September/October 2010
Scrap companies have taken their hits during the economic crisis of the past two years and emerged shaken but resilient. Here’s a look at the inventory, personnel, and money management strategies they’ve used to keep their footing.
By Jim Fowler
“The worst. Shocking. … Like we fell off a cliff.”
“A once-in-a-lifetime event.”
“Nothing in my 40 years in the scrap industry had been as severe as 2008.”
Those recollections—from Rob Bakotich of Ferrous Processing & Trading Co. (Detroit), Joel Denbo of Tennessee Valley Recycling (Decatur, Ga.), and Cap Grossman of Grossman Iron & Steel Co. (St. Louis), respectively—capture the mood of the scrap industry in fall 2008.
What happened that fall was beyond this industry’s usual ups and downs. From 2002 to mid-2008, most scrap commodities grew rapidly in value, hitting some all-time highs. That, plus the emergence of China and its seemingly insatiable appetite for scrap, had some talking of “supercycles” and a new industry paradigm. Many scrap veterans say they knew better. They knew the good times eventually would come to an end; it was just a question of when. What no one predicted was that the scrap market, instead of entering a cyclical decline, would get blindsided by the biggest economic collapse since the Great Depression. Though the recession officially began in December 2007, most scrap companies saw the impact in September 2008, when prices dropped precipitously, credit dried up, and markets disappeared more quickly than you can say reneged contract. “It was the first time in my business career that you couldn’t sell at any price—there were just no takers,” Denbo says.
Two years later, the scrap industry is shaken but resilient. Some companies did not survive, but most did. They weathered the economic storm by sharply cutting expenses, increasing efficiency, and managing their money carefully, among other strategies. Just as the Great Depression of the 1920s and ’30s shaped their parents’ and grandparents’ business outlook, these scrap processors and traders will likely long remember the approaches they used to cope with the recession of 2008.
Managing Inventory
When Larry Odle of Rocky Mountain Recycling (Commerce City, Colo.) recognized that the market was on its way down, the first thing he did was sell into it, he says. “We aggressively sold while the market was collapsing, took our lumps early, and cleaned up our inventory to avoid the unknown future, potentially larger, hits.”
Odle’s philosophy is that “your first sale is your best sale.” Don’t think about how much you paid for the material, he adds. “It’s [worth] what it’s worth today.” If the company didn’t sell, he adds, it “wouldn’t have the cash to buy the next deal.” Edward Arnold Jr. of Edward Arnold Scrap Processors (Corfu, N.Y.) echoes that advice. “When scrap was $700 a ton one month, and you knew it was going up to $800 the next month, it doesn’t always pay to wait for the $800,” he says. “Sometimes you’re just better off to continue moving the material.”
At Tennessee Valley, “when scrap was as high as it was, we were buying and selling and trying to push every ton we possibly could out of the door,” Denbo says. “We just had the belief that it was in our best interest to ship, ship, ship. But when the bad times came upon us, we shifted back to the old-school mentality, the way our fathers did it: Buy it cheap, lay it on the ground, and wait for a better day.”
Ferrous Processing & Trading’s Bakotich says he’s now keeping a close eye on supply and demand. “I’m not afraid of inventory, but I have a much more keen sense of what inventory costs, where it is, and how much we have. I think all scrap processors today are more willing to change their buying prices more frequently or quickly to adjust the flow of scrap into their facilities.”
Personnel Decisions
Payroll ends up in the cross hairs during any economic downturn. This time, with scrap processing volumes decimated, it was a natural place scrap companies looked for ways to economize. Natural is not the same as easy, however. Many companies in this industry boast they have never laid off workers, developing decades-long, sometimes multigenerational relationships with their staffs. “In our 54 years in the business, we have never laid a person off,” Arnold says. This time around, when faced with business declines, “the easiest thing for us would have been to lay off half of our 65 employees,” he says, “but I couldn’t go home knowing we had done that.” Instead, Arnold and his sister, Denise, sat down with all of the company’s employees, explained to them what was going on, and cut everyone’s schedule from 50 to 55 hours a week to 40 hours.
In Spencer, Iowa, Shine Brothers Corp. took the same approach. “Early on, we decided we didn’t want to lose any of the 100 good people we’ve got in our organization because they’re all important to us,” says the company’s Toby Shine. “You can buy all of the equipment in the world, but if you don’t have the people around to run it and maintain it, you’re dead in the water.” The company cut everyone back to 40 hours a week, no overtime.
