MAY/JUNE 2007
High metal prices have raised the profile of—and competition in—the market for electric motors and shredder pickings, or meatballs. With the help of new ReMA specs, this export-driven business is growing rapidly—and experiencing some major growing pains.
BY KENT KISER
Years ago, scrap processors considered electric motors dreck, or garbage. Though they contain valuable metals—including copper, aluminum, steel, and cast iron—processing them to recover those metals was difficult and time-consuming. Many processors just set them aside or were happy to sell them for a few cents a pound.
In the past decade, however, electric motors shifted from scrap non grata to a highly desired, internationally traded commodity that’s now the lucrative specialty of a few scrap companies. Two commodities in this niche—mixed electric motors and shredded electric motors (aka shredder pickings or meatballs)—even earned their own ReMA specifications in 2006 (see “Meet Elmo and Shelmo” on page 52).
The electric motor scrap market certainly is revving high these days, but motor recyclers worry their good fortune could shift at any moment based on the whim of one country—China, the largest consumer of this export-focused scrap.
Building the Motor Market
Mainland China might be the center of the scrap motor universe now, but “the Taiwanese were the originators of the mixed metal scrap business in all ways, shapes, and forms,” says Steve Cohen, president of U.S. Motor Recycling Inc. (Chicago). In the early 1970s, Taiwanese scrap buyers reportedly crisscrossed the United States in search of small electric motors and other low-grade scrap. The roving buyers loaded this material into containers and shipped it to Kaohsiung, on Taiwan’s southern coast, where workers processed it by hand.
At about that time, the Cohen family’s business—which specialized in motor dismantling and cleaning—began exporting 10,000-ton loads of scrap motors in vessels bound for Taiwan. The company would send barges down the Mississippi River to collect motors at various yards, then it would load the material into vessels at major U.S. ports such as New Orleans. This bulk, open-hold shipping approach continued until container shipping became the norm around 1980, Cohen says.
Taiwan remained the primary destination for scrap motors until the late 1980s, when pollution concerns led the Taiwanese government to shut down the motor-processing yards, Cohen says. Undeterred, the Taiwanese scrap processors moved their operations to southern China. Since then, China has established itself as the motor recycling center of the world, with the eastern coastal city of Taizhou in Zhejiang province reportedly serving as the market’s epicenter.
There, as well as in a few other Chinese processing centers, thousands of laborers use their hands and rudimentary tools to dismantle primarily small, “fractional” motors—those with 1/4, 1/2, 3/4, or other fractional horsepower—and related scrap such as automotive starters, alternators, armatures, and transformers. The Chinese workers also sort through shredded electric motors, which consist mostly of automotive harness wire and small motors that have passed through the grates of an automobile shredder. These items are known as “shredder pickings” because scrapyard workers hand-pick them from a shredder’s downstream conveyor belts. (When the shredder tears off the motor’s cover, the reddish, rounded ball of copper-rich material that remains bears some resemblance to a meatball, hence the other nickname for this commodity.)
The scrap motor business also encompasses sealed motor units, which are a different—and controversial—animal. Sealed units, which come from refrigerators, air conditioners, and freezers, have a small motor and a compressor sealed in a steel canister that contains a few teaspoons of oil. Though no U.S. law prohibits exporting sealed units, China refuses to accept them unless they are removed from their cases and dry. U.S. motor exporters that want to ship this material to China must either require their suppliers to open and drain the sealed units or do it themselves, which can be time-consuming, costly, and environmentally risky. They also can ship the units to some countries in Southeast Asia, as well as to Mexico, India, and Pakistan, which reportedly still accept undrained sealed units. With their potential environmental hazards, “I wouldn’t want to even talk about that stuff,” one motor shipper says.
Even with today’s higher metal prices, U.S. buyers don’t process fractional motors, shredder pickings, or sealed units themselves because the labor and operating costs are too high. “The per-ton cost of processing motors domestically exceeds the combined cost of shiping motors to China and processing them there,” says Steve Gilbert, president of Global Recycling Inc. (Charlotte, N.C.).
