Friday, 14 June 2013

Micro Level Trends – Steel Recycling – A New Era of “Muck w' Brass” in Auto-Bodies

There's an old British saying that “Where there's muck there is brass”, whereby, “muck” indicates dirtiness and “brass” money. Originating from agriculture, 'muck' meant animal manure diluted with water to allow 'muck spreading' over arable fields for soil fertilisation.

Sometimes quoted here in the UK with the over-affectation of a broad Yorkshire accent...”Whe' Moock ther' be Brass”. Such a mentality gave rise to the self-made industrial barons during the 18th and 19th century, their no-nonsense, common sense attitudes ironically much akin to those of the diminishing landed gentry many would eventually succeed. 

Both groups though - with focus on the physical (land, commodities and goods) - a world away from the financial ephemera and glitterati seen in those less reputable areas of The City and Mayfair; where all too often throughout history, other people's money was misdirected into over-hyped, ambitious 'projections and schemes' thanks to liberal 'schmoozing'.

[NB Unfortunately today similar and worse occurs at the other end of the social spectrum, with 'sign-ups' to on-line 'millionaire' money-making schemes (confidence tricks). History repeating itself via new formats].

In essence, the 'Muck w' Brass' saying depicts a true value of often under-appreciated physical materials in the here and now; as opposed to the exaggerated expectation and over-appreciation of the meta-physical and often downright ethereal.

Timing is Everything -

The phrase itself obviously pertains to the fact that during specific periods, when a prevailing economic picture has formed that highlights the start of any new economic upswing, it is the base materials of everyday use become the new 'cash-cows'.

Those who are able to collect and store such materials at a low cost during the previous downturn and during the tentative beginnings of the upturn, then obviously find themselves well positioned to release their recyclable wares to a receptive market. Thus able to sell-on their accrued holdings in a 'sweet-spot' period when overall supply has become restricted, thus not meeting a revitalised demand, and so material price (usually by class and weight) rises. The simple rule of demand-supply economics.

[NB That is of course until the rising demand and restricted supply picture softens and plateaus thanks to new market entrants and sourcing channels, and so the relationship inevitably switches.
The Here and Now -
Today, in the sphere of materials recycling regards “refined ferrous metals” (ie steel and steel-alloys) signs for the beginning of a new positive era are appearing. More specifically in the arena of recyclable old vehicle bodies and engine parts, though perhaps less so for components.

Therefore, positive for those participants that have remained within vehicle recycling.

[NB Many SME participants have either been squeezed-out of the sector, or consolidated into larger players, as an outcome of high capital expenditure costs to satisfy governmental and EU regulation over the last 15 years or so]

Qualifying Materials -

The materials of specific interest being metals such as: mild steel (eg vehicle bodies, white goods casings), carbon steel (medium and high precision industrial tooling), stainless steel (both domestic and industrial uses), cast iron (engine blocks, train bogey wheels etc).

The Present Economic Backdrop -

We obviously presently exist an age where necessary western governmental austerity has been balanced by expectation of continued and QE programmes. All in an effort to create 'pump-priming' and improve financial trickle-down, so creating the conditions for new growth across the 'triad regions' (N.America, Europe and Japan').

Though indicators are still only tentatively positive, the US Fed's high liquidity injections into domestic banking sector (Wall St, Fannie Mae and Freddie Mac ) and industry (GM, Chrysler et al) is now broadly seen as having been thus far a successful exercise to aid economic recovery. That model is now being replayed, arguably to an even higher proportionate extent via 'Abenomics' in Japan and is expected to surface within the next 8-12 months as the only viable (last resort) kick-start solution to present European economic woes.

[NB As previously stated by investment-auto-motives, the 'austerity vs liquidity' policies are not opposites as widely understood by their respective conservative vs liberal ideologues, but infact ultimately complimentary phased initiatives].

A New Western Consumer Tailwind -

Although there have been criticisms that such QE has thus far done little more than artificially boost stock-market prices, across the US and UK even with limited practical deployment of programmes such as 'Lending for Business', commercial sentiment in various B2B and B2C sectors is seemingly slowly improving.

