Calculating The Spread

"Markets like these can make a dummy look like a genius," Steve Katz of City Scrap & Salvage, Akron, Ohio, says. "When markets are rising, you pick up margins," he says. "It can be quite easy to make money."

But that doesn’t mean recyclers are guaranteed record profits. They must still keep an eye on operating costs and ensure they are not overpaying for unprepared material. With the record prices being seen today in ferrous and nonferrous metals markets, obtaining material to process is one of a recycler’s chief expenses.

"It’s a very competitive world when it comes to acquiring scrap," Joel Denbo, manager of operations for Tennessee Valley Recycling, Decatur, Ala., says. "Our business is still governed by a trader’s mentality. We would like to make a 100 percent markup, but the marketplace doesn’t let that happen," he adds.

Recyclers could adopt a manufacturer’s mentality and demand a certain margin for their material, Denbo says, but that is unattainable on a consistent basis.

Katz says he pays as little as he has to for incoming material, noting the he doesn’t seek any prepared material for City Scrap, but does quote better prices should it be offered for sale. "If you have an educated seller, you have to pay more," he adds.

About 40 percent of City Scrap & Salvage’s business is from peddler traffic, while industrial accounts make up 60 percent of the company’s business. Katz says City Scrap typically realizes a higher margin on peddler material. However, landing new industrial accounts, he says, can mean "working for peanuts" until the account’s material can be fully incorporated into the company’s scrap mix.

Adam Weitsman of Upstate Shredding, Owego, N.Y., says 2008 is shaping up to be the highest-margin year in the company’s 11-year history. "Demand is great," he says.

Because of market volatility, he says Upstate Shredding, like most scrap processing operations, focuses on getting material processed and shipped as soon as possible. "We make money on every ton as long as we get it out by the end of the contract," he says.

"We don’t like to sit on much [material] at all," Katz of City Scrap says. "We turn inventory over a few times per month. We get it in, cut it and get it out."

Weitsman says he passes on material if he feels there is not a sufficient margin. "We buy a lot of scrap by rail," he says. "If the supplier is far away and it is toward the end of the month and I know the market is going to drop, it is better to pass on that material."

Denbo focuses on managing Tennessee Valley Recycling’s operating costs. "Everyone has similar costs in a particular region," he says. "Everyone has their own opinions on where the value is and the route to go."

While Weitsman has a formula he uses to calculate operating margin that takes into account the sale price of the shredded scrap; the zorba price; disposal, energy and transportation costs; and shredder maintenance, he says it only works 75 percent of the time. "A lot of it is going by gut," he says. "You have to react fast to changes in the market."

He adds that the energy to operate the shredder is still a small part of his operating expenses, as are labor costs. "Raw materials and trucking are the biggest costs," Weitsman says.

Although Upstate Shredding runs a large auto shredder and processes approximately 40,000 tons per month, Weitsman says he tries to keep the operation, with a staff of fewer than 30 employees, as lean as possible. The company’s production-oriented approach means that it employs no buyers or sales staff.

"The money is all in the production," Weitsman says. "You can add to the margin that way."

For instance, Upstate Shredding has focused on improving separation and sorting of material downstream of its auto shredder in an effort to lower disposal costs and to recover more nonferrous metals for resale. "You can’t increase your margins without reinvesting in your business," Weitsman says.

Operators of auto shredders are often able to work on a larger margin because of the nonferrous content in the goods to be shredded. However, I-beams and similar ferrous materials are lower margin items.

"I will shred anything I can in order to upgrade the sales price for the material," Katz says. "Right now we upgrade everything we can into busheling in order to maximize profit."

Escalating energy and transportation costs can also eat away at a scrap processors’ margins. When using outside transportation, Denbo suggests finding out what the transportation costs will be before making a deal, noting that they could have changed by dollars per ton in a short time. Escalating transportation rates could have a negative affect on an operation’s margin if not considered in advance of the sale.

Denbo adds, "The educated scrap dealer studies the expense matrix as hard as he can."

While transportation costs are increasing, they are a small percentage of an operation’s costs because the margins are so high currently, Katz says.

He adds that being scientific in regard to operating expenses is more critical the tighter margins are.

With production costs being a large factor in determining the spread a recycler can achieve, a breakdown could spell catastrophe for an operation. Both Weitsman and Katz cite major breakdowns as variables that could quickly erode profit margin.

"We try to have a spare of everything here," Weitsman says.

"You have to fix equipment as soon as possible," Katz says. He adds that repair costs are not always a factor, noting that often times, "Downtime is more costly than repairs."

Upstate Shredding has business interruption insurance for such reasons. "If I go down, I am protected," Weitsman says. "It’s an expensive policy, but I think you have to think of the worst-case scenario."

Additionally, getting a call at the end of the month from a low-margin account with a considerable volume of scrap when the market is falling could wreak havoc on a processor’s margins, Katz says. In such cases, a processor may have to walk away from the material. "We don’t like to do that," he says. "But we may have to do that if a large drop in prices is anticipated in the next month."

The author is managing editor of Recycling Today and can be contacted at dtoto@gie.net.