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Corporate insight can lead to independent success

Dec 31, 2013 | 08:00 PM | Lisa Gordon

Tags  Scrap, veterans, executives, independent broker, midwest, profits, Lisa Gordon

Shrinking margins and corporate losses remain prevalent themes in the metals recycling industry, but executives who walk away from large companies can earn a decent living flying solo.

Three industry veterans, each with well over 20 years’ experience, who have become successful independent brokers within the past two years all said without hesitation that overhead is killing corporate scrap profits.

“I had long careers at two publicly held companies and what it all boils down to is corporate overhead is just too high. At one point I realized the (operation) was never going to make money and I would never get a bonus again,” a southern broker said. There are fewer layers in an onion than at the southern broker’s previous employer. “Each yard had its own accountant and the group of regional accountants was overseen by a central accountant,” he said. “Corporate recyclers are bloated with overhead.”

A Midwest broker said that corporate accountants who know nothing about the buy-sell aspect are given too much authority. “When things got tough in 2009, the banks started telling scrap companies how to operate, which meant the (corporate) accountants started telling buyers and sellers what to do. This type of thing takes precedence and you get away from the relationships,” he said.

Investments made to recapture metals aren’t always profitable, the southern broker noted. “It is not worth all the cost of the equipment to get out every pound. They have improved downstream nonferrous systems and are getting 99.5 percent in recovery, but the additional metal exceeds the investment and they are not able to recoup their investment.”

Companies in the South often have multiple shredders within 100 miles of each other, he said. “There are just too many shredders out there and no reason why one needs shredders this close to each other. If they figured this out, maybe they would start making money again,” he said.

The southern broker said his former employer was shipping 160,000 tons per month and losing $12 on each ton due to selling, general and administrative expenses. “And if you are only shipping 100,000 tons per month, (the loss) becomes $25 per ton,” he said.

The broker is using other scrapyards to process, load and deliver his material. He pays the toll processing scrapyard a higher premium for unprepared material and a lower fee for prepared material. “I don’t have a marketing team and don’t have a physical yard. I am doing well and bid shrewdly by running up the price. If I don’t get the contract, the guy who gets it is going to bleed,” he said.

The Midwest broker agreed that overhead is the primary problem, but not noted that misguided growth is not helping corporate scrap companies either. “When the markets were good, everybody thought ‘grow, grow, grow,’ and it wasn’t that prudent,” he said. Expanding a geographic footprint or processing capabilities wasn’t a sure bet. “If you look back across the landscape today, there are successful companies that are doing well but didn’t prosper as much during the big run-up. But they didn’t lose sight of who they were. Growth has to be with vision and not just for growth.”

Corporations that are slow-footed also struggle against the pure trading principles of the scrap industry. The Midwest broker said that when he was presented with a good deal, he would find the opportunity was gone by the time he cut through the red tape to gain approval. “People questioned deals, and by the time you could convince them the deal was gone,” he said. “It is a corporate way of thinking and not a family way of thinking. In our industry it is very tough for publicly traded companies to be profitable because our industry is not conducive to forced selling and the publicly companies have to do that.”

The Midwest broker’s toughest challenge is that the volume he handles each month can fluctuate tremendously, so he has learned to budget and not celebrate the boom months. “Am I more motivated than before? No. But I really enjoy being back to basics and getting deals done,” he said. “I didn’t have to reinvent the wheel because I know how to play the game.”

An eastern broker said he became disillusioned that he couldn’t pursue deals because it interfered with the corporate unit or required his bosses to think outside the box. “It goes back to flexibility. Even on a local level I was told, ‘No, it interferes with this yard’ or ‘No, it’s not what we do,’” he said.

Building a good reputation has been the key to his success, he said. “There are guys like myself who have relationships with people they have built and don’t have the overhead the others do. I don’t have the equipment, I have to make sure I pay people on time, and I can make a decision a lot quicker than these larger companies. There are a lot of positives to being an independent.”

The eastern broker’s biggest obstacle right now is the poor health of the U.S. economy. “The scrap business is a very competitive environment and everything you touch is so costly, but the toughest challenge is the economy because it is not where it needs to be,” he said.

The eastern broker stepped out on his own with blind faith and without a safety net. “I never had a chance to get scared or think about being scared because I have a family I need to provide for,” he said. “To do this, you’d better get moving each day because your phone is not going to ring by itself. Instead of being discouraged, I kept on persevering. And it doesn’t hurt that I am readily accessible 18 hours per day.”

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