Inevitably, there will continue to be mixed messages, such as here in the UK the present divergent fortunes of the giant Tesco supermarket empire versus the reborn (so far) success story of the travel agency Thomas Cook.

However, whilst the managers purchasing index reflects a necessary 'workshop-floor' cautiousness, the combined positive results of a buoyed stock-markets, reduced business and personal debt-levels (tho' still high), 'austerity fatigue', spring-time positiveness and an improved housing market has buoyed general consumer confidence.

Hence, those companies best positioned within their own sectors, both 'internally' and 'externally' through: balance-sheet strength, fine-tuned inventory, strong supplier relationships, contained fixed and variable costs, meaningful advertising, targeted product offerings, general brand relevance and physical and virtual end-user connections are thus able to leverage their competitive advantages.

Though perhaps not as immediately obvious as the likes of personal electronics, the upturn in business and consumer spending on new vehicles, commercial and private, has demonstrated that firm B2B and B2B footings are being created via lower-risk credit availability and transactions. In the still cautious retail banking environment, this done increasingly through in-house, 'captive' auto- financing: extended to known and new clients.

Given the impact of the financial crisis, unsurprisingly the average age of the respective American and European car parcs has increased by a dramatic level, in stark contrast to those levels seen between 1995-2007.

This then means that a potentially massive level of pent-up demand will be moving from 'potential' to 'kinetic' status, the beginnings of that trend already under-way in the USA and UK.

This then changes the face of each country's car parc, as new buyers re-enter the market-place and the dynamic of the used market alters. As new cars are traded for old at dealerships, or indeed sold privately or through car-sales brokers, the previous hiatus to the used car market likewise aleters; across the ever decreasing values of 2nd, 3rd, 4th hand vehicles. Furthermore used vehicles are set to see residual prices drop as the previous fierce competition for what was a limited supply eases. As used vehicle prices fall and general credit eases, so a disincentive to buy, run and maintain older cars emerges. So greater numbers will (and seemingly already have begun) to be taken off the road for good.

This then benefits the vehicle scrappage / recycling sector, which is then able to obtain unwanted vehicles at no or low costs.

The ploy by such operators is to pretend to theoretically offer a set price in advertising, then upon inspection of the vehicle offer very little or no monies for removal; seemingly always stating a drop in metal prices and critically recognising that the vehicle increasingly becomes a cost liability for the owner/seller. Thus all too often the vehicle is removed with the notional 'seller' gaining nothing from the actual material value of the 'exchange'.

Thus as the new car market slowly re-gains its past momentum, so a tide of end-of-life vehicles will be headed to scrap-metal merchants and vehicle recyclers. The unfortunate outcome being that the now extended average age of the vehicle means that there is a very limited after-market for its used components, on a mileage/kilometre basis far more worn that in the modern past, and with no ready-made marketplace.

Thus intelligent merchants and recyclers will be reliant upon a sound business strategy and model which hones-in upon the mid-term value of recycled steel and partially aluminium, with as a secondary issue generally less easily recycled plastics, glass and textiles.

Thus a new tide of high quantity auto-body steel recycling is now under-way across the US, Canada, UK, Japan and eventually Western Europe.

China's Over-Production Headwind -

As the WSJ reported at the beginning of the week, tensions are growing between the EU and China regards the general global over-capacity of steel production.

China seen as the biggest culprit amongst the primary steel processing nations, with an estimated surplus of 200m tonnes for 2013, versus that of 40m in the EU, 37m in Russia, 16m in S.America, 16m in Japan, 5m in S.Korea, 5m in S.Africa and 15m for RoW. The reason for this being that

China's sector is a major pillar of the economy, with obviously a prime influence on input prices for what is now domestic orientated economy, aswell as the interests of over 4m direct and indirect employees.

