Tools for Survival

November/December 2015

Tenacity, patience, and a careful review of their business practices can help recyclers withstand today’s moribund commodity markets.

By Megan Quinn

It’s like a rainy day that just won’t go away. The depressing economic climate is all too familiar to most people in the recycling industry: China’s slumping economy is causing a global ripple effect, reducing demand for commodities while there’s a global oversupply, driving prices down. Operations costs, meanwhile, only seem to go up. Experts aren’t seeing any near-term indicators that the sun will come out anytime soon. “Recyclers really are getting caught in the middle,” says Joe Pickard, chief economist and director of commodities for ISRI.

Businesses that are slogging through the doldrums say they worry about how long these economic conditions will affect their margins and their employees. Yet they also have hope for the long term, passion for what they do, and advice for how they have adapted to rainy days in the past and now. Resilience is key, says Brian Shine, president of Manitoba Corp. (Lancaster, N.Y.) and ReMA vice chair. This economic climate is “the new norm. People are going to have to work smarter, and work harder, and not simply wait for the markets to improve. It might be a while.”

From Good to Bad
Experienced recyclers know there will be good times and there will be bad times. Commodity markets have been cyclical as long as the industry has existed, and most recyclers believe what goes down must eventually come back up. Spirits were high between roughly 2002 and mid-2008, when commodity values were up and China’s growing demand for scrap spelled big bucks for recyclers.

Shine says he and others in the industry knew the good times wouldn’t last forever, but even some seasoned pros didn’t foresee how the recession, which started to hit the recycling industry in late 2008, would so acutely affect their business, dry up credit, and push down scrap prices. The most serious problems came from buyers who canceled contracts for scrap that had already been shipped to Asia from the United States and Europe. Recyclers and traders were on the hook for the shipping costs and storage at the ports while they looked for new buyers. Looking back at that financial crisis, workers liken it to electric shock or, Shine says, “like falling off a cliff.”
That decline, while sharp, was fortunately short-lived. Due in part to economic stimulus measures in the United States, Europe, and—perhaps most important—China, the scrap markets had recovered significantly, if unevenly, by 2011.

The economic challenges of the past year have a different feel—more like a slow, overcast, muddy, 500-mile walk than the adrenaline-fueled freefall of 2008. Pickard says he isn’t hearing the same level of panic that he heard back during the recession, partly because today’s downturn has happened more gradually and partly because no one has seen signs that it will go away anytime soon. Today’s market is the worst since the recession, he says. “There is an ongoing decline across the board in terms of demand, business opportunities, and profitability. It sounds pretty bad out there.”

Slippery Supply, Disappearing Demand
One factor that sets the current doldrums apart from the last economic downturn is demand. Though many companies took a financial hit during the recession, and prices plummeted, there was still an interest in buying and selling scrap. Today it’s a different story. China’s economy is slowing down, meaning it doesn’t have the same demand for U.S. scrap to construct things like steel bridges and apartment complexes for its expanding cities as it did after the recession.
The strength of the U.S. dollar has made American scrap more expensive in foreign markets, too. That means Chinese and other buyers can look for better deals outside the United States when buying scrap or other commodities, Pickard says.

The plunging prices of commodities such as iron ore, brought on in part because of global overproduction, is another problem. In some cases, scrap is a less attractive buy when companies can just as easily buy lower-priced primary material instead. David Chiao, whose company, Uni-All Group (Atlanta), exports mixed metal scrap to China, says that has been a problem for his business. “Steel prices keep falling, which is dragging down steel scrap prices,” he says.

Scrap supply is in a funk, too. Manufacturing produces new scrap, so when global manufacturing slows down, less scrap gets generated. Jim Wiseman, vice president of Smart Recycling Management (Nicholasville, Ky.), knows this all too well. “Guys just don’t have as much to sell. Finding items, and being able to find someone who has enough to sell, has been difficult. There just aren’t a lot of deals,” he says.

Staying Financially Stable
Many companies feel they are treading water financially, even if they don’t all face the same magnitude of financial woes, Pickard says. It’s harder to access credit since the recession, he says, and even though interest rates are low, those who can access more credit are not typically motivated to make large purchases because they are unsure about the return on their investment in this economic climate.

