Commodity Conundrum

Usually the value of the material is worth more as you go up the ladder to the final consumer. We try to go to wire mills or tube mills because they pay the best prices, but we have to give them the highest quality. This wasn’t always the case. Years ago, quality wasn’t as important to us as it was the Japanese.

Well you’re generating 5 percent scrap. The other 95 percent of your product just cost you more money.

The commodity price going up has an inverse affect on our clients and our customers. We’d rather have more customers that are very efficient and profitable than a lot of big customers that aren’t closely watching the value of the metals they are dealing with.

ADJUSTING FOR TURBULENCE

The protective mechanism we recommend to people is hedging—physical hedging or operations hedging—where it doesn’t matter whether the price is up or down; we’re in business to make money on the value that we’re adding, not necessarily the commodity prices.

As the recycler, what’s our business? Just like any other company … we are in business to make money, and how we do it is by handling scrap materials. And there are different levels, just like there are in other businesses. We’ve got retail…there are 1,800 small recyclers in the United States—shipping to either brokers, wholesalers or processors, wire choppers and shredders, who are specialty producers, or export processors doing the same thing as the wire choppers, smelters and refiners, mills and producers who are using the commodities that have been converted. Then there are specialty producers, such as foundries, steel mills, electroplaters and even chemical additives. Then, of course, is component and assembly reuse.

Why take something apart and refine it when it can be reused by somebody else as long as it doesn’t have proprietary information on it or it is not protected under some type of patent?

We ask people to know their disposal options … We were handling a lot of post-consumer goods, toys and appliances, and we were able to pay for them at the high commodity prices. Well, when commodity prices dropped in September, we couldn’t pay anymore. But disposal costs on the East Coast were anywhere from 15 cents to 20 cents per pound.

We went to our customers who we considered to be socially responsible, nonprofits and such, and said, "We can’t pay you any more for your scrap, but we can charge you less than you would pay to put them in the landfill.

The response we got was, "Well, you are a recycler and you’re supposed to be paying. If you can’t pay us, then we are going to throw it in the landfill."

And that was even with us providing the containers.

Even when you think you are doing the best thing at the best price, it is an uphill battle in convincing people that a recycler can make them money by saving them money even if there is a charge.

You’ve got aluminum, copper, iron, lead, stainless alloys, precious metals, paper and thermoplastics. If your people are not able to identify this stuff, it could be costly because you’re essentially paying for these materials.

The Chinese have learned about quality. One brass mill that we are delivering to informed me that they are now measuring the reflective properties of the metal that we are delivering to them. Not only does it have to have all the chemical analysis, but it has to reflect a certain amount of light. Another company wanted us to institute a statistical process control program to show what our reject rate was.

Demands in China are making companies in the U.S. more efficient and making them look harder at the money they are spending so they can be competitive.

ADDING VALUE

What are we doing with the material we receive from our customers? We are trying to keep their floors clean, providing containers or trailers to collect materials and saving time for our drivers when they pick up a load and bring out an empty container because we don’t have to wait for the customer to load it, it’s already loaded. We try to schedule route pickups and do multiple customers on one pickup to minimize the cost. We perform different types of sorting, dismantling and baling. We are giving balers to our customers so they can get more weight on the trailers. We are cutting and shearing, alloying, shredding and chopping and separating, incinerating and melting. These are all opportunities to add value but are a cost off what the metals would be worth.

From what I’ve seen, we can dismantle and generate a higher quality product with revenues that will offset the extra cost of labor. What we recommend is to dismantle electronics the way they were put together. Leave the pieces as large as you can.

IN BETTER DAYS

Everyone has been telling you about the market crashes; I want to show you how rapidly it went up. I remember copper when it was 48 cents per pound. I’ve been to copper mines where the cost of production outside the U.S. might be 40 cents per pound, inside the U. S. it might have been 90 cents per pound. So why were we paying $4 per pound last year for copper? All of the market prices are indicators; they don’t necessarily reflect the most important factor, which is supply and demand.

Where do prices come from? You can get them from New York Commodities Exchange, from the LME (London Metal Exchange), from several publications and from your buyers. It is a starting point, not an ending point. The ending point is the relationship that you have with the person you are selling to.

Again, these prices are averages. Maybe there are hazardous materials in there, maybe it doesn’t meet your customer’s expectations, maybe the top of the container doesn’t match the bottom—heavier materials tend to sink to the bottom. Because of the demand, the Shanghai copper price is 30 to 40 cents higher than the Comex price here in the United States. Asia is where the demand is.

We say don’t speculate. Base your business model on your operation and your value add, not on whether the commodity is going to go up or down. In some cases, you may want to sacrifice price for quick payment.

Editor’s Note: The following is an edited transcript of a presentation given by Mark Matza, executive vice president of Fortune Group, at the 2009 Recycling Today’s Electronics Recycling Conference & Trade Show, held in early June in Atlanta.