Surviving Difficult Times

If no news is good news, then things are bad indeed for commodity markets worldwide. For there has been a lot of news lately—about Asia, South America, Russia, and beyond—and most of it has been bad.

Scrap processors have been acutely feeling the effects of the world’s financial and economic woes. The scrap industry consolidation train has come to a screeching halt, with some of the major consolidators in dire straits. Public scrap corporations have reported losses. And many privately held companies have been struggling to make sales and meet payrolls.

Bad market conditions are nothing new to the scrap industry, of course. The business has always been cyclical. “Bad markets are every bit a part of the business as good markets,” notes Marty Davis, president of Midland Davis Corp. (Moline, Ill.). “In fact, we probably have more bad than good. So anyone in the industry should know bad markets are going to come. If you’ve been caught off guard, either you haven’t been in the business very long or you were deluded because the markets had been so good for so long.”

The difference this time around, even for scrap veterans, is that “these markets have been particularly severe,” admits Davis. “Every commodity has been weak and difficult to place.” Even during some of the bad markets of the early 1980s, he says, “we could always sell 3-foot plate as No. 1 heavy-melt. But this time we can’t do it. We couldn’t sell it for a lower grade, even if we wanted to—there just aren’t any homes.”

In a nutshell, asserts Ray Petermeyer, vice president of E-Z Recycling Co. (Portland, Ore.), “these are the worst times we’ve had in 25 years.”

When the going gets tough, however, the tough find ways to survive. The means may vary, but the end is the same: Stay in business. Here’s how some scrap companies are coping.

The Benefits of Belt-Tightening

In difficult times, the first thing to go is discretionary spending. Travel to conventions and seminars goes out the window along with company picnics and similar events. In other words, you forego perks to improve the bottom line. Notes Doug Kramer, vice president of Kramer Metals (Los Angeles), “Discretionary spending just isn’t an option now. There’s no room for luxury.”

Gary Schnitzer, executive vice president of Schnitzer Steel Products Co. (Oakland, Calif.), says his firm has eliminated unnecessary travel as part of its overall fiscal survival plan. “No expense is overlooked,” he says. “We’re reviewing all of them and trying to prudently make reductions wherever we can.”

Likewise for E-Z Recycling, which has implemented an “austerity program in which all managers have been instructed not to take trips unless absolutely necessary,” Petermeyer says. “We’re still attending ReMA and Paper Stock Industries Chapter events because we feel they’re important, but when it comes to some seminars and conventions that we might ordinarily have attended, we’re taking a second look. In the past, we also took employees to lunch, but now we’ve cut back on that as well.”

Critical to cutting unnecessary expenses is knowing just what your costs are. “If you don’t know your operating costs, it’s going to be very difficult to determine what to do,” says Tom Salome, co-owner and president of M. Lipsitz & Co. Inc. (Waco, Texas). “You have to realize that there are fixed costs that will always be there, so when your intake and production drop, the fixed costs will go up proportionately. There are some costs you can cut and some you can’t, and all you can do about those is sweat them.”

To get a better handle on just such issues, City Carton Co. Inc. (Iowa City, Iowa) has hired a financial officer. “By truly understanding our operating costs and the true numbers of what’s coming in, we’ve been able to tighten our belts,” says Andy Ockenfels, vice president of operations. “Our financial officer looks at the numbers and sees where we have to tighten the belt, whether it’s in sorting or handling costs or things like keeping the lights on too long. It’s been tremendous for us because in the past we operated on gut feelings—it looks profitable, so let’s do it. Now, by getting better information, it has helped us save.”

Paychecks and People

Other ways some scrap companies balance their ledgers in down cycles is by cutting back on employee bonuses and/or
restructuring their pay base.

“For the first time in our history, we didn’t give any bonuses last year,” Kramer says. E-Z Recycling has also backpedaled on its bonuses, Petermeyer says, noting that he has warned his employees that their bonuses may be considerably smaller than in the past, if they’re handed out at all.

Employees at Midland Davis, meanwhile, no longer receive annual, incremental wage increases. Instead, they earn quarterly bonuses based on overall company profitability. Under this new setup, “some employees have received more money than they did with pay raises,” says Davis. “Last year, everyone probably got as much in bonuses as they would have received in raises, but if we’re not making more money, then we’re not tied into increasing salaries.”

