Article | June 27, 2022

Metals Industry Valuation Considerations

Gordon Brothers’ experts provide key short- and long-term valuation considerations for the aluminum, copper, metal stamping and metalworking machinery, and steel sectors.

Lenders should consider how specifications like alloy, form and type may affect asset appraisal and recovery values across sectors within the metals industry. Additionally, lenders must understand a company’s costing methodology when its inventory contains commodity-type items like aluminum and steel, which are subject to frequent price fluctuations.

Aluminum

Aluminum is produced in a variety of forms and alloys. Base aluminum prices are tracked for either billet or scrap, but most aluminum is sold and used in a fabricated form such as sheet and coil, bar stock, extrusions, forgings and castings, among others.

For certain applications, such as aerospace and military, aluminum may be produced in proprietary grades to conform to industry specifications. As such, the cost and value of fabricated aluminum is more difficult to update and track, while the price of base billet can be tracked daily.

In a liquidation, the value of aluminum is driven by marketplace demand and need. Proprietary forms of aluminum absent a waiting customer generate a scrap value. Widely used aluminum products in standard sizes and quantities with material certifications generate strong recoveries in the secondary marketplace.

Inventory Costing and Mark-to-Market Reserves

Lenders must understand a company’s inventory costing methodology when its inventory contains commodities like aluminum, which are subject to frequent price fluctuations. A standard cost approach includes updating inventory costs periodically. Depending on update frequency, a company’s reported cost may vary from the market in an inflationary or deflationary environment. A rolling weighted cost approach utilizes an average weighted cost for each purchased item that equates to a rolling perpetual average. This methodology is useful for commodities, as a company’s reported cost will remain more in line with the market, although costs will still trail market prices by a set period.

Given the volatility in the aluminum market, lenders should be aware of the target company’s costing methods and consider incorporating a mark-to-market or lower-of-cost-or-market reserve. A mark-to-market reserve account will adjust the cost basis to market and ensure an advance rate based on a percentage of cost remains relevant, even in a volatile market.

As a result of increased pricing and ongoing market volatility, borrowers may face unexpected cost increases that could compress margins. Operators who work on a project basis are most vulnerable since input prices may differ at the time materials are purchased from when contract prices were agreed upon. On the other hand, recoveries on existing aluminum inventories may benefit from reported cost varying from market price in an inflationary environment.

Copper

Copper can be rolled, drawn, cast or extruded into a myriad of products. Common industry applications for 2021 included 46% building construction, 21% electric and electronic products, 16% transportation equipment, 10% consumer and general products, and 7% industrial machinery and equipment.[1]

Approximately 70% of copper is used as a conduit for electricity. Scrap supplies nearly one-third of copper production and virgin materials mining supplies the remainder.

As base copper prices decline, fabrication costs as a percentage of the total value of copper products will increase. The scrap value of copper as a percentage of cost will decline when copper prices fall because fabrication costs are not recovered when the material is scrapped. Copper products in standard sizes and quantities with widely used material certifications will continue to generate strong recoveries in the secondary marketplace after they are adjusted for any base metal market price fluctuations.

Basis of Growth

The copper industry’s growth is dependent on the metal’s high conductivity, corrosion resistance, ability to alloy with other metals, malleability and appearance. While there are substitutes in specific uses, copper has entrenched itself in the electrical construction, consumer electronics and communications industries.

Industrial electrical and consumer electronic products, including power cables, and construction, including wiring and water tubing, also represent a significant share. Transport industries use roughly one eighth of the total, and industrial machinery and equipment use approximately one tenth. A range of consumer and other products make up the remainder.

International copper price changes drive industry performance, with higher selling prices prompting producers to increase output. As with any commodity, the price is set by supply and demand, and demand increases as construction and electronics manufacturing increase. Additionally, copper and the U.S. dollar have a negative correlation; whenever the dollar rises, copper prices fall and vice versa.

Metal Stamping Machinery

Stamping presses make components by blanking, piercing or punching; forming, bending and drawing; or otherwise manipulating metal in sheet or coil form between the upper and lower halves of a die. The upper portion is attached to the slide of the press, and the lower portion is clamped or bolted to the bed or bolster. The die is designed to create the shape and size of the component.

Press specifications drive their desirability and value. There are two main drive types: hydraulic and mechanical. While other types of presses exist, hydraulic and mechanical are the most common in key markets. Hydraulic cylinders power hydraulic stamping presses. They have fewer internal components and more constant press force during each stroke. Additionally, hydraulic presses are more reliable than mechanical presses but cannot match their operating speed. Rotary motors power mechanical metal stamping presses through a screw, toggle, lever or other device.