Some businesses say they have escaped bigger economic problems by avoiding loans altogether. Chiao says Uni-All is self-financed, which has come in handy during times like these. Jim LoBianco, general manager for Davis Industries (Lorton, Va.), says his company also has benefited from self-financing. “It’s about hunkering down and working with your own money,” not the bank’s, he says. The company’s longtime owner and other stakeholders made sure to reinvest in the business and finance operations themselves, he adds.

Other companies, such as Manitoba Corp., have insulated themselves from some of the market volatility by hedging. Shine says his nearly 100-year-old company has been through many cycles of good and bad times, and hedging has been a beneficial strategy for it, especially because the company specializes in copper instead of spreading its risk among other nonferrous metals. When copper prices dip, hedging gives the company some financial stability, he says. Even so, “no one expected such a precipitous decline” as copper has experienced in the past few months, he says. With the safety net of the hedged positions, “we’re not losing money, but we’re not making money. We’re treading water.”

Brian Henesey, general manager and vice president of Rocky Mountain Recycling (Commerce City, Colo.), says the current economic situation has forced people to take a hard look at how they have been operating in the past. If they haven’t already, now is the time to identify the financial habits that are no longer sustainable, he says. The worst stories he has heard tend to involve companies that are slow to adjust to the reality of today’s slow market and are still budgeting based on past successes, he says. “At the end of the day, business is business, and you have to be in control of it,” he says. “You can’t let your business control you.”

More Modest Margins
Companies that have weathered previous financial storms have settled in for a long spell of stormy weather, and many say they have let go of their dreams of making big money, at least for now. “Lower market numbers—that’s our new reality,” Henesey says.

Others also say they’ve adjusted their daily operations to reflect more modest margins. If a dazzling deal happens to walk through their door, they’ll snap it up, they say, but their new goal is maintaining smaller, lower-risk deals that can help keep the lights on and employees paid.

Rocky Mountain Recycling is still moving scrap, but it is getting more selective about what it buys—and doesn’t buy. If something looks like it could have a higher value in the future, but it might be harder to sell right now, the company is less likely to buy it and leave it in the yard for an extended period of time. “Sometimes, the best buy is the buy you don’t do,” Henesey says.

Davis Industries also is staying on the conservative side, LoBianco says. “We’ve adjusted our monthly tonnages to get a realistic ‘sweet spot’ with reasonable margins. We try not to overreach for tonnage our margins will not allow,” he says.

Wiseman of Smart Recycling Management says he has seen good times and bad in his 38 years in the industry, and he has learned that every deal is important, even if it’s a small one. He likens himself to former Cincinnati Reds baseball player Pete Rose: “I’m just trying to hit singles,” Wiseman says. “In years gone by, there were triples, there were home runs, but there just are none out there right now.”

Smaller margins and the slower pace of business might be the “new norm,” but these recyclers say it’s better than the alternative: Stopping work to wait it out. After all, the industry is a volume industry, Pickard says, and “the more experienced members are continually turning over inventory. The most dangerous thing to do is sit on inventory and try to time the market [in the hope that] the prices are going up in the future,” he says. Instead, “they are buying and selling every day to the extent that they can.”
LoBianco says that advice rings true at Davis, where he wants to maintain good relationships with customers through steady operations. “I used to have a [nonferrous] guy who worked for us. He’d make sure everything was always cleaned up, he’d prepare all the scrap, then he’d turn around, [and] there’s another mess.” The constant stream of cleanup work frustrated him, “but I used to tell him, ‘when the messes are all cleaned up, you’re out of business.’ Yes, we all deal with the volatility, but [you] have to remain as steady as you can for your suppliers.”

Broadening Your Options
Wiseman says his version of “hitting singles” à la Pete Rose is to buy and market things the company didn’t previously handle, such as iron fines. “Anything I can buy for a price, sell for a price, and make money is what we’ll do. … Iron fines are the low end of the food chain, but it’s still an item that gets produced and needs to be sold. The value’s not great, but there’s a lot of it.”