It seems that the PRC leadership are intentionally maintaining an extended capacity at national level - and so over-supply at a global level - so as to effectively create an artificially low price ceiling for Sino industrial interests. One which in turn allows China's secondary industries to maintain their own margins in what has been a recently deflationary national environment. So assisting the internal financial strength of various players, including specialist infrastructure fabricators, civil and military engineering concerns, heavy goods and capex goods manufacturers, ship manufacturing and obviously home-grown auto manufacturers, themselves seeking improved market-share versus popular foreign nameplates. So, internal surplus aids the health of higher value industries.

As a result the present global steel demand represents only 80% of overall supply, China's 'help thyself' policy undermining the activities, price-targeting ambitions and strategic planning of other nations' steel processors and indeed partly those of global mining companies.

Mid-Term Ore Extraction Constraint -

The mining sector's largest players (eg Anglo-American, Glencore-Xstrata, Rio-Tinto, Corus etc) have well recognised that their expansionary exploration, extraction and M&A activities which became so much a part of their story for the last decade and half has largely come to an end.

Moreover the 'China Surplus Syndrome' in steel has proportionately deflated the extraction prices for ferrous metals, whilst the specialist and precious metals (ranging from platinum to gold and silver) have seen a pricing fall in recent times as previous EM demand from industry and consumers slows in line with slowed BRIC economies.

The outcome has seen mining companies' ambitions stifled, extraction levels contracted and profit margins slimmed. CEO's have stated that investors should effectively re-set expectations or exit the sector. This stated position itself a offering the possibility that such companies may seek to buy-back shares at discounted prices, or promote new investment interests for others with long-term perspectives buying into the trough.

Consequentially, mining companies will continue to simply seek a structural re-balancing of costs, with exploration and research and development being targets for budget cuts. Ultimately a matter of best 'sweating the assets' of open-cast and deep-level mines that exist within respective portfolios.

This then infers that a limited overall supply of iron-ore for steel-making will made available, with even that very much dependent upon actual and envisaged steel processing prices for rolled sheet, bar and billet steel prices.

Mid and Long Term Steel Processing Satisfaction -

This envisaged supply constraint from the mining sector then provides a golden opportunity for steel hoarders and steel recyclers.

Given that recycled steel has already been been effectively processed and 'refined' to produce the end item, it is far more easily and far less costly to re-process than the fresh processing (smelting) of extracted iron-ore (pig iron) or partly refined bar-iron and mixing-in the required complimentary ingredients: (basic steel) carbon and other alloying metals and minerals (manganese, phosphorous, sulphur, silicon).

Old recyclable steel is more easily treated, melted inside industrial crucibles with the insertion of necessary small quantity purification and carbonisation agents. This typically uses the EAF (Electric Arc Furnace) method which requires higher power input than conventional BOS (Basic Oxygen Steelmaking) and so becomes more cost efficient during periods of lower energy costs.

The world should be entering such an era as the lowered global energy requirement meets the incoming American shale energy revolution and oil and gas exporting nations re-set pricing levels to stimulate the global economy.

Thus recycled steel should be coming to the fore as an increasingly accessible, cleaner method for steel manufacturing; in all forms.

History Lessons -

The mid-term therefore could be viewed as possibly a re-run of the mid 1960s to early 1970s; when similar opportunities arose for some.

It was 're-processed' steel which gave Japan a manufacturing cost advantage during that period, thereby greatly assisting Toyota, Datsun/Nissan, Honda and others.

A plausible rumour has it that Japan used steel that had become available as the detrius of WW2 and Korean War. Cheap metal sourced from the salvaged sunken ships and the military hardware left behind by the Japanese, Korean and Western Allied Forces (eg anti-aircraft guns, tanks, jeeps, helicopters, airplanes, etc which were left on the islands and mainlands or simply thrown overboard from returning supply ships). However, the old steel was not 'purified' very well and led to sooner than expected new vehicle body rusting in wet-weather cold-climate countries in N.Europe and America/Canada and in the high humidity of salty coastal regions elsewhere.

