When it is certified later this year, Aleris' new facility in Zhenjiang, China will produce rolled aluminum products for the aerospace industry.

How Aleris Recycled Itself

Feb. 28, 2014
A "perfect storm" in the Great Recession put Aleris in Chapter 11 for 15 months Aleris is benefiting from auto and aerospace "lightweighting" Company culture is an important aspect of Aleris' efforts to create innovative, efficient operations

By the time Steve Demetriou took the reins of Aleris in 2004, he was a seasoned business executive with plenty of international experience. He had spent 17 years at Exxon Chemicals, including three years living in Brussels, and had served as head of Asia Pacific operations for Cytec Industries.

He also had been instrumental in structuring the deal that created Aleris. He had been on the board of Commonwealth Aluminum and was asked to become CEO. Six months later, Commonwealth merged with IMCO Recycling to form Aleris and Demetriou became chairman and CEO of the combined $2.0 billion firm.

After going public in 2004, Aleris grew quickly and its stock price rose from $7 a share to more than $50 a share. By 2006, there was a frenzy of interest in metals and private equity firm Texas Pacific Group (TPG) bought Aleris and took it private, providing a sizable return to stockholders. The company continued to grow, with acquisitions including Corus Group, a sophisticated German aluminum producer.

But Demetriou’s business savvy was put to the test when a “perfect storm” struck the aluminum firm in 2008. The global recession caused demand for aluminum to crater in Aleris’ primary markets – automotive and aerospace. The London Metal Exchange (LME) price for aluminum fell to one-third of its previous value. TPG had taken Aleris private in a highly leveraged deal that saw the company’s debt rise from about $1 billion to $2.5 billion. While other aluminum companies faced similar market issues, Aleris’ primary source of equity, TPG, decided not to invest any more in Aleris. By February 2009, Aleris could not service its debt and was forced into Chapter 11.

Aleris CEO Steve Demetriou has worked hard to steer Aleris from a philosophy of “make it and they will come” to one that is focused on customer needs.

“It became a job of mine to make sure that everyone understood it was the result of an unprecedented market problem, not a structural issue with the company,” said Demetriou, noting that Aleris’ situation was hardly unique in that turbulent period.

During the 15 months the company was in bankruptcy, Demetriou’s team took steps to cut costs, aiming to reduce operating expenses by $72 million annually, and closed several facilities. But at the same time, it turned to what they would do after the company’s financial infrastructure was shored up. They worked on plans for global growth, improvements in the company’s technology and operating culture, and a strategy to meet the fast-moving changes in the automotive and aerospace markets.

“Everybody had their heads up. We actually had a new lease on life with the restructuring that was going on, to beat the competition that was still trying to figure out how to manage through the storm,” he recalled.

The company gained new ownership in Oaktree Capital Management, along with Apollo Management and Sankaty Advisors, and emerged from Chapter 11 in June 2010. The stage was set for the next chapter in Aleris’ short story.

Heavy Investment in Lightweighting

Headquartered in Cleveland, Ohio, Aleris today has sales of $4.4 billion, approximately 7,300 employees and 40 production facilities in North America, Europe and Asia.

The company has focused much of its resources on the aerospace and automotive markets. It gave the green light to build a $350 million aluminum plate plant in China, which started production early in 2013. The plant has a 250,000 ton capacity hot mill and a 35,000 ton plate mill. The plant is selling commercial plate for the building and construction market while it works on qualifying for the aerospace industry, a process it hopes to complete by mid-year.

Making aluminum sheet for the automotive industry, said Demetriou, requires a special heat-treated continuous annealing line. Aleris is one of only a handful of companies that have the requisite technology. The company expanded its Duffel facility, investing $70 million in a cold mill that began production in 2013. He said Europe had been a strong market for Aleris not only because of government mandates but because the transition to aluminum was happening fastest among high-end auto manufacturers

Aleris' Duffel, Belgium plant is helping the company meet the demand of European car manufacturers for lightweight aluminum components.

Automotive and aerospace are markets that are both driven by the need to produce lighter vehicles that are more fuel-efficient. He noted that the industry had long used aluminum under the hood, but that in recent years, carmakers were “responding to fuel efficiency standards… by shifting away from steel hoods, side panels and bodies to aluminum.” He said aluminum provides all the attributes automotive manufacturers require – ability to withstand extreme temperatures, light weight, strength and sustainability due to its recycling capabilities. Demetriou said Aleris has focused its R&D on meeting the demand for new alloys, working with its customers on aluminum-lithium and aluminum-magnesium-scandium alloys.

