September/October 1996
Scrap generators, processors, brokers, and consumers have been finding benefits relating in new (and not so new) ways, such as sole supplier and scrap management arrangements. Here’s a look at these different avenues and where they could be taking the industry.
At the most basic level, scrap generators, processors, brokers, and consumers relate in straightforward buy-and-sell relationships: The generator produces scrap. Various processors bid on it, with one eventually buying and processing it. A broker, if there is one in the transaction, buys it from the processor. And, finally, one of the many consumers that can use the processed material purchases it and transforms it into a new product.
While this basic linear approach is still commonplace, new business demands are altering these relationships—and sending scrap on different paths. Some consumers, for instance, rely exclusively on one processor to serve all their scrap needs, from buying to processing to blending. Likewise, there are generators that funnel all their scrap through a single processor. Other generators and consumers, meanwhile, have detoured into the processing side of the business.
Some of these varied routes have historical precedent, of course. But more and more scrap seems to be moving in new directions than ever before. And with industry participants facing intensifying competition and a growing emphasis on quality, cost reduction, and service, it’s likely that they’ll continue to explore different avenues in the future.
Getting Exclusive
When it comes to purchasing scrap, most consumers are do-it-yourselfers. That is, they rely on an in-house raw material department to buy the necessary quantity and quality of scrap for their operations at the right price.
Many consumers, however, have opted to “outsource” some or all of their scrap buying activities, forging exclusive—and often long-term—supply and purchasing agreements with individual scrap companies.
Examples of such arrangements abound. In the ferrous realm, David J. Joseph Co. (Cincinnati) and OmniSource Corp. (Fort Wayne, Ind.) serve as exclusive purchasing agents/brokers for a handful of steelmakers, while Tube City Inc. (King of Prussia, Pa.) is the sole scrap purchaser for Pennsylvania Steel Technologies (Steelton, Pa.). On the nonferrous side, Calbag Metals Co. (Portland, Ore.) supplies all aluminum scrap (except UBCs) to Columbia Aluminum Recycling Corp., a Portland-based secondary aluminum smelter. In the paper sector, Newark Group (Cranford, N.J.) is the sole source of secondary fiber to International Recycling Corp.’s (Quincy, Mass.) deinked market pulp mill in Fitchburg, Mass. And there are dozens of similar arrangements.
Though the details of such orchestrations vary, the consumer generally contracts the processor or broker to be the exclusive supplier or purchaser of a specified quantity and quality of scrap per day, week, or month. For these services, the consumer pays the processor the cost of the material, plus freight and a negotiated per-pound or per-ton commission.
Gaining Momentum
In addition to exclusive supply arrangements, scrap generators and consumers have found benefit in establishing scrap management contracts with processors and brokers. Clearly, says Stephen Wulff, vice president of planning for David J. Joseph Co.’s ferrous division, “The use of outside experts for scrap management has become more widespread.”
In contrast to sole supplier relationships, scrap management agreements usually require the processor to be “inside the gate” at the generator’s or consumer’s plant, conducting some type of physical operation on-site, says Wulff, pointing out that “there’s a wide spectrum of services that people call scrap management.”
At the most basic level, a scrap manager may be responsible for simply handling incoming or outgoing scrap for a generator or consumer. In a step up from that, a scrap manager assumes processing, sales, and/or purchasing duties in addition to the material handling requirements.
In their most complex form, scrap management contracts require the processor to offer specialized services such as blending scrap to meet a particular consuming specification or providing comprehensive recycling services. Simsmetal America (Richmond, Calif.), for instance, manages the entire stream of recyclables for a number of its customers, says Alan Ratner, executive vice president, noting that this often means handling not only metal scrap but also such items as paper, glass, and plastics.
Of course, every customer’s needs are different and, thus, so are the services Simsmetal provides, he points out. “For a company producing 10 tons of HMS a month, a drop box may be fine,” he says. “Then you have another company, a large utility or manufacturer, that requires a whole range of services, such as environmental services, partnering on legislative items of mutual interest, maybe even commercial bonding and guaranteed destruction of product.” Being able to provide the resources and experience to handle these with credibility “can almost be more important than price,” he states.
