May/June 2003
The scrap industry’s biggest annual event—ISRI’s convention and exposition—gave attendees a chance to learn, network, relax, reconnect, and more.
ISRI’s annual convention and exposition—held in Orlando, Fla., in April—certainly lived up to its theme of “Exploring New Horizons.” For starters, the estimated 2,100 attendees could choose from 17 workshops and general sessions that explored topics from trading with China to price transparency to single-stream recycling. Plus, they could investigate eight spotlights that provided up-to-date market trends for commodities from aluminum to zinc. Attendees also explored new business opportunities through the convention’s networking and social offerings. And last but not least, the exposition gave all a chance to review the latest in scrap-specific equipment, products, technology, and services. Here’s a roundup of the scrap industry’s biggest event of the year.
Covering the Commodity Gamut
Aluminum Faces Surplus and Subdued Prices. The primary aluminum market faces continued surpluses and “subdued” prices until 2005 “as Chinese exports and capacity increases elsewhere outweigh rising demand,” said Colin Pratt of CRU International Ltd. (London) at the spotlight on aluminum.
Though world demand should rebound this year and grow by 5.9 percent, a “surge” in Chinese net exports and global capacity increases will likely produce a 1.2 million mt surplus in 2003-2004. As a result, prices—which so far have “held up pretty well despite all the bearish news” on aluminum—will likely fall from current levels to a three-month LME average of $1,300 a mt, or 59 cents a pound, this year, Pratt predicted. Prices could slip even lower next year—perhaps around 50 cents a pound—before recovering in 2005 with a deficit that could surpass 400,000 mt, he said.
In aluminum, China is both a big player and a big question mark, Pratt noted. Indeed, Chinese consumption accounted for most of the 2 million mt global increase in primary aluminum consumption from 2000 to 2002, he explained, while Western World consumption is just now returning to 2000 levels. For 2003, China should provide nearly half of global demand growth, Pratt said, as well as more than half of the new capacity expected between 2003 and 2005.
Mark Russell of Indalex Aluminum Solutions (Bannockburn, Ill.), which has invested in the Chinese aluminum extrusion industry, noted that as more aluminum production moves to China, the industrial scrap base in North America will be reduced. Scrap spreads are likely to remain tight, he said, while billet premiums remain under pressure due to overcapacity in North America. Since 2000, the overall extrusion market has decreased 30 percent, he added, while billet overcapacity has led Indalex to idle 220 million pounds of production at its largest casthouse in Ahoskie, N.C. But if the company can’t find a buyer, that facility could be restarted.
Russell and Pratt agreed that China’s aluminum production is challenged by tight alumina markets and a lack of electrical capacity. Also, Chinese wages, though still low, are starting to rise and will continue to rise as the Chinese economy grows and its industries modernize, Russell said. While China faces a greater and greater need for electrical power, its electrical production isn’t increasing enough to match that demand.
‘Real Potential’ for Tire Wire. Tire wire—the tread and bead steel recovered during scrap-tire processing—has “real potential” to become a valued raw material for steel mills, though it faces various obstacles, noted two steel-mill scrap buyers at the scrap tire and rubber spotlight.
In its favor, tire wire is made of high-quality steel, which makes it good low-residual scrap, noted Vicki Roche of Gerdau AmeriSteel Corp. (Tampa, Fla.). Also, the material is reasonably priced and plentiful, with as much as 40,000 tons available annually.
Depending on its rubber content, tire wire can add carbon to the melting process, which can reduce a mill’s carbon-charge costs, observed Jim McNicholas of Bethlehem Lukens Plate Products (Coatesville, Pa.). Bethlehem, in fact, has been conducting test melts using whole tires with their rims (minus lead weights and brass stems) to gain the carbon and rim metal. As the rubber is consumed, it also gives off energy, aiding the melting process, he said.
One challenge for tire wire is its inconsistent chemistry, mainly due to its variable rubber content. “Melters look for consistency in their raw materials,” said McNicholas, noting that melters “design their charges so they have a real tight chemistry range, and then they want to be able to repeat that chemistry range time and time again.”
The objective of every melt shop, he noted, is to achieve least-cost liquid metal, which is affected by more than just the price of a raw material. Other important factors are the material’s chemistry, metal yield, and the cost of melting it.
Another problem with tire wire is its lack of density unless baled or briquetted. Loose tire wire is not only difficult to handle, it also displaces denser scrap in the mix, can burn off quickly in the melt or float off in the slag if not layered properly in the furnace, and has a short “shelf life,” deteriorating quickly when stored outdoors, Roche said.
To increase the use of tire wire in the steel industry, tire processors should focus on several goals, said Roche and McNicholas:
- Create standard specifications for tire wire. [This goal was achieved at the ReMA convention when ISRI’s board of directors approved a list of 11 specifications for tire wire.]
- Remove as much rubber as possible from the tire wire to improve its chemical consistency (unless the melter wants rubber content for carbon purposes).
- Increase the material’s density by baling or briquetting it.
- Determine tire wire’s melt-yield through scientific analysis.
The Burgeoning Steel and Scrap Markets. From 1992 to 2002, global demand for ferrous scrap grew 41 percent from 210.5 million to 297.3 million mt, reported John Harris of Ispat Sidbec Inc. (Contrecoeur, Québec) at the ferrous spotlight. China had the largest growth in demand, with its consumption doubling from 18.2 million to 36.2 million mt. North America’s ferrous scrap demand increased 44 percent from 40.1 million to 57.9 million mt, while Europe went from 46.5 million to 61.3 million mt, he said. In contrast, Japan’s demand for ferrous scrap declined slightly from 31.5 million to 31 million mt.
