Brisk new auto sales good for recyclers
Any sign that the economy is improving is welcomed news for all Americans, but the four year growth streak in new auto sales is particularly good news for the recovering automotive industry and for most recyclers. More promising, auto industry experts expect new auto sales to continue to increase over the next few years. True Car, an authoritative automotive pricing and information website, raised its forecast for new U.S. auto sales to reach 16.5 million units for 2014 and 17.2 million for 2015.
This is a leading indicator that more used vehicles have been and will be entering the salvage and scrap markets. Fact is, the primary source of old steel scrap in the U.S. is automobiles. In 2010, the U.S. Geological Survey estimated that 13.5 million tons of ferrous scrap was recycled from automobiles, not including salvaged parts and many other scrap commodities.
At the same time that new auto sales have been increasing, light vehicles are staying on the road much longer. According to Polk, a leading provider of automotive information, the average age of all light vehicles on the road today stands at a record high of 11.4 years, based on review of over 247 million U.S. car and light truck registrations earlier this year. That’s up from the 2002 average of 9.2 years. Polk expects this trend to continue. The increased longevity of newer vehicles can be attributed to improved technology and fierce competition in the marketplace to deliver reliability and better gas mileage.
Bill Gager, president of the Automotive Parts Remanufacturers Association (APRA) commented on the Polk report: “The American consumer continues to keep their vehicles for longer than ever before and parts remanufacturing, which is the ultimate form of recycling, continues to benefit from this growing trend.” The Polk report also said that the number of vehicles older than 12 years has increased more than 20 percent and that is expected to continue to rise for at least the next 5 years.”
While better new car sales are good for most recyclers, some sectors may suffer. As disposable income rises, consumers buy more new vehicles rather than call on recyclers involved engine rebuilding and remanufacturing (R&R). This sector operates counter-cyclical to the economy as a whole. And, when consumer income levels are high, demand tends to fall because motorists are more willing to replace worn out vehicles rather than extend their useful life through rebuilding and remanufacturing engines. Contrarily, when consumer income growth is stagnant, R&R demand generally increases because these services are a cheaper alternative to vehicle replacement. According to the 2013 IBISWorld report on engine building and remanufacturing in the U.S., as consumers purchase more new cars, demand for R&R services is expected to fall.
Over the next five years, R&R industry revenue is forecast to stall as new vehicle purchases pick up. Consumer disposable income is projected to grow strongly, causing consumers to turn to new cars instead of R&R services. As such, IBISWorld forecasted industry revenue to fall at an annualized rate of 5.0 percent over 5 years to 2018.
The Automotive Engine Rebuilders Association (AERA) is the technical resource and industry voice for internal combustion engine builders, re-manufacturers, machine shops, OEMs, suppliers and service providers. American Recycler News asked Paul Hauglie, president of the AERA about the impact of new auto sales on his members. “Demand has slipped somewhat, but the engine builders are finding other areas to put their business to work. For example, expanding their automotive engine building to include light duty trucks and medium diesels; doing just cylinder head work and block work, working closer with the dealerships and specializing more in the restoration market. Obviously their business will take a dip especially when potential customers are buying new instead of rebuilding what they have. Many of these rebuilders have not been able to effectively communicate the benefit of rebuilding versus buying new, i.e. a bill of $3,000 instead of $30,000.”
Rob Wagman, president and chief executive officer of LKQ was asked about the effect of new car sales on his company.
According to Wagman, “New car sales are good for us from this perspective. It takes pressure off the used car market and hopefully the price of salvage should drop in the coming quarters. What we’ve found is when used car prices started increasing dramatically we had to pay more for salvage and they were less readily available. We think the surge in new car sales is generally good for the recycling industry. New cars obviously carry full insurance, whereas the average car on the road in the United States today is now a little over 11 years old and those cars carry less insurance, and therefore are less likely to get repaired. We see it positive for two reasons. One, more cars that are insured are more likely to be repaired because they are late model, and secondarily, we hope to see lower prices in the used car market. We see this as good signs of things to come.
“Obviously, the longer a car stays on the road, the more likely we are to sell mechanical parts. From a collision point of view, it’s probably not a good thing because as they get older the more likely they are to be totaled. So it’s kind of a shift in our business…newer cars require more sheet metal parts, while older cars need more mechanical parts. It’s really just a switch in the kind of components we sell,” said Wagman.
Joe Pickard, chief economist and director of commodities for the Institute of Scrap Recycling Industries (ISRI) weighed in on the effect of new auto sales on recyclers.
“I think in the long run the more vehicles that get sold, the more will find their way back into the recycling stream, which is good. Coming out of the recession, we’ve seen new vehicle sales improving, but we’ve also seen people holding onto cars much longer. For example, the National Automobile Dealer’s Association (NADA) has some recent numbers on vehicle scrappage, year to year, and they show a decrease in the value of light vehicle scrappage in 2012 versus 2011, even though total new vehicle sales were rising.” According to NADA, scrappage as a percent of registrations fell from 97.4 percent in 2011 to 82.3 percent in 2012 further verifying that people are keeping vehicles longer.
“There are other things at work in the scrap industry,” Pickard pointed out. “One is certainly related to pricing. We’ve sustained a period of weaker prices for iron and steel. As those prices come down there is less incentive for people to scrap vehicles because they are getting less money for them. We’ve also seen an increase in the number and size of automobile shredders, which has caused a lot of competition for available feedstock. In the late 70s there were about 160 shredders in operation and today well over 300, many with much larger capacity. That puts prices for scrap under pressure, and pressure on profit margins for scrap recyclers. On the demand side prices for the scrap they are selling have also been coming under pressure. Not every commodity grade, but the trend this year is that prices are generally down as compared to this time last year. It’s made a more challenging business environment for people recycling automobiles. A third trend is that a lot of the vehicles being fed to the shredder have less nonferrous metals and other types of valuables because they’ve already been removed. So the per unit value of those hulks are less valuable.
“As the economy grows and as the manufacturing sector increases, those are positive for the scrap recycling industry. Typically, vehicles being scrapped are about 60 percent ferrous by weight. But there’s also an increasing amount of aluminum for weight reduction to increase fuel efficiency going into new vehicles. Some other good news is that more shredder residue such as plastic, glass and rubber are beginning to find their way into the recycling stream,” Pickard concluded.
The trend towards keeping vehicles longer is beneficial to companies like Pull-A-Part, a fast growing self-serve chain of 25 locations in the Southeast, Midwest and Southwest which bills itself as the premiere do-it-yourself used auto parts superstore. At a company location or at its website a high-tech inventory system makes it easy for consumers to find a specific part and the exact location of the vehicle on a company lot. A typical lot holds anywhere from 1,500 to 2,000 vehicles, most 10 years or older. Using his or her own tools, the consumer removes the part to achieve savings.
Steve Levetan, senior vice president at Pull-A-Part commented on the state of his business: “On one hand, people are keeping their cars much longer, which means they need parts for those cars, which is good for our parts sales. But because people are keeping them much longer, it’s impacting our ability to get cars. However, we are able to source the cars that we need in a very dynamic marketplace. Business is good.
Finally, improved new car and light truck sales trickle down throughout the economy, especially to the numerous auto component manufacturers across the country and for those dealers recycling industrial ferrous and nonferrous prompt scrap metals generated from the manufacturing process.