Building Diverse Revenue Streams

Apr 11, 2018, 18:16 PM
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March/April 2018

By Rachel H. Pollack

Building-Diverse-Revenue-StreamsAdaptation is second nature to scrap recyclers, says Michael Friedman, president of Sustainable Management Corp. (Louisville, Ky.). Companies that 100 years ago recycled bones and fur now are handling end-of-life electronics. It’s all about the pivot, he says. “Surviving companies learn how to pivot at the right time.”

Some companies pivoted decades ago, not just to handle new commodities, but also to provide fee-based services. For Balcones Resources (Austin, Texas), the trigger was the mid-1990s collapse in paper markets, says CEO Kerry Getter. “Probably 95 percent of our revenue at that time was associated with those markets, and we suffered as a result of that collapse,” he says. Since then, the company has “been on a mission to diversify our revenue stream by developing programs and services associated with recycling we can charge a fee for on a monthly basis” regardless of commodity prices. Twenty years after this pivot, up to 45 percent
of the company’s revenue comes from fees, Getter says.

Other companies did similar soul-searching earlier this decade, while living through five years of low commodity prices. “When things got particularly bad for a couple of years, we made a conscious decision to not sit back and blame the markets,” says Adam Dumes, vice president of Cohen Recycling (Middletown, Ohio). “We decided to incorporate additional services, or to try to recover costs or generate revenue from services we were already providing,” to increase the sustainability of the business.

Discussions with these and other scrap industry participants revealed six broad approaches firms are taking to diversify their revenue, regardless of what scrap commodities they handle.

1. Charge for Your Services

It sounds obvious, but scrap companies serve customers in ways that extend well beyond buying and selling scrap. Traditionally, “arranging trucking, warehousing, some level of intermediate processing … significant, value-added services somehow were embedded in those prices,” says Marty Seaman, partner and executive vice president of Resource Recycling Systems (Ann Arbor, Mich.). The challenge for a scrap company, he says, is to create “a business model that says I can charge for these services and still keep commodity value as one element of [price].”

It might not be easy, but it’s becoming essential, recyclers say. “Companies have to become more realistic [about] their true costs,” says Mark Lasky, CEO of Sadoff Iron & Metal Co. (Fond du Lac, Wis.), citing operations, regulatory compliance, logistics, and transportation as growing expenses.

Transportation is one place to start disaggregating these services. “We can’t afford to haul materials for free anymore,” Dumes says. “Freight’s a real cost. As inexpensive as fuel is, other factors are more expensive,” such as drivers. “We pass [those costs] on to the customer on an aboveboard level, we’re not passing it along in the scrap cost.”

Also look at the cost of being a one-stop shop—accepting odd, hard-to-recycle, or negative-value items. Friedman says he’s complained about this for years. “A scrap dealer will say to a supplier, ‘I can’t really [sell] that, but I’ll take it for no charge.’ He’s afraid to say, ‘Here [are] your options. … I can charge you $50 a ton and make sure it’s recycled,’” or you can landfill it. Customers will pay to keep recyclable but low- or no-value material out of a landfill, he says. Not asking for payment is “leaving money on the table.”

Dumes agrees. “We can’t be bashful about charging” for material that isn’t “in our wheelhouse,” he says. “At the very least, you’ve got to cover your cost.” With customers, “it’s supposed to be a mutually beneficial relationship,” he points out. “It’s not unreasonable” to ask them to pay. “We want to be a one-stop shop to the extent we can without it becoming a major burden.”

Charging for services or disaggregating prices is a move toward greater transparency, something scrapyards have resisted, “especially where it came to protecting their margins,” says Joe Pickard, ISRI’s chief economist and director of commodities. “But I think especially now, with the [growing] corporate culture in our industry, rather than just mom-and-pop [operations], that transparency is going to be even more valuable.”

A lack of transparency can leave the door open to fraud, Friedman points out. Companies who realize their price can’t cover their costs sometimes resort to short-weighting on the buying side, adding moisture on the selling side, or other deceptive practices.

2. Find or Produce Value Where Others Do Not

Where some companies see problematic materials, others see opportunities. With the right processing equipment, technical knowledge, or business connections, a material that seems low-value or even hazardous can be a valuable scrap stream, these recyclers say.

