May/June 1992
Exporting scrap is a different breed of business than domestic scrap marketing, but one that can be equally rewarding. Here are the nuts and bolts of how export trade works.
BY KENT KISER
Kent Kiser is associate editor of Scrap Processing and Recycling.
To a scrap recycler that sells only to domestic consumers, the export business may seem complex, risky, and intimidating—and it can be. Dealing with foreign businesses, learning about international banking issues, and keeping up with overseas markets can be challenging and downright daunting. Scrap exports, however, can open up a whole new world of opportunities for domestic recyclers, once they learn a few exporting basics.
The bottom-line decision behind marketing scrap overseas—or anywhere—is to secure the best price available, which may be with foreign buyers. "This business is a game of nickels and dimes," notes one scrap export expert. "It's all a function of price."
Depending on the type of scrap, the proximity of a processor to domestic consumers, and international demand, the most nickels and dimes may be found with buyers who deal in yen, marks, or rupels. West Coast processors, for instance, can often send material cheaper to the Pacific Rim than to the Midwest . "Commodities flow like water, they move to where the openings are," says Warren Rosenfeld, president of Calbag Metals Co. (Portland , Ore.), a nonferrous scrap exporter. "The strategy," he explains, "is finding the best market for the commodity at any given time?"
Aside from price considerations, "the export market is a release valve for the oversupply of tonnage the domestic market can't handle," explains Steve Vento, president of the international division of William Goodman & Sons Inc. (Sunrise, Fla.), a scrap paper exporter. In addition, scrap firms may find rewards in exports when they process grades of material their local consumers aren't interested in.
In the United States , exporting also offers several benefits to the economy at large. "The export market puts pressure on domestic scrap consumers to be more competitive," notes Edward Hollander, a ferrous export merchant with Clarendon Ltd. (Glenview, Ill.), adding that scrap exports also "generate revenue to help offset our trade deficit." The United States may be a trade-deficit nation, but it's a net exporter of scrap. Metal scrap, in fact, is the leading oceanborne export cargo from the New York City/Newark, N.J. port, accounting for 1.8 million tons—or 75 percent—of the port's bulk exports.
Overall, U.S. exporters shipped 9,722,482 tons of ferrous scrap overseas in 1991, according to figures from the Department of Commerce. Paper exports from the United States totaled 6,597,708 tons last year, while exports of aluminum, copper, lead, and zinc came to 901,974 tons. U.S. stainless steel and alloy exports logged in at 544,489 tons in 1991.
Scrap exports are shipped from approximately 20 ports in the United States, including the East Coast ports of Baltimore; Boston; New York City/Newark, N.J.; Camden, N.J./Philadelphia; Norfolk, Va.; Savannah, Ga.; and Miami; the Gulf Coast ports of Tampa, Fla.; Houston, and New Orleans; and the West Coast ports of Los Angeles/Long Beach, Calif.; San Francisco/Oakland, Calif.; Seattle; and Portland, Ore. It has also become commonplace for steamship lines to transport material from inland processing sites to major loading ports using what they call "mini land bridges."
Sorting Through the Players
Although each scrap commodity has its own export idiosyncrasies, they all follow a basic formula: Move the material from a processing plant in one country to a consuming facility in another in exchange for payment. While a few large processing firms completely handle the transactions on their own, most scrap companies that export work with outside specialists, such as domestic and/or overseas merchants or brokers, overseas sales agents, freight forwarders, and ship charterers to help them get material from point A to point B. The number and type of export specialists brought into the process varies with every transaction, depending on the quantity and grade of scrap, the location of the processor and potential consumers, and each participant's expertise in the export arena.
A scrap firm that desires minimal involvement in export arrangements, for example, can sell its scrap to a domestic merchant or broker, who may deal exclusively with scrap exports or may serve both the domestic and foreign markets. (According to those who make the distinction, the difference between a merchant and a broker is that the former takes title to scrap while the latter technically doesn't; however, the two terms are often used interchangeably.) The merchant/broker may then work with commissioned sales agents in foreign countries, who help market the scrap and find consumers. The merchant/broker also may call on his or her foreign counterparts, who act as buying agents for overseas consumers. Or, the merchant/broker may sell the material directly to a foreign consumer, secure letters of credit—or other credit terms—and collect payment from the consumer.