In recent months, the ferrous scrap market strengthened largely due to China’s burgeoning steel production, which could surpass 300 million mt in the next five years, Harris said. Lower scrap exports from Ukraine and Russia, favorable ocean freights, and currency fluctuations also helped.
The strong export demand for ferrous scrap meant that domestic U.S. scrap found new international homes, Harris said. Also, domestic scrap prices went up while steel prices and volumes went down, putting extreme pressure on steel plant margins. In the future, North American and European steel producers may counter Far East competition for ferrous scrap by integrating backward into the scrap market, Harris said. Other options for steelmakers will be to consolidate globally to create least-cost synergies and establish global scrap-buying units. Steelmakers could also attempt to negotiate advantageous freight rates and develop raw material programs that combine scrap and alternative metallics. Further, steel companies may pursue new technologies to reduce their dependence on ferrous scrap, Harris noted.
And what should ferrous scrap processors do to thrive in the future? They should know their local and international markets well; maintain a balance by selling to both domestic and export consumers; and use price references other than the monthly factory bundle price to determine the true value of their scrap, Harris said.
Up and Down in Ukraine. Last fall, the Ukraine government imposed a duty of 30 euros a ton on exported ferrous scrap, which essentially stopped scrap from leaving the country, said Alex Antikides of Widenet.com Ltd. (Surrey, England). At that time, Ukraine was shipping about 175,000 to 200,000 mt a month of ferrous scrap. The Ukraine government also continued collecting a 20-percent value-added tax (VAT) on scrap exports, but it stopped returning this tax to the proper parties. These taxes completely paralyzed the Ukraine scrap industry, halting collection, bankrupting companies, and reducing employee ranks from 40,000 to 10,000.
But the situation has improved. The government has started returning the VAT, and it was expected in May to either abolish the export tax altogether or reduce it to 18 euros a ton. As a result, scrap collections have resumed and scrap shipments have started flowing again, with expectations that they could soon reach previous levels.
Ukraine will continue to be an important source of ferrous scrap in the future due to its massive scrap reserves of 36 million to 40 million mt, which will come out over the next 10 to 15 years, Antikides said. The country also has about 18 million mt of pool iron in pits that could be recovered.
Scrap Prices and Steel Competitiveness. James King, an economic adviser based in Corbridge, England, examined what producers of hot-rolled coil can pay for ferrous scrap to remain competitive:
- At scrap prices up to $120 a mt, electric-furnace producers of hot-rolled coil are competitive against any U.S. integrated producer, King said;
- Without import tariffs, scrap prices under $90 are needed for electric steelmakers to compete with low-cost overseas producers, he noted; and
- At scrap prices above $100 a mt, existing capacity for merchant pig iron and HBI in low-cost countries will take business from the U.S. scrap trade.
Copper on the Rise. Consumption of refined copper will set a record this year, reaching 15.5 million mt—up 3.4 percent from 2002, said Ronald McGrainor of Metal News & Views (Hudson, Ohio) at the copper spotlight. This record is largely due to mushrooming demand from China, whose copper consumption could increase from 2.2 million mt in 2002 to about 2.6 million mt in 2003.
Global refined copper production is expected to total about 15.7 million mt this year, which will exceed demand by some 148,000 mt, McGrainor said. This surplus will shift to a deficit in 2004, however, as production grows to 16.3 million mt, lagging demand by about 173,000 mt.
World inventories of refined copper, meanwhile, could show a net increase of 148,000 mt compared with last year, with visible stocks accounting for 83,000 mt of that gain and less-visible stocks taking up the remaining 65,000 mt, said McGrainor. Though general inventories are rising, exchange stocks are expected to decline—from 1.3 million mt in 2002 to about 989,000 mt in 2003—thus boosting copper prices.
As for prices, McGrainor forecast an average copper price of 76.75 cents a pound this year, increasing to 84 cents a pound in 2004.
Tough Times for Brass Ingotmakers. Several challenges have combined to make brass ingotmaking “a rather poorly performing industry” in the United States, said Ronald Schumann of I. Schumann & Co. (Bedford, Ohio).
The industry’s challenges, he noted, include continued overcapacity and shrinking markets. The latter problem is partly due to competition from plastics, aluminum, and stainless steel, though unfair global competition is also a factor. “Our customers are losing market share due to competition from imported castings from Asia and Mexico where labor and regulatory compliance costs are a fraction of those in the United States,” Schumann stated.
These competitive factors have reduced the domestic market for brass and bronze castings by about 35 percent from the 1950s to the present, he said. This trend has meant that U.S. brass ingotmakers have fewer customers that wield more power to dictate the price and terms of sale.
U.S. ingotmakers are also finding it hard to keep up with the costs of doing business. “Increases in commercial insurance rates along with increases in workers’ compensation, salaries, and benefits have added to the financial difficulty facing the brass ingot manufacturing sector,” Schumann said.
On the environmental side, ingotmakers must meet strict environmental rules in their plants, and they have had to address government concerns about the lead content in brass products, especially plumbing fittings, Schumann noted.
U.S. brass ingotmakers also face stiff competition for copper-based scrap from international consumers, principally China, Schumann said. This trend has been aided, he explained, “by an abundance of empty overseas containers in the U.S. that allow a scrap dealer to ship metal to Asia for approximately the same cost as it is to ship that same material to us.”
Another scrap-related issue is that U.S. brass ingotmakers have fewer but larger scrap companies from which to buy material. As a result, Schumann said, “the prices that we pay have escalated relative to the loss of suppliers.” Scrap quality is also an issue, Schumann said, noting that “it is clear that the scrap purchased today is of significantly inferior quality” to scrap available a few years ago. “We are increasingly seeing nonferrous scrap, in particular red and yellow brasses, replete with contaminants such as iron and aluminum.”
