Scrap Metals Supplement--Survival of the Fittest

Marty Davis’s great-great grandfather founded what would become Midland Davis Corp., Moline Ill., in 1892, collecting scrap metal with the aid of a horse and buggy. "Whether business was good or bad, the horse had to eat, he would say," recalls Davis, who now co-owns and manages the company with his brother.

The company has grown from its roots in scrap metal to include paper recycling. And the two Davis brothers at the helm of the current operation (Marty and his brother Mitch) are the fourth generation of their family to manage the Midland Davis recycling venture. It’s a pattern familiar to many small to mid-sized scrap companies that pass from one generation to the next and on down the line.

And while the pulse of consolidation in the scrap industry may be once again picking up, owners of mid-sized scrap companies, such as Marty Davis, still see a place for their independent businesses among the giants—and even some room for growth.

BIG FISH, LITTLE FISH AND ONE POND. Davis says his company has received only a few buyout offers over the years, and mostly informal ones at that. He says that while a corporation once casually courted Midland Davis’ paper operation, it had no real interest in the scrap metal half of the business, so the deal fizzled before it ever really existed. "Not a lot of big companies want both," Davis says. "They want one or the other."

Davis says while he doesn’t think mid-sized scrap operations are under extreme pressure from bigger firms to consolidate, there are certainly enough options to go around if a regional company wants to join with a larger corporation. "In the [consolidation] heyday in the mid-’90s a lot of scrap companies were getting bought up, and there was talk about how big that was going to become," he says. "But so far, that hasn’t happened; it has gone in spurts. But if somebody were looking to sell, that would be a viable option."

Manny Bodner of Bodner Metal & Iron, Houston, says his company has remained family-owned since 1948. For him, like Davis, the climate in the industry is one less of pressure and more of personal decisions.

He says the decision is based on how a company wants to grow. "Strategy may be part of it—opportunities may be presented, and you have the option to choose the best route for any particular company."

If a company chooses to remain independent, it faces a number of challenges trying to compete with its larger counterparts.

For one thing, bigger companies tend to have more resources and more money to spend in general, says John Sacco of Sierra Iron & Metal, Bakersfield, Calif. In addition to those advantages, Sacco, who is also currently secretary-treasurer of the Institute of Scrap Recycling Industries Inc. (ISRI), says corporations often escape the regional limitations of many smaller, family-owned operations.

"In our case, the bigger companies always have better markets," Sacco says. "Where we’re at, we’re limited by our markets. We can’t export boatloads, and there are not that many mills on the West Coast."

Sheer volume of material can put smaller or mid-sized scrap operations at a competitive disadvantage, Davis says. "For certain items, we just don’t get that much, so we have to go through a broker," he says. "But big companies are selling to the mills direct, so they have a price advantage on the sale end."

For Jim Bly of J&M Enterprises, Artesia, N.M., the problem often centers on financing and equipment. Bly says when he first started in the business he had no problem finding equipment to suit the needs of his small scrap and tire recycling facility.

But in recent years, Bly says it’s been increasingly difficult to get equipment that works with his smaller business. "A lot of the equipment manufacturers are gearing toward the bigger companies," he says. "I don’t need a $1 million machine that can do 10 tons per hour. I just don’t have that much material."

Davis, who is also a past president of ISRI’s Paper Stock Industries chapter, says because smaller companies deal in smaller amounts of material, they can be held to higher quality standards by buyers. "I’ve heard the charge made that mills might not come down as hard on (bigger corporations) because they need that quantity of material," he says. "Whether you can get away with less quality because you’re enormous, I don’t know. But our 150 tons per month that we ship, (mills) can replace that in the blink of an eye."

THE RELATIONSHIP FACTOR. But even if they’re sometimes outgunned, outnumbered and out-financed by large corporations, smaller companies have their own arsenal to help them edge out deep-pocketed, resource-rich corporate competitors.

For instance, Davis says that smaller companies can turn that pressure to put out the best quality product to their advantage. "If you don’t have the quality, you’re going to get bounced out," he says. "But if you have a reputation for a quality product, the mill knows it."

Bodner agrees. "All things equal, integrity is where the competition is; the integrity of your product."

For Bodner Metal & Iron, emphasizing quality is a way to make up for offering a smaller volume of material. "If you sell five tons vs. 50,000 tons, the advantage will go to the 50,000 tons," he says. "But you can get around that with integrity and quality."

Bringing in a smaller volume of material gives smaller companies the luxury of giving more attention to quality, says Bly. "Because we handle small amounts, we’re able to grade it better," he says. "Some of the mills might favor the smaller guys because they know that."

Aside from focusing on quality, mid-sized scrap companies can also excel in establishing relationships and services, Bodner says.

In terms of serving scrap generators, smaller companies can have the advantage when it comes to fast, flexible service, says Davis. "A lot of big companies are probably more inflexible in what they’ll take and when they’ll take it," he says. But smaller companies don’t have to be that rigid, he says. "For instance, if we have customers who want to come in on Sunday, we do it at the same price," Davis says.

Finding a market niche to differentiate it from a national or multinational firm doesn’t hurt, either. For Midland Davis, that meant evolving beyond ferrous and nonferrous scrap and developing a paper operation to complement the company’s foundation. "We provide a full gamut of recycling," Davis says.

Bly says he’s carved out a market niche by concentrating on smaller amounts of materials and foregoing handling large obsolete scrap objects in general. He says he focuses on doing things in smaller amounts and giving attention to whatever commodity has the strongest market at the time.

Another benefit for the smaller, independent scrap company might seem like a disadvantage at first, says Bly. "It’s hard to get contracts from mills like the big companies get," he says. But without a contract he is not obligated to sell to any particular mill. Instead, Bly says he can take his steel scrap to wherever the price is highest. For a national corporation, the difference in price Bly can get by playing the field would be negligible, but for him, he says it makes a big difference.

THE NEXT GENERATION. But while mid-sized companies can put their advantages to work for them, a significant hurdle always makes an independent company’s future uncertain—personnel. "It gets down to whether you have family in the business," says Sacco.