Dealing with shrinking profit margins
The main issue facing the scrap metal industry these days is deteriorating profit margins. It appears that increased competition for scrap metal has created bidding wars among large shredders resulting in premium scale prices to keep shredders running. This has resulted in tightening margins for large shredders, caused many to cut operating hours and some to shut down. In medium and large metro areas, small scrap dealers and feeder yards are in price wars with their competitors to acquire material, while at the same time playing one shredder against others to get top dollar for their scrap. Another dynamic is that medium to large scrap yards are being forced to pay top prices for heavy melting steel (HMS) that normally goes to make cut grades, but shredders are using it to feed their equipment.
Joseph C. Pickard, chief economist and director of commodities at the Institute of Scrap Metal Industries (ISRI) offered his input on current market conditions. “Margins are down partly due to competition for available feedstock. Not only for the last year or so, but competition has been rising for the last decade. The industry had developed a lot more capital equipment in terms of shredders and other processing capability pretty much widespread across the country. There are more people and more capacity competing for the same amount of metal, which can cut further into profit margins, especially when market prices are volatile. Although by historical standards prices today are not low, they are not where they were in 2011.”
“The feedstock supply seems to be holding pretty steady. Steel being produced in the U.S. is down 1.4 percent from 2012. Export of steel is down overall, but I think 2014 will be a little better than 2013,” Pickard continued.
“I think you are going to see continued interest in industry consolidation, especially given the current level of shredder capacity.”
Over the long term, Pickard believes that the global marketplace will continue to expand, with growth throughout Asia with continued emphasis on infrastructure and populations moving from rural to urban areas. He thinks these long term trends bode really well for steel and scrap metal export.
“Any change in regulations like the Affordable Care Act will take time for people to figure out and deal with, “said Pickard. “It’s very competitive nationally and there’s slower demand for export metal. “Through October, we saw a drop from Turkey of about 19 percent as compared to 2012. Taiwan is a big market as well and demand there was down 16 percent. South Korea was down 30 percent. India was down 58 percent. China was actually up 3.9 percent, but low demand compared to historic highs,” Pickard concluded.
Greg Brown, is chief executive officer of Raleigh Metal Recycling, Goldsboro Metal Recycling and a new, third facility under an operating agreement in Wilson, North Carolina. He is also chief executive officer of Benlee Roll Off Trailers based in Romulus, Michigan. He weighed in on the state of the scrap industry in the southeast.
“We are having the worst year since I owned the company in six plus years, with margin being the issue. The number one driver is shredders fighting for material and paying too much for it. I only have a small shredder, so we sell approximately six or seven hundred gross tons a month of shred, but when the shredders fight for material we have to compete with them, even on HMS that we sell as cut grades. In the southeast, the margin issue is worse than in other parts of the U.S.”
In fact, five scrap yards and a major shredder have shut down in North Carolina, in the past four months as reported by American Metal Markets (AMM).
Other weakness in the southeast was recently confirmed by one of the country’s largest metal recyclers, Steel Dynamics, Inc., with their OmniSource operation. Its third quarter financial report stated “Operating income for our metals recycling operations decreased 29 percent to $11 million in the third quarter 2013, as compared to the second quarter of this year, which was the result of decreased ferrous metal spread, as increased ferrous volume did not offset the decline in market prices. Profitability from our Midwest operations was actually slightly improved; however, the continued industry overcapacity of shredding locations in the Southeast resulted in deterioration in earnings for those locations.”
Brown reported that in recent months, a number of shredders and scrap yards in his area have shut down because of the margin squeeze. Brown is relying on increasing productivity and offering superior customer service to cope with shrinking margins. “We are looking at every way to increase margin by reducing costs. We are not cutting back on people, but we’re reducing overtime. We’re trying to run our baler at off hours which is higher productivity when customers are not around. We’re handling items less. We used to store our motors at the far end of the facility. Now we created an area right near the truck docks so we don’t have to carry the material as far. We are looking at switching more products from lugger boxes to roll-offs so we do less trucking and save on transportation. Every month we are looking more carefully at rail costs versus trucking costs for outgoing. It’s also putting pressure on us in terms of being less generous with salary increases, but we are not cutting health care as some others have done.