Mallin Brothers Co. (Kansas City, Mo.) also pledged to retain all of its 25 employees during the downturn—and it challenged them to prove the wisdom of that decision. “We had meetings and explained that we didn’t want [the employees] to worry about their jobs, but in keeping their jobs they would have to step up and be even more efficient and productive,” Jeff Mallin says. Morale and attendance at the company improved, he says.
For many scrap companies, however, cutting hours and overtime and increasing productivity were not enough to balance the budget. Layoffs totaled 10 percent, 20 percent, 30 percent or more of their respective work forces. “You look at the situation, and you just don’t have a choice,” says Rocky Mountain Recycling’s Odle. “We were struck by the cold reality of what we had to do.” His company eliminated quarterly bonuses and overtime and let go 10 temporary workers and two regular employees, keeping a staff of 61.
Ferrous Processing & Trading eliminated all nonessential overtime, cut up to 30 percent from the salaries of nonunion employees earning more than $50,000 a year, stopped all 401(k) and profit-sharing contributions, delayed all nonessential capital expenditures, and it still ended up cutting 233 positions—32 percent of its work force. “It was extremely emotional and a very difficult thing to do,” Bakotich says, “but the people who were left felt we did the right thing to protect the company.”
Grossman Iron & Steel laid off 80 percent of its unionized employees—100 of 125 workers. “It was like turning off the lights,” Grossman says. “We were laying off guys who had been here 10 to 15 years.” Managers at the company fared only slightly better. In early 2009, “we had to cut the team back and reduce salaries by 10 percent,” Grossman says. As shocking as those cuts were, the decrease in business volume in late 2008 demanded it, he says. “I think we ran our shredder two days in November and two days in December.” And from October 2008 to June 2009, “we didn’t sell any material to our top five customers.”
Tennessee Valley Recycling cut overtime, temporary employees, and consultants, then regular employees. “Combined, we reduced our work force by one-third—100 people,” Denbo says. “I’m not talking about marginal people; I’m talking about good people.” Doing so was painful, he says, but “I had to protect the company.”
In the end, “you have to ask yourself, ‘OK, how do we survive?’” says Evan Koplin of Macon Iron & Paper Stock Co. (Macon, Ga.). By laying off 15 to 20 workers, including some longtime employees, he could keep the remaining work force at 40 hours a week. “While it was demoralizing losing people you worked with, given the overall economic situation, [the remaining workers] were glad to have a job.”
Other companies interviewed for this story that reported layoffs include Conservit (Hagerstown, Md.), 8 percent to 10 percent of its work force; Skagit River Steel & Recycling (Burlington, Wash.), 10 to 12 of its employees; and Pacific Metals Recycling International (Vancouver, British Columbia), 16 percent of its work force. Each company that laid off workers says it has since been hiring back to varying degrees.
After the cuts, the remaining work force at each company had to learn to do more with less. At Grossman Iron & Steel, “we made sure our remaining people were cross-trained” to operate multiple pieces of equipment, Grossman says. As much as the union contract would allow, “we utilized our guys in as many roles as we possibly could, and that kept our costs down.” Koplin took the same approach. “We learned we can do more with less, but to accomplish that our employees have to [adapt] to three or four positions.”
At Skagit River Steel & Recycling, Charlie Urbick says he had employees take on responsibilities he previously outsourced, such as checking the oil and greasing the equipment at the start of the day. “We also stopped outside services for truck washing and plant cleaning and are doing them ourselves.” Each Friday, the staff even vacuums and dusts the office, he adds.
Controlling Other Expenses
Companies hunted high and low for opportunities to economize beyond the personnel budget. “We looked at every little detail we could,” Koplin says. “We looked at supplies we were purchasing; we renegotiated lubricant contracts; there is not a thing going through here that we didn’t say, How can we cut prices and do it better?” At Edward Arnold, instead of keeping a large supply of replacement parts, “we let the inventory run down and then kept it at a minimum,” Arnold says. Further, to minimize transportation costs, “we also made sure the containers our trucks were picking up were full.” Urbick says he worked with fuel suppliers and outside trucking firms to reduce costs as well. Only three budget categories at Tennessee Valley were safe from cuts, Denbo says: safety, maintenance, and environmental protection. “Everything else was on the table.”
Variable costs, such as power, self-adjust as your volume goes down, Odle notes. “It’s hard to get out of the way of your fixed costs, so I say, try to run with a little bit less.” What this means, he says, is “if you need 10 trucks, run with six and hire outside trucking. … You can’t do with fewer shears or cranes, and they are expensive to own when times get bad. The things you can do with less of, hire out, so when the inevitable downturn comes, you can reduce. You don’t need to own everything yourself.”
