Going Up?

A Positive Outlook For Scrap And The Auto Recycling Industry



Twenty years ago the auto recycling industry was flourishing. Many auto recyclers grew successful businesses by selling used parts to local customers, adding self-service yards and scrapping vehicles.

Then the Great Recession happened. From December 2007 to June 2009 and the gross domestic product fell 4.3 percent in that time, the largest decline in the postwar era, according to www.federalreservehistory.org. Scrap prices also fell to all-time lows. According to an Institute of Scrap Recycling Industries (ISRI, www.isri.org) report, the price of ferrous scrap went from about $750 a ton (at its highest) around July 2008 to about $111 in Nov. 2008. Prices rebounded somewhat after that, but continued to drop after 2011. Some auto recyclers even reported seeing scrap priced as low as $30 a ton at one point.

One of the reasons prices dropped so low was that commodity prices were on a downward trend. China’s aggressive growth had slowed, leaving excess supply in the United States. At the end of 2011, there were 300 shredders in the United States in 2016 100 of those shredders were shut down. The forecast didn’t look good either. In 2015 ISRI held a Commodities Roundtable in Chicago, Ill. Panelists commented that U.S. exports were to most likely stay way down. But now, outlooks for 2017 are finally looking up.

 

Scrap Outlook

ISRI issued a news new release in Dec. 2016 that said scrap prices had a strong finish in 2016.

“Tighter domestic scrap inventories, elevated raw material prices for iron ore and coking coal, a series of domestic sheet price increases, reduced imports of steel into the U.S. and improving demand for U.S. ferrous scrap overseas have all contributed to a rebound in scrap prices in the fourth quarter of 2016,” the release stated.

The release stated that published reports from early December indicated ferrous scrap grades were up from $40 to $50 per ton, with the American Metal Market listing regional number one HMS prices in the $240 - $260 price range.

Looking ahead to 2017, Joe Pickard, chief economist and director of commodities for ISRI, told The Locator that the scrap forecast looks positive. He said there are several economic indicators for this, including an encouraging U.S. labor market and rising numbers from the manufacturing sector.

“The manufacturing PMI (purchasing managers’ index) report for February 2017 was the highest it’s been since August 2014. That’s a good indicator,” he said.

There has also been an increase in steel production, which bodes well for scrap demand, Pickard said. In January 2017, ISRI’s own weighted index, the ISRI Index, hit its highest level since 2015.

“We’ve also seen improving scrap prices overseas in Turkey, that’s our largest overseas market, and that tends to support market prices in the United States,” he explained.

IScrapapp.com reported in its Mar. 8, 2017 blog that the markets are remaining strong and strong prices are being seen across the United States and Canada. Non-ferrous aluminum prices are continuing to rise steadily, to near two-year highs, the blog stated. Copper has stayed strong and remained at an 18-month high and ferrous prices are also on the continual rise. The site reported that automobile scrap in Girard, Ohio was paying $195 per ton on Mar. 7, 2017.

 

Auto Recycling Growth

The rise in scrap prices can be seen as a benefit to auto recyclers and the auto recycling industry as a whole. Industry sources are already seeing an increase in part sales.

The 2016 Update of the Mitchell Collision Parts Price Index, by Greg Horn, vice president, Industry Relations and featured in the Mitchell Industry Trends Report (www.mitchell.com), showed the recycled parts index had a nearly 10-point increase from 2015 and is the fastest rising part type. Horn noted that there has been a rapid increase of remanufactured parts, which consists mainly of remanufactured alloy wheels. And, looking at a further breakdown of recycled part pricing, he stated that the recycled index for General Motors had the highest point increase of any index.

Major players in the auto recycling industry are echoing that growth. LKQ Corporation announced results for its fourth quarter, and full year ended December 31, 2016, on February 23, 2017. While fourth quarter net income was down 9.2 percent net income for full year 2016 was $464 million, an increase of 9.6 percent as compared to $423.2 million for the same period of 2015.

Robert Wagman, president and CEO of LKQ (www.lkqcorp.com), said that Wholesale-North America achieved its highest annual margin levels in the last five years. “Parts and services organic revenue growth in the fourth quarter of 2016 was 3.8 percent, but the company achieved organic growth of 5.2 percent on a same day basis, including 3.0 percent in North America, after adjusting for differences in selling days between the fourth quarter this year and last year. These growth rates are consistent with the 4.8 percent and 2.9 percent we achieved company-wide and in North America, respectively, for the full year,” he said in the company’s statement.

Schnitzer Steel Industries, Inc. (www.schnitzersteel.com) also released positive growth statistics for its Metals Recycling division (AMR). The company stated in a January 2017 earnings report (which released its fiscal first quarter 2017 results - ending on Nov. 30, 2016) that the AMR delivered its best first quarter performance since fiscal 2012. The AMR’s total first quarter revenues up 11 percent from 2016. The company stated improved market conditions contributed to the improvement, along with cost reductions and productivity initiatives.

The company stated it expects AMR’s operating income for the second quarter to increase sequentially and year-over-year driven by the continued improvements in market conditions for recycled metals.

“In the first quarter, AMR delivered a substantial increase in operating income compared to the prior year quarter, largely due to the increased contributions from the successful implementation of our cost savings and productivity initiatives. In the second quarter, our expectations for improved performance are underpinned by the stronger market environment that we are experiencing as well as continued progress on our strategic initiatives to reduce costs, deliver internally-generated synergies and drive further productivity initiatives,” commented Tamara Lundgren, President and Chief Executive Officer in the company’s release.

 

Risk Factors

While the forecast looks good for 2017, Pickard did warn that the commodities markets are volatile and you never know where prices will head. “Risk factors that are still being contended with are the nature of commodities markets in general,” he said. “When prices improve, there tends to be more supply and that can put a lid on prices.”

Pickard acknowledged other factors like a strong U.S. dollar, which can hurt overseas markets, and political concerns could affect the scrap industry. And, there are still a lot of questions about scrap demand from China. Even though 70 percent of scrap demand gets consumed in the United States, that 30 percent is still a big market. Pickard said future growth markets are pointing to Southeast Asia and the India subcontinent, including India and also Bangladesh and Pakistan. He said Latin America could be the next big overseas market.

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