After all, he explains, “China’s natural resource is labor. They’ve got the people to do the job.” Chinese motor processors—most of whom are women—are incredibly smart, hard workers who have developed extensive expertise in how to dismantle virtually every type of motor, he says, “because they’ve hand-processed hundreds of thousands of tons of motors from all over the world.”
One U.S. company, Gershow Recycling (Medford, N.Y.), used to process small motors in a proprietary process, but “with the costs of processing compared with the prices offered by Asian buyers, many times the domestic processing costs are too expensive,” Gershow President Kevin Gershowitz says. The company now exports most of its motors and shredder pickings. “You put the pencil to the paper, determine which number comes out better, and that’s the direction you go,” he says.
Even Rick Porter, president of Rich Metals Co. (Davenport, Iowa), which still processes large motors in the United States, agrees that it doesn’t make economic sense to process the fractionals. “Due to the intricacies of the smaller motors, I’d spend almost as much time taking one of the smaller ones apart as a larger one,” Porter says. “My cost per pound would be higher on the smaller pieces.” (For more on Rich Metals, see “Motor Processing, American-Style” on page 55.)
Price Parameters
What explains motor scrap’s recent transformation from dreck to in-demand? The short answer is motors contain significant quantities of metals that are reaching record-high prices.
Most motors incorporate two or more types of nonferrous and ferrous metals in their basic components. Chinese motor processors are principally after the motors’ copper windings because the red metal is the highest-value commodity. Next most valuable is the aluminum—in windings or aluminum/steel armatures—followed by the ferrous components, which include cast iron or steel casings plus thin silicon steel sheets, or laminations.
Motors’ scrap value is based on the constituent metals’ market prices. Typically, the more copper a motor contains, the more it’s worth. The copper content varies among different types of fractional motors and even within each type, experts note. Some motors even contain No. 1 and No. 2 copper in the same unit, making the cost calculation trickier. On average, though, fractional electric motors are 9 percent to 10 percent copper by weight. AC motors average 7 percent to 9 percent copper; DC motors have 15 percent to 18 percent copper content.
Though AC motors are the lion’s share of the motor scrap stream, the percentage of DC motors in a mixed load determines the material’s price. Recognizing this value difference, some scrap dealers separate DC motors from mixed loads to maximize the material’s sales potential. Doing so, however, “significantly lowers the value of the balance of the material to the consumer and, in effect, creates a grade of mixed motor scrap with a lower value than the ReMA Elmo specification contemplates,” Gilbert says.
Noting another market dynamic, Gilbert maintains that some consumers bid up prices based on their belief that there are opportunities to get additional value out of electric motors other than the metallic value. Some processors, for instance, attempt to mine scrap motors for reusable and resalable components, which can add to the recovery value of the material. That’s why some buyers are willing to offer higher prices for motor scrap. “If you calculate market prices offered by these speculators based only on metallic values, it often does not add up,” Gilbert explains.
Getting It There
Long gone are the days when U.S. exporters shipped scrap motors in open-hold vessels. Today they ship the material exclusively in 20-foot- or 40-foot-long containers, with the former holding 36,000 to 46,000 pounds and the latter holding 45,000 to 55,000 pounds. Generally, sources note, the shipper must guarantee a minimum weight in the container without exceeding the maximum allowable weight for the container.
Motor and meatball scrap is usually shipped loose, spread evenly along the length of the container and no more than halfway up the container’s height. Once a container is loaded on a vessel, it takes an estimated 21 days for the shipment to reach China from the West Coast and 41 days from the East Coast.
Motor exporters face some of the same export challenges as other scrap shippers: It can be difficult to secure containers and vessel space at certain times of the year, they say, when shipping lines can opt to carry higher-priced products. Volatile, and often rising, freight rates and fuel surcharges also are an issue, though the buyer and seller often negotiate to share such cost increases. “It’s hard to explain to some U.S. sellers that the burden of the increases must be shouldered by all parties,” Gilbert says. “You have to be fair. The buyer does not always have to pay the surcharges alone.”
