MAY 2012

Scrap metal recycling: Expanding in a recovering environment

Valued at over $60 billion, the United States ferrous and nonferrous scrap metal recycling industry continues to grow, driven by a recovering U.S. economy, a growing Asian economy, and the growing demand for products manufactured with recycled materials. M&A has continued among the major players, including PSC Metals, Metalico, Nucor, Schnitzer and SIMS Metal Management.

Despite the volatile economic activity across the global markets, the outlook for the sector remains positive as the demand for scrap metal grows among both domestic and global consumers.

Steel is the most recycled material worldwide. In 2010 in the U.S., 74 million metric tons of scrap steel were processed by the scrap recycling industry, representing a U.S. ferrous scrap market value of over $22 billion. The U.S. is the largest exporter in the world, shipping ferrous scrap to over 90 countries around the world including China, South Korea, Turkey, Taiwan and India, with Turkey being the largest importer of scrap steel.

Besides growth in steel demand, a large contributor to demand for steel scrap involves the rate at which producers use scrap steel to produce steel. China, now the world’s largest steel producer, has contributed to the reduction in the global percentage of scrap steel used to produce steel, from 43.9 percent in 2000 to 37.5 percent in 2010. However, China’s scrap steel usage is expected to increase significantly by 2015 according to the country’s five year plan.

Scrap steel is processed into a commodity grade material and used to produce over 75 percent of raw steel in the U.S. Some of this steel gets recycled again, further extending the economic and environmental benefits.

With the use of scrap steel, CO2 emissions are reduced by 58 percent versus steel produced from raw ore. Furthermore, manufacturing steel using scrap steel requires 60 percent less energy than producing it from iron ore.

Nonferrous metals do not lose their chemical or physical properties in the recycling process, allowing these metals to be recycled an infinite amount of times. In the U.S. alone, the value of the nonferrous scrap industry rose to almost $40 billion, which is a 28 percent increase from 2008 to 2010.

The scrap recycling industry remains highly fragmented, with the top 20 companies controlling about 35 percent of the sector. In the U.S. there are well over 500 independent recyclers with more than 1,000 operating locations, and many of these are family operated.

The industry is characterized by high barriers to entry due to strict government regulations, the high price of capital equipment and the value and scarcity of land required to process scrap in some regions.

Larger recyclers are expanding, and consolidation is expected to continue in this fragmented setting. For example, SIMS Metal Management was particularly active globally in 2011, closing a total of eight acquisitions in various global locations. In April of 2011, Schnitzer purchased American Metal Group of Los Angeles, California. This acquisition enhanced Schnitzer’s supply network in Northern California and expanded metal recycling operations in that region.

On November 28, 2011, Icahn Enterprises put in a bid to acquire the remaining 90 percent it did not own of Commercial Metals, offering $1.73 billion (total enterprise value $2.91 billion). The offer price of $15 per share from Icahn Enterprises LP represented a premium of 31 percent. This offer valued the equity at 7.0x LTM EBITDA. This offer has recently been formally withdrawn by Icahn after failing to win the level of support they had sought from other shareholders.

Improving economic conditions and demand from developing countries will continue to drive the growth in the scrap metal sector. Mergers and acquisitions will continue as producers seek to build scale and drive profitability. These trends are important to consider in maximizing the value of a business in this sector.