Mallin says his company follows a conservative spending strategy in good times and bad. “I’m always looking at expenses,” he says, “and we’re always looking at ways to cut expenses. There’s really no fat in our company.”
Money Management
The credit crunch aspect of the recent financial crisis took a heavy toll on the scrap industry. Banks all but stopped lending while they tried to sort out fiction from fact on their balance sheets. Some companies needing to finance scrap or equipment purchases suddenly could not borrow money at any price. That’s been the biggest issue for Golden By-Products (Ballico, Calif.), says the company’s Jana Nairn. “The money market is ridiculously tight, and for an industry that is so capital-intense—[for] expansion, equipment, operating funds—it’s made it tough.”
Cash reserves helped cushion this blow for some companies. Urbick says he began to build a “war chest” in 2007, when he started “having some insecurity about what the market and economic conditions were looking like. … I wanted to have enough cash that we could pay off all of our bills if we had to.” On the other side of the country, Denbo also worried the good times would not last. “I didn’t know when, or how much, but I knew the shoe was going to drop.” He was “bound and determined to have a lot of cash” in preparation for that moment, thus he began building TVR’s reserves. With this money in the bank, when the market collapsed TVR could both pay the bills and buy scrap. “We lived off of our cash,” he says.
Cash reserves also helped keep the lines of communication open with the banks, these managers and owners say. “We’ve had a good banking relationship because we haven’t needed our bank,” Conservit’s Jack Metzner says. “We’ve got a tremendous balance sheet, and we have a lot of cash.” He wonders, though, “how it would have been if we really needed them.” Denbo wonders the same thing. “We have a close relationship with our bank—we always have—and we communicated with them about what was going on and how we were progressing through the troublesome period,” he says. “I’m glad we were in that position, because I don’t know what their reaction would have been if I had walked in and said, ‘OK, we need to do this, that, and the other.’ I don’t know how kind they might have been to us.” Always have an accurate picture of your cash situation, he advises. “You don’t want to wake up some morning and say, ‘Oops, I don’t have any money.’ Don’t let yourself get short of cash.”
“Having reserves made things a lot easier than if we didn’t,” Koplin agrees. Even so, his banker looked at how fast his revenue dropped in 2008 compared with the previous two years and expressed her concerns. “We tried to keep her totally informed and updated on what was happening,” Koplin says. “She saw that we were quick to make cuts. As a result, we were able to maintain some degree of profitability—with the exception of the three months of the downturn [in late 2008]—and that gave [the bank] a comfort level with us.”
Arnold says his bank provided help when the company needed it, which he credits to a close working relationship. “Our banker was here so much I thought he was one of our employees,” he says with a laugh. “We brought them in as soon as we knew what was happening, and knowing the commitment we have as a family business, they worked with us and helped us get through. We had some reserves, but near the end of the downturn we were relying more heavily on the bank, and they stayed with us.”
Other companies were not so fortunate, reserves or no reserves. Though Rocky Mountain Recycling had substantial cash reserves, its bank treated it “absolutely horribly,” Odle says. “They were unreasonable, and I don’t know why.” He ended up switching banks, and he now offers this advice: “Know your banker, know where you stand with him, and always have another bank in your back pocket. You should always have your foot in two banks.”
Skagit River switched banks just a few months before the fall 2008 crash. The company had been with Bank of America for 30 years, Urbick explains, but as the bank expanded it seemed out of touch with the business and how it operated. In early 2008 he invited four banks to compete for his business, ultimately selecting a local company. “I redid our loans, lowered our interest rate, extended our payment terms, and dropped our monthly payment by about 15 percent at that time,” he says. That move, a close relationship with the new bank, and more efficient operations “helped us weather the storm,” he says.
The Federal Deposit Insurance Corp. took over Golden By-Products’ bank. “Now we have a new bank,” Nairn says, “and we’re going through the educational process again. We ask ourselves, ‘Are they going to embrace the tire recycling industry, or are we just a stepchild they ended up with because they took over the bank we had been with?’”
Some companies, such as Mallin Brothers, avoided credit problems by simply never using credit. “Our company is totally internally funded,” Mallin says. “We’ve never borrowed money from the bank.” This approach takes discipline and a willingness to sacrifice a certain amount of growth for stability, he admits. “We’re just slow and steady—we just keep plugging along.” The recession has proven the wisdom of this approach, Mallin says. It has “validated everything my grandpa and father have tried to teach me over the years. It’s just the right way to go about it. We may make a little less, but we sleep at night. I go to bed knowing my bills are paid, I don’t owe anybody anything, and I’m blessed to be in that position.”