Notably, CCIC North America, the Chinese government-approved inspection agency, must inspect all containers of U.S. scrap destined for China—including motors and meatballs—unless the scrap firm is a Class B self-inspection company, in which case it can conduct its own inspections following CCIC rules.
A Host of Challenges
As the rewards of the electric motor scrap market have increased, so have the challenges, sources say. Some current tribulations include the following.
Capital gains … and losses. High metal prices have brought more volatility to the market and placed unprecedented financial demands on motor dealers. “Not that long ago, we were buying a million dollars of motor scrap a month, when the material was 10 to 15 cents a pound,” one exporter says. “Today, with the higher prices for copper and other metals, we’re spending $600,000 or $700,000 a week. That presents a new set of issues in financing and being able to cover your purchasing costs.” The point is that motor buyers now need greater access to trading capital to finance their scrap purchases and compete effectively. “You have to be a lot more sophisticated as a trader and understand the market,” U.S. Motor’s Cohen adds.
Overall, higher metal prices raise the financial stakes for all parties and increase the risks of participating in a global scrap market. “When the market has a big correction, it’s not unusual for some international buyers to walk away from the order,” Gilbert says. “People get stuck all the time.” That’s why it’s critical, Cohen says, to “have a lot of confidence in your relationships with your suppliers and buyers. The cost of doing business has increased, so you have to really know on both ends who you’re doing business with.”
A world of competition. Every scrap niche has its competitors, but motor buyers say their niche has become a feeding frenzy in recent years, in part because motors are still an inexpensive commodity compared with other scrap metal grades. “There used to be 10 main buyers,” says Joe Chen, president of Tung Tai Group (San Jose, Calif.), “but now there are probably more than 100 buyers, so it’s 10 times the competition.” Today, he notes, it’s easier for Chinese citizens to get U.S. visas, so many Chinese buyers are coming to the United States to cross the country—like the Taiwanese buyers of the past—and buy motors directly from dealers. “Now you have every person from Asia knocking on every single door, all over the country,” one recycler says.
In addition, more U.S. brokers and dealers are entering the market. In particular, some midsized and larger processors that previously sold their scrap to specialized motor exporters are building volume and selling directly to Chinese dismantlers.
This stiff competition has forced U.S. buyers to bid up motor prices, whittling their margins in the process.
A tilted playing field. Competition is one thing; unfair competition is another. That’s a common complaint among motor scrap buyers, who claim that some firms engage in questionable business practices by consistently flouting U.S. and Chinese import/ export rules. One top complaint is that some U.S. exporters persist in shipping sealed units to China, even though the country expressly prohibits such material. Some exporters also reportedly label shipments as motor scrap but send more valuable material, such as Birch/Cliff.
Aside from creating unfair advantages, such unethical behavior could give American motor shippers a collective black eye. “If a lot of people disobey the rules, it will just come back to haunt everyone,” Gilbert says. “That’s why it’s in everyone’s best interest to weed out the shippers who are not following the regulations.”
Clogs at CCIC. Because U.S.-based motor exporters ship almost all of their material to China, every day they deal with CCIC North America—and, more specifically, with the shortcomings of that group’s inspection system. According to one shipper, CCIC doesn’t have enough offices to cover the main U.S. ports and doesn’t employ enough inspectors to execute inspections in a timely manner. “If I have to ship from certain areas,” the shipper says, “it can be very difficult to apply for CCIC inspections.” Also, many CCIC inspectors could use more training in scrap materials so they know what they’re examining, the shipper asserts.
Online objections. In this era of Internet commerce, it isn’t surprising that many types of scrap—including motors and meatballs—are bought and sold online like collectibles on eBay. Some firms view this as a great service for scrap buyers and sellers; others aren’t so positive. In Gilbert’s view, online scrap auction sites “impersonalize the industry and create a price-driven race to the bottom. I think the process cheapens our business because it doesn’t nurture long-term relationships or give parties the opportunity to deal.” Another motor exporter dislikes the “no claims” aspect of some online purchase agreements because it can allow unscruÂpulous sellers to misrepresent their material and get away with it. “Sellers can set transactions up to do whatever they want without worrying about claims from the buyer,” he says, noting that the claims option becomes more important as metal prices increase.
