5 steps to get the most out of scrap metal

Manufacturers generate scrap during the production process. This scrap is collected and sold to scrap companies to be processed and then sold to the mill, which will eventually sell the new steel back to those same manufacturers. That’s the life cycle.

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For the longest time industrial recycling has been handled the same way: You call a few scrap companies, obtain pricing, have the selected provider place a few containers, fill the containers, and wait for the payment. You hope the check comes. When it does, you match the payment you received with the weight and type of commodity your company placed in the containers and the corresponding dollar amount.

Nothing new here yet, so why keep reading? Here’s why. Manufacturers make money on their products, and everything else in the process is a cost center. Right? Almost. Scrap is not a cost center; it’s a profit center. It’s a byproduct of the process and probably the only revenue generator a manufacturer has besides the products it makes.

For this reason, it is worth paying close attention to and maximizing these revenues. Decision-makers have different reasons for selecting scrap companies, whether it’s price, service, existing relationships, transparency, accountability … or even tickets for seats behind the dugout.

At one point most scrapyards were mom-and-pop businesses. Some were honest and well-run, while others knew every trick to separate manufacturers from their scrap and pay the least possible for it. Today many large, publicly traded companies have entered the market and have added a level of honesty. That said, even the honest ones want to buy low and sell high—and who can blame them? Like everyone else, they’re in business to make money.

Scrap buyers need to be competitive. They don’t want others to swoop in, offer a little more, and win your business. At the same time, they also work to ensure they end up with healthy margins.

Considering all this, how can you get the most out of your scrap? That depends on the type, variety, volume, and condition of your scrap material. And it can take a lot of time, knowledge, and experience, in which case outsourcing your scrap management can sometimes make business sense. That said, no matter who handles your scrap revenue stream, they should follow a few fundamental steps.

1. Tie the Negotiated Price to an Index

If you’re a fabricator, you produce scrap every time the punch press or laser cutting machine finishes a nest. Selling it isn’t a one-time event. If you just shop around for the best price, you might have a scrap company lure you in with an above-market price, then ever so gradually lower your per-ton rate to a below-market price.

Scrap companies will be slow to react to up-markets and quick to react to down-markets. But the price itself shouldn’t come out of thin air. From the start, you need to ensure pricing is tied to a defined commodity-market index so that you protect yourself when the market falls and benefit when the market rises.

The index price generally will not be the same as the agreed-upon price for the scrap. When negotiating your scrap prices, you’re really negotiating the price differential—that is, the difference between the market index price and the amount the scrap company gives you. When your scrap prices are tied to the market index, they should move in lockstep with it. When the index goes up $20, your scrap price should go up by the same amount.

2. Reverse-engineer the Price Differential

When negotiating the price differential, try reverse-engineering it; that is, factor in what has to happen to the scrap before it’s sent to the mill, including the shipping and processing costs, as well as what the mills in the area are demanding. This gives the whole process a level of transparency.

Consider a pallet of sheet metal skeletons fresh off a laser cutting machine. These skeletons must undergo a number of value-adding steps before a mill will buy them. They need to be segregated by type and cut down to a mill-acceptable size, such as a 3- by 3-foot section.

Preparation steps depend on your exact material mix and specific mill requirements in the area. That said, if you map the basic steps, you can then assign cost estimates to them. This allows you to start with the index and factor in those costs, as well as transportation costs, to “back in” to a fair price—one that covers costs, gives you a competitive rate, and gives the scrap company a reasonable margin.

With all this, you can develop a pricing structure. It boils down to knowing where the material is being sold (that is, what mills are buying the scrap), as well as its cost to ship and process, then incorporating a handling fee and a little profit for the effort.

Knowing all the value-adding steps involved in the scrap business also can help you decide whether it makes business sense to perform some scrap prep on your own floor. For instance, would it make sense to chop your sheet skeletons? In a sheet metal or plate operation, you probably wouldn’t want to tie up a laser or plasma to cut up a skeleton. But if you have idle hands and torches available, they could be put to good use. Cutting skeletons does take time, of course, so whether this makes business sense depends on your own processes and the price increase a scrap company is willing to give you.

