Profile: Schnitzer Steel Industries Inc (SCHN.O)

Schnitzer Steel Industries, Inc., incorporated in 1946, is a recycler of ferrous and nonferrous metals. The Company is a recycler of used and salvaged vehicles, and a manufacturer of finished steel products. It operates in three business segments: the Metals Recycling Business (MRB), the Auto Parts Business (APB) and the Steel Manufacturing Business (SMB). In February 2009, the Company acquired a self-service used auto parts business with two locations in California. In March 2009, the Company acquired a metals recycler in Nevada, providing an additional source of scrap metal for MRB’s Oakland, California export facility. On October 2, 2009, the Company acquired four self-service operations, which are located near the Company’s MRB export facility located in Portland, Oregon and sold its full-service used auto parts operation to LKQ Corporation.

The Company provides an end of life cycle solution for a variety of products through its vertically integrated businesses, including sale of used auto parts, procuring autobodies and other metal products and manufacturing them into finished steel products. As of August 31, 2009, all of the Company’s facilities were located in the United States and its territories and Canada. In December 2008, the Company acquired a metals recycler in Washington to provide an additional source of scrap metal to MRB’s Tacoma, Washington export facility. In February 2009, the Company acquired a metals recycler in Puerto Rico. In February 2009, the Company acquired an additional 16.66% equity interest in an auto parts business located in California, and in April 2009, acquired the remaining 8.34% equity interest in this business, there by increasing the Company’s equity ownership in this business to 100%.

Metals Recycling Business

MRB buys, collects, processes, recycles, sells and brokers ferrous scrap metal (containing iron) to foreign and domestic steel producers, including SMB and nonferrous metals (not containing iron) to both domestic and export markets. MRB processes mixed and large pieces of scrap metal into smaller pieces by sorting, shearing, shredding and torching, resulting in metal processed into pieces of a size and density required by customers to meet their production needs. The manufacturing process includes physical separation of materials through manual and mechanical processes into ferrous and nonferrous sub-classifications. The Company’s Everett, Massachusetts; Portland, Oregon; Oakland, California, and Tacoma, Washington facilities has a mega-shredder capable of processing approximately 2,500 tons of metal per day. The Company’s Johnston, Rhode Island and Salinas, Puerto Rico, facilities operate shredders capable of processing up to 1,500 tons of scrap metal per day. The Kapolei, Hawaii; Anchorage, Alaska, and Concord, New Hampshire facilities operate smaller shredders.

MRB sells both ferrous and nonferrous scrap metal. The ferrous products include shredded, sheared, torched, and bundled scrap metal and other purchased scrap metal, all of which is sorted and classified. MRB also purchases and recovers nonferrous scrap metal from the shredding process. MRB then further processes and sells this nonferrous scrap metal into products that include aluminum, copper, stainless steel, nickel, brass, titanium and high temperature alloys. During the fiscal year ended August 31, 2009 (fiscal 2009), MRB made sales to customers in China, South Korea, Taiwan, Malaysia, Thailand, India, Turkey, Egypt, Greece, Indonesia, Italy, Pakistan and other countries located in Asia and Europe. MRB sells recycled metal to foreign and domestic customers.

Auto Parts Business

APB procures used and salvaged vehicles, primarily from tow companies, private parties, auto auctions, city contracts and charities, and sells the used parts from these vehicles through its 37 self-service, 16 full-service and two hybrid (having self-service and full-service under one roof) auto parts stores, which are located across the United States and Western Canada. The remaining portions of the vehicles, primarily autobodies, cores (which include engines, transmissions, alternators and catalytic converters) and nonferrous materials are sold to metal recyclers, including MRB.

APB sells used auto parts from each of its self-service and full-service retail stores. The full-service business sells its parts primarily to collision and mechanical repair shops through its sales force, which includes inside and outside sales people. In addition, APB sells the cores of autobodies to a variety of wholesale buyers and sells the scrap metal from end of life vehicles to MRB and third-party recycling yards throughout the United States. The wholesale component of APB’s business consists of core and scrap sales. Once the vehicle is removed from the customer area, certain remaining parts that can be sold wholesale are removed from the vehicle and consolidated at central facilities in California, Florida, Texas and Calgary, Canada. From these facilities, the cores and scrap are sold through an auction system to a variety of wholesale buyers.

Steel Manufacturing Business

SMB is a steel mini-mill that produces a range of finished steel products using recycled metal and other raw materials. SMB’s melt shop includes a 108-ton capacity electric arc furnace (EAF), a ladle refining furnace and a five-strand continuous billet caster. The melt shop produced 401,000 tons of steel in the form of billets during fiscal 2009. SMB operates two computerized rolling mills that allow for synchronized operations of the rolling mills and related equipment. The billets produced in the melt shop are reheated in two natural gas-fueled furnaces and are then hot-rolled through one of the two rolling mills to produce finished products. SMB’s annual finished goods production capacity is approximately 800,000 tons.

SMB produces semi-finished goods (billets) and finished goods consisting of rebar, coiled rebar, wire rod, merchant bar and other specialty products. Semi-finished goods are used for SMB’s finished products and for sale to other steel mills. Rebar is produced in either straight length steel bars or coils and used to increase the tensile strength of poured concrete. Merchant bar consists of round, flat, angle and square steel bars used by manufacturers to produce a variety of products, including gratings, steel floor and roof joists, safety walkways, ornamental furniture, stair railings and farm equipment. Wire rod is a steel rod delivered in coiled form, which is used by manufacturers to produce a variety of products, such as chain link fencing, nails, wire and stucco netting.

SMB sells directly from its mini-mill in McMinnville, Oregon, from its owned distribution center in El Monte, California (Los Angeles area) and from a third-party distribution center in Lathrop, California (Central California). SMB’s customers include steel service centers, construction industry subcontractors, steel fabricators, wire drawers and farm and wood product suppliers. During fiscal 2009, SMB sold its finished steel products to customers located primarily in 10 Western states and Canada, and billets to customers in Asia. Customers in California accounted for 40% of these sales.

The Company competes with LKQ Corporation, TAMCO Steel and Nucor Corporation.