Growing with the Times

Although the trend toward consolidation in the scrap industry is more prevalent in the ferrous scrap segment, nonferrous processors are feeling the heat as well. In Chicago, Universal Scrap Metals Inc. recently moved to a larger facility and acquired a nearby nonferrous operation, placing them in a stronger position to grow in a highly competitive marketplace.

Universal has been in the nonferrous scrap business since its founding in 1972, and has developed a good niche for itself, according to Philip Zeid, president. This has been enhanced by the company’s April acquisition of Mandel Metals’ Recycling Division, located a few blocks away in Chicago, which has its own niche in mill grade products. The acquisition increases USM’s nonferrous capacity by about a third.

"We already handled mill grade material, but Mandel Metals has a niche into mostly segregated types of aluminum," Zeid explains. "We often sell to the same people. Now we have significantly more volume to sell them, and we can prepare a much better package. So it’s an excellent addition to our business that blends well."

Today it’s important to seek economies of scale, says Zeid, because each year business expenses go up, but scrap prices fluctuate so much that it is difficult to maintain margins. "The fact is, we have no control, nor much influence, over the markets that dictate what consumers will pay for scrap. We add product value by preparing scrap to consumer specifications, but we cannot add to the base scrap price a reasonable processing charge for our work. So we have to look for ways to economize by eliminating duplication of effort. In the case of Mandel, with our facility and trucks, we can handle his business for about one third of what it costs to operate as a free standing business. That’s a real economy of scale."

According to Barry Riback, vice president of Universal, with the addition of Mandel Metals, Universal processes about 60 million to 70 million pounds of nonferrous scrap annually. "In addition, we handle about 15,000 tons a year of ferrous scrap," he says. "The steel part of the business is mostly a byproduct of our nonferrous industrial accounts."

Consolidation in the scrap processing industry is, overall, a good thing, Zeid maintains. "Larger, financially sound companies can afford the capital expenditures necessary to provide the quality services and products required by both customers and consumers," he says. "However, mergers and acquisitions join together privately owned entrepreneurial firms with independently operating personalities. One big question concerns management – on a national level, can they effectively manage this type of operation? I think it can be done, but it remains to be seen."

There already has been consolidation over the past 10 years as a result of natural attrition. "There used to be a lot more dealers like us 10 or 15 years ago; today there aren’t very many of us," says Zeid. Scrap processors have found that escalating operating costs, sizeable investments in new equipment and increasing competition force them to continually expand their businesses just to stay even.

"To thrive in today’s marketplace, we must develop economies of scale, find a niche with less competition, and develop relationships with consumers to provide premium priced, custom-made scrap packages," says Zeid. "Otherwise, we remain in the same old situation where scrap processing is a great business – but only when the markets are strong and prices are moving up. And when they’re not strong, it’s a struggle."

At the beginning of the year, Universal moved its operations to a new site a few blocks away from its previous location. The company’s new 121,000-square-foot facility is situated on 6.5 acres, which gives them more than 3 acres of open space for trailer storage, parking and future expansion. The new facility has allowed the company to expand to more than three times its previous size. Universal currently employs 54 people.

The majority of the company’s business is in aluminum alloy and copper alloy. "Volume-wise, aluminum is probably the larger part of our business, but in terms of revenues, it’s almost equal to copper because of the different values of copper versus aluminum," says Riback.

The company also trades other nonferrous metals, including nickel alloy, zinc, tin and precious metal scrap.

Universal buys scrap from industrial and manufacturing companies, independent scrap dealers serving all types of industrial accounts in the metropolitan Chicago area, recycling centers, disposal companies and other seasonal scrap generators. The company sells processed material to smelters and refineries throughout the Midwest and United States. Some material is exported to Asia, but this only amounts to about 5 percent of the business, says Riback.

"We export items that are very labor-intensive to process, including certain brass items and second grade copper," he says. "Lower labor costs in China and the Far East make it economically feasible to clean and process this type of scrap in those countries. Our consumers cannot use this material unless it is cleaned." The company does not export fines, slags and drosses which recent Chinese regulations typically do not allow.

