Tariffs a “Tripple Whammy” Against Auto Recyclers
Open any newspaper or listen to a newscast and you’d be hard pressed not to find information about the imposed tariffs recently set in place by President Trump.
In May, the Trump administration announced the imposition of tariffs on metals imported from its closest allies – namely the EU, Mexico and Canada, each of which will face 10 percent tariffs on aluminum and 25 percent on steel.
As Ivan Bilaniuk, an international business partner at Dinsmore & Shohl LLP in Washington, DC, explained, the first tariffs were imposed on solar panels and heavy appliances in January. Shortly thereafter, the Trump administration used its authority under Section 232 of the Trade Expansion Act of 1962 to impose a broad 25 percent tariff on steel imports and 10 percent tariff on aluminum imports.
“From the auto recycling industry’s perspective, the cost of your product increases, but your cost of business also increases,” Bilaniuk said. For example, for a small recycler running at capacity looking to expand, the impact of the tariffs might be net neutral. That’s because, though the value of their products has increased, so in turn has the cost of adding new steel-based infrastructure. Companies that have their operating costs under control and production under capacity are in a better position to reap the benefits. They should be asking, “how much of our day-to-day operations involve steel and aluminum?”
Mike Bassipour, president of GLR Advanced Recycling, said the impact for auto recyclers is going to be drastic and extremely negative.
“Leaving politics aside, the tariffs have been a triple whammy against our industry,” Bassipour said. “Aluminum, copper and steel have all been impacted simultaneously, resulting in eroding markets which yields diminishing profits. At this rate, industry wide, thousands of jobs are potentially on the line until this gets resolved.”
Not surprising, the response to the tariffs within the scrap recycling industry has been unfavorable.
“We are trying to catch a falling knife which makes daily operations difficult,” Bassipour said. “The secondary aluminum markets specifically have struck us hard. I strongly believe the trade war/tariff dispute will be short lived. Both sides of the pond need it to be.”
To prepare and cope with the tariffs, auto recycling companies are evaluating their businesses and their day-to-day activities to offset the tariffs’ impact. While the degree of impact varies by company, GLR Advanced Recycling is taking a very streamlined approach to their processes, making them as efficient as possible.
“For us, per usual, we don’t fall in love with our inventory and always try to keep it moving,” Bassipour said. “If you sell for a profit, it’s hard to lose. That may seem over simplified but it’s our mentality. We also are focusing on running as efficient as possible and concentrating on margins.”
Gordon Heidacker, managing director, automotive sector group head at Great American Group said that in automotive, the trickle-down effect takes time to clearly show its hand on pricing and profit opportunities as a result of the tariffs.
“Some savvy auto recyclers may decide to buy more and early to anticipate a run up of price, some may stand pat to see the actual effect,” Heidacker says. “In plastics, there is more of an issue with finding ways to handle all the non-recyclable product. In many cases, the repair parts side continues to be robust regardless of the tariffs as vehicles are being retained longer and are driven more miles per year, thus driving a market for parts away from cars needing repair and cosmetic improvements. The repair parts market has always been driven by being lower cost than new parts and tariffs will only drive more customers to the junk yard to find a replacement part over a new and more expensive component.”
According to Michael Jenny, managing director at Livingstone Partners, a middle-market M&A firm that specializes in sell-side M&A across a variety of sectors, one of them being metals, tariffs are creating disruption and uncertainty in the market, although the steel mills are enjoying higher profits as a result. “Further downstream, metals users who cannot pass on price increases are being squeezed, however,” Jenny said. “This is likely not sustainable.”
Globally, the impact of import tariffs, reduced exports and a stronger dollar cannot be ignored. That’s why Jenny said that where shredder operations are concerned, profitability is also being impacted by the relative lack of demand for nonferrous byproduct such as zorba.
“Recyclers need to buy right and turn quickly in order to stay ahead of the curve,” Jenny said. “Longer term, the value of recycling companies has always been in their access to supply, and we do not expect this to change. Recyclers with good supply customer relationships and access consistent, high quality supply, such as scrap generated from manufacturing sheet steel into finished products, will always be of value in the markets.”
On the Horizon
The U.S. is working with other countries to determine a solution to the imposed tariffs and trade concerns. Unfortunately while these discussions are happening, the scrap market continues to weaken and many industry players are unsure how long recycling companies can hold out before changes to their infrastructure and overall businesses need to take place.
Metal processors in the U.S. may experience more domestic companies turning to them for their metal supply. While this increase in demand would result in an increase in production of materials, it may also cause scrap prices to increase as more U.S. companies will be in the market for scrap. The increased demand could also cause an overflow in scrap metal, resulting in reduced prices for scrap.
According to Heidacker, the future impact of the imposed tariffs is difficult to determine. However, he said the lower cost of recycled product over imports will shift volumes away from overseas product and make the market in the U.S. more competitive, which in turn will increase bids on lots of scrap vehicles.
“The larger scrap dealers and recyclers have the potential to do well,” Heidacker said. “However it is still not fully known to what extent these tariffs will affect final prices from exporting countries as some have done their best to absorb the tariffs – such as in the tire industry, China manufacturers have lowered margin expectations to accommodate a good portion of the tariff offset.”
For base metals and other commodity recycled products, Heidacker said the future looks good as an alternative. “The trends for recycled metals will be on an upswing,” Heidacker said. “On other products, the market will remain strong and tariffs may have less of an impact over time. It will be more likely affected by annual miles driven and average age of vehicle in market.”
If nothing changes and the trade war/tariff battle continues, Bassipour strongly believes many businesses will have no choice but to shut their doors.
“It’s not sustainable. Sellers won’t want to sell their scrap vehicles so cheap, which of course will make it problematic to buy inventory trickling down to loss of revenue,” Bassipour said. “Bottom line, with the deleterious impact on oversees consumption and oversupply domestically of material, it is going to continue to create a bumpy road for auto recyclers.”
Published in the October 2018 Edition