Finding the right balance between expansion and retrenching is one tool for survival, he says. “You still have to do business, no matter what the price of the commodity is. People are still producing scrap and still have to get rid of it and get something for it. It’s not like there are absolutely no opportunities. You just have to find the things that work for you,” he says.

Some recyclers say they have avoided a big financial nosedive because they already had expanded the range of scrap they handle ahead of the current commodity slump. Keith Ristau, president and CEO of Far West Recycling (Portland, Ore.), says until 2005, the company’s business was 98-percent paper sales, and it exported a third of the material to China and other parts of Asia. In 2005, he helped the company expand to process metals, EPS foam, plastics, glass, and electronics. Though paper is still about half of its business, “we needed to diversify,” he says. “With paper, profit margins are at historic lows right now. We … didn’t want all our eggs in one basket.”

Far West Recycling is considering diversifying further to process even more types of materials, but Ristau says it won’t announce a plan unless the company decides it’s financially solid. Henesey and Chiao also say their companies are at least thinking about ways to either branch out or diversify, but they are similarly hesitant to say more.
Chiao, who is the Non-ferrous Division president of the Bureau of International Recycling (Brussels), says it can be tough for companies to broaden their export business options, especially if they rely on the Chinese market. He has talked to companies that are hoping to find new markets elsewhere in Asia to fill the void that China has left, but that strategy can take time.

“When China is the biggest manufacturer in the world, and they stop producing, there is no immediate alternative or replacement for that big market,” he says. “Some are [turning to] Southeast Asia, or India, but demand can’t come close to what China’s was. People are always looking for new markets, but right now, it doesn’t seem like there’s an immediate answer.”

Another strategy has a long history in the United States: If you see better business conditions elsewhere, go after them. EG Metals owner Danny Jones says his company, based in Hillsboro, Ore., opened a Dallas location in 2013 as a way to diversify its business “when the world economy was growing and demand for scrap was strong.” The decision has paid off during these tough times, he says.

In addition to commodity and economic woes, the Hillsboro facility, located near Portland, has faced exporting problems, he says. Some of the Port of Portland’s biggest shipping companies stopped using the port, and last year’s West Coast ports labor dispute further tangled up EG Metals’ shipments to Asia. The company, along with some other West Coast exporters, had to pay extra to send the materials by rail to Seattle’s port instead.

On top of that, doing business in the Portland area is more challenging than in Texas, in part because of different business regulations, and commodity prices aren’t as favorable in Oregon as they are in Texas, he says. “Everyone is still feeling the pinch, but you’re definitely feeling more of a pinch in certain areas [of the United States] depending where you live,” he says.

This summer, in an effort to counter the effects of Portland’s challenging business climate, EG Metals decided to move its end-of-life electronics processing operations to its facility in Texas. It still maintains its Oregon facility as a scrap aggregator, but it laid off a number of its employees there. “Until the markets shift in the Northwest, we have to scale back,” he says.

In contrast to that facility’s cutbacks, Jones says he expects to hire about 20 more employees for EG Metals’ Texas facility, which already employs 30 people, before the end of 2015. Its brokerage in Texas has allowed the company to buy material from around the United States. He sees other positive signs, too. While the Oregon facility relied mostly on customers in now-waning markets in China, the Texas operation has helped EG Metals form business partnerships in nearby Mexico and maintain business relationships in India. “We’re doing good business in Texas. … The growth in Texas is huge. A lot of companies are moving to Texas, not just on the scrap side, but overall,” Jones says.

Staying True to Customers
Chiao says it takes effort and energy to forge new relationships that might eventually turn into business deals, but businesses also should spend the energy to maintain relationships with their current business partners.

Henesey agrees. Recyclers don’t have the power to change the current market, he says, but they do have control over how they maintain their relationships with customers, suppliers, and industry partners. Customer service and strong relationships always should be a priority, he says. “You need to maintain that A+ level of customer service, and if you’re at an A right now, you have to be at A+.”

Customer service is a way to keep business going or even generate new business, even if it’s not quantifiable right now, he says. In a competitive market, Rocky Mountain Recycling is always conscious of its customer base because “when the markets fall, and you don’t have a good relationship with your supplier, for example, … they look elsewhere.”

