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It’s Scrap at PARC:  Driving a HYBRID MODEL

Pacific Auto Recycling Center is a start-up hybrid scrap and auto recycler doing it their way, and creating a business model to watch for success in metals recycling.
By Caryn Smith

A carefully thought out idea that became a reality, Pacific Auto Recycling Center’s (PARC) founders set out to launch a cutting-edge auto recycling facility, yet ended up with a progressive hybrid salvage yard that works to process end-of-life metal all the way to container shipments overseas. PARC processes end-of-life trucks and cars for parts resale, as well as appliances, cans and other metals, and even e-waste.

In operation since November 2016, the planning for the facility, located in Lancaster, California, took about two years. The company saw the value of membership in the Automotive Recyclers Association and have been members since opening. “Originally designed as an auto salvage and recycled parts business, once I came on board, we quickly realized that a lot of the process of auto recycling has to do with the recycling of scrap metal,” says Keith Churchill, Vice President, Marketing, Public Relations and Business Development. “I had six years of experience working with scrap metal facilities, and brought that to table. The main thing we did first to boost revenue was install a shredder for ferrous metals.”

With that expertise, the business direction evolved to a hybrid concept, consisting of a full-service and self-service auto recycling operation, with thriving recycled parts sales and eBay presence, and a salvage metal division that is a California-certified redemption center for beverage containers and e-waste; accepting TV’s, computers, cell phones, and other electronics, as well as appliance recycling, can recycling, and more.

While California has its regulatory challenges, in the metal recycling world, the state is a huge contributor to the scrap metal industry. The Rocky Mountains separate the east and west coast scrap markets, says Churchill. In the east, most scrap goes to Turkey, the current number one buyer of U.S. scrap in the world. The 2nd buying market is Taiwan, which the California scrap metal feeds. “California is pretty much the entire west coast of the U.S. It alone is a big market for scrap metal, which the founders felt was a great place to do business.”

State of the Art Comes First
The most interesting piece of this story is the amount of planning involved before the center even broke ground. “We all sat down and asked ourselves, ‘In ten years, what will inhibit our ability to do business in an eco-friendly environment.’ We see the state of California crack down on all of our auto recycler customers for one issue or another. Those established facilities can’t afford to turn back time and add filtration systems to their stormwater drainage or put in concrete, like we started with. Sadly, it’s putting some out of business,” says Churchill.

Remarkably, this 20-acre facility consists of 16 acres on contained concrete, and two acres of asphalt for customer parking. That equals 75,000 tons of concrete costing a cool $1 million, and a cutting-edge stormwater system that actually filters the run off before it enters the outlaying evaporation pond. This design for the future earned
Pacific Auto Recycling a rare “stormwater exemption” from the state of California and never needs to be inspected for its environmental impact because the runoff is 100 percent contained and clean water runs into the pond.

“All of these things we put into action before we opened the doors. We knew in the state of California, it is a fight to stay ahead. All these agencies are make things challenging for recyclers. We wanted a head start to future regulatory impact.”

Automotive Recyclers
As for the automotive recycling business, they dismantle about 1,000 cars and trucks a year, employing 15 of the 50 overall staff (25 full-time and 25 part-time). The facility specializes in full-service vehicles 2005 to current, and self-service vehicles 2005 and below. If it is a premium car (Lexus, Mercedes and the like), they have a special section for those cars.

In the flow of things, cars come in from street buys and auctions where they are held for 30 days according to the DMV law, then completely dismantled and inventoried. They start with fluid drainage in the dismantling bays, and removal of ewaste and tires (in CA, tires need to be recycled) and evaluation of the rims, if they are re-sellable or scrap. They do a complete tear down and clean everything that can harm the customer or lessen the scrap value. Then determine if it goes to self- or full-service areas for further processing. What metal is left, they send to their shredder.

The Ups and Downs of Scrap
The scrap metal market is a finicky thing. Understanding metal value requires knowing the expectations of the commodity customers, and being comfortable expecting the unexpected.

From the early 2000s, the “California Blend” HMS 80/20 or more like 50/50 ratio of heavy to light steel and trash was an acceptable sellable and profitable commodity to China, the primary buyer of U.S. scrap, notes Churchill. “Because China was setting the standard of what was acceptable, everyone else buying it, including Southeast Asia, had to adapt to this dirty blend.”

“When China exited the marketplace, able to supply its own demand for scrap metal internally, the standards for the HMS mix increased because the new leading buyers raised the standard. Buyers wanted 100 percent clean product from U.S. suppliers, and that, of course, trickled down to the sellers. With China not buying any dirty material, everyone in Southeast Asia stopped buying, too,” Churchill explains. “As a company, we saw the trend, and we were able to navigate away from others in this category. We mechanically separate fluff from metal in the shredding process and we are also removing contaminants by addressing them in the dismantling processes.”