On the scrap generation side, scrap management arrangements have been most obvious in the automotive industry. Late last year, for instance, Ford Motor Co. (Dearborn, Mich.) selected seven processing firms and one scrap consortium to manage the ferrous and nonferrous scrap generated at its North American production plants in nine regions, primarily the Midwest.
One of Ford’s scrap partners is OmniSource, which also serves as the scrap manager of a handful of Chrysler Corp.’s (Detroit) stamping and machining operations. (In all, OmniSource has scrap management arrangements with about 20 major ferrous and nonferrous generators and consumers across the country, according to Danny Rifkin, the firm’s executive vice president.)
On the consuming side, scrap management contracts seem to be most pervasive in the steelmaking sector. In some situations, a processor is contracted to manage a mill-owned scrap operation on-site or adjacent to the steelmaker’s melt shop.
In other cases, a processor owns and operates a plant near or next to the steelmaker to exclusively supply that consumer. Such is the case with Gallatin Mill Services, which owns and operates a scrap operation adjacent to Gallatin Steel Co. (Carrollton, Ky.), managing all inbound scrap receipts as well as handling the mill’s finished products.
In yet other instances, a processor operates a remote plant that is owned by the steelmaker and dedicated to meeting its scrap needs. Simsmetal America, for instance, runs Richmond Steel Recycling Ltd. (Richmond, British Columbia), a scrap operation owned by a subsidiary of Birmingham Steel Corp. (Birmingham, Ala.) that primarily supplies the firm’s mill in Seattle.
In contrast to predominantly commission-based supplier and purchasing agent contracts, scrap management compensation arrangements are structured in a variety of ways, including a flat monthly fee, a per-pound or per-ton handling fee, a commission based on the amount of product made by the consumer, a share of the operational savings realized by the consumer, and more. “There’s no standard approach to these arrangements,” says Rifkin. “The structure is unique to the situation.”
Enjoying the Benefits
For scrap processors and brokers, there are several advantages to exclusive supplier and scrap management contracts.
For one, such arrangements give processors a secure scrap source or consuming outlet, which affords them a predefined idea of their financial return, insulates them to a degree from price swings, and gives them the stability and confidence to make investments.
For Calbag Metals, it was just such a desire that led the company to develop sole supplier relationships, explains Warren Rosenfeld, president, noting that fundamental changes in price behavior have made the scrap processing business more risky and volatile than ever before. “Now you’ve got to act like a manufacturing company and make a product every day,” he says. “You can’t ride some market price expectation.”
Such arrangements can also give processors a locked-in competitive advantage in the market by giving them control of more material and increased buying power. “Having a substantial tonnage under management can provide benefits over time, creating access to a wider range of markets because of volume that might not otherwise be available on a smaller scale,” Rifkin says.
Further, exclusive arrangements can put processors and brokers on the inside track for additional opportunities with the generator or consumer.
For generators and consumers, outsourcing scrap-related functions enables them to focus more on their core business. “Take the example of a steelmaker that hires a recycler dedicated to providing a good product, taking its feedstock all the way up to the melt, creating its charges,” says Ratner. “A lot of companies believe this frees them up to concentrate on their core business, which is making high-quality steel, and not on the peripherals. From my point of view, a steelmaker spending time worrying about handling scrap efficiently and shipping it rather than focusing on its core business is not making the best use of its time. There are plenty of companies available to do a fine job in those areas.”
By farming out their scrap functions, generators and consumers also can glean market advantages thanks to the processor’s scrap expertise. “We bring extensive market coverage and knowledge to the sourcing of scrap for our steel consumers,” says Wulff. With 40-plus traders buying ferrous scrap all over the world, he notes, Joseph Co.’s “coverage of the marketplace is going to be much more complete than the coverage that even a fairly heavily staffed purchasing department at a steel mill could provide.”
Scrap managers can help generators and consumers in other ways as well, notably by helping them improve their operating efficiency and reduce their scrap costs. Ford, for instance, reports that it hired scrap managers to help it establish better control over its scrap stream, maximize the reuse of these resources, and, as such, contain its raw material costs. And Joseph Co. has been able to help its steel consumers reduce their scrap costs and establish better control over their melting operations, which can mean fewer missed heats, fewer operational hiccups, and, thus, greater efficiency and productivity, according to Wulff.