Others say they’re going to be more cautious about taking on debt in the future. “Everyone [wants] to grow their business,” Denbo says, but “you don’t bet your company on a debt level you cannot handle.” If you need to borrow, look at alternative sources of financing, Odle says. “Equipment companies are more willing to work with you in a downturn than your bank, and their rates can be less,” he points out.
Revisiting Relationships
The longest lasting impact of this downturn may be on relationships between scrap buyers and sellers. These were business relationships, but when they came to such an abrupt end, they seemed to leave psychological scars. “The main reason this downturn was a lot worse than others is that people [reneged] on deals. Cargoes were abandoned all over the place—it was a mess,” says Mark Lotzkar of Pacific Metals Recycling International. “This was the first time that people we had deals with literally [disappeared] off the face of the earth.” Bakotich recalls Sept. 24, 2008, when “four steel mill executives called me to say they would not be buying any scrap for October. With just six days to go in the month, that was a major problem,” he says.
Companies now wonder whom they can trust, and they’re unwilling to extend themselves in business deals without better guarantees of what they’ll get in return. You have to know your customers, Odle cautions. “I got hit really hard with some export buyers and one large domestic buyer,” he says. “Everybody complained about the exporters, but my worst hit was $250,000 by a shredder operator” in the Midwest—a situation that is now being settled in court. “Only do business with people you trust,” Lotzkar says. “Getting paid is more important than price. That’s not to say price isn’t important, but getting paid is more important.”
Jeff Mallin says the 2008 financial crisis has led his company “to evaluate with more scrutiny the financial stability and health of companies we sell to. There have been a few we have had to withdraw from our list, but [we] also validated most by their ability to weather and thrive during these economic times.” He adds, though, that maintaining profits while reducing risk requires “diversifying your customer and supplier bases and getting paid for the material you ship—making sure you’ve insured your receivables.”
Those who kept their word have seen the benefits. “We honored all of our contracts and paid all accounts, both trade and commercial, on time and in full,” Denbo says. When other companies did not, it “opened the door for companies like mine to take on new business.” He adds that the companies that reneged “only have themselves to blame. One’s word is still important in business.”
Looking Ahead
The memory of the past two years “is not going to fade,” Mallin says. “It was substantial enough that it will leave a lasting impression on people.” Those interviewed for this article offered a few more pieces of advice for riding out this economic storm and preparing for the next one:
Make the hard decisions. Layoffs “are the hardest decisions in terms of emotions and the human element,” Grossman says. “Hit them head-on. Don’t pretend it’s going to be easier tomorrow.”
Prepare for change. “I learned that because things have always been the same in the past, don’t think they will continue to be the same,” Koplin says. “You’d better adapt, and you’d better adapt fast.”
Use your network. Talk to friends in the industry to see how they’re handling the situation, Grossman suggests. “I talked to everybody I could,” he says. “Pick people’s brains and use all of your information sources.”
Stay focused on safety. Treat new workers and returning workers the same in safety training, Grossman says. “No matter how long they had been with you, when they come back, you have to start over with them. We learned that lesson in the early ’80s.” As his company has started to rebuild its work force, it has been “hyper-focused” on safety, and it has gone about 18 months without a lost-time accident, Grossman says. “That’s through some busy times and some lean times.”
Look to the future. “Don’t get rid of your A and B team” when cutting the payroll, Odle says. “We’re not in a dying business. We’re in a business that is going to be here forever. Wherever you were prior to the downturn is probably where you’ll be after the downturn, so you want to keep yourself competitively positioned with all of your good employees. … Keep that core in place, tough it out, and have reserves available.”
At Edward Arnold, “my guys wanted to know how I could be so positive during the downturn,” Arnold says. “What choice do I have? Rather than walk around with the face of fear, I stay positive and try to figure out a way to make it work.”
Shine says there’s no magic to surviving this economic environment. “We work hard in good markets, and we work hard in bad markets. That’s the way I was brought up, and that’s the way our employees reacted to the downturn. It’s just the way we’ve always done it.” He notes, however, “It’s much more fun in the good times.”
Jim Fowler is retired publisher and editorial director of Scrap.
Scrap companies have taken their hits during the economic crisis of the past two years and emerged shaken but resilient. Here’s a look at the inventory, personnel, and money management strategies they’ve used to keep their footing.