Pain at the Pump

Consumers at the gas pump are not the only ones to feel the pain of filling up their tanks. Recyclers, often operating fleets of vehicles using thousands of gallons of diesel fuel per year, have been hit doubly hard with high diesel fuel prices and low commodity market prices. An increase or decrease of even a few cents per gallon can have a big effect on bottom-line profits.

In an attempt to manage some of these inflating but needed costs, several recycling companies are implementing tactics aimed at managing the volatile but necessary fuel cost component of their businesses.

MANAGING A MASSIVE TASK

With a fleet of more than 27,000 vehicles, diesel fuel is a necessity for Waste Management Inc., Houston. With waste hauling as its primary bsuiness focus, there are few options available to avoid using the estimated 250 millions gallons of diesel fuel the company’s fleet consumes each year.

And as some recycling companies and waste haulers have found, one of the necessary evils to surviving high fuel prices (and low commodity prices) is implementing a fuel surcharge to pass the added costs along to customers. Waste Management did just that, implementing a fuel surcharge to its customers April 1, 2000.

Vince Fortuna, vice president of fleet for Waste Management, says the decision to do so “was a tough one, but a necessary decision. We put a surcharge on and that is not always best because it really touches our customer base where it hurts."

John Franssen of Team Logistics, Verona, Va., says it was also necessary to implement a fuel surcharge at his company, but customers are becoming more understanding of the rising prices. “What most of the people like myself have done due to the high cost of fuel is to implement a fuel surcharge and pass that cost along to the brokers, and more so the mills.”

Team Logistics’ surcharge fluctuates on a weekly basis and is based on information from fuel trade magazines. “What we have done with some individual packers and brokers is we have reestablished some rates incorporating the surcharges,” Franssen remarks.

TACKLING THE ISSUE

Although Waste Management has implemented fuel surcharges, the company is approaching the high fuel costs several ways, Fortuna says. “We are approaching it from basically three angles. One is, we’re approaching it from a technology angle.

“One of the things we have done is we have been testing and recently standardized a new high-capacity idle pump. It produces the same amount of hydraulic pressure at idling, where with the old trucks you had to rev the engines up. That produces a significant fuel savings.”

Maintenance is another aspect of fleet management Waste Management is considering, he says. “We are constantly checking the overhead and injectors of the engine, the fuel systems and air filters, to make sure they are performing at optimum capabilities.” The company has also hired a full-time staff member to work specifically as a manager of fuels and emissions, Fortuna says. “This is moving to the forefront-fleet energy management is becoming a priority for a lot of people. The cost of crude oil and tighter controls the EPA is putting on engine performance is going to derogate fuel economy.”

Fortuna says mandates expected to be implemented by the U.S. Environmental Protection Agency (EPA), Washington, in 2006 are expected to increase costs even more for anyone with a fleet of vehicles.

The mandate is aimed at reducing emissions from the vehicles, but changes in a vehicle’s engine to comply with this ruling could affect fuel efficiency as well, and Fortuna says he is unsure of the exact effect these changes will have economically.

And while a one-cent drop in fuel prices may not sound significant to some, it can make a major difference for Waste Management with its economies of scale. “If we move fuel economy a half mile per gallon, it saves millions of dollars for us,” he says.

BARGAINS BY THE BUNCH

Like Waste Management, scrap recycling companies have also had to devise a strategy for diesel prices. Buying in bulk has been the approach OmniSource Corp., Fort Wayne, Ind., has been using to combat rising fuel prices. “The thing that affects us most is the diesel price, and believe it or not, it has actually gone down, although prices are still extremely high,” says Mike Moran, group president of OmniSource Transportation. “It has forced us to get more for our material or pay less, or both.”

Trying to buy fuel in bulk quantities or at fixed prices has helped OmniSource cope to some extent. “As far as our private fleet, what we have tried to do is we buy on a futures market. We buy bulk as much as possible and try to lock in a price that is going to be lower than the rack price on delivery.”

And this strategy appears to be working for OmniSource. “Overall it has saved us money,” Moran says. “We’ll lock it in depending on the deal. We price with three or four companies and lock it in for 30, 60, or 90-day contracts. Or, if we can’t get enough difference in rack prices we won’t sign a contract and take a load-to-load deal.”

Moran says the company tries to be as educated as possible about fuel prices and the market and then makes a decision.

Although the company has not had to implement an across-the-board fuel surcharge, OmniSource is taking fuel costs into consideration when giving estimates for deals. “We have built that in where it will bear it. We do take it into account and we have passed along fuel surcharges where we can,” Moran says.

Balancing the economics of the business against possibly losing a customer is a hard choice to make, Moran says. “Some [customers] say no, and you have to evaluate if you want to possibly lose them.”

Franssen echoes Moran’s sentiments in saying that while the company does need to look at its bottom line, keeping loyal customers is also a consideration that is taken into account when quoting prices. He says most people he deals with have become accustomed to the price fluctuations, as fuel is a necessary component to hauling materials and there is little control over the pricing.

“Each one is looking at an individual basis,” Franssen says, “but their eyes have been opened to it. They know it on both ends, the brokers and the mills, and they realize it is out there and they realize it is an issue.”

PINCHING PENNIES

Balcones Recycling, Farmers Branch, Texas, has also had to weigh keeping long-term customers versus the company’s bottom line profit. While there have been no changes in what the paper recycler collects as far as paper grades, the company is factoring in the added fuel costs when it provides quotes, and is looking at other sources of revenue, says Kerry Getter, president of Balcones. “We’re really not focusing as heavily on the paper recycling side of the business as we are in some other areas.”

“We haven’t changed in what we collect, but we are not pursuing new relationships with the vigor we have in the past,” Getter says. “We’re trying to utilize the assets we have to develop other revenue sources.”

Getter says the company has budgeted for the rising fuel costs. “We have budgeted for a 25% increase in fuel costs this year,” he says. “We have essentially budgeted for the numbers to be about the same as they were in the year 2000.”

Balcones has not implemented any one particular strategy in dealing with the high costs, and is trying not to pass that cost onto customers. “Really, all we are trying to do is re-price and not go back and put surcharges on existing customers,” he says.

LOOKING AHEAD

What will occur in the future with diesel prices is hard to say, Moran says. “Typically what happens is fuel will drop because they use the same crude for heating, so demand will drop in the spring and summer,” Moran says. “With what is going on now, who knows. It may not follow true to form.”

Franssen sees prices staying fairly stable for the time being. “What I’m anticipating is over the summer, when normally people are using it more for travel, what my gut tells me, is that it is going to remain where it is now, at least for the early part of the summer.”

But, he says, although prices have slightly dropped and seem to be stable for the moment, as soon as prices start to move, things start to go haywire, and no one can tell what will happen. RT

The author is the associate editor of Recycling Today.