Metals recycling M&A activity like 'riding a roller coaster'

The mergers and acquisitions (M&A) market for metals recycling companies has been like riding a roller coaster for the last 18 to 24 months. Coming out of the COVID-19 pandemic, supply chain disruptions and tight material markets drove a flurry of transaction activity as metal recyclers seized the opportunity to add scale and metal producers sought to secure metal units. The headline-grabbing transactions of 2021 then incentivized many private owners to explore liquidity events in the first half of this year.

Transaction activity subsequently slowed as quickly as it increased, leaving many companies that pursued a business sale unable to find a buyer. Several factors contributed to the slowing activity, including changes to the macroeconomic environment (i.e., the inflation that inevitably followed record fiscal and monetary stimulus), a valuation gap between buyers and sellers and overall market volatility. As the global economic outlook settles and provides greater clarity on the future operating environment, we believe 2023 could be a good year for metals recycling transactions in the middle market (<$500 million enterprise value).

The COVID-19 pandemic tested metals supply chains as they have never been tested before. The immediate demand shock of the pandemic pressured metals pricing and led to a curtailing of production capacity. The U.S. government’s unprecedented fiscal and monetary stimulus followed inflated asset values and stimulated a rapid economic recovery—suddenly, recyclers and metal producers needed to ramp up to meet growing demand.

The supply chain simply wasn’t prepared for this kind of reaction, as labor inefficiency, reduced access to obsolete scrap and the lag effect of lower industrial production from March 2020 to October 2021 further strained an already tight material market. The sharp pricing recovery and sustained backlog of demand created a strong operating environment through the second half of 2020 and 2021.

The favorable postpandemic operating environment strengthened balance sheets and fueled a range of strategic investments in recycling. Consolidators in the scrap recycling industry were active acquirers, as numerous recyclers like SA Recycling and Triple-M completed multiple acquisitions in 2021 and 2022. Other recyclers opted for strategic investments in capacity expansion or new capabilities.

Ferrous-heavy assets have been particularly sought after, as steel producers snapped up ferrous recycling assets at a rapid pace. Cleveland Cliffs, BlueScope, Steel Dynamics (OmniSource) and Nucor Corp. all completed notable acquisitions with the support of investors.

In addition to the inherent competitive advantage of controlling raw material supply, the acquisition of metals recycling platforms has been welcomed by investors who have embraced environmental, social and governance (ESG) policies and business plans. Decarbonization also remains a consistent theme for steelmakers this year. The strategic focus on ESG and securing access to metal units is not isolated to the ferrous market, with nonferrous metals producers also making significant investments in recycling.

Nonferrous metals producers are attacking recycling from multiple angles, with some companies, like Wieland, Aurubis and Aperam, pursuing strategic acquisitions and others, like Novelis and Hydro, making strategic investments in greenfield operations.

The aluminum industry has been particularly notable, as producers are under significant pressure from investors to clean up, or decarbonize, their supply chains and develop higher-purity secondary products. Aluminum producers have chosen to primarily focus on greenfield investments in captive recycling operations, rather than acquiring legacy platforms.

These new recycling operations can be dedicated to aluminum recycling and more easily integrate customers into closed-loop recycling arrangements. However, in areas like copper and specialty metals, producers have made strategic acquisitions of existing recycling platforms, like Totall Metal Recycling, Metallo Group and ELG Haniel, to reduce their carbon footprints and secure consistent access to high-quality scrap streams in metal markets where production of virgin metal units has been more volatile.

Environmental stewardship remains a strategic focus for management teams and investors. With new recyclers entering the market each year, we expect consolidation trends to persist and the valuation gap between buyers and sellers to begin to normalize in 2023. Valuation expectations could moderate as earnings normalize and higher capital costs become a reality for all companies, and with greater clarity on the macroeconomic outlook and the future operating environment, buyers should become more confident in their valuation of recycling assets.

We also expect the backlog of stalled auction processes from mid-2022 to reenter or test the market in 2023. Business owners who are contemplating an exit should begin to prepare for a sale six to 12 months ahead of launching a sale process. Now is the time for a sale to close in 2023.  The trends driving consolidation in the metal recycling industry will continue to be present for the foreseeable future.

Eric Klenz is managing director and Barry Stormer is vice president of KeyBanc Capital Markets Industrial Group. KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A. This report was not issued by our research department. The information contained in this report has been obtained from sources deemed to be reliable but is not represented to be complete and it should not be relied upon as such. This report does not purport to be a complete analysis of any security, issuer, or industry and is not an offer or a solicitation of an offer to buy or sell any securities. This report is prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual person or entity.