July/August 1991
Except for environmentally related expenditures and those geared toward participating in postconsumer household scrap recycling, scrap industry spending plans appear less ambitious in 1991 and 1992 than in previous years. Economic recovery will be key to an improved outlook.
By Robert J. Garino
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries (Washington, D.C.).
Today’s scrap industry executives, while perhaps not as melancholy as Shakespeare’s Hamlet, are nevertheless struggling with decisions concerning the commitment of funds for expansion and/or modernization in 1991 and beyond. The current recession has prompted some to forestall long-term capital expansion plans in an attempt to financially weather an economic downturn that can be traced back to the third quarter of 1990. Thus, the decision to spend or not to spend, at a time when cash flows and balance sheets look uncertain at best, is indeed agonizing.
Spending Plans Lag
The U.S. Department of Commerce's fourth-quarter 1990 report on business spending plans showed that U.S. businesses initially expected to spend $546.7 billion on expansion and modernization in 1991, an increase of 2.4 percent from the $533.9 billion spent in 1990. According to the department's latest survey, however, taken in January and February, the recession and the Gulf war have led many businesses to scale down or postpone their capital investment plans. This could mean that capital spending may, in fact, show an overall decline in 1991. One source predicts that business expenditures will decrease more than 3 percent for the calendar year.
According to the Commerce Department, spending in the primary-metal sector is expected to drop 4.8 percent this year, reversing a gain of 1.3 percent in 1990 and 9.4 percent in 1989. At the same time, the report states, spending by the nonferrous industries is expected to increase, although by a smaller percentage than in the past two years. Unfortunately, figures on spending by the scrap processing and recycling industry are not available from the department.
When Will the Recession End?
Economists have been busy searching for the root cause of the current recession, as well as predicting its end. One popular explanation notes that after nearly eight years of economic expansion, a cooling off was "inevitable"--only the severity of the downturn was ever in question.
Others, however, insist that the United States was doing just fine through the summer of 1990 until the soaring oil prices that immediately followed Iraq's invasion of Kuwait in August and the prospect for war clouded consumer confidence. In fact, one consumer-confidence index plunged to its lowest level in a decade between August and October 1990. Thus, the Persian Gulf crisis may have been the catalyst that finally pushed the U.S. economy into recession.
As if to confirm that theory, most basic industries performed poorly in the fourth quarter of 1990, with an even worse first quarter in 1991. The gross national product (GNP), in fact, shrank at an annual rate of 1.6 percent in the final three months of 1990. Actually, the decline was smaller than originally anticipated, which raised hopes that the recession would be short and shallow.
As the second quarter of 1991 began, some reported that consumer confidence had returned, in part because the war ended and oil prices were down. Nevertheless, the U.S. government's initial report on first-quarter GNP showed broad-based weakness. Figures released at the end of April put the economic contraction at a 2.8-percent annual rate, with two-thirds of the decline attributed to a reduction in business investment in plants and equipment. Furthermore, according to a report issued in May by Dun & Bradstreet Corp. (New York City), manufacturers' expectations for production gains in the coming three months declined slightly from their more optimistic outlook in March. Manufacturers' outlook for the coming 12 months also declined slightly, suggesting that they “are worried that the recession may be deeper and longer than previously anticipated," Dun & Bradstreet reports.
Meanwhile, stock market analysts insist that the nation's basic industries are poised for a major uptick in 1991, noting that the Dow Jones industrial average hit an all-time high on May 31, closing at 3,027.50--23.04 points above its previous record set April 17. Not all economists believe that the Dow average is a reliable economic indicator, however.
Scrap Industry to Spend Less on More Equipment
How has all of this affected scrap processors and recyclers? The answer--or at least part of it--may be found in the results of our latest annual survey of members of the Institute of Scrap Recycling Industries ([SRI) (Washington, D.C.) on their short-term capital expenditure plans. The response rate to this year's survey was similar to that of past years, drawing approximately 20 percent of the approximately 1,800 questionnaires that were mailed. Respondents reported a combined investment of more than $750 million in their current processing and consuming equipment.
An interesting aspect of this year's survey was the similarity in responses to questions about last year's equipment purchases and future purchase plans: Many noted they plan to spend about the same in 1991 as they did in 1990. How much is that? As Table I notes, respondents spent less on equipment costing more than $250,000 in 1990, but moreon equipment priced $100,000 or less. That trend of spending less on more is expected to continue--in fact, increase--this year. This is a contrast to spending habits of previous years. While 68 percent plan to purchase equipment valued at less than $100,000 this year, the 1990 survey revealed that 37 percent of the respondents invested less than $100,000 in equipment in 1989 but 43 percent spent between $101,001 and $500,000 on machinery that year.
