July/August 1989
Optimism About Business Continues
By Robert J. Garino
Robert J. Garino is director of commodities at the Institute of Scrap Recycling Industries, Washington, D.C.
As the results of Scrap Processing and Recycling's 1989 Business Survey were being tabulated at the start of the second quarter, the U.S. economy was enjoying its seventh year of virtually uninterrupted growth and expansion. Although lagging some of the increases posted by other businesses and industrial firms, the scrap metallics and nonmetallics industries were positively participating in this longest-ever peacetime expansion--especially fervent in the past three years. For many, 1988 was one of the best years ever. Profits were up and, as our survey uncovered, equipment spending also was up.
Some Macroeconomic Considerations
How good was 1988 for most U.S. businesses? Corporate profits, as measured by the Commerce Department, were up 14.6 percent for all of last year. The 1988 increase was, in fact, the biggest jump since a 22.4-percent postrecession hike in 1983. In addition, the nation's gross national product (GNP) grew at 3.9 percent for all of 1988-the best showing since the 6.8-percent increase recorded in 1984.
While the 1989 Business Survey also uncovered some doubts about anticipated business conditions for 1989 and beyond, it found that capital spending was up noticeably over the previous year. "These are the good days. Let's hope they last the decade," quipped one major equipment manufacturer at the Institute of Scrap Recycling Industries' (ISRI) annual convention and exposition, held in Los Angeles in March.
Setting the stage for what the business community is expecting in 1989 and beyond is its perception of the current state of health of the U.S. and world economies. In the first quarter of 1989, data released by private and government economists seem to confirm that consumer spending, business investment, housing construction, and government spending are increasing more slowly than in 1988.
In 1989, the picture is indeed different--hence some uneasiness. First-quarter GNP figures indicated that the economy is cooling off. Preliminary numbers note that the U.S. economy slowed to a modest 3.0-percent annual rate in the first quarter, down from 3.5 percent in the fourth quarter of last year. Nevertheless, it is generally believed that there is substantial momentum built into the U.S. economy and that, while slower, the business climate remains sound and healthy
The question being mulled over by the business community during the first quarter of 1989 was, Is a recession on the horizon or (as in 1986) are we taking a short, temporary breather? According to our survey, ReMA members, at least, seem to favor the latter scenario. This view also was expressed by the majority of other U.S. industries. According to recent Commerce Department data, companies report that they plan to increase their outlays for new plants and equipment by 9.1 percent in 1989, to $469 billion, slightly lower than the 10.3-percent increase recorded in 1988. But what about ReMA members?
1989 Survey Breakdown
In the survey, we asked what types of equipment were purchased in 1988 and what purchasing plans were made for 1989. The questionnaire was mailed in February to approximately 1,700 firms--encompassing all active, associate, and foreign ReMA members. More than 220 firms responded, a response rate of approximately 13 percent.
Responses came from 40 states and five countries.
There is no assurance that the responses reflect the overall ReMA membership. Indeed, comparisons of certain results with known industry statistics suggest that, at least for these data, the respondents may not be typical.
The summary tables that follow use arithmetic averages, or means, in tallying results. Where applicable, medians also were used to help clarify some of the totals.
To find out who was buying what equipment, members were asked first to declare whether they were scrap processors, domestic brokers, importers/exporters, consumer/manufacturers, or "other."
This tabulation differs slightly from our understanding of the ReMA membership as a whole. According to membership information, for example, 6 percent declare themselves consumers, 49 percent are listed as ferrous, 37 percent as nonferrous, and 7.5 percent as paper stock. ReMA does not have distinct categories for processors, brokers, or importers/exporters. Thus, for example, brokers and importers/exporters may be found in any of the above ReMA membership categories.
Scrap Processors Examined
Taking a closer look at the scrap materials handled by processors (the largest number of respondents), ferrous scrap was the principal scrap metal in terms of total tonnage, followed by nonferrous metals, nickel/stainless steel/high-temperature alloys, and waste paper/paper stock. Among the nonferrous metals, aluminum scrap ranked highest, followed by lead batteries and copper. It should be noted, however, that significant nonferrous tonnages were not broken down by individual commodity, but rather were reported as "base metals-nonferrous."
Almost unchanged from the 1988 survey was the number of employees per firm among respondents. In 1988, processors averaged 49 employees per plant, and in 1989 the figure was 45. However, the range among individual responses was wide--from more than 700 employees per firm to less than 5. Thus, for 1989, the median employment figure of 24 is probably most representative.
