SCHN 2017 Annual Report

SCHNITZER STEEL INDUSTRIES, INC. 29 / Schnitzer Steel Industries, Inc. Form 10-K 2017 Strategic Priorities As we continue to closely monitor economic conditions, we remain focused on the following core strategies and plans to meet our business goals and objectives: • Long-term expansion of ferrous scrap metal supply and processing, sales volumes and operating margins; • Use of our seven deep water ports and ground-based logistics network to directly access customers domestically and internationally to meet demand for our products wherever it is greatest; • Further optimization of our integrated operating platform to maximize opportunities for synergies, cost efficiencies and volumes; • Continuous improvement initiatives to increase production efficiency, enhance effectiveness in our commercial activities and reduce operating expense; • Technology and process improvement investments to increase the separation and recovery of recycled materials from our shredding process and to generate more value-added products; and • Increase market share through initiatives to maximize volumes and through selective partnerships, alliances and acquisitions. Our auto parts stores are key suppliers to our metal recycling facilities, and we look to enhance the geographic proximity of operations among those facilities. We have a recycling presence in the Northwestern U.S., in Northern California and in the Northeastern U.S., near our export facilities in Tacoma, Washington, Portland, Oregon, Oakland, California and Everett, Massachusetts, which enhances our access to regional supplies of scrap metal and end-of-life vehicles. In fiscal 2015, we initiated and implemented restructuring initiatives consisting of idling underutilized metals recycling assets, including a shredder in Johnston, Rhode Island and another shredder in Surrey, British Columbia, and closing seven auto parts stores at AMR to more closely align our business to market conditions. Additional cost savings and productivity improvement initiatives, including adjustments to our operating capacity through additional facility closures, were identified and initiated in fiscal 2016. Facility closures in fiscal 2016 included a small shredding facility in Concord, New Hampshire. Six of the auto parts stores closed in fiscal 2015 qualified for discontinued operations reporting beginning in fiscal 2015. See Note 8 - Discontinued Operations and Note 10 - Restructuring Charges and Other Exit-Related Activities in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report. Key economic factors and trends affecting the industries in which we operate We sell recycled metals to the global steel industry for the production of finished steel. Our financial results largely depend on supply of raw materials in the U.S. and Western Canada and demand for recycled metal in foreign and domestic markets and for finished steel products in the Western U.S. and Western Canada. Global economic conditions, changes in supply and demand conditions, the strength of the U.S. dollar, and the availability and price of raw material alternatives affect market prices for and sales volumes of recycled ferrous and nonferrous metal in global markets and steel products in the Western U.S. and Western Canada and can have a significant impact on the results of operations for our reportable segments. Commencing in fiscal 2012 and spanning through the first half of fiscal 2016, our markets were adversely impacted by a slowdown of economic activity globally. The macroeconomic uncertainty, combined with global steel-making overproduction and a strengthening of the U.S. dollar had resulted in deteriorating market conditions for global steel manufacturers and volatile pricing swings. The weak price environment for recycled metals in fiscal 2015 and the first half of fiscal 2016 was exacerbated by a decline in iron ore prices, a raw material used in steel-making blast furnaces which compete with EAF mills that use ferrous scrap metal as their primary feedstock. Low-priced steel billets which use iron ore as their primary raw material, and which are direct substitutes for ferrous scrap metal in the manufacture of finished steel, also contributed to lower scrap metal demand and prices during these years. The low economic growth in the U.S. and the lower scrap metal price environment contributed to constrained scrap flows in the domestic supply markets which led to significantly lower margins in our AMR business during fiscal 2015 and the first half of fiscal 2016 before prices andmargins recovered during the second half of fiscal 2016. In fiscal 2017, the combination of improved U.S. and global economic growth and lower Chinese steel exports driven by higher domestic demand and reductions in less efficient steel-making capacity contributed to improved demand and prices for ferrous recycled scrap metal, positively impacting our operating results.