Motoring Into the Future
The wild, competitive ride of the scrap motor market will continue as long as metal prices remain high, motor experts agree. “We all feel it’s going to stay pretty volatile in the short term,” Gilbert says. Scrap veterans maintain, however, that prices eventually will return to earth, bringing some normalcy to the market. “There are times when everyone wants in and times people want to get out,” Gilbert says.
Virtually all American motor exporters expect China to remain the main destination for their scrap for at least the next 10 to 15 years. “I don’t think any other country can replace China anytime soon,” Joe Chen says. “China has the money, the workers, and the space.” Though some U.S. shippers see potential in Vietnam and India as future destinations, those countries have a long way to go before they can seriously compete with China.
China’s dominance of the U.S. export market for motor scrap also could be the key to the market’s undoing, however. China is “the major factor in this market,” Gershowitz says. “It determines most of our ability to move this scrap and what it’s worth,” but, he adds, “you never know what could happen.” As Gilbert notes, “The unpredictable nature of the Chinese government is definitely a challenge. With the stroke of a pen, you’re out of business tomorrow.” Because the country’s trade rules can change almost overnight, “that’s one of the great unknowns of dealing with China,” he says—“what may not be a big deal today could be a very big deal next week or next month.”
Despite this threat, motor exporters are confident, Gershowitz says, that “there will always be a market price for our commodities.” And regardless of which country is buying, he says, the goal remains the same: “You have to buy low and sell high—or at least buy at one price and sell it for a little bit higher. It doesn’t work the other way around.”
Meet Elmo and Shelmo
You know a scrap material has arrived when it gets its own ReMA specification. That was the case last year for electric motor scrap.
For decades, sellers of scrap motors and meatballs have relied on specifications set by the material’s buyers. Though that continues to be the norm, ReMA recognized the growing stature of the motor scrap market and decided to outline some official specifications for the market’s commodities.
In April 2006, the ReMA board passed two specifications—Elmo and Shelmo—to cover mixed electric motors and shredded electric motors. The new specs in their entirety are reprinted here.
Elmo—Mixed Electric Motors
Shall consist of whole electric motors and/or dismantled electric motor parts that are primarily copper-wound. May contain aluminum-wound material, subject to agreement between buyer and seller. No excessive steel attachments such as gear reducers, iron bases, and pumps, or loose free iron allowed. Specification not to include sealed units or cast iron compressors.
Shelmo—Shredded Electric Motors (also called “shredder pickings” or “meatballs”)
Shall consist of mixed copper-bearing material from ferrous shredding, comprised of motors without cases. May contain aluminum-wound material and insulated copper harness wire, subject to agreement between buyer and seller. Trace percentages of other contaminants and fines may be present. No free iron or sealed units.
To print out a complete copy of ISRI’s current Scrap Specifications Circular, visit www.isri.org and click on “Specs & Markets” in the left-hand menu.
Motor Processing, American-Style
Rick Porter is an anomaly in the scrap motor business in that his company, Rich Metals Co. (Davenport, Iowa), still processes larger motors domestically rather than shipping everything overseas.
For the past 30 years, his firm has specialized in processing AC and DC motors that are basketball-sized or larger, typically 10 hp or more. “We mostly process the motors that don’t lend themselves to export,” he says, explaining that international buyers typically want smaller, fractional motors. Rich Metals does export small units it receives in dealer loads of motors, but it keeps the larger ones to process itself.
In its process, the company first takes each motor out of its casing and removes the armature. “Then we get down to the stuff we have to do by hand,” he says. At this step, the firm uses “creative cutting” with torches and other tools to dismantle each motor. The task is easier said than done. “If you don’t know where to cut it and how to cut it, it’s not going to come apart,” Porter says, noting that his firm often receives larger motors that other processors have tried—and failed—to take apart.
After dismantling a motor, Rich Metals “cooks” certain parts in an environmentally approved furnace to remove any varnish insulation on the metal. The material is then ready for sale.
Kent Kiser is publisher and editor-in-chief of Scrap.