These and other factors have winnowed the U.S. brass ingotmaking business from about 60 companies in 1960 to only 10 today, Schumann said.
Bullish Times for Nickel and Stainless. Nickel’s prospects are bullish for the next few years, defined by growing consumption, supply deficits, and prices consistently over $3.50 a pound, said Marja Kirves of Falcon-bridge Ltd. (Toronto) at the nickel/stainless spotlight.
World nickel consumption will increase 5 percent in 2003, driven largely by growth in stainless production, Kirves said. Nonstainless consumption will grow 2 percent as electronic alloys and the battery sector recover, though the aerospace and land-based turbine markets remain sluggish.
On the supply side, global nickel production will increase 31,000 mt this year, but the market balance will still post a 21,000-mt deficit. Kirves, in fact, forecast ongoing nickel deficits of 41,000 mt in 2004, 1,000 mt in 2005, 52,000 mt in 2006, and 98,000 mt in 2007.
“With supply limited,” she stated, “demand becomes the key driver”—and it’s shaping up to be strong thanks to solid stainless order books and inventories, expiration of the labor contract at Inco’s Sudbury, Ontario, operation, tightness in scrap supplies, the ramp-up of new stainless capacity, and “explosive” Chinese demand.
As for prices, industry analysts see nickel ranging from $3.51 to $3.87 this year, $3.83 to $4.55 in 2004, and $4.19 to $5 in 2005, Kirves reported.
The prospects for stainless steel—nickel’s major market—are equally bullish, noted Markus Moll of SMR GmbH (Reutte, Austria). Stainless steel production totaled about 22 million tons last year, and it’s expected to continue growing 5 percent a year through 2010 to reach 33 million tons, Moll said.
In terms of demand, Western Europe will remain the largest stainless consumer, with demand rising from 6.5 million tons today to 8 million tons by 2010, Moll said. China will have the second-highest stainless demand, doubling its consumption from 3.5 million to 7 million tons. North America will be in third place, with consumption growing from 3 million tons this year to 4 million tons by 2010.
As for scrap usage, stainless producers will maintain a scrap ratio of 46 to 48 percent from 2003 onward, said Kirves. The supply of stainless scrap has tightened, in part, due to reduced scrap exports from C.I.S. nations. Also, scrap exports to Asia have skyrocketed to feed the insatiable demand from mills there. Weak aerospace demand, meanwhile, has meant that superalloy scrap is being used in stainless melts, she said. When aerospace demand returns, however, nickel will get an extra boost to replace this superalloy scrap.
Looking ahead, the stainless industry will continue to consolidate, with the top six producers accounting for 85 percent of the market by 2010, Moll said. Also, he predicts, “some major scrap processors will merge with the nickel industry.” Further, there will be increasing usage of blended scrap as feedstock for stainless mills, surpassing its current level of about 1 million tons a year.
Deficits Ahead for Lead and Zinc? LME prices for lead and zinc are close to all-time lows in real terms, but the markets for both refined lead and zinc should move into deficit this year and next, predicted Huw Roberts of CHR Metals (Surrey, England) at the lead/zinc spotlight. Lead could see an 82,000-mt shortfall this year followed by a 100,000-mt deficit in 2004, while zinc should expect an 8,000-mt deficit in 2003 and then a much larger 160,000-mt deficit next year, Roberts offered.
As a result, the LME cash price for lead could reach 23 cents a pound this year—up from 21 cents in 2002—and then hit 27 cents in 2004. Roberts forecast LME zinc at 38 cents this year—up from 36 cents last year—and then 46 cents in 2004.
Factors influencing these markets include weak economic conditions in North America and Western Europe, a global surplus in smelter capacity to treat lead and zinc mine production, and “very strong” demand growth in Asia, Roberts noted. China, in particular, is “absolutely fundamental” to the fortunes of lead and zinc, Roberts said, noting that China has become the world’s largest consumer of zinc, the second-largest consumer of lead, and the largest producer of both metals. Moreover, China has become a massive exporter of SLI and small industrial batteries while simultaneously expanding its demand for both products.
For lead, relatively stagnant mine production has meant that “the distinction between primary and secondary production of lead is becoming increasingly blurred,” Roberts said, adding that some primary smelters have been converted to secondary operations. Thus, “basically all the future growth in lead demand is dependent on the secondary industry,” he stressed.
On the zinc side, the market suffers from too much metal, with almost as much new capacity expected this year as is scheduled to be closed or cut back at other facilities. Much more rationalization is needed, Roberts concluded.
Both Roberts and Steve Stack of The Doe Run Co. (St. Louis) highlighted the collapse of the telecom “bubble,” which saw U.S. demand for telecommunications-related batteries cut in half between 2000 and 2002, with further declines expected this year, Stack noted. U.S. demand for lead could total 1.54 million mt in 2003, Stack said, down from nearly 1.58 million mt last year and more than 1.76 million mt in 2000.
As European lead production decreases and premiums increase overseas, more primary metal is moving across the Atlantic, Stack noted. This, in turn, increases U.S. reliance on recycled lead, which has grown from 69 percent of U.S. production in 1990 to 77 percent in 2000 and 81 percent last year. Stack forecast U.S. production of secondary lead of 1.1 million mt this year, down slightly from 2002.
He also explored how U.S. imports of SLI batteries are exceeding the growth in automotive demand, with Mexico alone seeing its shipments of SLI batteries to the U.S. increase from 1.7 million units in 1996 to just under 12 million units last year.