That said, your company, wanting to focus solely on producing products for customers, might just perform the least amount of scrap prep possible. And this can sometimes make sense; scrap prep can add another ingredient of complexity on an already complex shop floor operation. But remember that, like the parts you produce, scrap is also a revenue center, so it’s often worth scrutinizing to get the most out of it.

3. Stay on Top of Your Load and Tracking Reports

Every day a truck arrives at your facility, retrieves your scrap, and leaves a pickup receipt and scale ticket (showing the amount weighed at the scrap company’s facility) at your dock. At the end of a certain period, the dock foreman retrieves the scale tickets and delivers them to the front office.

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When a check from the scrap company arrives at the end of the month, somebody in the office needs to verify how many loads left the facility and how many loads the company got paid for. Often, not all of those pickup receipts make it into the office. And sometimes the scale tickets don’t match what’s itemized on the check from the scrap company.

Who’s responsible for matching the pickup receipts to scale tickets and verifying each load is accounted for? If you work at a busy plant, you need someone overseeing this process, especially if you scrap aluminum, stainless, or other high-value commodities. This is critical. Each load or misload can account for thousands of dollars.

4. Look out for Downgrades

It happens. Two skeletons of ferrous material find their way into a bin of nonferrous scrap. This turns a “clean load” of stainless into a “dirty load.”

The same thing applies to the form of scrap, be it chips and turnings or solid pieces of scrap. Perhaps you have a machining department near your sheet metal operations. Maybe the main fork truck operator is sick and his replacement dumps turnings into a box dedicated for solid scrap. Boom, you get $150 per ton instead of $250 a ton. Even though 98 percent of the weight is solid, the entire load is downgraded.

Beware—that’s just how the industry works. It’s common industry practice to pay for the least valuable commodity in a load. If a dirty load is 90 percent stainless and 10 percent another, less expensive material grade, you don’t want the entire load to be downgraded to the lower price. Ideally, the payment should be based on the percent of material in a load.

Some form of downgrading for dirty loads of scrap is certainly fair, particularly if a dirty load significantly increases the amount of segregation work. But it doesn’t take too long for a scrapyard worker to lift one skeleton of ferrous material out of an otherwise clean load of stainless. And again, one ferrous skeleton shouldn’t downgrade the entire load.

If a scrap company does downgrade a load, it should provide documentation showing why it did so. Most scrap companies can take pictures and provide documents explaining why and exactly how they downgraded the scrap. Make sure there is an agreement in place to send documentation and pictures for any downgraded load. This also will help you contest future downgrades down the line.

Just having the conversation about these kinds of details can help build a relationship. If you talk with the scrap company about how it handles dirty loads, you build an understanding of how it operates. This in turn builds mutual respect with an understanding that documentation is part of a modern, “trust-but-verify” business relationship.

5. Request Third-party Weight Verification

This is another part of that trust-but-verify relationship. Several times a month, request to see a loaded truck’s weight reading from a public scale, like a CAT scale between your plant and the scrapyard.

Ideally, you should be able to request these third-party verifications randomly. The CAT scale report should have a time stamp and a recorded weight; the scrap company then should have a separate scale report with a slightly later time stamp and (ideally) nearly the same recorded weight, within a certain range or tolerance window.

Again, the scrap business has evolved, so you don’t have the “not all four wheels on the scale” kind of games seen in decades past. Scrap companies these days usually operate to a certain standard. Regardless, to get the most out your scrap, it’s just good business practice to request documentation.

From an Afterthought to a Profit Center

So where do you go from here? First, know that not all scrappers are created equal. Some have better markets than others for ferrous and nonferrous. Figure out which are which, and source the ones that best represent the commodities your company is scrapping.

Next, figure out if they currently are using a formula or a differential to an index. If so, great. If not, find out what the scrap company’s average prices for the past year were.

Finally, hit the markets. Get pricing for every single commodity generated and compare it to the others. For peace of mind, benchmark all of these to an index.

It’s not rocket science, but it does take someone to track and oversee the process. That person should understand scrap and how it’s traded and negotiated. Also, be sure to add protocols for your team and scrap company so the scrap process is done properly. When and how should the scrap bins be filled, and by whom? If the usual fork truck driver is sick, who will manage, transport, and sort scrap until he returns?

The goal is to monitor and maximize every aspect of your scrap program. Done right, you can turn scrap—an afterthought for most manufacturers—into an increasingly valuable profit center.