The Value of the Metals Middlemen
In an era where so much value has gone virtual, plenty of companies still succeed with tangible, physical products and services. Consider the middlemen situated between metals suppliers and their end-use consumers.
Thanks to their deep knowledge of the industry, middlemen play a unique role in the market. On the one side are their suppliers, the mills and other producers who want to keep production runs as high as possible in order to keep their per-unit costs low.
They are not in the business of customization. On the other side, their customers, the manufacturers who use the materials but want them only when they need them, and in particular shapes, sizes, and quantities – often in lot sizes that aren’t big enough to be economical for the mill. These significant structural differences often make it very difficult for the two sides to work together.
Enter the middleman. What makes a successful metals middleman? An ability to buy sufficiently large quantities of material while processing, adding value, or simply arranging for its distribution and delivery in the smaller and varying quantities that the manufacturers need – is a good start. This opens a larger market to small- and mid-sized manufacturers because the middleman has effectively aggregated the sum total of their demand into a single order – his own.
The equation is simple. The more customers you have, the greater is your value to the mills and the greater your leverage to secure volumes and pricing that your customer base cannot get directly. In recent years, the middleman has added a second value-type, as a risk buffer/manager. Thanks to growing market volatility and uncertainty, manufacturers are more aware of commodity risks. As a result, many are willing to pay someone else to manage that risk on their behalf.
Market makers and master distribution businesses take risk on, on behalf of their consumer customers and charge a premium for that service. By matching buy orders with sell orders, or hedging greater volumes of exposure in the middle, middlemen are able to largely eliminate their own risk exposure in a way the end-use manufacturers simply cannot do. Successful market makers add value to virtually every stage of the supply chain in other ways as well. Their services may include marketing, trading, manufacturing, processing, distribution, and transportation. They may even offer expert advice on domestic and international logistics, or, if the experts’ advice seems too daunting, by leasing capacity from their own fleet.
Over the past few years, as less able operators have exited the market, the survivors have taken advantage of the opportunity to gain more scale and skill. Most now use sophisticated computer modeling to improve the efficiency of their arbitrage and hedging strategies, further reducing their risks. Today’s most sophisticated metals brokers understand they are in a service business, and that both their suppliers, and customers, rely on them to keep their supply chains running smoothly on both sides.
Three additional factors making these firms more valuable:
1. Commodities price cycle – The ups and downs continue, often in unpredictable ways, and smart middlemen tend to make money on that volatility.
2. Size – Up to a point, the bigger these companies get, the more valuable they become. The size of their customer and supplier networks, opportunities for diversification, and easier access to capital all encourage both organic and inorganic growth.
3. Strategic redefinition – As noted above, many manufacturers no longer believe they should be metals investors. Whether the reason is leftover risk-aversion from the last recession, a desire to focus on their core business, a reluctance to handle volatility in a slow-growth environment, or all of the above, more manufacturers are happy to outsource that risk and steady their costs.
Given the strength of the metal brokers’ franchise, it’s not surprising a number of private equity investors have begun to feel that the leading metals brokers have a golden touch. In the past few years alone, Trivest has integrated new companies into Columbus Recycling, Apollo bought Phoenix Services, Traxys purchased the raw materials trading division of Commercial Metals Company, and Sims Metal Management recently announced the UK acquisition of Morley Waste Traders.
Livingstone Partners has also represented recycled metals suppliers in two important deals: EMR’s purchase of Metal & Waste in the United Kingdom and SA Recycling’s acquisition of Tennessee Valley Recycling. Of course, metals brokers aren’t the only indispensable middlemen out there. A number of other industries take a similar path, taking what had been an old-fashioned business and using data analytics alongside a deep understanding of their customer to significant success.
Far from being disrupted by digital technology, smart metals brokers and similar businesses in other sectors take advantage of these new capacities to strengthen their niche, augmenting their prior advantages in scale and skill. In all sectors dominated by these kinds of players, we expect such consolidation will continue.