Electronics Recycling Gains Momentum. “E-recycling is in its infancy, and it’s a growth industry—you get in now, or you may be losing out later on,” asserted Bob Glavin of United Recycling Industries Inc. (Franklin Park, Ill.) at the spotlight on electronics recycling.
Before entering the business, though, companies should know that electronic scrap can contain a variety of hazardous materials, including lead, cadmium, mercury, batteries, hexavalent chro-mium, and brominated flame retardants, Glavin noted.
Firms should also know that there are no permits or licenses required to be an e-recycler, and there’s a general lack of standards for the business, he said. Many states as well as the federal government, however, are examining e-recycling and developing piecemeal legislation on the topic, creating a need to unify state efforts, Glavin stated.
E-recyclers can either export the material or process it domestically, Glavin said. Exports, which usually go to developing countries, aren’t illegal, but they can raise “a lot of problems” with customers. “More and more companies, government agencies, and municipalities are insisting on the tracking of their material” so it doesn’t end up being mishandled, Glavin said. “You want to make sure that you inadvertently don’t turn your customers’ recyclables into another country’s waste.”
In Glavin’s view, “the future of e-recycling is going to be in responsible domestic processing, but with that you’re going to have higher costs.” Those higher costs will be driven, in part, by customers’ desire for greater accountability and more complete asset management. Also, due to higher labor expenses, domestic processing will have to be automated, thus increasing costs. In addition, domestic e-recyclers will face stricter regulations regarding worker health and safety as well as environmental issues.
E-Recycling Advice. Steve Skurnac of Micro Metallics Corp. (San Jose, Calif.) offered these tips to traditional scrap processors thinking of becoming e-recyclers:
- Don’t be unrealistic about the economic value of electronic scrap. “If you consider the entire cost equation—that is, the cost of collecting it, the cost of storing it, the cost of doing the hazard removal, and then the cost of doing some form of manual or mechanical separation—you won’t be able to recover the intrinsic value of the metals that are in there from anybody,” said Skurnac. So processors must charge a fee for their e-recycling services.
- Learn about ESM, or environmentally sound management, because customers want their end-of-life electronics managed in an environmentally sound way, Skurnac said. Also, he noted, “if industry can demonstrate that it’s handling electronic scrap in an ESM fashion, then there may be less regulation coming forward on this material.”
- Expect to work with auditors. “If you’re processing electronic scrap in any way, shape, or form now, you’re going to have auditors—somebody’s going to come into your facility to find out what you’re doing with that material,” Skurnac said.
- Establishing customer relationships will be key, Skurnac said, noting that the three main categories of customers for e-recyclers are original-equipment manufacturers, collection companies, and walk-in customers.
- Get involved with your state’s legislators and regulators to help them understand the industry and pass recycling-friendly rules. These officials “would like to get more input from the companies that are actually doing the recycling,” Skurnac said. “Otherwise, we will end up with a patchwork of 50 different regulations and bills, which will make the business very difficult.”
Recycling CRTs. Despite their lead content, cathode-ray tubes (CRTs) are a growing recycling success story. North American CRT glass manufacturers used about 43,800 tons of recycled CRT cullet in 2000, which accounted for about 8.2 percent of CRT glass that year, noted Greg Voorhees of Envirocycle Inc. (Hallstead, Pa.).
A CRT is basically made up of four glass components: the neck glass (30-percent lead content); funnel glass (25-percent lead); glass frit or solder; and panel glass, which is lead-free in newer monitors but can have 2 percent lead in older TV screens, Voorhees said. Overall, he noted, CRTs can contain anywhere from 1 to 11 pounds of lead depending on their size and product type.
Recycled CRT cullet offers many advantages to CRT glass manufacturers, including improved batch-melting characteristics, better heat transfer, lower emissions and energy consumption, and enhanced glass quality, Voorhees said. Recycling CRTs also conserves virgin resources. Disadvantages, though, include possible contamination of the glassmaker’s equipment and final products.
A major challenge in recycling CRTs is separating the different types of glass, Voorhees said. Also, since color CRTs usually fail the U.S. EPA’s TCLP test, they are considered hazardous waste and must be processed in an environmentally sound manner. CRT recyclers must, in fact, have a lead program for their workers and test their facilities regularly to prevent any hazardous exposure. Another challenge is that states have varying regulatory requirements.
CRT recyclers are also competing against the declining cost of virgin CRT glass raw materials, which are under $200 a ton and dropping, Voorhees noted. In addition, collecting old CRTs can be difficult and expensive.
Government E-Recycling Activities. Re
viewing various government actions on e-recycling, Clare Lindsay of U.S. EPA (Washington, D.C.) discussed the National Electronics Product Steward-ship Initiative (NEPSI). This group includes more than 15 manufacturers, 15 states, and 18 others such as recyclers, retailers, environmental groups, academics, and more.
NEPSI’s goal is to develop a national financing system—shared by manufacturers, retailers, governments, and consumers—to recover and recycle used PCs and TVs, Lindsay noted. Options under consideration include an advance recovery fee (ARF) at the point of purchase (most likely under $10), partial cost-internalization in which government and industry would share e-recycling costs, or a hybrid approach that begins with an ARF, then sunsets to partial cost-internalization.
Regardless of what happens at the federal level, “state legislation is where the action is,” she stated. Many states are considering e-recycling bills that range from full producer responsibility to partial producer responsibility to point-of-purchase fees. California, especially, could pass a precedent-setting e-recycling law this year.
Still, though states will face pressure to pass unified e-recycling laws, “it’s almost going to be necessary for the states to legislate singly in order to create the pressure that will cause industry to want to get together on some solutions,” Lindsay said.
