Scrapyards Squeeze Spending

If tough times don’t last they certainly linger.

A prolonged slump in scrap prices is prompting recycling centers to scale back or sell—and the pressures are likely to continue.

The total value of U.S. exports of all scrap commodities to China, whose once voracious appetite for commodities has weakened with its slowing economy, declined by 10 percent to $3.1 billion in the first half of 2015, according to an analysis of Census Bureau trade data by the Institute of Scrap Recycling Industries Inc. (ISRI). Export sales to China totaled $3.5 billion in the same period a year ago and $5.5 billion in the first half of 2011, ISRI researchers wrote in a scrap market report released on Aug. 8.

 “The big question is going to be how long this lasts,” said Scott Horne, general counsel and vice president of government relations for ISRI.

“It’s not going to resolve itself very quickly in China. As a result, a lot of people are looking for alternative markets to develop and to grow.”

Recyclers are also restructuring operations.

“A lot of people have cut back on hours or even laid people off,” Horne said. “That’s something our members hate to do because many of them are small businesses that have been around a long time and have a commitment to their labor force.”

Some businesses are selling their yards to other recyclers because plunging scrap prices have made it difficult for them to survive, particularly if they have not had the benefits of learning tough but important lessons from previous downturns, such as not to retain inventory too long or to over leverage.

“You can’t speculate on inventory. That’s dangerous,” Horne said. “There was a philosophy that you could buy low and wait until you could sell high but that strategy was upended in the downturn in the late ‘80s and early ‘90s because banking had become more difficult and it was a challenge for some to get financing.”

Highly leveraged recyclers eventually could not cover their debt payments during that prolonged downturn. Recyclers that entered the industry during more recent boom times may now be having similar challenges.

“A lot of people bought a lot of equipment when the market was so crazy and those who borrowed heavily to do that have felt some strain,” Horne said.

Scrap processing firm Metalico cited debt relief as a benefit of its recent sale to Total Merchant Ltd. for $102 million. Its “strengthened balance sheet will reinvigorate Metalico as a prominent force in its markets and potential acquirer of other scrap operations,” the New Jersey-based operator of scrap metal recycling facilities stated in a press release on Sept. 11.

Savvy recyclers can capitalize on the downturn, like by repairing or replacing equipment that they may not have properly maintained when they were running hard during market peaks.

“If people have socked away some money over the years, then this is a great time to be looking at becoming more efficient,” Horne said. “Anyone buying equipment right now is probably getting a deal.”

Slower markets are also ideal for investing in training and developing talent, Horne said. However, recyclers may be reluctant to spend until conditions improve.

“One can recommend but it’s up to the individual to have a good idea of their staying power and if they can take advantage,” Horne said.

Economists do not expect significant price increases soon, but Horne for one is confident that recovery is inevitable.

“It always seems to come back. If it didn’t come back we would be in a real global mess.  It wouldn’t just be us,” Horne said.

“This is clearly a global marketplace. We’re not the only ones suffering.”