In its new facility, Universal has a variety of scrap handling equipment, says Riback, including a Harris HRB 918W High Production Baler and a Logemann Briquetter. There are crane systems throughout the plant, including a 25-ton overhead crane in the facility’s aluminum high bay room. The room’s 58-foot ceiling allows the company to dump trailer loads there. The facility also has a totally enclosed drainage system, which is pumped out regularly by a licensed service, so there is no contamination to the water supply.

"We want to make sure our customers feel comfortable that their material is being handled properly, they’re receiving value, and it’s being processed in an environmentally safe facility," says Riback.

The company also has a variety of magnetic separation equipment, including drum magnets, overhead magnets, sorting tables and a slow-moving conveyor such as the type found in material recovery facilities where mixed metals can be sorted.

For moving material around the large facility, which has distinct areas for receiving, processing and shipping, Universal is developing a mechanized tramway system. This is far more efficient than moving individual boxes by forklift, says Riback.

"We have carts similar to baggage or mail carts," he explains. "We can pull them to different processing areas, where they are emptied. We will put dump hoppers on some carts. We’re focusing on plant logistics because as we get busier and have more metal to move around the plant, we have to find the best and most efficient way to do so."

Universal uses computerized metals identification equipment at two different locations, and has developed a fairly sophisticated computer system for keeping track of shipments received and sent out, says Zeid.

"We try to do everything on the computer," he says. "When dealers come in, we receive their material on the computer, and the receiving ticket is simultaneously printed out in the scale room and in the office. We always know what’s coming in and can have a check ready by the time the customer reaches the office door. Computerization allows us to have better control over what’s coming in and what’s available for shipment."

The trailer scale outside the plant can be weighed at any computer terminal in the plant, says Zeid. This means that the appropriate department can easily be in charge of weighing a shipment in or out.

"The control of a shipment goes where it belongs, and we are not tied to one person recording or weighing in trailerloads of material," he says. "From the standpoint of efficiency and accuracy, this works well. As we grow this allows us better control over our business – you have to know what’s going on in this business on an hourly basis."

The company also has digital color cameras focused on every scale which record everything that comes in and everything that goes out, so if there are questions, the recording can be used for reference.

"In our business, it’s the actual handling and processing of the metal that makes you successful," says Zeid. "Basically, you receive, process, package and ship. It’s not a complicated process, but when you’re handling large amounts of metal, it’s a process that has to be pretty fine tuned."

Although Universal’s new site had only a relatively small amount of environmental contamination – below reportable levels – from its previous inhabitants, the company made the decision to voluntarily enter the site into the state’s Soil Remediation Project, which is affiliated with the federal Brownfields Initiative Program. According to Zeid, Universal is one of the first scrap companies in the state to go through the program.

"We made this decision when we bought the property, since there was a high level of volatile organics in one area where the previous owners must have had a plating or painting operation," says Zeid. "It was nothing that was reportable or that would make this a Superfund site, but it exceeded the standards set forth by EPA. We had a choice: move in and operate and do nothing, or do what we did and work with the state to develop a set of environmental cleanup standards that were site-specific."

Universal did extensive testing to determine the extent of the site’s contamination. They developed and submitted an environmental risk management plan, which was approved by the state. As part of that plan, the company cleaned up one 40-foot by 40-foot area, disposing of the contaminated soil and paving over it. After inspection, the Illinois EPA issued the company a letter stating that the property is not a threat to human health and no further remediation is necessary.

"This eliminated liabilities for anything that existed prior to our being here," says Zeid. "When you buy industrial sites, you become responsible for past problems, and we didn’t want Universal or our customers exposed to that. Today we have a clean bill of health. It raises the comfort level for ourselves and for our customers."

Universal spent almost $200,000 between assessing the site, cleanup and working with the state developing the plan, but Zeid says this investment was well worth it. Another benefit of the cleanup is that the company’s bank is now much more comfortable financing the project, he says.

There has been a lot of movement in the last few years to create a variety of financing mechanisms for recycling businesses, but post-consumer or municipal recyclers have tended to be the ones to take advantage of these. Traditional scrap recyclers have tended to avoid them. But Universal has the attitude of taking advantage of whatever opportunities exist, and this has paid off handsomely, according to Zeid.