Trading With China
There has been an ever-increasing flow of U.S. scrap to China, and that trend will continue for the foreseeable future, said David Cammarota, director, metals division for the U.S. Department of Commerce, International Trade Administration (Washington, D.C.).
Since 1997, U.S. scrap metal exports to China have risen in value from about $134 million to $846 million in 2002, while China’s share of U.S. metal exports has grown from 6 to 37 percent, Cammarota reported. By metal, U.S. exports of ferrous scrap have grown from $41 million in 1997 to $287 million last year, while shipments of copper scrap have increased from $147 million to $272 million and exports of aluminum scrap have grown from $60 million to $83 million, he said.
China’s need for imported scrap will continue, in part, because its economy is expected to grow about 8 percent a year through 2010 and, in part, because it lacks sufficient domestic scrap supplies, Cammarota noted.
For scrap exporters, China’s entry into the World Trade Organization could bring pros and cons. On the downside, there are reports that China could reclassify scrap as a semifinished product, thereby increasing the import duty from zero to 2 to 3 percent, Cammarota said. On the plus side, China is expected to lift its “specified trading system” in 2004, which would allow foreigners to operate trading and distribution firms in China and relax conditions on foreign direct investment.
In the paper sector, China is now the world’s second-largest producer of paper and paperboard at about 32 million mt a year, as well as the second-largest consumer of paper products, using 40 million mt in 2002, said Gary Stanley, director, forest products and building materials division for the U.S. Department of Commerce, International Trade Administration.
China’s paper industry, however, is extremely “raw-material dependent,” consuming about 16 million mt a year of scrap paper, with imported fiber accounting for 6.9 million mt—or 43 percent—of that total, Stanley said. The United States—the largest exporter of scrap paper to China—has seen shipments to China increase from 645,000 mt in 1996 to about 3.3 million mt in 2002, which is just over a third of total U.S. scrap paper exports. And China’s demand for scrap paper is expected to grow at least 8 percent a year in the next three to five years, he reported.
As with metals, China’s entry into the WTO should increase its overall paper consumption and give U.S. firms greater export opportunities, Stanley said. Notably, China will reportedly reduce its tariffs on paper and paperboard products from its current average tariff of about 14 to 5.5 percent.
Advice From the Trading Trenches. U.S. processors thinking of selling scrap to China should consider the following issues, said three speakers at the workshop on trading with China:
- Keep up with the frequent Chinese government policy changes, said Tony Huang of Sigma Group Inc. (Kaohsiung, Taiwan), who noted that “many of the new rules are conflicting, confusing, and interpreted differently in different parts of the country.”
- Be prepared to deal with “monkey business” in the Chinese import market, said Huang, asserting that most nonferrous scrap imported into China is declared at an artificially low value to avoid the 1.5 percent import duty and 17 percent value-added tax. China’s customs agency, however, is becoming more vigilant in checking declared values of imported scrap, Huang said. Also, Chinese nonferrous recyclers are working with customs on a new procedure for scrap import price verification.
- Select your Chinese trading partners carefully and be cautious in your transactions, Huang said. “If you decide to deal with companies you don’t know very well,” he said, “make sure that you only commit to prompt shipment to avoid market fluctuations and don’t make the shipment until you receive a letter of credit or cash in advance.” Andy Wahl of Newell Recycling of Atlanta Inc. (East Point, Ga.) agreed. His company avoids letters of credit, instead requiring cash before delivery or upon presentation of documents.
When contacted by Chinese scrap buyers, Wahl said, it’s prudent to ask what kind of licenses they have. “A lot of the companies who import material are working off of the processing licenses of local Chinese companies,” he said, adding that “hopefully we’ll see some progress on how companies can obtain those licenses.”
Turning to processing-related issues, Wahl suggested that U.S. recyclers should know the following points:
- Many Chinese buyers prefer mixed metals over sorted because their low labor costs make hand-sortation economical. Cheap labor does indeed give China an “immense advantage” in the market, said Don Lewon of Utah Metal Works Inc. (Salt Lake City). “If you take China’s labor costs, multiply them by five, and cut our labor costs in half, China would still have a huge advantage”;
- Chinese buyers often prefer loose or loosely baled material so they don’t have to break apart dense bales for sorting; and
- Chinese buyers can often afford to pay more for scrap, Wahl said, because of their low labor costs and because they don’t have the same material losses from mechanical processing as Western recyclers.
Both Wahl and Lewon expressed concern about the effects of scrap exports to China on U.S. scrap processors and consumers. Chinese buyers, for instance, have been “ferocious competitors” for scrap wire and cable, which has hurt domestic wire choppers—including his firm, Lewon said. U.S. secondary aluminum smelters have also been “squeezed hard,” he stated, as more domestic aluminum scrap heads to China.
This trend led Wahl to ask whether the U.S. aluminum smelting business could face the same fate as the U.S. copper smelting industry, which has largely disappeared.
Focusing on Small Businesses
The Orlando convention included a new feature—a special set of four workshops specifically designed for members who operate small businesses. The workshops focused on environmental compliance, cash flow concerns, banking and other lending issues, and litigation information.
For Environmental Protection, Get It In Writing. To protect the environment—and your scrap facility from regulatory problems—it’s smart to adopt written contracts that spell out your environmental policies, said John Hayworth, ISRI’s director of environmental compliance, at the workshop on environmental issues for small scrap operations.
For instance, if oily waste from supposedly dry turnings and borings poses a potential regulatory problem for your operation, add a provision to your contracts that the supplier must take back any shipment that has too much residual oil, Hayworth suggested.
