Perspectives

American Recycler: Auto Recyclers Facing Rough Roads

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From: Auto Recyclers Facing Rough Roads
By: Mike Breslin

Back in January 2012 American Recycler published an article penned by Mark Henricks titled Rough Roads Ahead about the problem of auto recyclers acquiring cars.

At that time, it was the number one issue facing recyclers.

Five years later, we followed up with Michael E. Wilson, chief executive officer of the Automotive Recyclers Association (ARA) and asked how business is for auto recyclers.
“I wouldn’t say that the economy for auto recyclers has improved since 2010. In some aspects there may be some better opportunities for recyclers in the coming months, but if you are looking at the last five years, really not much has changed on buying at the auctions, other than fees continuing to increase.

For the last 18 months, because of the economic conditions in China, India, Turkey and so forth, full service recyclers have seen seller services and scrap prices take a huge downturn, probably 50 percent of what they were, maybe down more towards 75 percent on scrap prices. For recyclers on the self service side, it’s been a huge factor. The prices may have come down for purchasing vehicles, but if the scrap processors are not buying the hulks it causes a lot of issues and challenges for them.

“The self service part of the industry really had significant growth from about 2010 and coming out of the recession. That part of the market was definitely picking up. Folks in our industry that were full service were looking at opening up hybrid yards where one part was full service and the other part self service. Those who did that over the last two or three years did not experience an upturn for very long.

“In the full service sector, with the electronic commerce and on line auctions of salvaged vehicles, it continues to be more than auto recyclers that are buying vehicles. Probably about 50 percent of the buyers at the salvage pool auctions are recyclers and the rest are the general public and used car dealers. There’s been a continued trend towards an increase in the public and used car market, probably a single digit increase since 2010. With the price of used vehicles being at an all-time high, a lot of dealers are coming into the salvage auctions, purchasing vehicles, fixing them up and putting them up for sale.”

Edmunds.com, a leading reference for car shoppers, recently reported that certified pre-owned (CPO) car sales are at an all-time high. In the company’s latest used vehicle market report, analysts noted that in 2014 CPO sales hit an all-time high of 2.3 million. Last year, CPO made up 20.8 percent of total used car sales at franchised dealerships, the highest percentage since certified pre-owned programs were introduced.

“We fully expect CPO popularity to continue throughout 2015 because many leased cars are being returned to the dealership in excellent shape and lightly used cars are being traded in at faster rates than in previous years. This allows dealers to maintain a large CPO inventory,” explained Edmunds.com senior analyst Jessica Caldwell. “Car shoppers are finding a great selection to choose from, and, in the current economy, many are comfortable spending a bit more for that extra peace of mind that a CPO car brings.”

Wilson estimated that the number of used vehicles being exported out of the U.S. from auctions at about 30 percent. But it’s mostly late model vehicles in the $15,000 to $20,000 price range, because it doesn’t make economic sense to export the older, less expensive cars.

Also, Wilson pointed out that over the last 18 months the U.S. dollar has really strengthened, which is going to have a dramatic effect on the used vehicle export sector.

In 2010 ARA estimated that there were 8,400 automotive recyclers in the U.S. “Since then we sense there’s probably been a small reduction in that number,” said Wilson. “We are hearing of closing of shops because it’s getting harder and harder to stay in business. In addition, there have been and continue to be numerous acquisitions. The landscape really hasn’t changed that much since 2010. It was hard then and it’s hard now. Some of the folks that were on the fringes back then have been weeded out.

“From what I hear, low prices for scrap metal are not going to rebound anytime soon,” Wilson continued. “Prices, I believe, are pretty much going to stay where they are for the rest of the year, at least, and I don’t know how much further into 2016. The longer that price is down, it hurts each and every month for those relying on crushing cars when they are making one quarter or one third of what they were making five years ago. That’s painful.

“Scrap prices are also having a hard time in the collision repair industry where we sell a lot of our parts. They’ve had a huge wave of public consolidation and we believe the recycling industry is going to see more taking place.”

Wilson was referred to a group of recycling companies that consolidated with an IPO this spring as Fenix Parts, Inc. It combined eight original companies and created a network of full service and self service recycling parts yards in key regional markets in the U.S. and Canada. The founding companies had been in business an average of 25 years and operate from 13 locations. Since the IPO, Ocean County Auto Wreckers of Bayville, New Jersey has also joined the Fenix consolidation.

In speaking of the advantages of consolidation, W. Kent Robertson, chief executive officer of Fenix said, “Given the highly fragmented nature of the automotive recycling industry with literally thousands of companies, there is a great opportunity for further consolidation. In addition to growing organically, expansion through acquisition will be an important part of our overall strategy and a key long-term value driver for our customers and shareholders.

“We also believe there are significant benefits of scale – first, increased parts availability through the hub; second, synergy with respect to how we buy cars, tow and distribute parts to our customers; and third, the leverage we gain on our fixed cost structure and corporate general, administrative expenses. We see additional growth opportunities by enhancing the effectiveness of our sales force, the development of an integrated technology platform for bidding and pricing, the expansion of our dismantling capacity, and by growing our distribution in existing and adjacent markets,” Robinson concluded.

“It wouldn’t surprise me that other entities look to an IPO as a possibility over the next few years because of economies of scale and to make sure there’s a long term plan for a business,” Wilson predicted. “We have many generational businesses in the scrap industry, often third and fourth generation family businesses. Sometimes the latter generations don’t necessarily want to be in that business and are looking for ways to continue operations. Consolidation is one way.”

Wilson said that one of the most significant changes for full service auto recyclers over the past five years is change at an accelerated pace. A lot of electronic commerce has taken place, especially over the past two or three years with new platforms coming into the marketplace that have caused issues. GM, for example, is looking at a dynamic pricing platform for their replacement parts. That will make it more difficult to price recycled parts. There are regional and seasonal pricing differences and many other supply and demand factors. Electronic platforms, especially in the collision and repair industry are getting more and more sophisticated so the quality of recycled parts needs to be raised. OEMs want to recapture the replacement parts market because it’s dropped from 74.8 percent back in 2008, 2Q. Now they are at 65 percent on replacement parts.

“Since the spigot has kind of been turned off from China and other foreign markets some shredders are not even buying scrap depending on how much they have in inventory,” Wilson observed. “And since there’s really not much of a demand from shredders to buy scrap, that’s really been hurting recyclers.

“No question, automotive recyclers are definitely getting more curves thrown at them these days, but the industry has been around for 100 years and they have modified their operations to compete as time has gone by. And, I am confident that most all of them will do the same down the road, but they will have to continuously adapt their operations to change,” Wilson concluded.

S.A. StevensonAmerican Recycler: Auto Recyclers Facing Rough Roads

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