"We investigate all opportunities to determine what is the best way to finance a project," he explains. "When we first moved into this area in 1986, we worked with the city through a business development loan. Then when we decided to make this move, we knew we were in an Enterprise Zone and an Empowerment Zone, so we just investigated all the avenues that were available to us."

Although he says the city is more than happy to work with businesses, he admits the process is often frustrating. "They have all these programs and they want to help you, but you have to have a good constitution to go through the process – there is plenty of red tape and bureaucracy," he says. "But once you get through it, it’s well worth the time and effort. In fact, we could not have made this move without the help of the city and the cooperation of our bank."

When Universal first approached their bank about financing the new property, says Zeid, bank officials were nervous because of the presence of mild soil contamination. To make the project a reality, he says, cooperation and coordination between the city, the state and the company’s bank was essential.

"The city gave us a bridge loan – a two-year program that allowed us to purchase the property and equipment," he explains. "The loan is guaranteed by our bank, and IEPA accepted the property into the brownfields program. So we all worked together to create an acceptable package."

Going by the philosophy that "if you don’t ask, you don’t get an answer," says Zeid, Universal called up the local utilities to see what special programs were available, and they were delighted to find out they qualified for discounts on both electricity and gas. In addition, Universal contacted the county real estate tax department and found they had a program giving companies who develop and substantially rehabilitate property in Chicago a six-year tax break.

On the employee end, says Zeid, the company tapped into a State of Illinois program which gives grants to help provide classes for employees. The company calls its program "Universal U", he says. "We have an English class for Spanish-speaking employees, and another class for employees who want to improve their communication skills. We contribute an hour a week for each employee to go to class, and they contribute another hour, and part of this is funded by the state. Our employees really benefit from, and enjoy, the classes."

Universal even contacted the state’s Department of Conservation. "We were fortunate that the Department of Conservation was willing to work with us on an experimental urban reforestation project," says Zeid. "We received a grant of 1,000 trees to stabilize the soil, provide windbreak, noise and environmental barriers around the perimeter of the site. It was exciting to receive a shipment of that many trees."

The company also received a grant from Chicago’s Facade Rebate Program through which the city pays up to half the cost if a company improves the exterior facade of the building. "We’ve done a good deal of upgrading already," he says. "Right now we’re painting the facility, and the city grant pays for half of it."

Zeid speculates that most scrap processors are reluctant to take advantage of programs like these because they want to keep a low profile. "You do have to be up front and provide a lot of information about your business, but the fact is that the government is interested in creating jobs. If we move our business out of the city’s economic development zone, jobs are lost. So it’s to the advantage of the city government to work with us. In fact, they’ve been very cooperative."

Like many traditional scrap processors, Universal buys a lot of scrap from smaller dealers or peddlers. When Zeid first bought the business in 1985, he says, 80 percent of its business was from the smaller dealers. Today, that amount has diminished to about 40 percent, which he attributes partly to attrition and partly to changes in Universal’s business as it has grown. Nevertheless, the company strongly believes in supporting the smaller dealers who are able to give personalized service to many smaller accounts in a way that larger scrap companies simply can’t.

"The small accounts that don’t have a lot of metal are difficult for some of these larger companies to service – they want to pick up quickly, get in and get out," he says. "We have drivers that go in, help our customers load – that’s the personalized touch of the business. In nonferrous it’s particularly important to make sure it remains that way."

These independent peddlers who have a truck but no central yard of their own to consolidate scrap sell metal to larger companies like Universal, Zeid adds. "We’re their market. And with today’s trucking and transportation costs, it saves us a lot of money by having the smaller dealers deliver the scrap to our plant. And they’re out there every day buying metal. In effect, they become part of our sales force."

There are fewer of these smaller dealers who just have a truck and no place to consolidate scrap, says Zeid, because they can’t survive in today’s more competitive marketplace. The small dealer built the scrap business and although they are a smaller part of the business, they are still a vital part of the industry. "We’ve always respected these guys," he says, "and we’ll always support and buy metal from them."