Expenditures in '88 and '89
Forty-one percent of the responding processors reported total equipment purchases of less than $100,000 last year, and only 6 percent indicated that 1988 purchases were more than $1 million. For 1989, 56 percent indicated that they had either purchased, ordered, or planned to buy less than $ 100,000 worth of equipment, and 7 percent either purchased, ordered, or planned to spend between $1 million and $5 million. This is apparently a vote of confidence for growth in the U.S. economy this year.
We also asked firms to tell us their equipment investment in total dollars. Processors responded with an average investment of $5.4 million per facility, for a total of more than $740 million. Expanding this number to include all ReMA members, with the broad assumption that approximately 70 percent are processors, this industry would have an estimated combined equipment investment of $6.5 billion-and that does not include those firms identified as multifaceted or consumer/manufacturers. Our 1988 survey also showed that those two groups are very capital-intensive, with the latter at the top of the list.
As for 1990, the principal planned purchases reported in the survey were, again, less than $100,000 (45 percent of those answering the question checked this category) but, perhaps significantly, 8 percent said they plan on buying equipment ranging from $1 million to more than $5 million. In our 1988 survey, only 4 percent said they actually purchased equipment with a price tag in excess of $1 million.
Types of Equipment Purchased, Planned
Processors purchased a myriad of kinds of processing equipment last year. Our survey itemized 19 examples; respondees added 18 more. The 10 most often cited items were trailers, forklift trucks, cranes, tractors, roll-off trailers, trucks, magnets, balers, conveyors, and front-end loaders. Trailers were the item most frequently checked. Among the ones listed in the "other" category, processors noted that they purchased roll-off boxes, can recycling equipment, containers, plasma cutters, pumps, and densifiers.
In 1989, capital and expense plans call for more trailers, roll-off trailers, tractors, forklift trucks, and trucks--the top five choices. Under "other," roll-off boxes were identified most often, followed by scales, grapples, and densifiers.
Environmental Impacts
We also asked processors what specific types of equipment they had to invest in during 1988 as a result of environmental regulations. More than 80 percent of the processors responded with a variety of answers, ranging from dust collectors, cement pads and drainage systems, and cyclones to new sweat furnaces and monitoring equipment. Those choosing to respond to the costs of environmentally related equipment put the number at only $1.6 million. However, only 34 companies out of 158 assigned a specific dollar amount.
It appears that processors anticipate additional purchases of environment-related equipment this year, albeit less than half said yes. One who did reply simply wrote, "one lawyer."
The Processor's View of 1989, 1990
How do processors view the outlook for their segment of the scrap industry in 1989 and beyond? Given the choice of "excellent," "good," "moderate," and "poor," 68 percent of the processors believe this year will be at least as good as 1988, while 21 percent believe that business in 1989 will be excellent. No one felt that 1989 would turn out to be a poor year and only 11 percent responded with a "moderate" outlook.
Comments on 1990 ranged from "We view 1990 to be another good year, and anticipate a further increase in our turnover" to "No idea" to "I expect business conditions in our industry to gradually deteriorate from moderate to poor throughout the year." The majority of comments were generally favorable about next year, however, processors expressing concern most often cited macroeconomic conditions and environmental regulations as major issues to be factored in for the near term. As one commented, "[It] depends on the overall economic health of the nation and the world. We expect somewhat of a downturn and/or recession in late 1989 into 1990." With respect to environmental issues, another offered: "The most serious threat to our business and the industry in general is the potential cleanup for 'acceptable' processing methods of years ago."
Consumer/Manufacturing Spending Up in 1988
While consumers/manufacturers rank low in terms of absolute numbers (5 percent of the survey respondees), this group is the most important in terms of average equipment investment.
In terms of tonnages, they handle mostly waste paper/paper stock, closely followed by aluminum, copper, other nonferrous metals, and lead batteries. This group also averages considerably more employees per firm, with several firms reporting a total employment in excess of 1,000. However, many of these employees are not directly related to the recycling portion of the business and, for some ReMA members, recycling is not their core business. (An example of this is an integrated aluminum producer.)
In 1988, 44 percent of the consumers/manufacturers responding purchased equipment in the $100,001-$250,000 category in 1988. This compares with 22 percent of processors' and 22 percent of multifaceted plants' purchases in this category. This year the group appears to have slightly tempered its spending plans with roughly one-third of the total ordered or planned equipment purchases less than $100,000. While that may suggest some spending conservatism in 1989, plans for 1990 are more ambitious. According to our survey, the largest number of respondees in the consumer/manufacturer category (38 percent) checked off the $250,001-$500,000 range.
