notes. The company’s sole mill in Seguin, Texas was producing just 120,000 to 150,000 tons of product in the early 1980s, according to Heinkele. The four SMI facilities now combine to melt some two million tons of steel annually, with capital projects underway that will increase capacity yet again.

While the late 1998 steel glut was causing dropping prices and production cutbacks—and CMC was by no means immune to the negative effects—the company did not see its steel buying markets disappear.

One of the reasons, notes Heinkele, is that the company sells heavily to federally-funded highway and bridge projects that are required to buy steel and concrete reinforcing steel rebar made in the U.S. Overall, SMI also fared well because “they are low-cost producers, and they have excellent relationships with their customers,” says Heinkele.

Regarding the highway-related projects, Rabin notes that “The Transportation Equity Act for the 21st Century (TEA-21) is very positive for CMC. In general, we expect steel bar consumption to swing more toward the public sector during the next few years.”

In addition to melting and rolling steel, the CMC Steel Group also operates some 20 steel fabricating plants in eight different states, manufacturers steel fence posts, steel joists, has a heat treating plant, and operates rail car repair and fabrication facilities.

Within the manufacturing segment, the company also warehouses concrete-related products and operates Howell Metal Company, a maker of copper tubing made from primary and secondary copper. The tubing is used in the plumbing, air conditioning, and refrigeration industries.

OPERATING REGIONALLY AND LOCALLY

While steelmaking has surpassed scrap processing and trading on CMC’s revenue scoreboard, the company’s scrap operations are still significant in the southeastern U.S.

CMC operates processing facilities or feeder yards at more than 40 locations in eight states. The scrap involvement is substantial enough that the company has felt the effects of the ferrous scrap market woes of the past nine months.

The company’s 1999 fiscal year first quarter covered the months of September, October and November of 1998. CMC’s Recycling segment reported a “significant loss” that quarter, according to Rabin, “because of the worst steel scrap market in 25 years.”

Also facing potential difficulties because of the sorry state of global commodity prices is CMC’s Marketing and Trading Segment, which markets and trades primary and secondary metals as well as ores, concentrates, industrial minerals and chemicals.

In the first quarter of 1999, however, the segment improved income by 37% compared to a year ago, despite revenues that were only 7% greater. Rabin calls this “a continuing accomplishment for this segment amid the collapse of global markets and the extraordinary drop in world prices.”

On the scrap metal side, Heinkele says the company has not taken a broad-brushed approach to either centralizing or decentralizing, but instead may employ a different degree of centralization depending on the operational aspect being considered.

“We buy locally,” he says of scrap purchasing. “All of our purchases are done locally. Facility scrap buyers bid on contracts and set their own prices to compete locally.” Heinkele notes, though, that “over the past 12 months we have restructured all of our facilities into five regions, naming a regional manager and marketing manager on the buy side.” The regional structure was established “to coordinate so our facilities don’t compete with each other for scrap,” Heinkele notes.

He believes the new regions will also allow the company to “better utilize equipment, so that each location can interchange and help an account that might border on a region.”

Other operational aspects are centralized corporation-wide, Heinkele says. “As far as equipment purchasing goes, we do have a consolidated capital budget. Each yard submits a request list to our office in Dallas for corporate approval. That is consistent throughout the company.”

On the sell side, however, “our sales operations are handled centrally out of Texas,” says Heinkele. “Even though we may add new facilities, the same marketing group talks to the consumers. There is continuity.”

While the company’s scrap is shipped throughout North America and to overseas markets, most facilities remain in the southeast quadrant of the U.S.

Heinkele also mentions that CMC’s Steel Group and the Recycling Group do not necessarily operate in tandem so that each can take advantage separately of market opportunities. “Other than one or two ventures where there are agreements, we basically keep things at arm’s length,” he notes. “They buy from us as would any other steel mill. They have their own marketing team and do their own buying. They definitely buy more material from others than they do from us.”

BRACED FOR THE TOUGH MARKET

As the late 1990s have revealed, being a publicly-traded scrap metal or steel company can be like walking a tightrope since these companies deal in basic commodities.

How can CMC executives keep shareholders content when markets plummet?

“It’s difficult,” says Heinkele. “It’s a very mature business, and we’re not any different from anyone else in this industry. When prices fall this low, the flow of scrap really slows down. As the flow slows, margins narrow. Last year, for the fist time since the early 1990s, we were not profitable,” he notes. “But we had positive cash flow, and we still do. We’re not taking as big a loss as some of our competitors.”

A number of factors can help explain CMC’s ability to weather the tough markets. Foremost, of course, the company’s steelmaking and steel fabricating divisions were able to take advantage of low scrap prices to post significant earnings. “ During the same first quarter that CMC Recycling recorded a significant loss, the “CMC Steel Group had a record first quarter and operating profit was up 61% versus last year’s first quarter as we benefited from our vertical integration and lower raw material costs,” noted Rabin in remarks accompanying the company’s earnings statement.

As noted earlier, the Steel Group operates separately in part so that it is not obligated to buy scrap at an artificially high price from the Recycling Group. Likewise, when scrap is priced higher, the Recycling Group is free to operate as a separate unit to sell its scrap at the most profitable margin.

The nearly 1,000 employees of the CMC Secondary Metals Processing Division processed 1.95 million tons of ferrous and nonferrous scrap during the company’s 1998 fiscal year. While that is an impressive figure, the company’s officers have adopted a philosophy that the wisdom going into the processing of each ton contributes a lot more to the long-term health of the company than the total volume figure at the end of the year.

The author is editor of Recycling Today.