Sparking Interest

Scrap recyclers traditionally have operated in the background, laboring in relative obscurity.

Lately, however, a host of macro-economic indicators have made the recycling industry more visible. This visibility has been a blessing and a curse. Consolidation in the metals and mining industry has helped to make scrap metal recyclers a more visible and essential link in the supply chain.

Market volatility also has brought to light some other trends, including interest on the part of venture capitalists. Part of the reason has undoubtedly been the increased interest in "green" technology and the concept of sustainability. However, for-profit businesses also see opportunities to take advantage of macro trends as a money-making venture.

Meanwhile, many hedge funds and other investment houses continue to play an over-sized role in many nonferrous commodities. Their actions have sent many nonferrous metals, notably copper, nickel and even lead, on quite a roller coaster ride.

On the negative side, higher metals prices have resulted in an explosion of scrap metal theft.

EVERYTHING BUT THE KITCHEN SINK. Scrap metal theft is a growing problem. In response local legislators have introduced a multitude of legislation that, in some cases, could be crippling to companies in the industry.

Many scrap dealers have significant concerns. The patchwork quilt of legislation has included requiring sellers to present their drivers’ licenses, dealers to take photos of the seller or the scrap load, mandating scrap recyclers to pay for material only by check after a prescribed time has elapsed, and forcing scrap dealers to hold material on site for a number of days before processing it. Not only do tag-and-hold requirements create a logistical nightmare for many yards in light of space constraints, the policy also makes it more difficult for dealers to effectively and profitably move material, especially in a volatile market.

Scrap metal theft is far from a nuisance crime. The U.S. Department of Energy reports the losses to businesses as a result of scrap metal theft are approximately $1 billion. In addition, these thefts have caused outages in power, telephone service and other basic public services.

Scott Stolberg, president and CEO of AAEQ, a Las Vegas scrap metal recycling firm, says his company has implemented many of the policies the Institute of Scrap Recycling Industries Inc., (ISRI), Washington, suggests, including recording the seller’s driver’s license and license plate numbers.

Chuck Carr, ISRI vice president of member services and communications, says the association has taken a proactive stance in addressing the situation. In addition to sending out scrap metal theft alerts to its members whenever there are theft reports, the association is educating law enforcement agencies throughout the country on the best ways to reduce the possibility of theft.

"We have encouraged companies to take IDs, train employees to spot material and know what to do when they see stolen material," Carr says. "We have to be a part of the process to educate people."

Success is taking place locally, fueled by greater cooperation among scrap dealers and law enforcement agencies. In the Knoxville, Tenn., area, for example, law enforcement agencies have partnered with local scrap metal recyclers to develop a network to report metal thefts in the area.

"We communicate daily with scrap dealers," J.D. Burrell, one of the Knoxville detectives involved in the scrap metal theft program, says. "There is nothing magical; we have just increased communication."

Investigators say the task force now includes approximately 40 agents in 14 counties in Tennessee.

Other successes are sprouting up around the country. In the Macon, Ga., area, a partnership between scrap dealers, law enforcement and others has resulted in a significant decrease in the number of scrap metal thefts. Since the Macon-Middle Georgia Metal Theft Committee was formed in November of 2006, scrap metal thefts have declined sharply from more than 80 in December of 2006 to nine this past October.

MERGERS MAKE HEADLINES. Merger mania is sweeping all facets of the metals industry. Vertical integration is a popular strategy in which companies look to purchase upstream and downstream operations to guarantee themselves a supply of raw materials as well as the finishing operations.

Merger activity has rocked the scrap industry before. The first wave of consolidation that took place during the last decade of the 20th century was done to land more material. In some cases, these deals stitched together disparate facilities throughout the country and were paid for with stock, resulting in bankruptcy for some companies.

The earlier generation of acquisition-minded leaders is no longer around. In their place is a new generation of scrap and metals industry leaders touting a strategic approach to their businesses deals.

Looking at the most recent blockbuster deal, the Steel Dynamics Inc. (SDI) acquisition of OmniSource, the move appears logical. The two companies have had a long-term relationship, with the owners of OmniSource an earlier participant in the growth and development of SDI.