This then a lesson to the likes of lower cost players and brands such as S.Korea's Kia Motor, Renault-Nissan's Dacia, possibly an affiliated Datsun, as well as Russia's LADA.

Back to Today -

Thus we see that rising new car sales will have an automatic affect on the now aged western vehicle car parc across N.America, the UK and W.Europe. This in turn will see a record number of older vehicles – which had been economically tenable over the last 5 years because of perverse circumstance – become both uneconomical to maintain / repair and fall from favour as financing access to new vehicles becomes more easily obtained.

The Vehicle Recycling Sector -

Here in the west, it was not until the 1950s that old vehicles reached their “end-of-life”, the emergence of mass car ownership, vehicle availability, model and variant choice and the importance of auto-styling fashion sounding the death-knell for older vehicles.

As a consequence, the vehicle scrapping sector grew enormously. Originally known as 'Scrappers', the genre morphed into 'Dismantlers' so as to both distance itself from unwanted associations and to highlight the fact that stripping a vehicle for re-saleable parts had become the norm given that the platforms and mechanical systems of vehicles were often carried over across model-lines and generations in a bid to save engineering and manufacturing costs. Since the early 1990s the philosophical focus has been supposedly on whole vehicle 'recycling', both regards components and the metal body-shell, so as to confer to environmental awareness.

Of course late model vehicles, especially those of high sticker price and value, which have been deemed by insurers as not cost effective to repair are more likely to be laborously stripped for parts given the innate value of low-wear components, which themselves go to specialist second-hand components supply firms.

However, today the very definition of the term 'recycling' is highly flexible, with different nations managing the subject in very different ways.

Much dependent upon governmental policy and its relationship with the bigger economic imperative, which itself derives from a country's own domestic industrial agenda. This seen to be (in extremes) either a self-sustaining national 're-circulation' of materials ideally designed into next generation products, versus the obverse, of simply collating and shipping mixed material scrap abroad.

The former obviously far more environmentally responsible, though the latter has some cause to say that it assists the industrial development of advancing countries. This so only if the scrap is properly sifted and processed when reaching foreign shores, and not simply put into landfill in a cost-efficient but potentially hazardous manner.

Given the theorum posited that because of macro and industrial trends scrap steel will become an increasingly valuable commodity, it then makes little sense to simply lightly sift and bury the material.

A Simplified “Recycling” Process Perspective -

The following gives a snap-shot of how three advanced countries deals with discarded vehicles, highlighting the seemingly stark differences that exist between Britain (as effectively a post-industrial country stuck with yesteryear habits) and the vanguard of Japan and its spiritual follower Germany.

Conventional UK Process -

This process is very basic and highly destructive, typically using a powerful cab-operated mechanical pneumatic/hydraulic arm and grabber.

1. Ascertain VIN (Vehicle Identification Code).
2. Remove wheels/tyres and battery (for onward sale if good)
3. Remove catalytic converter from exhaust pipe
4. Tear-off bonnet/hood
5. Tear-off front panel (containing bumper, lamps, grille, radiator, oil cooler)
6. Pull-out engine (ripped from body mountings) / store separately
7. Lift remaining car-body into Crusher/Baler
8. Extract baled 'cube'

Time taken : 6-7 minutes (excluding wheels/tyres/catalyst)

[NB No draining of vehicle fluids: petrol/diesel, engine/gearbox/differential oils, hydraulic fluid].
[NB Catalytic converters sent to specialist processors such as BASF Cinderford].

Obviously, engines are of specific interest given their relatively small dimensions to high metal content.

The dismantling process itself overtly simplistic, stemming from on cost to income grounds, and noted as 'behind' that increasingly adopted by Germany, given the greater inter-relationship between VW, BMW, Daimler and domestic recyclers.

Conventional Japanese Process -

This process is far more selective, typically using a similar cab-operated mechanical arm but deploying a cutter-pincer 'beak'. (Also, the equipment has two low-level pincers to hold the vehicle structure stable as dissected). Thus has pecking bird and restraining crab actions.