That personal touch might turn into new business down the line, Wiseman adds. “You want to strive to take care of [customers] because they are your best advertisement,” he says. “Someone called me today and said he got my number from someone [else], and I appreciated knowing [the recommendation came from] someone I had done business with.”

Other relationships might not yield immediate dollar signs, but they can grow in value over time. For example, Davis Industries lets the local fire department use its scrapyard as a place to practice extracting victims from crushed cars. It doesn’t directly bring more scrap into the yard, but it helps the company’s relationship with the community, LoBianco says. “It’s good for business, and good for the neighborhood as well.”

Maintaining a solid reputation also means staying true to your values and constantly striving for improvement regardless of the market, Shine says. “In an up cycle, it’s easy to think, ‘We’ve got it all figured out.’ The key for us is continuous improvement, regardless of market conditions. We don’t want to react when things are bad and not pay attention” when things are good.

Think about what sets you apart and play that up, he suggests. Are you the only scrapyard in the area that can boast specific certifications or quality standards? Are you known for fast turnaround times or unique products that other nearby companies don’t have?

Shine says Manitoba Corp. is known for its finished copper products, and it chose to become ISO certified to show customers its commitment to quality. Wiseman says his company underscores its reliability, even in unreliable times. He is not always able to offer the highest prices, but “I can guarantee that if you want it picked up tomorrow, I can pick it up tomorrow.”

Staying True to Employees
While wooing customers and strengthening outside relationships is key, it is equally important to strengthen relationships inside your scrapyard or office. Keep your workers in the loop, these recyclers say. They might be worried about the fate of their jobs, and they will be more effective if they have the needed information—such as the possibility that you will have to limit overtime, cut hours, or lay off workers.

Cutting your employees’ hours, closing early, restricting overtime, or laying them off can be a rough decision, but “one big expense is payroll, and you really need to measure and watch the hours,” Henesey says. He is avoiding layoffs by reducing overtime and idling several pieces of equipment. He also is considering reducing the yard’s hours.
Ristau says Far West has avoided layoffs through attrition, but that has resulted in a “lean and mean” crew who are doing more with less. “You have to cut labor wherever possible, but you have to have a certain number of people to get the job done. There’s no getting around that.”

Ironically, as the overall U.S. economy gets stronger, workers have more job choices available, and that makes it hard for some scrapyards to attract qualified employees to keep essential operations going. “It’s hard to find good people to work for us, especially equipment operators, which are very hard to find. Sorters are hard to find, too,” Ristau says. He also faces problems budgeting for employee wages. Jones of EG Metals mentioned Oregon’s high labor costs: The state’s minimum wage rose this year to $9.25 an hour—the second-highest minimum wage in the country, just behind Washington, Ristau says. “That’s tough, and [lawmakers] keep talking about raising it even more,” he says.

Even if you have to make staff cuts, Henesey says, never cut programs or services that keep your remaining employees safe. “Health and safety exceeds profitability. It’s an instinct, like putting on your seatbelt when you get in the car.”

Staying Optimistic
Business owners and employees say it can be a challenge to find a bright side to the current conditions, but their daily work always seems to offer one or two examples. Scrapyards such as Davis Industries are using their downtime to make repairs and do maintenance, LoBianco says. At Rocky Mountain Recycling, Henesey says he is taking the conditions in stride. “It’s easy to get miserable, but then your associates, your peers, they notice that, and it becomes contagious. But if you continue to lead and be positive, you’ll inspire your group, and it’s amazing how people feed off of that.”

Chiao knows conditions are tough, but he says it’s also an opportunity to come out the other side with better experience and business acumen. “There’s another way to look at this: This is a readjustment period, and only the healthiest and strongest will survive. That may not be totally bad.”

Wiseman says he is proud to know that his peers are sticking by their companies. He talks to a lot of privately owned scrapyards, he says, and none of them is even thinking of getting out of the business, even though they are working harder than ever and making less. “There’s a vigilance and tenacity in this business,” he says. “I still go to good-sized [ISRI] chapter meetings with good turnouts, and you don’t see anyone saying, ‘I give up.’ Scrap guys don’t give up. They fight. They figure out ways to scratch and claw” to keep operating day in and day out.

Megan Quinn is reporter/writer for Scrap.