Consumers/manufacturers were big buyers of forklift trucks, computers, balers, and front-end loaders in 1988. In addition, companies also listed furnaces (reverberatory and rotary), crushers, and dryers. This year this group expects to purchase more computers, forklift trucks, balers, and pollution-control systems.
Equipment purchases as a result of environmental regulations appear to have hit this group the hardest, with an average expenditure of more than $460,000 per respondent. Individual responses included bag house, chlorination system, and crusher/dryer, among others. In addition, nearly 90 percent anticipate additional environment-related purchases in 1990. This compares with 59 percent of the multifaceted group and 48 percent of the processors, both of which also anticipate added expenditures.
Consumers/manufacturers are optimistic about 1989, with 64 percent believing that business will be at least as good as in 1988 and 36 percent possessing a "moderate" outlook. (No one responded "poor" or "excellent.") This view generally carried over to 1990 as well. Comments included: "moderate to poor," "depends on economy," and continued good."
Multifaceted Firms Optimistic about '89
"Multifaceted" refers to operations conducting business in more than one category, e.g., processor/broker, processor/consumer. They represent nearly 20 percent of the survey respondents.
Major scrap materials handled last year and this year by this group include ferrous scrap, waste paper/ paper stock, aluminum, nonferrous metals, and nickel/stainless steel/ high-temperature alloys. This group is the largest handler of glass and plastic scrap. The median employment per firm was 40; the average was 71.
Last year's equipment purchases were spread over all categories, however, one-third of the expenditures were classified as "under $100,000." Nevertheless, this group was the biggest spender in the $1 million-and-more category, with more than 20 percent admitting to purchases of more than $1 million in 1988. This basic pattern of responses was repeated for 1989 and 1990. In 1990, for example, 29 percent are planning on expenditures of less than $100,000, but 14 percent are looking at $1 million and more.
As with processors, multifaceted firms purchased a wide variety of equipment last year. Most often cited were trailers, forklift trucks, cranes, and computers. Some big-ticket items included shredders, shears, furnaces, scales, and pollution-control systems. This year, this group is planning to buy more trailers, tractors, cranes, forklift trucks, pollution-control systems, and front-end loaders.
Environmental regulations played an important role in investment plans for this group last year. Items listed include systems for dust collection and oil separation, radiation detection equipment, concrete drainage, bag houses, and an after-burner and a cyclone for a turnings dryer. Nearly 60 percent anticipate additional environment-related expenses in 1990.
The majority of the multifaceted group (47 percent) believes that 1989 will be good and 33 percent responded "excellent." In fact, this group was the most optimistic about '89 business prospects. What about 1990? Comments received were widely divergent and included everything from "excellent" to "a recession is coming." In spite of a slight reserve detected in the majority of comments received, they were positive about 1990.
Brokers, Importers/Exporters Summarized
If we combine the last two survey categories, domestic brokers and importers/exporters, ferrous materials topped the list of scrap handled. This was followed by waste paper/paper stock, nickel/stainless steel/high-temperature alloys, and nonferrous metals. Among the nonferrous metals, aluminum and zinc were the most prevalent.
Brokers noted that scrap plastics played an important part of their 1988 scrap volume. In terms of actual tonnage, it ranked fifth highest, trailing waste paper/paper stock, ferrous scrap, nickel/stainless steel/high-temperature alloys, and aluminum used beverage cans. Even more interesting was that, according to estimated 1989 volumes, plastics are expected to move up to third place (still trailing waste paper/paper stock and ferrous scrap). Apparently, those responding are not considering glass in 1989.
These two groups are not capital-intensive and tend to be relatively small operations in terms of number of employees--averaging 10 and 7, respectively. Brokers, however, do buy considerably more different types of equipment than do importers/exporters. Brokers noted purchases of containers, trailers, tractors, and other processing equipment, which suggests that this group has a very broad conception of the function of broker. Importers/exporters, the survey revealed, are planning to buy more computers.
Brokers and importers/exporters had similar 1989 outlooks, with most responding "good" for 1989. As for 1990, paper stock brokers and importers/exporters had the most positive expectations.
Overall Analysis
In analyzing the 1988 survey results, we concluded that this industry was confidently investing for the long term. That sentiment still exists in 1989 and may even be stronger, judging by the types of equipment investments and the dollar amounts committed.
Long-term capital investment decisions are being made with full knowledge that questions remain about economic growth and impending industry problems. Though both questionable growth and industry difficulties could have serious long-term implications, optimism--and equipment purchasing--in the scrap recycling industry prevails.•
As the results of Scrap Processing and Recycling's 1989 Business Survey were being tabulated at the start of the second quarter, the U.S. economy was enjoying its seventh year of virtually uninterrupted growth and expansion.