North American Metals Industry: A Buyer's Market
The industry appears to be in the midst of a modest recovery, after metals prices reached their low earlier this year. Production curtailments (voluntary and involuntary), domestic trade actions, and relatively stable end market demand have resulted in margin and share price gains for publicly-traded metals companies, particularly those in the steel sector. M&A activity, however, remains subdued with buyers demonstrating discipline and restraint in an otherwise frothy M&A environment.
With struggling competitors existing in the market, metals companies that have weathered the current downturn are better positioned to capitalize on improving conditions. However, questions remain around whether we’re experiencing the beginning of a prolonged recovery.
The outlook for some key end markets remains uncertain (although unlikely to deteriorate further) while relatively high domestic metals prices and a strong US dollar threaten to attract imports. Despite these concerns, the recent rally in metals equities seem to indicate that investors believe higher metals prices are sustainable and the worst is behind us. If that thesis holds, increased M&A activity should soon follow.
End Market Outlook
The outlook for key North American metals end markets remains mixed, with some near peak demand (Automotive) and others arguably near trough and poised for modest improvement.
Aerospace: Commercial backlogs should continue to drive growth over the medium term.
Automotive: Conditions are beginning to soften, although a modest increase in North American production is still expected. Aluminum should continue to benefit even if production slows.
Construction: The non-residential market is set for continued recovery over the next few years following high single digit growth the past several years. Imports, however, will continue to challenge domestic producers.
Machinery/Heavy Equipment: Weakness persists due to continued softness in the mining and agricultural sectors.
Oil and Gas: The market appears to have stabilized somewhat but little improvement in pricing/market conditions is expected near-term.
M&A activity in the metals supply chain (scrap processors to service centers) remains muted and “value-focused”. Many subsectors are best by restructurings and liquidations with relatively few assets trading hands. The current environment has created opportunities for industry participants with healthy balance sheets and for private equity investors with access to capital.
- Black Diamond Capital Management, LLC acquired ArcelorMittal’s LaPlace, Louisiana and Vinton, TX long product mills in March. ArcelorMittal’s Steelton, PA mill was also on the block but ultimately not included in the transaction.
- Granges AB won a court-supervised auction for Noranda’s rolled products division in early July. The transaction is set to close in the third quarter.
- The Essar Steel Algoma and US Steel Canada auctions continue as KPS Capital Partners dropped out of the bidding process in July after being unable to reach agreement with the province of Ontario.
- Steel Dynamics Inc. bolstered its downstream processing capabilities with the acquisition of Vulcan Threaded Products Inc. in August.
Share prices and valuations for many publicly-traded metals companies have recovered significantly since the beginning of 2016 as metals prices have rebounded.
A vast majority of public market participants in the scrap processing and service center sectors are trading on the basis of forward earnings (i.e. 2017 earnings) as last twelve month (“LTM”) performance remains unchanged. Private scrap processors and service centers have often been trading on an adjusted book value basis.
Across sectors, market participants with significant exposure to the oil and gas end market (e.e. TimkenSteel Corporation and MRC Global) are trading at multiples that reflect the distress inherent in that end market.
Aluminum producers as a whole continue to exhibit stronger operating results and trading performance than counterparts in steel and specialty / nonferrous metals. A noteworthy exception to this trend is the primary aluminum subsector where producers (both private and public) face headwinds due to significant energy and other input cost differentials versus the rest of the world.