Growing quality concerns and the spread of responsibility down layer after layer of suppliers have also contributed to the emergence of long-term and exclusive supplier agreements. “The fact is, when you are running huge, capital-intensive plants, you can’t be down, so consistency in quality in delivery is what consumers are looking for,” Rosenfeld explains. And, he says, “consumers are now learning they can pick up value with scrap if assured that quality and consistency are there.”
Consumers, in particular, may also need to lock in supply via long-term contracts to secure financing for expansion or, as in the steel industry, alleviate some of the “air of urgency and concern for availability in the scrap market because of all the new capacity,” Wulff says, noting, “Mills are seeking to satisfy some percentage of their ongoing requirements with material that is committed to them. That helps them sleep better at night.”
Weighing the Disadvantages
Beyond these positives are a variety of drawbacks to exclusive supplier and scrap management arrangements.
For processors and brokers not in on the deal, for example, each exclusive arrangement can represent a lost opportunity.
Even for those in on the deal, the security and stability of exclusive arrangements can preclude “the chance for windfall profits due to huge commodity swings and guessing right,” Rosenfeld says. “We don’t get to appreciate any of that in these deals.”
And the fierce competition for market share can make exclusive arrangements less than ideal. “Sometimes in these contracts, business is so competitive that the eventual winner ends up doing it at a very thin margin,” says one Midwest processing executive who declined to be identified. “I don’t necessarily disagree. In the scrap business, there’s an adage that if you don’t have the material, you don’t have the opportunity. Many times we go into deals on thin margins, hoping it pays off.”
Further, if a processor or broker in an exclusive deal “is viewed as too closely aligned with a particular customer, others may not want to do business with them,” says Phil Alpert, a partner with National Fiber Supply Co. (Chicago).
For generators and consumers, exclusive supplier and scrap management arrangements could, over time, mean they receive less information from others about what’s going on in the market. “It can be uncomfortable for a purchasing manager to rely on one company to tell him about the market,” Wulff says.
And since scrap recyclers are human like everyone else, there’s always the chance they could miss a deal or overlook a development in the marketplace to the detriment of the customer.
Further, generators and consumers give up an important degree of flexibility when they enter into long-term exclusive arrangements, cautions the Midwest processing executive. “I feel that most large companies with lots of scrap are better off keeping their options open in terms of selling scrap,” he says, noting that the market changes “and what works for six months or a year may not work later.”
And he expresses disbelief that consumers are willing to turn over something as important as scrap acquisition to an outside firm. “Raw material is one of the most important elements that goes into a product and many times it’s overlooked in terms of who manages it,” he states. “If I were a consumer, I’d hire an expert in raw materials to do my own sourcing. I wouldn’t turn it over to anybody outside.”
One final caveat is that exclusive supplier and scrap management arrangements simply aren’t appropriate in every situation, Rifkin points out. There might not be enough volume to merit such a relationship, for example, or it may not be practical for geographic reasons. Further, the generator or consumer might even “already be doing the job as well as it can be done,” he notes.
These drawbacks aside, however, most recyclers emphasize the positives of exclusive supplier and scrap management arrangements. “If implemented correctly and the parties are working together, I generally only see benefits,” says Ratner. And most expect the trend toward long-term and exclusive relationships to continue. “I think they’re here to stay,” he says.
Doing It Yourself
While some generators and consumers have been busy outsourcing their scrap-related functions, others have been doing the opposite, taking scrap matters into their own hands by dealing directly with scrap sources—and, thus, bypassing processors—as well as by becoming processors in their own right.
Take Weyerhaeuser Co. (Tacoma, Wash.). In 1974, the huge paper products company opened its first paper recycling operation. By 1984, it operated 10 processing plants, and a decade later—in 1994—it had 22. Since then, Weyerhaeuser has been on an acquisition and building spree to the point where, now, it operates 40 plants in North America that recycle more than 4 million tons of secondary fiber, half of which the firm consumes in its own mills. And other paper makers such as Jefferson Smurfit Corp. (St. Louis) and Sonoco Products Co. (Hartsville, S.C.) have similarly expanded their own recycling operations in recent years.
