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Mutual Benefit

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St. Louis-based Metal Exchange Corp. has found success through risk management and long-term business relationships.

DeAnne Toto August 7, 2013

A simple motto guided the actions of Morris Lefton when it came to his business dealings: “Nisi adieris non intellegis,” or “If you don’t go, you don’t know.” This phrase remains an integral philosophy of Metal Exchange Corp., the company Morris founded with Howard Estabrook in 1974.

Morris believed he could learn more about clients by visiting them than through phone calls and emails, his son Mike Lefton says. Such visits help to give Metal Exchange a better understanding of its clients’ needs and form the foundation of the long-lived, mutually beneficial business relationships that are the cornerstone of the company’s success.

Mike has served as chairman of Metal Exchange since 2010. He practically grew up in the business, which was formed when he was 12 years old. Since he graduated from college in 1984, he has worked for the company’s Pennex Aluminum affiliate as well as in Metal Exchange’s Chicago trading office.

Mike says that at the time the company was founded, Morris, who died in 2011, and Howard (known in the industry as Curley) thought Metal Exchange would be successful if it traded 2 million pounds of nonferrous scrap per month. Today, the company trades and manufactures almost 2 billion pounds of nonferrous products per year, employs more than 700 people and, in addition to its St. Louis location, has four trading offices in the U.S. as well as offices in Brazil, China and Switzerland.

Metal Exchange’s business is not limited to trading but also includes manufacturing, scrap processing, distribution and transportation. Its trading and production activities focus on a wide variety of nonferrous scrap; primary raw materials, such as copper cathode and aluminum P1020 and billet; secondary raw materials, such as aluminum remelt sows (RSI) and aluminum billet; and semifabricated aluminum, including flat-rolled products, impact extrusion slugs and extruded shapes.

In the time that Mike has served as chairman of Metal Exchange, the company has acquired two manufacturing facilities and further expanded its international trading activity.

“It’s exciting and fulfilling that I can take the business to a different level,” Mike says of the company that his father founded. “I think he’d be very proud to see where the company has grown to.”


Relationships Count
Metal Exchange has grown in part because of its solid reputation and dedication to building long-term, mutually beneficial business relationships.

“Reputation is very important in our business,” Mike says. “We bring a sense of confidence in that we always do what we say we are going to do.”

He continues, “We realize that we have to create value for our customers day to day. You can be opportunistic; but, in the long run, you have to create win-win situations for both you and your customer. We’re focused on the long-term relationship rather than the one-time home run.”

Metal Exchange’s focus on building long-term business relationships is even more critical in the aftermath of the recent recession. “It’s even more important to know your customer and to know who you are dealing with,” Mike says. He adds that the company’s credit committee is made up of senior management and the credit manager, who work to ensure the creditworthiness of the firms Metal Exchange sells to.

“The most important thing we can do is be active in communicating with suppliers and customers so that we understand what is going on, what is taking place with a particular customer in a particular region, and react to that,” says Ben Evans, executive vice president of trading at Metal Exchange. “Staying very close to our customers and suppliers has been Metal Exchange’s modus operandi and continues to be,” he adds.

The company’s belief in long-term business relationships has contributed to its growth in numerous ways. For instance, while Metal Exchange has traditionally handled aluminum and copper, it also buys, consumes and trades brass as well as many grades of magnesium scrap and pure and alloyed ingots. “We do not limit ourselves to aluminum and copper,” Mike says. “It is more about what our customers need and consume and how we can bring value by utilizing our market knowledge and broad range of contacts.”

Mike continues, “Keeping customers and suppliers satisfied and happy is what drives us.”


Beyond Trading
Ben says Metal Exchange’s trading business segment represents 75 to 80 percent of the company’s overall business by volume. While the trading and manufacturing businesses are run separately they frequently work together in certain business areas.

For example, the company’s trading division is the commercial face of Metal Recovery Systems (MRS), Metal Exchange’s nonferrous scrap processing affiliate, Ben says. MRS’ products include copper flake, aluminum flake, copper wire chops of all grades, aluminum wire chops and 6063 thermal extrusion chops.

Ben says, “As part of the manufacturing group, MRS can tie into manufacturing expertise, operational and maintenance experience and safety expertise.” The trading division offers expertise on the commercial side, securing inbound material for MRS and marketing its finished products. “It is the best of both worlds in terms of access to both sides of the business,” he adds.

Rick Merluzzi, president of manufacturing at Metal Exchange, estimates that this segment accounts for 20 to 25 percent of the company’s overall business in terms of volume. However, roughly 80 percent of Metal Exchange’s employees are part of its manufacturing affiliates, he adds.

Metal Exchange’s manufacturing companies—MRS, Electro Cycle Inc., Continental Aluminum, Pennex Aluminum, ElementAL Holdings and partially owned Tower Extrusions Ltd.—are involved in various stages of the aluminum supply chain and serve a diverse array of markets. Rick says he sees growth potential across all of Metal Exchange’s manufacturing businesses, particularly within the automotive sector.

As a supplier to Tesla Motors, Rick says Pennex Aluminum worked with Tesla for seven or eight months prior to the introduction of its Model S electric automobile, perfecting the extrusion and fabrication of the vehicle’s frame. “We can’t be successful in our business unless our customers are successful,” Rick says.