In fact, Zeid’s father was a small independent scrap dealer, and this was his introduction to the scrap processing industry. Although he worked for his father while he was in high school and college, he did not enter the business immediately after college. He was vice president and director of marketing for Coronet Films from 1974 until 1982, and a senior manager for MCI Communications in 1982 and 1983. In late 1983 he started his own business to buy and sell scrap metals and became associated with Universal Scrap Metals.

"In 1979, my father was injured and could no longer work," Zeid explains. "He couldn’t leave the house but he still had a couple of accounts. To help pay the bills, I would take care of his customers around 6 a.m. before going to work and sold the metal to Universal. In 1982, Herb Polikoff’s partner at Universal passed away. I was still taking care of my father’s accounts while working as a senior manager for MCI, but I was looking for a different opportunity. I accepted Herb’s offer to come to Universal learn how to broker metals and give him a hand."

Tragically, Polikoff was killed in a skiing accident on New Year’s Eve in 1984. His family decided not to keep the business, and so Zeid purchased it in early 1985. In December of that year, Riback merged his business, Maltz Metal Co., into Universal. Riback’s family has been involved in the scrap metal business for two generations in Chicago, and he has been in the scrap business since 1967.

"He’s an old friend of mine from high school," says Zeid. "Barry’s business was more industrial, and he also had a retail business. At that time, 80 percent of Universal’s business consisted of buying from other dealers that served industrial accounts or served other parts of the community. Both focused on nonferrous scrap, and it was a good fit."

The markets for aluminum and copper are currently firm, says Zeid, but he is well aware that drastic changes could occur at any moment – witness the rapid decline in copper prices as a result of the Sumitomo scandal last year. "We think things are firm and this will continue," he says. "Economies are strong and demand is strong. We’ve seen only small price increases and decreases, which suggests stability."

Commodity markets have too much affect on metal prices, he adds. "The futures markets are there to lend stability and give you some fix on where things are, based on supply and demand, but this isn’t how it’s behaving," says Zeid. "If we could all get away from the idea that the base value of scrap is what the commodity market states, we would probably have more balanced pricing based on realistic supply and demand."

Zeid compares scrap processors to farmers without a subsidy, because they have no control over the price of their commodities. "How do you run a business when you can’t reasonably know or predict the selling price of your product? Our business is good – it’s growing, we have good demand and supply – but then you throw the unknown in there. In addition, our customers want to be paid well for the metal they sell us, and consumers want low prices for scrap. Somewhere there’s a combination that works, but it’s difficult to find that balance."

At some point, consumers will recognize the value in the careful processing and separation of scrap that processors do, he believes. Then processors can begin charging a price for scrap that exceeds, or is at least more stable than, market price.

"The mill charges their customers for the fabrication they do," he says. "At some point we’ll be able to say ‘we have a fabrication charge too. If you want the product presented in a way that meets your specs and is easy to consume, then it’s going to cost 3 to 5 cents a pound to do it.’ This charge will help us cover the expense of custom processing. When consolidation becomes more of a reality, consumers will find scrap to be available from fewer dealers. When they have to go to these sources, the terms they will discuss will be mutually beneficial."

Future plans for Universal include looking for opportunities to grow. Part of this is consolidating with other processors to produce economies of scale, as costs and expenses increase.

"This kind of umbrella will allow us to be stronger, maintain, and grow our business," says Zeid. "The process of consolidation also works at a local and a regional level. We look at it in terms of strengthening our position with our consumers and with our customers, because we can provide what we believe is a more efficient and quality-sensitive company."

Universal has made a commitment to grow the business, adds Zeid. "We’ve been contacted by a number of different people who are interested in talking about how we can work together, merge or acquire. We’re going to be selective about how we do it, but we’re going to look at all the opportunities."

Universal’s philosophy is to do business the old fashioned way, says Zeid. "We do that by maintaining relationships with the dealers and the smaller guys, by building our business through additional industrial accounts, and by making our product more quality conscious and consequently more valuable to our consumers," he says. "There’s no mystery to it – it’s simply doing the job we have to do better and more efficiently. We don’t have as many competitors as we did in the past, but it’s still a very competitive market. You just can’t be complacent."