In especially difficult times such as these, some scrap companies are having to take the more drastic step of paring their work force. The preferred approach is to reduce personnel through attrition, such as not filling open or vacated positions. Midland Davis did just that, opting not to hire a new employee when its plant manager retired. “We saved some money in that there was a well-paid employee who isn’t being replaced,” Davis says. Other staff cuts have been more temporary, he says, noting that a driver was recently laid-off when the plant he serviced closed temporarily. “In the past, we would have had him do something else,” Davis says. “Now, he knows that if that customer shuts down again for two weeks in May, he may be laid-off again.”

Layoffs aren’t anyone’s favorite way of trimming expenses—especially for many family businesses where strong bonds are often forged with employees.

E-Z Recycling, for one, is loathe to let its employees go because, as Petermeyer explains, “we’ve done that in the past and found that when markets return, we have to start all over again.” Instead, he plans to move full-time employees to the sorting lines if the situation requires and cut back on the temporary employees who usually perform this job.

At times, however, market conditions are so bad that layoffs become necessary to maintain company profitability. Doug Kramer, whose company has gone through several layoffs, knows this only too well. “With a family business, you tend to have a different relationship with your staff, so it’s hard to lay them off,” he says. “Some employees have worked here 20 or 30 years and their children are working here, so it’s difficult not to get personal about it.” Nevertheless, he says, market conditions are forcing his company to once again consider reducing its staff.

“In the late ’80s, we were running a large work force, and we made some severe cuts because of the markets,” he recalls. “Then we found out that we didn’t need all those people and that we were doing the same amount of business with fewer employees. So we’re looking again at the value of a smaller, more highly motivated group of individuals and concentrating more on the machinery rather than just hiring a bunch of hands.”

City Carton Co. has made a similar change in its staff, notes Ockenfels. “Instead of having a lot of employees on the payroll, we’ve made sure our full-time employees are better-qualified,” he says. “We’ve been able to juggle permanent employees with temporary labor that we use whenever there’s an influx of material. Before, we’d have had them on the clock all the time. Now it’s just when we have an up-time.”

Casting the Net Wider

Like most dark clouds, depressed market conditions can have their silver lining in that they prompt companies to improve their efficiency and learn how to work harder and smarter. “You always need to operate lean and prudent,” Schnitzer says.  “This will make the scrap industry more efficient, and that’s what we need to be to better serve our customers.”

Bad times can also push scrap firms to be more aggressive in their existing markets or motivated to search out new ones.

Domestically, Schnitzer Steel Products has begun approaching steel mills that it hasn’t previously supplied. “We’re shipping more by rail,” says Schnitzer, “so we’ve made an investment in our domestic momentum that we haven’t done before.”

The company has also set its sights on overseas markets. “In the current market change, we’ve reacted with a little more vigor than in the past,” he says. “We’ve done some things that we haven’t done before, like heading overseas looking for markets. We’re now looking at some markets that we hadn’t considered before. Our circle has gotten larger. To meet this, we’ve strengthened our overseas sales force. We’ve tried to use this time as an opportunity, and we’re starting to see things bear fruit.”

Other firms have made other operational changes to help increase their viability. City Carton, for example, has implemented policy changes requiring industrial suppliers to have greater volume before its drivers will make a pickup.

And the firm has adjusted its fees for servicing less-profitable suppliers, says Ockenfels. Because City Carton deals primarily with municipalities, it has concentrated on educating these suppliers about the scrap commodity markets and current market conditions. “We want to keep them informed so they can use this information in setting their budgets,” Ockenfels explains. “We’re talking with our customers more, going more local and getting the word out so they won’t be surprised that they’re not getting paid $200 a ton for cardboard like they did in ’95.”

E-Z Recycling has even decided to cut some suppliers from its client list. “If we have some that are marginal, they’ll be dropped if they’re not productive,” Petermeyer says.

Scrap companies are also changing the way they buy. Kramer Metals, for instance, is more aggressive in looking for scrap and is “far more visible than we’ve been in the past,” says Kramer. At the same time, it doesn’t hesitate to turn down certain deals. “We’re quicker to pass on an offer rather than just buy it up,” he notes. “We’re also much more conscious of the quality of scrap. We don’t want to be in a position where we have a buyer reject the material on a quality issue or give the buyer an excuse not to purchase it.”

Salome has this to add about what constitutes a prudent buying and selling strategy in these difficult times: “I see dealers cutting margins to keep from losing too much volume. They’re their own worst enemies. In their shortsightedness, they say, ‘I’ll buy it now and figure out how to make a profit later.’ We’ve seen people buying copper and aluminum at prices where their margins are lower than what our costs are to handle it. You can’t make that up in this situation. Volume doesn’t mean a thing if it’s not profitable. If you can’t buy it and make a profit, don’t buy it.”