“Documentation is the key to success in the environmental arena,” he explained. “If you have not documented it, then in the eye of the regulator it did not happen.” So write contracts that specifically identify the materials you can and cannot accept. Then use those contracts with all your suppliers, including peddlers.
“If the peddler signs that document,” Hayworth said, “then you have a track record.” But without such a signed document, “you don’t have a leg to stand on—you’re merely accepting whatever that person gave you at face value.”
Operators must understand environmental rules to establish a good source-control program as well as cope with myriad interpretations of those regulations, Hayworth noted. For instance, he said, many state regulators want to define scrap facilities as “solid waste processing companies.” By understanding what the rules actually say, an informed scrap operator can respond: “No, I’m not [a solid waste processor], and here are the reasons why I’m not ... ”
It’s also important to stay current on the latest developments in environmental regulations. Hayworth pointed to a recent change in storm water rules that requires certain facilities to obtain a specific permit for any construction work that disturbs as little as 1 acre of land. At presstime, EPA still had not developed the required permit. So Hayworth cautioned operators who might be affected against starting any construction projects of 1 acre or larger until that permit is available. Otherwise, they could leave themselves open to legal challenges by environmental groups under the citizen lawsuit provisions of the Clean Water Act.
Keep the Cash Flowing. Think that increasing sales is the solution to all your financial challenges? Think again, warned Robert Langdon, author of Managing Your Business for Profit, at the workshop on cash flow for the small scrap operation.
With a series of worksheets, Langdon demonstrated how a scrap operation that increases its net sales of $5 million by 15 percent could actually make its cash flow situation worse by more than $110,000. In part, that’s because increasing sales by 15 percent in an inventory-intensive field such as scrap processing often requires the business operator to increase his inventory by 20 to 25 percent. In addition, you might need to purchase additional equipment to handle all the extra material. As a result, “your cash flow might be negative even though profit went up,” Langdon said. “Everything looks good—but you can’t pay your bills.”
Noting that sales are actually just the start of the process of generating cash, Langdon explained that businesses derive their cash from various and sometimes unlikely sources. Depreciation on equipment, for instance, has a positive cash impact on your balance sheet, as does increasing your accounts payable. “If you typically owe your customers $100,000 a year and you increase it to $110,000,” Langdon said, “it’s like borrowing an additional $10,000 from them—and what’s nice about doing that is that it has no cost to you since you don’t pay interest on it.”
The two best ways to increase cash flow are to turn your inventory more often and decrease the number of days it takes to collect your accounts receivables, Langdon said. Consider the same 15-percent sales increase example from before. That scenario assumed 45 days to collect receivables and nine inventory turns a year. By reducing the collection time to just 40 days and turning inventory one extra time, $110,000 in negative cash flow can become more than $10,000 in positive cash flow, Langdon demonstrated.
After working with inventory-intensive businesses for 25 years, “in almost every case there was room to turn inventory faster,” Langdon said. He recommended scrap operators compare techniques on inventory turnover to improve their own performance.
To help track collections, Langdon suggested that business owners monitor their cash-receipts journal periodically throughout the month, rather than waiting until the end of the month to calculate collections. He also recommended techniques such as billing your customers as close as possible to the date that the product or service was delivered and calling your biggest customers within two weeks of delivery to ensure they were happy with your service, inquire about doing more business with them, and find out when you can expect to be paid for the original service.
Most importantly, he stressed, you should reevaluate both your own expectations about your business and your customers’ performance to make sure that you’re seeking a realistic profit from customers who can actually meet that realistic expectation. Customers who insist on taking longer to pay than you want to give them are also the ones most likely to never pay you at all, Langdon noted.
Tending to Bankers and Other Lenders. The scrap industry has several strikes against it when turning to banks and other lenders for loans, said two speakers at the workshop on how small business owners can maximize their banking relationships. For one thing, the industry has a history of recent financial underperformance as well as outright disasters, explained Robert Schulten of GE Capital’s Metals Finance Group (Danbury, Conn.), who discussed asset-based lending.
Moreover, lenders not only hold a negative view of the scrap business itself—because of market fluctuations, the fragmented nature of the industry, and its commodity products—they also often aren’t comfortable with the entrepreneurial background of the individual scrap operators.
When banks deal with entrepreneurs, they sometimes wonder if such people “have the skill set to take the business to the next level,” noted Al Sykes Jr. of Cornwall Management Services L.L.C. (St. Augustine, Fla.), who explored commercial lending issues. That “next level” is important because banks want to loan money to people who can grow their businesses, he said. Banks also view entrepreneurs as “either unwilling or unable to expand their advisory circle,” Sykes noted, adding that many small scrap operators don’t even get an outside accountant to thoroughly review their books and records.
Banks like managers who seek advice from a wide group of advisers, both internal and external. They also want lots of records and reports with information on how a company is run, what its key ratios are, how often its inventory turns, and so on. “Professional, sophisticated managers don’t run their businesses by the seat of their pants, they run them with data,” Sykes stated.
One key source of such data is a business plan, which Sykes described as “the tool you can use to change the banker’s view.” That’s because you “can’t change your past performance, you can’t change what they think of the industry, but you can give them a new image of your business.”
That image will tell the bank that your company knows what it’s doing, why it wants the money, and how it will pay the money back, Sykes explained. Backing up this image with numbers is critical, he added, but it’s also important to demonstrate your business strategy, which includes understanding the constraints on your business, the assets you require, and how to best utilize those assets.
“When the untrained eye looks at your inventory, what they see is a pile of rusting junk,” Sykes said. “You’ve got to make sure that your banker understands that that material is highly liquid ... and hopefully it’s worth more than what you paid for it.”