Churchill went to a conference in Southeast Asia last year to network with the steel mill buyers. “We sell 100 percent clean heavy melting steel (HMS) scrap to our
customers. We use brokers and traders to get product to buyers, because that way once a container departs our port, the payment is made. Still, knowing the buyers standards ensures top dollar and that shipments make it past the buyer’s port. Our attention to quality,. To keep out anything dirty helps profit margins and makes our customers happy,” says Churchill. “In business, you give the customer what they want, and what they want is pure scrap.”

“These days, if there is any trash in a shipment, it will be sent back at the seller’s expense. All of Asia has adapted this and containers in receiving countries have actually been turned back. Quality is important, now more than ever, in scrap value.”

What does this mean to auto recyclers who all sell their scrap to processors? “We buy car bodies from other auto recyclers throughout California and a few from Mexico,” says Churchill. “I have to say in order to get premium prices for scrap metal, the days of crushing cars with a recycler’s trash is coming to an end. We pay more for scrap when the auto recycler sends it cleaned up. As in the ‘trash in/trash out’ saying, auto recyclers who cease to crush trash or extra tires in their cars will make more money.”

Trends and Forecasting
There are connected industries that can impact profits, timing and costs, and then random occurrences that impact the market that are unpredictable. “Scrap in 2018 was a difficult year,” says Churchill. “There are the things you can plan for, and other things you cannot. We experienced great growth in the first quarter, and then the marketplace was hit with random issues. Our 2018 wasn’t horrible, it was just flat.”

In 2014, scrap went from $500 to $40 a metric ton because the Chinese flooded the market with U.S. billet and tanked the market. Billet is created from scrap and/or iron ore. Billet and/or scrap are the feedstock of EOF consuming mills, thus, Billet price is a competitor of scrap price. Then China backed out of the U.S. scrap market almost altogether, producing enough internally to meet their own need. Since then, the major scrap buyers are Turkey, Taiwan, India and the rest of Asia. These new market players demanded higher levels of quality product, but the U.S. suppliers were slow to fulfill quality demands. This has artificially driven down scrap profits that were once through the roof.

“In 2018, we got hit with the issue of downgraded materials, the 80/20 mix. Foreign steel mills began rejecting the California blend. We also experienced a hiccup in transportation, which we overcame,” he says, “but was caused by a legal scrap container shipment sent from South America to a Vietnamese port that was full of illegal cocaine. The result slowed the transport process, because every load received in certain ports is now inspected before it is released. Therefore, it made prices go down for everyone in that emerging market.”

“There is still a depression in the market now because of issues with the mills. The electric arc furnace mills require carbon arc electrodes to melt the metals. In one
month last year, the carbon arc electrodes went from $1,700 a metric ton to $17,000 a metric ton,” says Churchill. “While these are unexpected, we can plan for cyclical occurrences, such as the Chinese New Year in February, where Asian countries take off almost the whole month. On our side, the end of year holidays slow down everyone’s business as well.”

“Looking forward, 2019 is going to be an interesting year,” he says. “Personal gut feeling, I see a slow and steady increase. More of the same.”

Getting the Best Scrap Value
“We buy scrap vehicles from over a dozen auto recyclers in the west coast,” says Churchill. “They usually only crush cars to save money on transportation. I would say, if a recycler doesn’t already have one, they should invest in a car crusher. In the future, the auto recycler will have to think about the whole package – not just the upsell of parts. Consider what you are throwing away to get the highest profit.”

“We reeducate our customers on quality standards. We get them out of the habit of crushing trash with their cars. If a scrap recycler has to clean out waste in the shredding process, it takes more time and warrants lower prices paid to purchase it. If they send clean product, we can pay more for it. At PARC, we buy based on quality and quantity. We can’t predict the unpredictable, but what can be controlled is quality. Strictly looking at the dismantling side, scrap is not a problem. It is a huge profit center when you know what you are doing!”

As for economics, Churchill says that the recent U.S. tariffs are of no concern to him. “We are not selling scrap to China. This alone artificially drove up the price of scrap the first 3 months of the year. It would have been an epic year, except for the Carbon electrode debacle. 2019 has potential.”

PARC is a work in progress, but they have big plans for the future. “Our Lancaster site is our first, and feeds primarily off the Los Angeles marketplace. We have plans to build 10 more facilities, with types of operations based on the location we choose, in the next 10 years on the West Coast.” This clever business model is built for the future, and thoroughly encompasses the entire life-cycle of money-making recycled auto parts and scrap metals.

Caryn Smith is the editor of Automotive Recycling magazine and has been covering the industry for over 20 years.