“In the Raleigh area over the last six years, six new scrap yards and four shredders opened up, said Brown. “I’m a real customer service nut. We were the first yard to offer ATMs. We went from two nonferrous scales to eight, three truck scales and two ATMs. Despite this, I was losing business to these other new scrap yards, but didn’t get hurt too badly. Then in January, a new shredder opened up about 80 miles north in Reidsville, North Carolina. In March, another new shredder opened up in Rocky Mount, about 60 miles east of us. So when the price of steel went up about $.75 in March, we heard our closest competitor with a big shredder in the Raleigh area raised the scale price $3.25 per hundredweight to keep their market share. We had to compete with them, which destroyed our margin.
“Competition among shredders is the number one issue killing margins. For us, nonferrous volume is down a bit. Part of that has to do with the housing slump. The other thing is the sheer number of scrap yards – the little guys. There’s not a big barrier to entry into the scrap business. You buy a scale and you can open up a scrap yard,” Brown concluded.
Brown also mentioned that his company has also seen more “weighting” of incoming scrap loads with additions of dirt and concrete.
In southern California, Kurt Rexius, is the chief executive officer of P&T Metals, Inc. based in El Monte. P&T deals heavily in copper, aluminum, stainless and exotic metals. The company employs approximately 50 people. “California is pretty slack and scrap is seeing low volume for the last six months. Prices have also been very slack. Over the last couple of weeks it has picked up a little for copper. Other than that it’s a pretty flat market for copper, aluminum and stainless steel. Both buy and sell prices have been low,” said Rexius.
“Over the last year our margins have shrunk on copper, stainless steel and aluminum. To counteract this we are exploring every avenue. Everybody is hungry for scrap right now so all the dealers and buyers are reaching out for scrap, and a lot of our dealers are not doing very well. As long as prices are down, margins are going to stay down. If the economy gets a little better, that will help,” Rexius ended.
In Green Bay, Wisconsin we caught up with Bruce Haws, owner of Midwest Scrap Metals LLC. Midwest is a small ferrous and nonferrous scrap operation doing approximately $5 million in annual sales. “Over the past year a lot of my big industrial customers have been pretty slow and now with the colder weather coming in it has really slowed down,” said Haws. Our overall business margin has narrowed over the past year or so. I would say it is down 5 to 10 percent. Everyone is trying to cut it closer. As compared to four years ago, we are doing worse. I’d say we’re down about 20 percent.”
Midwest is combating tightening margins by concentrating on superior customer service. “Customers worry about the service. You have to treat them fairly,” said Haws.
On the east coast we interviewed Frank Lobascio, managing partner at Armor Metals & Recycling LLC in Pennsauken New Jersey, which serves the metro Philadelphia area and employs 16.
“We’re a company that’s about two and a half years old, but over the past year and a half I’ve found the margins to be squeezed. It’s definitely gotten tighter, especially in copper. When there are big price drops it’s hard for me to catch up, and I can’t afford to sit on the material or horde it and wait for the prices to go up. We do much better with a stable market. Actually, our margins have gotten a little better on ferrous with the wholesalers we sell to. A lot of them have increased their ability to process and have shredders that are very hungry. These shredders run 24/7 and their capabilities are so significant it’s pretty tough to keep them fed. Because we are a feeder yard, it’s actually helped us a little on iron. Here in the South Jersey-Philadelphia area you have a lot of big shredders in play. There are so many and there does not seem to be enough material to justify them. They are paying higher process and I sometimes wonder how they are making any money. That has helped us.
“In the retail part of this business you have people who are expecting a certain price for the material they bring in and there’s also a squeeze there. You have the competition of many yards close together and now you have the whole world economy that’s not bouncing back.
“Our major step to deal with tight margins is strong marketing and getting our name out there. We have a fantastic location. We also come from another industry where service was everything. So by implementing great service, we’re trying to increase our market share and move ahead a little faster. We’re watching every dime, of course. Forestalling pay raises, cutting hours, using part timers, considering health benefits are all things we are thinking about going forward,” Lobascio concluded.