Charles Bradford with Bradford Research, notes that the SDI/OmniSource deal makes sense, adding that SDI gains a significant advantage by protecting a large portion of its raw material supply.

This isn’t the only move the company has taken to protect its raw material supply. SDI, along with Kobe Steel, has created a joint venture that is building an iron nugget manufacturing plant on Minnesota’s Iron Range. The plant is projected to produce 500,000 tons of iron nuggets per year.

The SDI/OmniSource deal is only the most recent merger. Sims’ acquisition of Metal Management takes a different tack. Sims Metal, a scrap recycler with operations throughout the world, has made a play for Metal Management, a U.S. scrap metal giant, as a way to boost the amount of scrap Sims exports, especially to China.

The Metal Management deal is only one of the most recent acquisitions by Sims, which also has snapped up several electronics recycling firms, both in the United States and in Europe.

Frank McGrew with Morgan Joseph, a mid-market investment bank, notes that in the past companies sought to grow through economies of scale, however, their moves now partly reflect well-thought-out strategies. Companies, notably producers of finished products, are looking at their portfolios of companies and seeing holes they can fill. Many companies are becoming as vertically integrated as possible.

These high-profile acquisitions are not the only moves that have occurred during the past year. Recognizing the importance of strengthening their volumes in a particular geographic area, other privately owned scrap metal recyclers have added to their processing capacity in particular geographic regions.

Eric Prouty, an analyst with Canaccord Adams, a private investment company, says consolidation will continue through 2008. This won’t be limited to one segment of the metals business, but will include producers of finished steel as well as upstream suppliers of raw material, whether scrap metal or a mining product.

"Recycling will become more global. Companies will scale up. They no longer can be viewed as regional," Prouty says. "I also expect to see more vertical integration."

While some companies say they feel private equity firms have been slowing their moves in the recycling business, Prouty sees more private money being allocated to recycling.

THE ROLE OF PRIVATE EQUITY. While mergers have picked up steam in the industry, private equity firms, in many instances, are sitting on the sidelines.

McGrew says there are several reasons for the lack of private equity funding currently. After initial equipment, land and permitting costs, the material is essentially a commodity, which is driven primarily by price.

Also, while profits in the scrap industry have been robust during the last few years, a healthy return on investment for a $5 million investment is often too small to generate enthusiasm from many private equity firms.

A recent report by Standard & Poors notes that the nearly $70 billion in debt that has been accrued in the metals business through acquisition has come from many private equity sponsored leveraged buyouts.

Among these is the high-profile acquisition of Aleris, an aluminum and zinc recycling operation, by private equity firm Texas Pacific Group. More recently, TMB Industries, a Chicago-based private equity firm, has acquired Stainless Foundry & Engineering Inc., a Milwaukee-based provider of low-alloy steel and stainless steel.

Further indication of the interest by venture capital money, Environmental Capital Partners recently announced that is has partnered with New York Private Bank & Trust to invest $100 million in middle-market green companies, including recycling-related operations.

The use of venture capital funding, however, could see a slowdown if credit markets see tightening because of uncertain economic indicators.

A WEAKER DOLLAR. During the past year, the U.S. dollar has declined in comparison to many other foreign currencies. The drop has resulted in positives and negatives.

On the positive side, the lower dollar means U.S. companies are able to export material at a more favorable rate. Reflecting this trend, Bradford notes that recent figures from the Commerce Department show total exports up nearly 20 percent.

Alternatively, the weaker dollar creates opportunities for voracious overseas companies to make strategic acquisitions in the United States.

While there are some challenges for the steel industry, such as the wheezing domestic auto industry and a slumping housing sector, a number of analysts have reported that the by the fourth quarter of 2007, the steel sector would strengthen. U.S. manufacturing has picked up, while consumption by China continues to keep the flow of material strong. At the same time, the weak U.S. dollar is limiting the imports of goods into the United States, which bodes well for domestic steel companies.

The largest concern is the overall health of the U.S., and by extension, the global economy. As problems with the housing sector grow, more economists are looking at a greater likelihood of a sluggish economy.

The author is senior and Internet editor of Recycling Today and can be reached at dsandoval@gie.net.