1 Ascertain VIN
2. Remove of interior trim, seats, carpets and insulation
3.Remove wheels/tyres and battery
4. Cut and Tear-off each exterior panel
(front panel, front wings/fenders, each door, boot-lid, bumpers)
(cut bumpers into sections and place into bin for plastics)
5. Remove radiator/oil cooler
6. Remove major wiring looms
7. Remove individual glass (as broken but intact items)
8. Cut-out B-posts to weaken shell structure
9. Pull-out dashboard as broken unit
10. Pull-out heater matrix
11. Flatten roof into floor
12. Turn-over the 'pancaked' structure to show underside.
13. Remove exhaust pipe (inc catalytic converter and silencer/muffler)
14. Remove drive-shafts
15. Remove lower A-frame suspension arms

[NB Steel separated according to type: sheet steel vs tubular steel vs hollow pressed steel items, all separated out into different bins]

Time taken : 15-18 minutes

The Japanese method is still very 'heavy-handed' and damages beyond immediate re-use items such as the radiator, but it is the far more effective separation of parts that allows for far greater onward classification and collation of materials.

Understandably, the primary difference between the distinctly different two dismantling models of Britain and Japan is that the former is quicker and philosophically brutalistic, whilst the latter is far slower and philosophically sensitive.

Conventional German Process -

This process sits as a 'halfway house' between the simplicity of the British system and complexity of the Japanese model.

1. Ascertain VIN
2. Remove wheels/tyres and battery
3. All fluids drained
4. Remove catalytic converter (precious metals, platinum etc)
5. Safe activation / explosion of airbags
6. Specific parts (lamps, trim, engine, transmission) dismantled during periods of high demand only.
7. Removal of front sub-frame (engine, steering, suspension)
8. Removal of rear sub-frame / axle.
9. Shell (inc glass, interior seating, dashboard and trim) flattened in crushing machine.
10. 'Sandwich' put through shredding machine to create smaller fragments
11. Separation of metal types, plastics, glass and textiles types.
12. Giving shredder granules (hard plastics), shredder fibres (cushions, carpets), shredder sand (rust, glass, paint particles)

Each category of residue (granule/fibre/sand) has various and specific uses. Shredder granules used as mixing agent in the smelting process in German iron foundaries. Shredder fibres used in sewerage treatment to provide a burnable substance in combustion electricity production. Academic research into shredder sand application is ongoing, separated into constituent metalic and organic materials.

[NB Paradoxically, it is the value-appreciative developing nations that have traditionally been the most environmentally efficient recyclers, re-using near every part of a discarded vehicle; from direct swappable parts to other similar models, adaption of parts to fit other vehicles, the marriage of disparate parts to create a home-grown vehicle, re-use of parts in alternative ways (eg. engines as electrical generators, seats as furniture) and sheet and structural metal in a multitude of applications, vehicular and otherwise]

Process Development and Economic Alignment -

Inevitably the American originated standard of crushing and baling/cubing a vehicle still dominates as the global scrappage standard, stemming from what may now be regarded as an unenlightened era 60 years ago. Yet infact is was very well suited to the second half of the 20th century when the ongoing economic rise of the West. A time when the phrase “planned obsolescence” was confined to auto-makers' design, engineering and marketing departments, and during a period when a vehicle's end-of-life could be as far as 20+ years away; far removed from a car company's immediate concerns of a then newly growing safety-engineering CSR agenda.

As the negative societal impact of vehicles became apparent, expanding from the fuel-efficiency and emissions focus of the 1970s, to questions about end-of-life disposal over the last 20 years, so varying initiatives across the world have been under-taken by governments, the recycling sector and manufacturers themselves. The latter engineering recyclability into the new model development equation. This so because just as the emissions credits system has come into being to provide a 'carrot and stick' approach to production emissions, so in time it is expected that similar product disposal policies will come into being.