At the same time, there is little difference in purchases of big-ticket items ($500,000 or more) from year to year, but this year's survey indicates a lower level in the $100,001 to $250,000 category when comparing 1991 purchase plans with 1992 plans. This may hint at more conservative overall spending plans.
Table 1 also compares 1990 purchase plans from last year's survey with actual 1990 purchases taken from this year's survey. The percentages are remarkably similar, suggesting that companies followed through in 1990 as they indicated they would.
Although fewer industry members say they are purchasing equipment above the $200,000 mark in 1991, several equipment suppliers have remained outspokenly bullish. At ReMA's annual convention in March in Las Vegas, Michael W. Lockman, vice president of Mosley Machinery Co. Inc. (Waco, Texas), credited growth in material recovery facilities (MRFS) with helping to boost new orders for balers, which range in price from less than $200,000 to $300,000 or more. Lockman notes that "scrap processors are looking to bale different kinds of postconsumer as well as industrial scrap as a direct result of MRFs that are now in operation."
Manufacturers of other types of equipment also are pointing to this trend. Jeff Ham, sales manager for Hustler Conveyor Co. (St. Louis), says that the rapid growth in source separation systems and the growing number of MRFs in operation have produced a "definite uptick" in processor queries requiring follow-up. In addition, recent figures from the Conveyor Equipment Manufacturers Association (Rockville, Md.) showed that U.S. conveyor manufacturers set records last year in both new orders and shipments.
We were also interested to know whether more attention is being given to nontraditional scrap sources such as plastics, glass, and rubber. Last year's survey noted that 21 percent of the respondents planned to purchase equipment that could be used to process plastic scrap. This year's question asked: "Other than balers, do you plan to purchase equipment to process nonmetallic scrap in 1991-1992?" Seventeen percent said yes, while 83 percent said no. The positive respondents said the nonmetallic scrap processing equipment they would be buying would include conveying equipment/sorting systems, plastic granulators, document destruction equipment, small shears, and can densifying equipment.
Steve Otto, Eidal International Sales Corp. (Wilsonville, Ore.), observed at ReMA's convention that "tires are a hot area for scrap processors to consider" and, consequently, he foresees demand picking up for rubber/tire shredders, crushers, and pulverizers.
Environmental Product Spending to Grow
The survey also asked what specific types of equipment and/or systems companies had to invest in during 1990 as a result of environmental regulations, with respondents noting that more than $14 million was earmarked for environmental expenditures last year. Specific purchases made include
Baghouses/dust collection systems,
Radiation detection equipment,
Water/oil separation systems, and
Paving for existing surfaces.
These expenditures are believed to be recession-proof. A survey by Booz-Allen & Hamilton Inc. (New York City) notes that 90 percent of 160 Fortune 500 companies surveyed said that the recession won't affect their environmental spending.
Like previous year's surveys, this year most respondents said they believe that they would face additional expenditures directly related to environmental regulations in the coming year. In 1990, 60 percent anticipated additional expenses, while this year 56 percent said they were expecting such expenses.
Moving From “Moderate” to “Better” Markets
Although conventional wisdom currently puts most of the U.S. industrial base in recession, ReMA members expressed little gloom and doom. The overwhelming majority rated 1991 as "moderate" as opposed to "excellent," "good," or "poor." A few, in fact, considered their 1991 prospects to be excellent. Specific commodities in this category were stainless steel, followed by ferrous, copper, and precious metals.
As for 1992, respondents expressed an abundance of optimism for all commodities. Although there was a certain amount of hesitancy about expressing a view of tomorrow ("My crystal ball is out on loan"), as well as a touch of cynicism ("If you hear some good news, call me!”), respondents seemed confident that the recession would end in 1991, and this would bode well for the scrap processing and consuming industries in the second half of the year and beyond. As one noted, "Most industrial accounts serviced anticipate a stronger third and fourth quarter and are very optimistic regarding 1992. Indications are that the automotive industry will rebound in 1992, which should help all metal categories."
There was also this interesting comment concerning next year: "1992 should be considerably better as we, and others in the industry, change our collective mindset from that of being a commodity-based business to one of being service oriented and being able to charge for the valuable services that we render to our customers. We will become more profitable and less subject to the economic vagaries of the various metal markets." •
Except for environmentally related expenditures and those geared toward participating in postconsumer household scrap recycling, scrap industry spending plans appear less ambitious in 1991 and 1992 than in previous years. Economic recovery will be key to an improved outlook.