On the metals side, some steel mills such as Chaparral Steel Co. (Midlothian, Texas) and Bayou Steel Corp. (LaPlace, La.) have operated shredders for years.
Likewise, North Star Steel Co. (Minneapolis) has had its own scrap processing division—North Star Recycling Co.—for about the past 15 years. This division, which supplies about 25 percent of the steelmaker’s ferrous scrap demands, manages on-site scrap operations at two of the company’s mills, as well as four processing facilities separate from its mills.
In a similar vein, Co-Steel Lasco, a Whitby, Ontario-based steelmaker, has all of its scrap needs met by Co-Steel Recycling, its scrap recycling division, which processes 1.2 million tons of ferrous and nonferrous scrap a year at six locations in Ontario and one in Buffalo, N.Y.
Though such consumer-operated scrap divisions are still “fairly rare,” more steelmakers have expressed interest in them, says Jim Jonasen, vice president and general manager of North Star Recycling. Take Birmingham Steel, which announced this summer that it plans to build a greenfield ferrous scrap processing plant in the lower Mississippi River region to exclusively serve its mills in Birmingham; Jackson, Miss.; Kankakee, Ill.; and Memphis.
Whether you’re talking paper or steel, consumers have similar reasons for venturing into scrap processing. One is to gain broader and more secure access to scrap—especially during supply squeezes. According to Wulff, such backward integration is “another strategic approach that some consumers are taking to try to address the supply urgency in the scrap market.” In the steel market, in particular, he says, the thought behind such ventures is “if I build it, the scrap will come.” But such operations won’t necessarily expand the available supply and could end up simply creating more competition for material in the market, he states.
Consumers are also becoming processors to “control the quality of their raw material a little bit better and buy the scrap, process it, and deliver it to their mill at a cheaper price than they could buy on the outside,” Jonasen says.
There’s also a definite do-it-yourself—as well as a profit-focused—mentality involved. As Jonasen asserts, “We don’t feel we need to pay a broker a fee to go out and buy scrap for us. We have a pretty good feel for the market, so we feel we can buy as competitively as large brokers are able to do.” And on the topic of profits, Terry Newman, vice president and general manager of Co-Steel Lasco and Co-Steel Recycling, asserts, “We’re very encouraged in that scrap could be as good if not better a profit producer for us than our steel mills.”
Far from being limited to consumers, some scrap generators have also gotten in on the scrap processing act, establishing their own scrap divisions—usually called “investment recovery” centers—to process and market their surplus and obsolete material. Florida Power & Light Co. (Miami), for one, has operated a wire and cable chopping operation in West Palm Beach since 1981, and over the years has become the clearinghouse for any and all of the utility’s scrap. Asked why the utility has opted to become its own scrap processor, Dennis Merchant, supervisor, replies, “Our company likes to get that little bit of profit margin versus just selling the material outright.”
Other utilities that have similar investment recovery operations include New York State Electric & Gas Corp. (Binghamton, N.Y.), Niagara-Mohawk (Syracuse, N.Y.), and Florida Power Corp. (St. Petersburg, Fla.), though each differs in how much processing—if any—it does.
Heading Down the Road
If nothing else, these examples show that generators, processors, brokers, and consumers are relating in new—and some not so new—ways in an effort to respond to each other’s changing needs and remain competitive.
So where are the recycling relationships of the future heading?
The general trend seems to be away from arm’s-length, buy-sell interactions and toward more cooperative, partnering types of relationships. Price, though important, is hardly the be-all and end-all it used to be, as service and quality have risen steadily to match it. And there appears to be a shifting emphasis from short-term gain to long-term stability as a hedge against market fluctuations and competitive threats.
Though the road ahead is always unclear, these appear to be the relationship signs to watch. And the challenge will be to adapt to these changing dynamics—and somehow enjoy the ride. •
—Kent Kiser, managing editor of Scrap, and Jeff Borsecnik, a former associate editor of Scrap and now a writer based in Seattle