Thoroughly Modern Machinery…Or Not

When it comes to capital investments, especially in equipment, scrap processors are divided over whether down markets are a good or bad time to buy. Is it more important, they ask, to get new equipment and improve efficiency or keep funds
liquid?

Ockenfels is in the first camp. Given his state’s unemployment rate of 2 percent, his company has turned to upgrading equipment to control labor costs. Computerizing his company’s branch offices has also saved some expenses. 

“It has cut down on duplication of paperwork so we can grow without increasing our office staff,” he says. “It has proven to be an excellent way to communicate between plants and with customers. We spend less time on the phone—you don’t have to make five phone calls to get a message to five different plants. Managers get the information that day as they need it and don’t have to spend time talking on the phone to the home office.” And offering customers the chance to receive billing information and account histories via the Internet has turned out to be a “nice customer service tool,” he adds.

Schnitzer is also in the pro-capital-investment camp. His firm has invested not only in upgrading existing equipment, but in purchasing new items as well. The company has also invested in new docks because, as he puts it, “while the scrap market isn’t as buoyant as it was, we think it’s the smart thing to do. Scrap metal is always in demand, just sometimes more than others.”

One potential advantage of buying equipment in down markets is that you could get a bargain price. Midland Davis can attest to this. As Davis explains, “Most of the things we’ve purchased have been during bad markets—not on purpose, mind you, but by the time we explored our options and made a decision, the market had gotten weak.”
   Then there are those who prefer to put off major equipment purchases until the markets recover. For Petermeyer, such an investment would “really have to be beneficial, one where we could show a profit before we’d invest.”

There’s also the issue of ensuring that you’re operating your existing equipment as efficiently and inexpensively as possible in slow times.

Some note, for example, that they save money by buying certain supplies and equipment through the National Association Supply Cooperative—Nasco-op—the ISRI-affiliated buying service.

Midland Davis looks closely at ways to trim its repair expenses. By purchasing equipment to repair tires, for example, the firm hopes to substantially reduce its tire repair expenses from last year’s total of $70,000.

And Kramer notes, “There are places where you can maximize fuel consumption and gadgets you can buy so that you won’t be using as much fuel.”

Insuring Your Viability

Perhaps the single largest ongoing expense of many scrap companies is workers’ compensation insurance. Salome is a strong believer that one of the keys to saving money in the scrap industry is controlling workers’ comp costs. “You have to have a good safety record,” he says. “Our company does, and it will save us more money than a lot of companies will make.”

The truth is that if your firm has a good safety program—and, hence, a low experience modifier—you can save a bundle on your premium. The bad news is that if you don’t have a low experience modifier already, it won’t help you save money during this down cycle. “You can’t start yesterday and get a good rate today,” notes Salome.

Fortunately, workers’ comp isn’t the only insurance niche where premiums can be cut. In your employee health insurance, for instance, you can save money by increasing the beneficiaries’ deductible or copayment.

Following proper environmental safety procedures can also mean reduced premiums. To make sure you’re paying the least amount necessary, check with your insurance carrier. Most will have representatives who will make on-site inspections and offer suggestions for improvement. (For more on insurance issues, see “Insurance 101,” beginning on page 179.)

Another “insurance policy” is a good relationship with the bank, Salome says. “You want to have a good line of bank credit so you can keep some material in reserves. My bank has seen me take this position before, so they know I’ll want a certain amount of credit to hold inventory. They understand my philosophy of holding when the market is depressed.”

Salome is a firm believer in building material reserves. “It’s my opinion that the only way to survive is to have enough reserves during the good times so you can borrow or use them and hold back a percentage of the material when the supply gets close to the bottom. It’s a mistake, however, to stock up on unprocessed material when it’s cheap because when prices go up you won’t be ready.”

Summing up his philosophy, Salome has these sobering words for processors, “If you haven’t made inroads into the areas of saving money on insurance, watching your experience modifier and safety record, establishing a good banking relationship, and performing well when you borrow, it’s too late to start today. It won’t save you.”

None of these survival strategies, of course, can get you through difficult times alone. The best approach is to use several of them in a way that best suits your company. And if you do, you’ll probably find that your company will be leaner, wiser, and more profitable when the market makes its inevitable swing upward again. •