Vertical Integration Alive and Well in the Metals Industry

Yesterday, the Wall Street Journal had a fascinating article discussing how Larry Ellison has done an about face on that early 20th century management innovation, vertical integration. Whereas two years ago, Ellison suggested he would focus on software only, today his plans include the purchase of Sun Microsystems which place him firmly on a vertical integration strategy where he will combine software with hardware. The journal article discusses a range of companies deploying vertical integration strategies from GM and Boeing buying up key parts suppliers to Apple getting back into the semiconductor business. The story also discussed key steel industry acquisitions including ArcelorMittal’s in several mines for key raw materials such as coking coal and iron ore and also Nucor’s acquisition of a major scrap metal processor. As every MetalMiner reader keenly knows, raw material price volatility as well as supply assurance can wreak havoc on a company’s ability to compete effectively.

So we decided to take a look at several companies in the metals industries to see if this “vertical integration strategy applied only to the steel sector or whether it cut across other producers and even service centers. Our cursory analysis suggests the notion of vertical integration is alive and well in the metals industry.

Let’s take a look at just a handful of aluminum producers to start. Century Aluminum represents a company that bucks the vertical integration trend by divesting itself of alumina and bauxite holdings. However, the acquirer of those assets, Noranda Aluminum Holding Corp, can certainly claim vertical integration status. The company mines bauxite, produces alumina and has four downstream rolling facilities producing aluminum sheet and foil. Rio Tinto Alcan also has vertically integrated operations.

Even on the service center part of the supply chain, ordinarily considered the middleman, much merger and acquisition activity has occurred for a variety of strategic reasons. Reliance Steel & Aluminum purchased competitor service center, PNA Group back in August of 2008. And though we’d argue many of the service center acquisitions tend to focus on expanding geography or adding complementary product lines to become more “full service, many of the acquisitions include companies that allow the service centers to not only offer more “products (e.g. different product mixes) but more important, “service capability such as flame-cutting, laser-cutting, heat treat services, testing, slitting capability etc. In other words, the integration includes many of the value-add processes formerly available through independent suppliers but now under the roof/management of the larger service centers.

McJunkin Redman, ranked the 3rd largest metals service center according to recently announced the acquisition of Transmark FCX Group PVC a supplier of valves and flow control equipment. This acquisition marks a “vertical integration of sorts when one views McJunkin’s own website, “Exclusively geared toward the distribution of PVF products to the energy and industrial sectors, McJunkin Red Man Corporation serves the oil and gas, chemical and petrochemical, refining, power, manufacturing, and mining industries, just to name a few. O’Neal Steels acquisition of Tad Metals in 2008 allowed that company to add more non-ferrous metals processing and distribution capability as well as geographic reach.

And though the age-old analysis of “make vs. buy still remains relevant for all manufacturing companies, the reasons to vertically integrate touch on a broad range of issues ripped from the headlines such as supply assurance to product quality to smoothing out raw material price spikes and hence earnings. Will history repeat itself? We wonder…

–Lisa Reisman

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