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Scrap volatility does not trump business savvy

Keywords: Tags  The Great Recession, scrap industry, ferrous scrap, No. 1 heavy melt, No. 1 dealer bundles, No. 1 busheling, shredded scrap

The Great Recession and its aftermath has been an interesting period for the scrap industry, to say the least. Demand and prices have dropped, soared, fallen and leveled out, while profit margins for the most part have been good.

Just two years ago, markets were in a state of near-euphoria after domestic mill productivity rebounded sharply and scrap export demand reached record levels. No one then thought that prices would reach historic highs, and yet 2011 saw the biggest average annual ferrous scrap values in history.

Although ferrous scrap prices were still at relatively high historical averages in the first quarter of 2013, they were well behind the first-quarter averages of the past two years. Still, No. 1 heavy melt, No. 1 dealer bundles, No. 1 busheling and shredded scrap are at strong levels, despite the volatility of the past two years. The combined average annual value of these materials through May 2013 is about 192 percent higher than it was 10 years ago, outpacing U.S. job growth, wages, energy costs, benefits (health care, pensions, etc.) and even the Dow Jones Industrial Average, which is up about 30 percent from 10 years ago (based on mid-May closing vs. yearly closing figures).

So even with all the economic uncertainty and volatility of the years leading up to and through the recession--including year-to-date 2013--the value received for scrap still outpaces most expenses. (However, such revenues can and do fluctuate wildly month to month, making each market cycle its own micro-economy, in many ways.)

That’s not to say everything is rosy today. Ferrous scrap has a fluctuating export market, as well as imports and competition from alternative iron inputs, to contend with; beyond this, consolidations, mergers and mills’ vertical integration of scrap sources continue to present challenges. In addition to similar threats in its industry, nonferrous scrap faces challenges on the environmental regulatory front and government efforts to rein in theft and fraud.

Add to that developing concerns over fuel costs and the sporadic scarcity of rail cars, and business practices often strain to keep up with the next problem. But those businesses that have and continue to be steady rather than mercurial are succeeding despite these challenges. A scrap venture willing to innovate, to stress efficiency and safety, and to invest in new technologies and strategies will survive and thrive.

Scrap usually is a high-volume, low-margin business; moving a lot of material through the yard cheaply and efficiently is critical. When demand is low and scrap is in short supply, that can be a difficult objective to sustain. However, the difficulty should not stand in the way of moves that will improve those aspects of the business. Those sellers who made money during the recession did so by following good business practices and taking advantage of timing when factors were in their favor.

Enough months saw strong mill buying, high export demand and rising prices--or a combination of all three, in a few rare instances--to drive good margins for those collecting and selling scrap. When these factors are strong, the scrap business can experience some extraordinarily profitable periods. When they are weak, times are tough. But when they are mixed, as in during the past two-year stretch, they challenge business savvy and managerial instincts.

Ultimately, scrap dealers have no more objective insight than anyone else involved in the economy on when consumer buying will increase, foreign demand will spike upward again or steel productivity will rebound. Yet one of the most important skills needed in running a thriving scrapyard is being able to manage the business through the cyclical periods of declining revenue. That means anticipating market trends and making investments that make sense in today’s environment and for tomorrow’s opportunities.

Scrap businesses should not lose sight of their competition, their role in the local market, their long-term customers, their communities or their goals. Being aware of such things--along with getting a handle on those issues that are more or less at the sole discretion of the yard owner--is the simple yet essential secret to future success.

Despite all the risks and challenges, many sellers keep a “sky’s the limit” attitude toward growth and profitability. And more successful businesses view the natural volatility of the industry as just another truth to factor into planning. Such an approach, they say, can lead to innovation and greater self-knowledge about business practices. Such thinking can make the next decade as dramatically successful and profitable as the past 10 years have been, but only if businesses are ready to take advantage of the twists and turns the market brings to them.

Yet one word--uncertainty--continues to keep a lid on industry exuberance. Although the doubts about economic recovery are deep-seated and hard to ignore, sellers believe that a turnaround is on its way. Some believe that prices may have bottomed out for this cycle and will continue to hold or improve in the coming months, even if the rest of the metals sector isn’t feeling particularly exuberant right now. And although there is much grousing over current political, economic and regulatory environments, most scrap sellers are fueled by optimism. Despite May’s price drops, scrap market players will say privately that another recovery is probably already just around the corner.

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