Globe Specialty Metals Cost Advantage

Globe Specialty Metals’ Cost Advantage

The key to Globe Specialty Metals' recent success is its focus on being the lowest-cost producer in its industry through vertical integration, process efficiencies and strategic location, says CEO Jeff Bradley.

For Globe Specialty Metals Inc. CEO Jeff Bradley, it makes no sense to ship raw materials from afar when the transportation expenses could cost more than the materials themselves.

In fact, why not lessen the company's vulnerability to price fluctuations by owning the resources? That's exactly the business strategy this New York-based company has adopted to sustain growth in the cyclical silicon metals industry.

See Also: Lean Manufacturing Leadership Best Practices

Globe Specialty Metals supplies silicon metals and silicon-based specialty alloys, which are key ingredients in hundreds of consumer products ranging from shampoo to tires and aluminum castings for automobile rims.

It's also a key material in solar panels and silicon chips for the semiconductor industry.

Globe Specialty Metals has grown its revenues 65% since its initial public offering in 2009 to $705.5 million in fiscal 2012, which ended June 30. The company reported record earnings of $54.6 million in 2012.

The key to the company's recent success is its focus on being the lowest-cost producer in its industry through vertical integration, process efficiencies and strategic location, Bradley says.

The company's core business dates back to 1871. The business, called Globe Metallurgical Inc., filed for bankruptcy in 2003. In 2006, an investment company called International Metal Enterprises Inc. purchased Beverly, Ohio-based Globe Metallurgical, the largest silicon metal producer in North America.

The three basic ingredients in silicon metal are quartz, a specialty low-ash coal and wood chips. Raw materials and electricity account for 75% of Globe Specialty Metals' costs, Bradley says. The company owns all of its raw materials supplies, a base it has built over recent years through acquisitions.

"We've always been firm believers in being a very lean, low-cost company and part of that lean, low-cost strategy is being vertically, backward integrated and having control over the raw materials, too," Bradley says. "Think about how many companies are so beholden to their suppliers, and that control is such an important piece of this low-cost story."

Made in the USA

The location of those assets is critical as well, Bradley says. The company uses 6.5 tons of raw materials to produce 1 ton of silicon metal.

"If you're not close to your raw materials, your transportation costs can cost more than the raw material itself," Bradley says.

For example, the company purchased metallurgical coal mining company Alden Resources LLC in July 2011.

Alden operates six mines in Kentucky and Tennessee. Globe Specialty Metals also owns a quartz mine in Alabama and chips its own wood in Niagara Falls, N.Y., and West Virginia.

The raw materials feed the company's main operations in Beverly, Ohio, as well as plants in West Virginia, Alabama and New York.

Approximately 74% of the company's business is based in North America, Bradley says. The company has operations in Argentina as well as a cored wire plant in Poland and an electrodes plant in China.

But Bradley says the resurgent U.S. manufacturing base presents his company with the most significant growth opportunities.

"The best region right now is the U.S.," Bradley says.

The U.S. automotive sector has provided a major boost to business. Silicon comprises about 8% to 10% of the content in aluminum rims. The material is also present in tires, door seals, hoses and seating foam.

Beyond autos, the solar industry may be Globe Specialty Metals' fastest-growing segment, Bradley says. Despite the solar industry's recent struggles and the associated negative press, Bradley says global demand remains strong with double-digit growth expected over the next three to five years.

While the company makes gains in new and established markets, it remains committed to driving down costs. Globe Specialty Metals saved more than $4 million in the fourth quarter through plant cost-cutting initiatives, Bradley said in an Aug. 21 earnings call.

The company also significantly reduced working capital during the final three-month period as it focuses on increasing inventory turns.

Globe Specialty Metals also began an operational improvement activities that will take place over the next six to nine months.

"We selected one of our strongest and most experienced silicon production managers to assemble and lead a team of some of the best-skilled operations people in our company to drive improvements at our plant," said Bradley during the earnings call.

The improvements should increase furnace efficiency, lower labor costs and increase output at its plants, Bradley said.

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