Ultimately then each output seen today aligns to a specific 'next step' of a broader disposal and material re-use picture: the spectrum spanning:

1. Direct re-use of components
2. Generic mixed material 'cubes' for long-distance transportation
3. High metal content 'pancakes' for shorter-distance chipping
4. Variously tailored 'bulk' for dedicated industrial uses

As stated, given the increased age of the western car parc, fewer component parts extracted from vehicles will be of actual use, so offering little economic value.

Many of the crushed cubes are typically destined for China and India where the cubes are simply melted-down and the different metals, materials and impurities extracted. However, often the cubes are simply smelted 'as is' and so the wide range of impurities inevitably go to local land-fill. Sometimes the cubes are sifted with the separated items typically fed-back into a well formed 'bottom social tier' domestic recycling system; itself organised around the “upstream separation” of parts but in a very haphazard way on scrap mountains with safety a low order concern.

The evolution of ecological consciousness in Japan has produced dedicated and nimble specialist dismantling machinery (the bird beak and crab claws) which allows a single operator to dislodge the prime parts of a vehicle in under 20 minutes, whereby such work would have otherwise taken far greater labour time when done by many hands. Thus Japan is seen to be at the forefront of recycling simply by the adoption of relatively low-cost 'bolt-on' equipment to the typical mechanical arm and caterpillar track chassis.

And as seen, Germany leads Europe in how to best extract value from recycled materials, by mixing both a modicum of manual labour to a quasi Japanese approach to dis-assembly, and importantly creating its 3-path route orientated to current and future domestic industrial capabilities.

Conclusion -

For the last 20 years vehicle manufacturers have been discussing and progressing “Design for End- of-Life”. A designed-in capability for easier mechanical and chemical dismantling, aswell as identifying and utilising affordable material types and groupings which may provide a yet more efficient source of raw materials”.

[NB Here the 'Tear-Down Engineering' departments of VMs has been and will inevitably play an increasing role. Originating as a manufacturing cost assessment section reviewing competitor vehicles, 'end-of-life' competitor assessment has been added to its remit].

The integration of the catalytic converter as an emissions limitation device was a catalyst in itself regards the issue of materials reclaim given its precious metals content of platinum, rhodium and paladium. Though raising the manufacturing costs and so price of a modern vehicle, such advances have enabled greater government, public and corporate interests toward this environmentally critical issue. (The very fact that a 'cat' will eventually become clogged is a physical reminder to the owner of his/her carbon footprint).

Yet as seen by the Japan's far more advanced vehicle strip-down procedures, N. America, the UK and much of Europe has far to go so as to truly progress and equal the Japanese benchmark. Germany obviously leads the West in this effort, the interests of firms such as BASF served by becoming the commercial and IPR 'owners' of such competencies. As such such eco-specialisms serve not only the advanced company but adds weight to its investment appeal.

However, far from such leading sciences, at the opposite end of the activity chain, steel vehicle body recycling / re-processing, in the mid to long-term, appears to have become increasingly attractive, given western auto-market dynamics and the apparent future extraction and pricing bottle-neck in iron-ore based steel-making.

As the west's economies slowly return to a proximity of normality, and as EM nations slow to a steady growth rate, before the bottle-neck becomes apparent, the recycling sector of all western countries should look to Japanese and German operational best practice. So as to pre-empt both the need for ever greater material separation and of course a speedy vehicle unit strip-down and turnaround.

Industry and government alike should be investigating this matter forthwith, so as to ensure that all parties from SME sized 'breakers yards', large corporates and government treasuries are to best benefit from the expected tailwinds to come for recycled steel-making after the present headwinds of conventional steel-making.

This eco-age often posits the importance of exotic materials, which in themselves have a role in limited series high cost goods. Yet as seen, for mass production, there is no end-of-the-road in sight for the intelligent ever growing use of what could be termed (recycled) 'clean steel'.

A world away from Hollywood's popularist entertainment, it won't be a fictitious 'Man of Steel' superhero that saves the planet, it will be the considered use and re-use of both natural and man-made materials that does so.

However, if the steel and automotive industries could learn to recycle a vehicle as often as film studios have recycled Superman, the world would indeed be saved.