“Manufacturing as an industry typically hates variability,” he continues. “We are taking the variability in raw material and scrap and transforming it into something of consistency that can be used in another process or end-use application. We focus intensely on excellence in performance and reliability.”

The Right People

 “I think we really try to hire the best people,” Metal Exchange Chairman and CEO Mike Lefton says. “We go to great lengths in the hiring process and do a fair amount of testing with all employees to make sure they have the right fit with the organization.”

In addition to interviews, the St. Louis-based company’s hiring process includes a number of personality, intelligence, interest and skills assessments, which amount to a “grueling day,” Mike says. “The testing has proven to be very good for us,” he adds.

Once Metal Exchange has hired the right people, it invests in their development, Trading Division Executive Vice President Ben Evans says. That is where Tom Akers, who retired as the president of trading at Metal Exchange in 2012, comes in. He now trains and mentors employees within the company through Metal Exchange’s management development program.

 

Risk Management
When it comes to managing volatility, Metal Exchange can be considered an innovator. The company designed and built its own trading system in 2005 to enable the efficient management of every aspect of its business, from buying and selling to payments, weights and risk management, including COMEX (Chicago Mercantile Exchange) and LME (London Metal Exchange) hedging.

According to Metal Exchange, its overall risk position is rolled up from the individual business unit risk positions and closely tracked at all times using its proprietary trading system.

Metal Exchange developed its risk management system internally because few options existed from third-party vendors, Ben says. “We believe it is a crucial part of how we understand our exposure at any given time,” he says of the company’s system.

“The volatility of metals markets today dictates tight controls over exposure in all places at all times,” Mike says, “and our system enables us to do that. In fact we are confident enough in the system that some of our customers have taken it on as well.”

Mike adds that Metal Exchange’s risk management software evolves in response to changes in technology and business.

Ben says Metal Exchange is “religious” about its attention to risk management. “We continue to have a high focus on appropriate risk management tools—for price risk, counterparty risk, performance risk, country risk—and developing tools that allow us to gain insight to better understand the magnitude of the risk.” He adds, “It’s the linchpin to how Metal Exchange has approached and continues to approach the business as things change.”

Metal Exchange also addresses volatility in a number of common sense ways. “We keep a flat position,” Mike says. “We are not speculators; we are not looking for big moves in the market one way or another. We are not taking big positions or going short or long. I would say that managing our position and being in control at all times is the way we deal with volatility.”

Mike adds, “I go to sleep at night knowing our risk is under control.”

He credits this to not only the risk management systems Metal Exchange has in place but also to the company’s employees. (See “The Right People”.)


Global View
The global nature of business adds to the risk companies like Metal Exchange face.

“The complexities of international business are many steps greater than domestic, and of course all scrap is now international,” Mike says. “Money collection is always critical, so deposits prior to shipment, receiving solid letters of credit, obtaining credit insurance and doing credit checks inside different countries and understanding Incoterms® in exquisite detail all are required.”

International trade is further complicated by new and evolving customs and environmental regulations from market to market and variable material definitions from country to country, he says.

“It all gets down to re-emphasizing that we must know well who is on the other side of the table, who we are dealing with, who we are trusting,” Mike adds.

When it comes to evolving environmental regulations, China’s Operation Green Fence provides a recent example. According to Ben, the regulation is affecting Metal Exchange most acutely at Chinese ports, where the clearing of material has slowed. “From our perspective, the greatest concern is with the lower grades of secondary aluminum, such as Zorba, more than on No. 2 copper. The Zorba product would lend itself to greater scrutiny because there is an expectation that there is a certain level of nonmetallic content in it.”

These delays can lead to additional costs in the form of demurrage and administrative time to follow up on the status of the shipments, he says.

According to sources, Operation Green Fence will conclude at the end of November, but Ben says, “I’m not going to wager a great deal of money that it will go back to the way it was.”

Logistics Management

Metal Exchange’s focus on the customer and bringing value to that relationship extends to the logistics services the trading division offers.

“We have a skilled and experienced team that can work with suppliers and customers depending on their level of need,” says Ben Evans, executive vice president of trading at Metal Exchange, St. Louis. He adds that some customers are very sophisticated and can easily move material from Point A to Point B. “Others need product delivered as close to their door as possible.”

Ben says, “We offer that level of capability and do it with a level of expertise that not everyone can bring to the table, whether domestic or international.”

He continues, “It gets back to understanding the customer’s business—what is critical to their success—and being able to tailor an offering to them that meets their needs.”


Growth Plans
Despite the current regulatory situation in China, Mike says Shanghai and, more generally, Asia offer growth opportunities for Metal Exchange, as does the company’s aluminum extrusion business.

Metal Exchange always has been an entrepreneurial company, and Mike says he is trying to retain that spirit while bringing structure to the company’s future growth.

“Where we are going to evolve, it is hard to say,” he says, adding that he could not have predicted five years ago where Metal Exchange would be today.

Mike adds that as opportunities present themselves, Metal Exchange will pursue them, but in a controlled fashion. “We know we want to grow, but we want to do it in a controlled way because we want to manage our risk.”


The author is managing editor of Recycling Today and can be reached at dtoto@gie.net.

Photos: Whitney Curtis

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