Demetriou said the company has significantly increased its R&D spending and hiring in the past two years. It has three R&D centers – in Koblenz, Germany where it makes aerospace plate, at Duffel, Belgium where it has a major automotive aluminum rolling mill serving the auto industry and a centralized research facility in Aachen, Germany.

Despite the immense order log for airplanes, Aleris faced somewhat soft demand in 2013 as the industry worked through a buildup of inventory. Demetriou expects airplane manufacturers will have worked through this “odd and unique” excess stock by the end of this year.

Of course, aluminum isn’t the only material being utilized in lightweighting efforts by aircraft manufacturers. Boeing, for example, notes that the airframe of its advanced 787 is comprised of nearly half carbon fiber-reinforced plastics and other composites. Boeing said this saves about 20% in weight compared to aluminum.

Demetriou said that while composites have found a niche in wide-body jets such as the 787, single-aisle planes make up 75% of the industry’s backlog. “The bigger planes can offset the fuel efficiencies,” he said. “You don’t get that in the single-aisle planes.”

Greater than the Whole

The strategic planning during the recession paid off as Aleris’ key markets have rebounded. “People thought it was going to be a prolonged 5 to 10 year downturn,” Demetriou says. “It’s still soft out there but things are a heck of a lot better than they were in 2009.”

Aleris is divided into two major businesses – rolled and extruded aluminum products and recycling. While some analysts have questioned the structure, Demetriou says they are complementary businesses that benefit the company. He points to the firm’s Uhrichsville, Ohio as a primary example.

“That is the number one building and construction aluminum sheet plant in the United States,” he said, “and it is based nearly 100% on recycled scrap aluminum. It is the perfect example of sustainability or green.”

The company recycles scrap aluminum for the spec alloy business, which is geared to the auto industry. Aleris takes scrap aluminum, upgrades it with specific alloys and then sells the metal to carmakers for use in cylinders, engine blocks and other products.

Most of Aleris’ key facilities follow this model of recycling furnaces combined with a rolled sheet production plant. And because it has this capability, Aleris provides recycling to other major aluminum companies such as Alcoa and Kaiser.

A Question of Culture

Demetriou has worked hard to steer Aleris from a philosophy of “make it and they will come” to one that is focused on customer needs.

“It is all about the customer,” Demetrious emphasizes. “It is a market-driven approach that asks, ‘What do our customers in the automotive industry need?”. What are the new products and technologies that our aerospace customers need? How can we provide special conditions and terms for our distributors so they can compete in areas that allow them to succeed.”

Along with that customer focus, Demetriou has also pushed for a rigorous approach to productivity improvement. He noted that Aleris was formed from a number of companies through merger and acquisition. The company has sought to take best practices from throughout the organization and leverage them internally as the Aleris Operating System. He said this effort extends from finance and purchasing to energy utilization and operation of the company’s furnaces.

“As much as we have had very significant productivity driven to the bottom line, we feel we still have a lot of opportunity going forward,” said Demetriou.

Aleris also has been attentive to culture both when deciding what companies to purchase and who to put in charge of them, Demetriou said.

“In many cases, we have put a leader from one of the companies we acquired in charge of the merged business,” he said. For example, after Aleris acquired Alumitech, a small U.S. recycling firm, it put Terry Hogan, Alumitech’s president, in charge of Aleris’ North American recycling business.

Demetriou said one of his principal activities has been to “deliver a deeper talent management process.” The company has programs for identifying high-potential employees, creating a development plan for them and looking for ways to accelerate their careers. That process, he says, has created a pipeline of talent in Aleris so that the company is not forced to look outside constantly for leaders.

Aleris has also focused on leadership “where the rubber meets the road,” said Demetriou. The company introduced training for its first-line supervisors.

“In the plants, we have tremendous experience,” said Demetriou. “There is still a lot of art in the aluminum industry.”

The aluminum industry can be dangerous, a fact that has driven Demetriou to emphasize operational safety. “We don’t do it for political reasons,” he says. “We do it because we care about people.”

While Aleris is a large, global company, Demetriou said it strives to maintain the culture of a smaller, entrepreneurial firm. That means a strong emphasis on teamwork, open communication and a data-driven approach to business that “solves today’s problems today,” as he puts it. For employees it has hired from larger competitors, Demetriou maintains, Aleris’ non-bureaucratic culture has been “refreshing.” And that culture, together with savvy global investments, may soon prove to be not just refreshing but very rewarding.

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