A freight forwarder, working closely with the processor on the merchant/broker's behalf (or directly with the processor if a merchant/broker is not employed), secures shipping containers for the scrap, ensures that the scrap is loaded properly, and handles the paperwork related to dock receipts, freight bills, bills of lading, and other documents. The ship charterer, also working for the merchant/broker or processor, finds the most suitable and inexpensive vessel in which to ship the scrap. Scrap paper and nonferrous materials are usually shipped in containers, whereas most ferrous scrap is shipped in bulk and fed directly into a vessel's hold.
In addition to saving scrap shippers the headaches of hassling with reams of bank and export documents, export specialists can save recyclers the cost of devoting hours of staff time to securing sales, containers, and ship space. Furthermore, dealing with specialists enables recyclers to focus on their specialty—processing and brokering scrap—and avoid having to become experts in other areas. Chartering ships, for instance, "is like trading another commodity," Hollander points out. "You have to know how to negotiate with the shippers to get the best possible deals, and the business has its own set of nuances."
Avoiding Export Angst
There are no guarantees in the export market, veteran exporters say, but scrap shippers can take a few steps to improve their chances of success. If they decide to sell through a merchant/broker or sales agent, the experts recommend, they should investigate the firm's reputation and financial reliability. If they instead opt to handle some or all export transactions themselves, they should first explore the track record of their potential consumers, calling other processors or merchants/brokers that have sold to those consumers. "Markets are rarely secrets in our business," Rosenfeld says. "You do your homework and hope your credit department is getting good information on clients you're dealing with."
The fear of not getting paid could give an exporter sleepless nights, but the use of certain banking instruments—usually irrevocable letters of credit—allays most financial worries. An irrevocable letter of credit, which establishes the financial reliability of the overseas consumer, can be issued by a foreign bank and confirmed by a U.S. bank, or issued and confirmed by a U.S. bank on behalf of the foreign consumer. Such a letter virtually guarantees payment to the seller—whether it be a processor, merchant, or broker—and basically eliminates the possibility of cancellation of the order prior to payment. The seller can usually get paid upon presenting shipping documents to the bank advising the credit.
Since letters of credit and other banking instruments carry administrative and risk costs that must be paid by both parties and reflected in the sales price, it's in the consumer's—and the seller's—best interest to establish more lenient payment arrangements such as cash-against-documents (cad) agreements. Under such terms, the exporter bills the consumer for an order upon providing proof-of-shipment documents, and the consumer is obligated to pay immediately.
Although this payment method circumvents the costs associated with letters of credit while ensuring prompt payment for the seller and shipment assurance for the consumer, because its riskier than an irrevocable letter of credit, exporters usually sell on a cad basis only to their most reliable, long-term consumers. "You have to be conservative in the beginning," Rosenfeld says, "but as you get to know the consumer, you're more willing to negotiate payment terms."
Building relationships with consumers and keeping in close communication with them can help smooth export operations in other ways as well. "We try to visit every consumer at least once a year, sometimes twice," Rosenfeld says. "Unless you make the investment in seeing how your consumer handles your material, it's not likely that you'll develop long-term business." Such visits enhance communication between the processor and consumer, establish a friendly rapport, and help the processor maintain a solid grasp on what the consumer needs.
That last item can be particularly critical in the export business, especially as it relates to quality. While it's devastating enough to have a load rejected or downgraded by a local consumer, when quality problems arise halfway around the world the impact may be that much harder.
No matter how many measures exporters take to ensure quality packages that meet specified grades and weights, however, disputes and claims do occasionally arise. Predicting when and where such problems might show up has little to do with the particular importing nation, Rosenfeld points out. "The difficulties in sales are usually customer-specific," he says, "not country-specific. If you ship what the consumer is expecting and what the contract specifies, there's usually not a problem." Some claims can be avoided by having shipments inspected by a consumer representative at the loading port. When disputes or claims do occur, they can be resolved by the parties themselves or through arbitration services, such as those offered by the American Arbitration Association (New York City) or the Institute of Scrap Recycling Industries (Washington, D.C.).