In addition, Sykes discussed the need to develop as many contacts within the bank as possible and let them deal with as many people within your organization as possible. Also, make your business valuable to the potential lender by centralizing all your banking with them—get your company credit cards through the bank and even try to convince your managers and staff to do their personal banking there.
Making sure that you understand the specific services a lender offers and that those services match your current and future needs is also critical, noted GE Capital’s Schulten. Determine whether asset-based lending is their primary business or just a sideline, he recommended, and inquire about how the lender will address your evolving credit needs as your company expands. You want a firm that will stick with you through the natural business cycles of the scrap industry, he noted.
The quality of your management, along with the consistency and reliability of your inventory and accounting systems, are critical areas the lender will want to examine, Schulten said.
Both speakers also stressed the need to be upfront with a potential lender about any problems since the lender will discover negative information anyway during due diligence.
Learning About Litigation. “If you do business today, eventually you will get sued,” asserted Richard Gilbert, an attorney with the Boston law office of Adler Pollock & Sheehan P.C., at the workshop on litigation and the small business.
Gilbert compared litigation to playing poker with some unexpected rules. Like poker, you have to put in an ante (that is, you need to hire an attorney), you have to meet every raise the other player makes to stay in the game, you might end up splitting the pot, and sometimes the best hand doesn’t win.
Unlike poker, you can’t refuse to play (if someone sues you, you’re in the game whether you want to be or not); even if you win, you might lose your ante and all the raises you made during the game (unless you manage to get your attorney’s fees paid by the losing side); you do get to see your opponent’s hand during the game; but “you don’t know the size of your bet until you’ve lost the game—and you can’t fold unless the other side agrees,” Gilbert said.
Though no one seems to want to hire a lawyer until he gets sued, a bit of “preventive lawyering” can help scrap operators reduce their chances of being sued or at least build the strongest “hand” for themselves if they do get sued, Gilbert said.
First, formalize your business arrangements with written contracts covering your key suppliers, key customers, and key employees and establish written records of key company policies. Gilbert acknowledged that unwritten contracts are common within the scrap industry. But he stressed that such informal agreements involve accepting the risk that if there’s a dispute, it will just be the other person’s word against yours. Written contracts are like a prenuptial agreement, he said. “It’s not there for when everyone gets along, it’s there to tell you what’s going to happen if you don’t get along.”
Another key is to make sure your litigation guarantees you reimbursement for attorney’s fees if you’re the prevailing party. Under the U.S. litigation system, each party is expected to pay his own attorney’s fees unless otherwise stipulated, Gilbert said. But this can easily mean you end up paying an attorney almost as much in legal fees as the disputed amount you’re trying to recover, he warned.
A good document-retention policy is also critical, especially if it makes your employees regularly discard old e-mails. E-mails that people mistakenly think are private can be some of the most damaging evidence in litigation cases, Gilbert said. Any document-destruction policy should be immediately halted, however, once you do get sued. Otherwise, the other side’s attorney will accuse you of destroying supposedly critical information.
It’s also important that managers “observe the corporate form,” which means treating their business and their personal property completely separately. U.S. corporate law protects your personal assets from your business debts unless it can be shown that you treated them interchangeably, such as by writing company checks to cover personal expenses, Gilbert noted.
If you do get sued, the “forum” or location where the suit is brought can be crucial. Different states have vastly different rules for litigation, Gilbert noted.
When choosing a litigator, find someone with experience in the particular field of law being disputed, he advised.
Finally, try to avoid litigation whenever possible. Binding arbitration or mediation can be less-expensive, faster alternatives to going to court, Gilbert said. His rule of thumb: Expect litigation to take five times as long and cost you 10 times as much as you think it should. Thus the question becomes: How much “justice” can you afford?
Environmental and Operational Challenges
Surviving an OSHA Inspection. Complying with OSHA regulations and “surviving” an actual OSHA inspection are separate things, said Mike Mattia, ISRI’s director of risk management. The regulations themselves, while sometimes tedious and hard to understand, are legitimately designed to protect your workers, “and they do a good job once you figure out what they mean,” he said.
The OSHA inspection process, on the other hand, can be a “nightmare,” Mattia noted, and sometimes seems more focused on “just trying to rack up some fines” rather than actually protecting worker safety and health. Mattia recalled instances in which OSHA inspectors misled scrap operators about what the regulations actually required or allowed. Moreover, the information or violations uncovered by such questionable practices have never been thrown out by any court, he noted. In that sense, an OSHA inspector is different from a police officer, who must follow various procedural rules—such as reading a suspect his rights—or risk having the case dismissed.
Mattia then offered various tips on how to survive an OSHA inspection. For instance, never say “no” to an OSHA inspector. Instead, always agree to provide the information or access the inspector requests, but ask for clarification on exactly what the inspector wants to know and exactly where in the OSHA code it says the inspector can make such a request. Keep a copy of those standards on hand for just such a purpose.
“OSHA’s got lots of rules that their inspectors must follow, but they won’t tell you those rules,” Mattia noted. “They won’t tell you that they have to explain in-depth what they’re there to inspect, that they have to give it to you in writing if you ask for it.”
So “when an inspector shows up, ask a billion questions,” Mattia said. Ask for that written information or ask to call the inspector’s director to clarify what they’re telling you. And remember that you have the right to record—in both audio and video—the entire inspection, as well as to do side-by-side monitoring.
Know your rights and insist—politely—that OSHA follows its own rules. “If you start making them play by the rules, you put a box around them,” Mattia stressed, and that “might get a lot of things stopped that aren’t necessary.”
Reviewing Single Stream. There are many pros and cons to single stream—the curbside-collection method in which all recyclables are commingled in one container.
