Commercial Metals Company (CMC)

TOP CONTRIBUTORS

Charles Colon

Alan Ibrahim

Andrzej M. Kotas

Commercial Metals Company (NYSE:CMC) is primarily a recycler of scrap metal, using discarded material to make new finished steel products. CMC owns groups of steel mini-mills in the U.S. and in Poland which melt down scrap metal to make steel. In addition to the recycling and manufacture of steel products, the company also manufactures specialized metals and copper tubing. The company earned $6.8 billion in revenue and $21 million in net income in 2009.^[1]

CMC owns the recycling centers that break down old products into scrap and the mini-mills that turn scrap into steel. This vertical integration helps shield the company from volatility in the iron ore market. CMC also protects itself by operating in multiple countries - less than 60% of its sales are in the U.S.

Increased international demand for steel, especially from China, has led to a global boom in steel prices . The flourishing industry has allowed CMC to earn handsome margins, and cash dividends for shareholders have increased fourfold in the past two years. The firm’s recent success will help it to deal with the significant risk factors in its market, including elevated international competition, rising raw material costs, and weakening domestic construction and automobile industries.

Company Overview

Business Segments^[2]

CMC divides its operations into two geographic segments:

CMC Americas

• Americas Recycling - processes scrap metals for use as a raw material by manufacturers of new metal products. This segment operates 42 scrap metal processing facilities with 20 locations in Texas, 7 in Florida, 4 in South Carolina, 2 in each of Alabama and Missouri, and one each in Arkansas, Georgia, Kansas, Louisiana, North Carolina, Oklahoma and Tennessee. The plants process and ship more than 2 million tons of scrap metal annually.
• Americas Mills - under this segment, the company operates 5 steel mills that produce one or more of reinforcing bar, angles, flats, rounds, small beams, fence-post sections and other shapes, a copper tube minimill, and a scrap metal shredder processing facility.
• Americas Fabrication - under this segment, the company operates steel plants that bend, cut, weld and fabricate steel, primarily reinforcing bar and angles; warehouses that sell or rent products for the installation of concrete; plants that produce special sections for floors and ceiling support; plants that produce steel fence posts; and plants that treat steel with heat to strengthen and provide flexibility.

CMC International

• International Mills - the company's wiss subsidiary, CMC International AG owns two steel minimills — CMC Zawiercie S.A. (CMCZ) with operations at Zawiercie, Poland and CMC Sisak d.o.o. (CMCS) with operations at Sisak, Croatia. These two mills constitute the International Mills segment. CMCZ has an annual melting capacity of 1.9 million tons and CMCS has an annual capacity of 116,000 tons of short pipe.
• International Fabrication and Distribution - operations buy and sell primary and secondary metals, fabricated metals and other industrial products. Products are sold primarily to manufacturers, in the steel, nonferrous metals, metal fabrication, chemical, refractory and transportation businesses.

Business Growth

FY 2009 (ended August 31, 2009)^[1]

• Net sales fell 35% to $6.8 billion. Sales fell in all of the company's business segments with the Americas Recycling segment having the greatest decrease of 64%.
• Net earnings fell 90% to $21 million.

Trends and Forces

• Climbing Steel Prices Boost CMC's Revenues: Demand for steel has been at historic levels recently, mainly due to rapid industrialization in developing countries, and especially in China. The elevated international demand for steel has caused steel prices to skyrocket and has led to impressive profits from steel makers around the world.

• Globalization of Steel Production Creates Acquisition Opportunities for CMC: CMC's international acquisitions, such as CMCZ in Poland, allow it to take advantage of lower labor and energy costs in Central Europe. Since international demand for steel is high, CMC's international producers have generated big returns and boosted revenues. But international production has been increasing rapidly as well, and new competitors are entering the market. China is expected to become a net exporter of steel, and the production of China's state-owned steel mills and huge consumption of iron ore make a Chinese presence in steel exporting a major risk factor for CMC.

• Demand Volatility in the U.S. Steel Industry Affects CMC's Revenues: The steel industry has enjoyed a number of very successful years recently, given the wealth of buyers and related high prices in the business. However, ongoing problems in the domestic automobile industry may affect U.S. demand for steel as companies like Ford and GM may cut production. In addition, the subprime lending crisis has depressed home construction, and if the woes of the residential housing market trickle down to the commercial real estate industry, builders may require less steel, less often as they work on fewer projects.

• There are Rewards (and Risks) Associated with CMC's Recent International Acquisitions: CMC's recent movements into the Polish and Croatian steel markets offer the company an interesting position in the worldwide steel industry. The company now occupies a strategic position in central Europe, offering more direct exposure to European customers and insulating the company from potential decreases in demand in the United States. Considering the development and emergence of many of Central Europe's economies, this location will allow CMC significant chances for growth and profits. As CMC's profits become more dependent on this sector of its business, however, the firm runs the risk that political or economic instability in these distant countries could have a major negative effect on its balance sheet.

• In Poland, the timing of the CMCZ capacity expansion at Zawiercie (+550 kt / year bar product capacity added in 2009) coincided with a comparable capacity expansion in bar production at Celsa Huta Ostrowiec (+525 kt / year bar capacity also added in 2009). These changes [adding over one million tonnes of light long product production potential] came just at a time when the steel market in Poland declined between 2008 and 2010 because of the worldwide financial crisis from ~11 million tonnes per year to ~7.7 million tonnes of steel per year^[3]. In consequence, capacity utilisation at CMCZ's Polish bar rolling business at Zawiercie may prove problematic during 2010 and even during 2011, as market recovery is awaited.

Competition

Although CMC competes with regional, national and foreign manufacturers of steel and copper products, the company does not hold a substantial market share in any of its domestic productions. The company claims that CMCZ is the second largest supplier of wire rod and rebar in the Polish market. CMC also asserts that it is one of the largest recyclers of nonferrous (non-iron) metal in the domestic market. The company competes with companies like:

• Nucor (NUE)

• US Steel (X)

• ArcelorMittal (MT)

References

1. ↑ ^{1.0 1.1} CMC 2009 10-K "Selected Financial Data" pg. 24
2. ↑ CMC 2009 10-K pg. 3-10
3. ↑ Polish steel demand analysis 2004-2010