Aleris Exec: Market Efficiency
Lags Aluminum Sales Growth

Editor’s note: Steven J. Demetriou, chairman and CEO of Aleris International Inc., Beechwood, Ohio, was the keynote speaker Nov. 17 at the Metals Service Center Institute’s annual Aluminum Division Conference in Tucson, Ariz.

Aluminum producers and distributors need to work more closely to reduce the “surge and purge mentality” that creates such wide swings in industry stocks and worsens the market’s volatility, said Steven Demetriou of Aleris International in recent remarks to MSCI members.

Pointing to data on service center inventories over the past five years, he noted that inventory has increased along with sales—but profitability has lagged. He blamed this on both distributors and producers, who need to do a better job of sharing information to streamline the supply chain.

“From our standpoint, higher sales should result in improved productivity, improved working capital, improved turns. But we are not seeing that in this industry, with low turns and a lot of volatility between purchases and shipments. The question is: how do we fight this together and capitalize on this opportunity?”

The key, he emphasized, is greater levels of trust between trading partners. “There’s this big elephant in the room [during negotiations] called supply chain optimization,” he said. “Nobody talks about it. But it boils down to a matter of trust, [sharing information more openly] so the supply chain is more synchronized.”

Aleris was formed in December 2004 through the merger of Commonwealth Industries Inc. and IMCO Recycling Inc. Aleris is a global player in aluminum recycling, value-added zinc products, and a major North American manufacturer of common alloy sheet, operating over 30 facilities in the U.S., Brazil, Germany, Mexico and Wales.

In its first year of operation, the company has made key acquisitions as part of its plan to transform two struggling companies into a single successful enterprise. “Transformation is something we live and breathe in every move we make. If all we did was merge IMCO and Commonwealth—two great but underperforming companies—we’d just be an underperforming double-sized company,” Demetriou said.

In recent months, Aleris announced the acquisitions of Tomra Latasa of Sao Paulo, Brazil, ALSCO Metals Corp. of Raleigh, N.C., and certain assets of Ormet Aluminum of Wheeling, W.Va. ALSCO is a supplier of aluminum building products with annual revenues near $300 million. Ormet, a producer of aluminum sheet and plate, emerged from Chapter 11 bankruptcy reorganization in April 2005. Tomra Latasa, a Brazilian recycling operation, was purchased from Tomra Systems ASA of Norway.

Aleris previously operated three rolling mills, including a direct chill casting facility in Kentucky and continuous cast facilities in Ohio and California. The ALSCO acquisition adds a rolling mill in Bellwood, Va. In addition to the Bellwood rolling facility, Aleris will acquire coating and fabrication facilities in Roxboro, N.C.; Ashville, Ohio; and Beloit, Wis.

Aleris plans to relocate equipment from Ormet’s Hannibal Rolling Mill, as well as the operating facilities associated with the Bens Run recycling facility in Friendly, W. Va., and Specialty Blanks Inc., Terre Haute, Ind. The Bens Run facility is an aluminum scrap recycling operation that will become part of Aleris’ Aluminum Recycling segment. Specialty Blanks makes aluminum fabricated products for lighting, cookware and automotive wheel applications, all representing new products for Aleris Rolled Products.

As part of its reorganization, Aleris plans to close and dismantle its redundant Carson, Calif., rolling mill and coil coating facility, phasing it out during first-quarter 2006.

Ormet will continue to operate its Bulk Marine Terminal and Alumina Division, both in Burnside, La., and the Reduction Plant in Hannibal, Ohio.
In addition to organizational structure, Demetriou and his management team are focusing on profitability and corporate culture.

On the profitability front, the company reported third-quarter net income of $31.5 million vs. a net loss of $300,000 in third-quarter 2004. Merger-related synergies and productivity benefits reached an annualized run rate of $32 million during the third quarter.

In terms of culture, Demetriou promised “more constancy of purpose in a focused commercial strategy.”

In the past, Commonwealth focused on service centers one year, then attempted to disintermediate them the next. “We will have a constant strategy in which [service centers] are a core, long-term segment for us. All we want to do is get better and strengthen our relationship together,” he told the service center executives.

While he admitted to being frustrated by destocking in the first half of 2005, Demetriou forecast a solid 2006. Demand for aluminum should remain strong in construction, despite fewer housing starts, as well as in transportation, distribution and consumer durables markets, he said. “In spite of some continued destocking next year, we view 2006 as a growth year for aluminum.”