A machine’s capacity is another key specification. A press’ rated capacity is typically determined by the tonnage pressure. Its stroke size, or strokes per minute, measures the distance and time it takes for the ram to travel from top to bottom.

Appraisers should consider machines’ bolster or bed size and the capacity of any slide adjustments. Single-acting presses have a single ram while double-acting presses have a subdivided ram. Triple-acting presses exist but are seldom used.

A variety of control types are used across different machines. Automatic or indexing machines automatically load the parts into the system and operate independently. Additionally, computer numerical controls (CNC), programmable controls or programmable logic controls may be present, enabling programming. Some machines remain manually controlled through a push button, pendent or foot control. Appraisers find tonnage, type, bed size, controls and age typically have the greatest influence on press values.

High-Tonnage Machines Warrant Special Appraisal Considerations

Metal stamping presses are available in a variety of capacities. Presses in the 100- to 500-ton range are common and readily transact on the secondary market. However, lenders should be aware that larger presses, particularly those with capacities of more than 1,000 tons, are substantial machines with a much more limited market and may warrant special appraisal considerations. Those who purchase larger presses, commonly used by automotive, appliance or HVAC manufacturers, may incur significant expenses to remove machines.

Since larger presses are often pit-mounted or have special flooring support, buyers may also need to factor in the necessary building repair cost after removal, which could result in lower values in a removal scenario. Lenders should consult with an experienced appraiser to understand how to value in-place machines and develop a realistic exit strategy.

Support Equipment Adds Value

Some stamping lines may have support equipment that adds to the overall value. For example, an uncoiler holds and safely pays off or uncoils steel strip. A straightener removes coil set from the material, allowing it to pass unrestricted through the die. A feeder loads the machine. This combination of equipment could add to a line’s total value. Lenders should look for detailed support equipment listings within press groupings. While items may not be valued individually, lenders should be aware of the potential to sell off these items piecemeal if the entire line does not sell in liquidation.

Metalworking Machinery

Metalworking manufacturing covers a wide range of industry segments and asset types. Special tool, die, jig and fixture manufacturing comprise the industry’s largest segment at over 31%, followed by metal cutting and machine forming machinery at nearly 24% and cutting tool and machine tool accessories at approximately 18%. Each of these industry classifications is primarily composed of CNC machine tool and fabrication shops.

Machine shops are the industry’s largest market and rely heavily on the performance of downstream markets like automotive, aerospace, oil and gas, construction, agriculture and mining. Asset groups commonly found in CNC machine and fabrication shops include machining centers, turning centers, boring mills, laser cutters, punch presses, roll formers, turret punches, press brakes and shears. Lenders often have clients in these market segments, and asset-based lending is commonly predicated on these types of assets because of the equipment’s versatility and historically wide marketability.

For the five-year period ending 2022, the U.S. metalworking machinery industry decrease at an annualized rate of 0.5% to 5,960 businesses following continued competition from affordable imports, domestic manufacturers’ efforts to relocate abroad and pandemic-related closures in 2020.

Processes within industry businesses often include machining, production, fabrication and maintenance, all of which utilize different types of metalworking equipment. The metalworking industry uses relatively standard and universal equipment across smaller market segments and as a result, these asset groups have historically tended to be easily saleable on an overall basis.

Machine Specifications and Origin Critical to Value

Dealers and end users typically prefer metalworking equipment manufactured in the U.S., Japan or Germany as these countries tend to be on the leading edge of technology with the most advanced control interfaces. In addition, equipment manufactured in these countries is known for ease of operability, superior performance, quality of craftsmanship and service availability. Equipment manufactured in these countries tends to hold its value better than equipment manufactured elsewhere.

Steel

Lenders should understand a company’s inventory costing methodology when its inventory contains commodities like steel, which are subject to frequent price fluctuations.

A standard cost approach includes updating inventory costs periodically. Depending on the frequency of updates, a company’s reported cost may vary from the market in an inflationary or deflationary environment. A rolling weighted-cost approach utilizes an average weighted cost for each purchased item that equates to a rolling perpetual average. This methodology is useful for commodities, as a company’s reported cost will remain more in line with the market, although costs will still trail market prices by a set period.

Given the volatility in the steel market, lenders should be aware of the target company’s costing methods. Lenders may want to consider incorporating a mark-to-market reserve to adjust the cost basis to market and ensure an advance rate, based on a percentage of cost, remains relevant even in a volatile market. Or if lenders incorporate a lower-of-cost-or-market reserve, they should adjust the inventory balance sheet value when market values change.

Closing

Gordon Brothers expects metal inventory appraisal values to remain relatively stable in the short-term following pandemic-related declines in 2020. However, uncertainty amid ongoing global challenges may affect values going forward.

[1] Copper Development Association