Cash or Crash for Trash? (Answer: "Stash")

Throughout my adult memory, "recycling" has been a bit like weather, as a topic of conversation. It's a popular "coffee table" topic, unlike insurance adjusting or ball bearing manufacturing... great topics both, but a higher threshold to "knowing what the hell you are talking about" means that people don't form opinions, or weigh in with them, as we can with the weather.

One of the things "coffee table" industries attracts is journalists. The more a topic is interesting to talk about at a social gathering, the more a journalist is likely to consider it a topic worthy of writing about. Lots of articles about pets and coffee, fewer about lawn fertilizer.

One of the frustrating things about this is when an anecdote gets stuck in the public consciousness in the absence of proportionality to risk or profit. Search "shark attack" and "railroad crossing accident" in the news (or see previous post), and you will find that the "man bites dog" story is, ironically, "shark bites man."

Today I'm thinking about what people perceive to be the value of recyclable commodities, after reading an interesting book review (thanks to a link from Hugo Neu corporation). Here is the introduction to the article by Carl Zimring: Mr. Carl Zimring is Assistant Professor of Social Science at Roosevelt University. He is the author of Cash for Your Trash: Scrap Recycling in America. (New Brunswick, NJ: Rutgers University Press, 2005).

I'm thinking about this because Good Point Recycling is (as always?) at pivotal point of growth, where we have more profitable opportunities to grow than we have capital to pursue them, and the banks... ahem. Anyway, we have about $1M in annual gross sales from about $120k in personal ("friend and family") loans over 7 years. We are small enough that we can tweak the looks of the books by whether I draw a salary or not (I've probably earned back about as much as I've lent back in, or have put back in as much as I've earned, which is good or bad depending on your point of view). As we charge into NY, RI, ME and CT markets, we need more trucks. It means capitalizing and taking market share while times are down.

This is pretty difficult to explain to investors who don't know the recycling business. They like to look at Earnings Before Interest, Depreciation and Taxes (EbIDT). I have to explain to them the big problem with my books is that I have ANY income. When the market crashes, as it has for all raw materials during the recession, as it does every recession, the smart players - or those who can afford it - hold their cards.

At a penny a pound, sales records are a sign of weakness.

The problem is NOT that we only earned $500 per week for scrap steel last spring. The problem is that we sold ANY steel when the price fell to a penny a pound from 15 cents per pound 6 months earlier. As an undercapitalized business, we have to look at whether to pay a guy to run the baler (you need to bale it to add value and speculate storage) or whether to stop baling, and the answer differs at 1 cent per pound vs 15. A well capitalized business would not have had to choose between hiring sales people to develop new markets and paying a guy to bale the steel.

If I had lots of money, I would have looked at the history of scrap materials and kept baling, and sat on the bales (as we did for as long as we could on ABS plastic, which also fell to a penny from 22 cents per pound... we started selling again at 8 cents and the price is now up to 15 or so. I increased value of the stock eight-fold by waiting from January to May, but lost half by selling in May rather than August).

Anyway, Zimring's book appears (from the article about it, written by Mr. Zimring) to hold a lot of the knowledge I got by talking to smart old men like Shelly Appel of Perkit Folding Box and Baynard Paul of PT Container, back in my Massachusetts DEP days. I had been in recycling since high school and knew enough to accept every invitation I got from the lions of the business, and my MA DEP business card was like a free pass to Disneyland for me.

Some of the information I got from them, other things I had figured out but could verify (Analagous conversation: "Hey, was the guy who played 'Kaptain Kangaroo' the same guy who played Clarabell the Clown?" "Sure, yeah, that was Bob Keeshan.") You could play out your hunches from 50,000 s.f. views by asking the guys who had been on the ground.

Here's a kind of reproduction of the conversations I had with the retiring giants of waste paper in the 1990s.

Me: "Why does the price for toilet paper raw material fall in a recession?"
Scrapper: "Hah, that was always the question we asked. They said because of how much we charged them during the boom. It was only really bad when there was both a recession and the price of oil was high, because the mills were paying more for the oil, but that doesn't usually last too long, oil can't stay up too long in a recession, at least it hasn't."
Me: "But even then, they come back faster because recycling saves energy, I would think."
Scrapper: "You know, I never really thought about that, but it's probably why the forest stocks get hit harder, and why our waste paper never failed to stop moving again. The hard part was keeping our clients."
Me: "Yeah, we have that problem when the press announces the paper is really going to landfills during the glut, people stop participating and new programs stall."
Scrapper: "Yeah, but we spread that rumor, too, because we have to pass the price cuts to the consumer."
Me: "No paper ever got landfilled because of a lack of markets, has it?"
Scrapper: "Oh, I'm sure some moron did it sometime. But probably not by anyone with enough savvy to own a baler. Some of the towns collecting it did that, that's when we realized we'd taken the price story too far.")