The uncertainty that can come from dealing with foreign countries also causes problems at times, exporters say. For example, "There's always the chance that the overseas buyer may not take delivery due to extenuating circumstances," says Irving Ehrenhaus, a nonferrous scrap broker with Glenrich Metals International Inc. (Forest Hills, N.Y.). He recounts an incident in which India doubled its customs duty on copper scrap overnight, which meant that Indian consumers would lose money on incoming shipments. As a countermeasure, many of these consumers didn't open their letters of credit on those purchases, which forced the merchants and brokers that sold the material to resell it elsewhere at a loss.
Another concern—especially for scrap paper exporters—is obtaining shipping containers and securing space on vessels. Since paper is one of the lowest-paying commodity for freight companies, they prefer to ship more profitable materials first, Vento says. In a depressed export shipping market, paper exporters have little trouble finding vessel space, but in a strong market, the availability of both containers and freight space is harder to find. In addition, hard times in the freight industry have prompted some shippers to merge and share vessels, which has further reduced the overall vessel space available.
Monitoring the International Market
Exporting is an international endeavor, so scrap exporters must constantly keep an eye on worldwide trade issues and political activities related to recycling, such as the Basel Convention on the Control of Transboundary Movement of Hazardous and Other Wastes, which establishes prior notification and consent requirement on the trade of undefined "hazardous and other wastes" and prohibits the movement of such material between countries that have ratified the convention and those that haven't. At first, the convention, which became effective May 5, seemed to be a life-threatening challenge to international scrap trade, but U.S. scrap exporters say the accord now appears less threatening in light of the "green/amber/red" definitions by the Organization for Economic Cooperation and Development (OECD).
Under the OECD plan, virtually all scrap materials are defined as nonhazardous and fall in the green category, allowing free trade with no restrictions. "Potentially hazardous" scrap—such as lead-acid batteries—is classified in the amber category and would require approval from the receiving nation in advance of shipment. Only unquestionably dangerous materials would be assigned to the red list and be severely restricted or banned from international trade. Even with the OECD proposal, however, exporters still fear that some foreign markets—including large scrap consumers in the Pacific Rim —could be lost or impinged if the consuming country doesn't ratify the convention.
To prosper in the export business, scrap exporters must also vigilantly keep up with the ever-changing overseas markets. In addition to monitoring the Reuters and Knight-Ridder news wires, Rosenfeld says his firm has a huge subscription budget that encompasses such publications as the Wall Street Journal, the New York Times, the Economist, East Asia Trade, and weekly newspapers from several foreign countries. "We're newshounds," he says, adding that "this business is about knowing a lot of things that go on in the world." Peter Mason, vice president of Ireland Alloys Inc. (Houston), an exporter of stainless steel and high-temperature alloys, says, "Every publication relating to the scrap industry and all the faxes we get from overseas come across my desk. We have a worldwide perspective of what's going on daily." Others say that their constant telephone conversations with overseas consumers are their best information resource. "More than anything, this business requires patience, good listening ability, and an incredible amount of thoroughness," Rosenfeld offers.
To Export, or Not to Export
Exporting is surely not for all scrap recyclers. If a processor has adequate domestic consumers in its area or is not easily accessible to ports, for example, there's little incentive to become an exporter. In addition, a processor may not want to bear the financial burden that export credit terms can create. "You become like a bank," Vento says. Scrap companies that do aspire to become exporters, however, must seriously consider the corporate pros and cons of the endeavor. "You've got to decide if exporting is the best way to spend your resources," Rosenfeld advises. "It's a management decision."
For those firms that understand the basics and are willing to take the gamble, the world becomes their marketplace, filled with exciting opportunities. After decades in the export business, Mason still asserts, "It's always interesting and it's always a challenge."
Advice From Uncle Sam
The Department of Commerce operates a Trade Information Center that offers information on federal programs to assist U.S. exporters, including export counseling, international market research, foreign trade contacts and trade leads, export financing, and advice on documentation and licensing requirements. The center also maintains a National Trade Data Bank and keeps track of upcoming conferences, trade shows, and fairs in the United States and overseas.
Trade specialists are available weekdays from 8:30 a.m. to 6 p.m. , Eastern Time, at 800/872-8723. A free brochure titled "Export Programs: A Business Directory of U.S. Government Resources" is also available. —K.K.
Exporting scrap is a different breed of business than domestic scrap marketing, but one that can be equally rewarding. Here are the nuts and bolts of how export trade works.