On the positive side, single stream can increase the “diversion” of material from the landfill, which “is what’s driving a lot of cities and counties toward it,” said Robert Haley, recycling program manager for the city and county of San Francisco.
Among other advantages, single stream is preferred by participants thanks to its simple one-cart approach, Haley said. It also discourages the scavenging of recyclables, reduces pest issues, simplifies collection and education efforts, reduces traffic and emissions by speeding the collection process, and decreases collection costs. By requiring only one toter cart for recyclables, single stream requires less space at the curb and enables municipalities to add carts for other materials such as organics, Haley said. In addition, single-stream carts allow collection workers to roll and dump material automatically into the truck rather than having to lift potentially heavy bins, thus reducing worker injuries and workers’ compensation costs.
On the negative side, single stream increases the need to sort material and can reduce the quality—and, hence, the marketability—of recovered material, Haley said.
The decision to use single stream is “really about tradeoffs,” he observed, noting that “there are a lot of interconnected variables here. All communities need to look at their tradeoffs and make their own decision about it.”
Still, the trend toward single-stream programs is undeniable. “Even the people who have some concerns about single stream are acknowledging that it’s a trend that going to be very difficult to stop in California,” Haley said.
That’s bad news to George Elder of SP Recycling Corp. (Atlanta). For him—as a scrap expert for a newsprint mill—the problem is all about quality. Specifically, recovered fiber from single-stream programs contains two-thirds to twice as much prohibitives, or nonfiber contaminants, as paper collected through a two-bin system. For every million tons of fiber, Elder noted, there’s about 1 percent—or 10,000 tons—of prohibitives like cans and bottles. These prohibitives are negative for several reasons: They are waste material to mills, they represent lost resources for can and bottle recyclers, and they have a “sizable financial impact” on mills. As Elder explained, every ton of contaminants costs as much as every ton of good recovered fiber. Also, when a mill’s screening equipment captures the contaminants, those wastes trap an equal amount of good fiber.
For mills, the challenge in using single-stream fiber is that “the technology is not available today, either in dry processing or wet processing, to produce acceptable pulp for quality paper from a very contaminated recovered fiber stream,” Elder said.
If the mills can’t source quality recovered fiber from curbside programs, they could turn to virgin fiber or support other collection approaches such as paper drives or two-bin programs, he warned. Elder also challenged the claim that single-stream programs increase diversion rates, stating that such rates “are way overstated in this country if you take into account the overall loss of collected material due to contamination.”
Though quality can be a problem in single-stream programs, that’s not true across the board, said Karl Mockros of Recycle America Alliance (Houston).
“I think one of the common misconceptions is that you can’t make a quality newsprint from a single-stream system,” he asserted. Though some of his firm’s single-stream facilities aren’t making the grade, “I can tell you that we have facilities that make even better quality newsprint than we do in some of our two-stream facilities.”
Fiber quality is a function, in part, of the equipment used in single-stream processing facilities. “We’re in the second or third generation of single-stream equipment,” Mockros said, adding, “It isn’t perfect. It doesn’t do everything we would like it to do. I’m looking forward to when we’re in about the fourth or fifth generation.”
To achieve quality, single-stream facilities must understand the specs of their mill consumers and implement an in-house quality program. Each Recycle America Alliance plant samples one bale of newsprint per day per shift and evaluates it for contaminants. If the material makes the grade, the samples are scaled back to three times a week per shift, then two times a week. If a bale tests out of spec, the facility goes back to daily testing until the system is back to spec.
Quality also comes down to a work-culture issue, Mockros said. “It’s important that your people come in every day with the understanding that they’re going to make a quality product,” he stated.
Refining the Price Process
“There are no pitfalls to price transparency, but there are considerable difficulties in achieving it,” said Martin Abbott, publisher of American Metal Market (New York City), at a workshop on price discovery and, specifically, how AMM determines its published scrap prices. There’s no mystery to the AMM price process, Abbott explained. “We call people, we make notes of what they tell us, we assess the information they’ve given us, and we publish a price,” he said. “There’s no secret formula, there’s no weighting of one source over another source, and we don’t put them all into some weighted average.”
In general, he noted, there are two methods of price discovery—the interactive, participatory method (such as commodity exchanges like the LME and Comex) and published prices—and there are pros and cons with both.
The interactive method offers transparency, participation, and risk management through hedge positions, Abbott said. On the downside, you can only participate if you meet certain requirements, and you often “compromise the pricing basis” by having to reference broad-brush prices rather than ones specific to your commodity and industry.
Published prices, meanwhile, aren’t participatory and are “the result of an artistic rather than a scientific process,” Abbott said. While published prices can cover different grades and locations, it’s possible to have too many prices, which makes it hard to get meaningful input and stay relevant. Published prices can’t change as frequently as futures prices, which can be viewed as a reduction of volatility and/or a reduction of transparency, he added. On the plus side, Abbott said, publishers are generally independent of the prices they publish in that they have no commercial interests to color their view.
There are problems in how published prices are used, Abbott stated. For instance, companies that operate in one region tend to use a different regional price because it serves their interests. Also, some firms use prices as indices rather than as outright numbers.
Though published prices are far from perfect, there are challenges to improving the process. Associations such as ReMA can’t collect and disseminate prices due to antitrust and other laws, Abbott noted. Market participants could be invited to submit proof of transactions to AMM, but even that approach isn’t foolproof since transactions can be faked, there will always be nonrepresentative contracts, and it’s impossible to represent all transactions in the market.•
The scrap industry’s biggest annual event—ISRI’s convention and exposition—gave attendees a chance to learn, network, relax, reconnect, and more.