You see, when the economy crashes, an automaker like GM cannot really stop paying debt without doing bankruptcy. It cannot get out of illiquid assets like factories. It hates to lay off workers. When it comes time to cut costs, raw materials become the 'go to' option. Hence, raw materials collapse in a recession (I've read that the Federal Reserve retired chairperson Alan Greenspan was a big scrap market news junkie).

But they cut the price in higher proportion than demand slows. The big ystery is toilet paper, which is made in disproportionately high percentages from recycled content (I don't know if Zimring zeros in on TP in his book, I should read stuff I review huh). The price of the raw materials for toilet paper - sorted white ledger for example - collapse tenfold just like everything else. Printing and writing paper go down, sure, and newspapers get light with less advertising - but toilet paper raw material (at least in the 80s) was independent. But it crashed too.

You can find some logic to it - factory layoffs may lead to less TP demand in the workplace. But when you gotta go, you gotta go, at home or at work or at the soup kitchen. And the price drop in SWL waste paper seems to just go along for the ride with other raw material prices. Why do they pay less? Because they can. The tissue paper mills rebound pretty well after a recession and are probably considered safe investments in a recession, like other 'staples'.

If you own a consumer like a paper mill or steel mill, you have a certain point where you don't want to see prices fall below, for a couple of reasons. First, if the material (steel, paper, or ABS plastic) is available at a penny a pound in January 2009, that's a great opportunity to stock up on inventory. You know Toilet Paper demand is going to kind of be around, so the more you buy at a penny, the less you may have to buy for a dime later on. Second, when the mills are smart (as they forgot to be in the early 90s at one point), they realize that you have to till the fields, maintain the supply. If the market falls too low, the marketplace may 'cannibalize' the packers, balers, scrap collectors, etc... when you need the paper bales again, you don't want to find the baler has been chopped into scrap steel or the dealer has sold his trucks.

During the bad times, the buyers tend to support the more loyal suppliers. They tend to stick it to the "gougers" from the past high times.

It was better in the old days when the mills actually lent the money for the balers to the scrap collectors. They'd find a really poor immigrant family in a high population area and buy him a baler and have the guy repay the loan in long term purchase orders. I really enjoyed learning the specific instances of that I learned from the old timers in my MA DEP days, and it made a lot of sense of what happened in the mid 1990s (goodbye Prins Recycling). There are still a lot of smart guys, like Johnny Gold and Ben Harvey and Randy Miller who were raised in 3rd generation scrap companies, and you will tend to see pretty honorable guys in that field, who understand the difference between "slash and burn" raw material harvesters (brokers who rush in and buy in high priced markets and are nowhere around when the price falls) and long term buyers. The importance of those 2nd-3rd-4th generation companies is that they replace the "notes payable" on the baling hardware, they institutionalize the relationships between supply and demand.

What is going on now in the "white box" or "SKD" markets is similar to the history of the scrap paper market in a couple of interesting ways, except the capacity was not baling but assembly. As paper mills de-centralized scrap material consolidation to small private entrepreneurs, using notes payable on equipment, so did OEMs outsource assembly of their products in the 1990s. The Taiwanese were (like the "Jews" the "Italians" in the scrap markets in Boston and NYC) "relocated" people who no longer owned land and therefore sent more of their kids to college (vs. societies who keep family money in land, who tend to keep one kid to watch the land, sometimes the best kid). The more of your kids go into either college or urban living (surviving in a city should be awarded with a degree on the wall), the more get jobs in engineering. Anyway, the Taiwanese who fled Mao wound up being very "mobile" investors who set up shops to assemble display devices and other peripherals for electronics, in contracts with Japanese, European, and American OEMs.

But it turns out the OEMs are not paper mills or steel mills. Turns out they have outsourced so much of the assembly that the little brooms are all finding each other, and Taiwanese and Koreans are turning from the poor outsourced labor markets to the giants of the industry.

Oh well, another long-winded blog that may not be read or appreciated, but maybe I'll put it in a book someday. The point is that there are all kinds of historical bases and connections which lead to success in recycling, which may not be apparent in a "Cash" or "Crash" in "Trash". If you have loyalty and trust, and are speculating on something other than buggy whips (i.e. metals, polymers, and fiber... not necessarily "added value" items like Pentium IIIs or CRT TVs), the raw materials market will come back, just as toilet paper markets come back. And India and China are growing centers of demand, and environmentally exploitable raw materials sources are finite.

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