For Balcones Resources, one such material is glass. “Other folks may shy away from glass, but we have taken a little bit of an opposite approach,” Getter says. “We help customers with glass-related issues.” The company invested in glass cleanup systems years ago, and glass has become a high-volume and valuable material stream. Handling glass “gives us a competitive advantage,” he says.

Friedman says his company specializes in “schmutz and dreck”—Yiddish words for dirt and rubbish—meaning materials other recyclers decline to handle due to their hazardous or complex nature. Electric-arc-furnace dust, for example, contains “a lot of zinc, iron, some lead, some chrome,” he says—valuable metals, but also health and environmental hazards in that form. With a U.S. Environmental Protection Agency ID number for hazardous materials management, Sustainable Management Corp. can buy, sell, and export EAF dust and similar materials.

Handling hazardous materials requires “a lot of paperwork,” Friedman says, and most companies don’t want the liability issues. But there’s a strong upside: “We may not have to pay top dollar, or any dollars at all,” to get the material, he says. “We may be charging for it.” Up to 70 percent of Sustainable Management’s business is handling such materials, he says, starting with a load of inner tubes back in the mid-1980s.

Recyclers are good at both “wringing out processing costs” and finding new outlets or uses for materials, skills that “narrow the gap to make transactions profitable,” Seaman says. The key when handling something new is, how “do you bring down the price of processing enough and create enough value on the other side?”

An innovative or unusual material stream might not be profitable forever, of course. Balcones Resources had “a very nice business” for about 12 years making alternative fuel for boilers out of commercial waste, Getter says. Then natural gas prices dropped, and the product was no longer competitive.

3. Sell the Process, Not Just the Result

Processing is a means to create clean streams of salable commodities, but processing can also involve destruction. Document, data, and product destruction can be sources of fee-based revenue as well as salable commodity streams. 

With Balcones Resources’ history in paper recycling, document destruction was a natural growth area, Getter says. The company provides customers with secure container delivery and pickup, or trucks containing shredders for on-site destruction, charging a fee that’s based on volume. It also sells the shredded paper. “Some large pieces of equipment” allow it to offer product destruction of items such as out-of-date software or defective consumer products.

Cohen Recycling launched an electronics division, Cobalt, in 2017. “The IT asset management aspect of that business is all about service-based revenue [such as] charging for data destruction,” Dumes says. “That shift in mentality was the biggest hurdle for me mentally,” he says, “to know the services we’re providing have value and can be a revenue stream.”

Cobalt provides “white-glove service” that includes on-site data destruction via a truck containing a hard-drive shredder and tracked management of IT assets collected for recycling. It offers revenue-sharing to customers when it can sell their electronics for reuse. To date, “the bulk of the revenue” from this division is still coming from the commodities and resale for reuse, Dumes says, but the services “are a way to diversify revenue streams and insulate against commodity [price] drops. We’re focused on growing that side of the business.”

Sadoff Iron & Metal also started recycling electronics last year, launching Sadoff E-Recycling and Data Destruction with facilities in Oshkosh, Wis., and La Vista, Neb. E-recycling and data destruction “fit well with our ISO process and our logistics,” Lasky says, and the company saw opportunities among its existing customer base. It also refurbishes and resells electronic products. The electronics business segment so far is “fairly small compared to our traditional ferrous and nonferrous, but we believe the growth potential is exponential,” Lasky says. “It’s something we’re pretty bullish on.”

4. Find New Ways to Monetize Your Assets

Scrap companies can make better use of their idle assets, Dumes suggests. Such assets might include money. If you can provide capital to longtime customers so they can buy or sell a product and “not tie up their cash or [make them] go to the bank and borrow the money,” there’s value to that, says Greg Dixon, CEO of Smart Recycling Management (Nicholasville, Ky.). Up to half of his firm’s monthly revenue can come from its financing of scrap purchases, he says. Your ability to provide financing might depend on how your company is structured, Dixon cautions, and you face “38 different hurdles” due to accounting regulations—not to mention that you’re tying up your money.

Trucks and rail cars are in-demand assets as well. Cohen Recycling provides hauling services to the public when its truck fleets are not fully occupied; Balcones Resources has a large enough truck fleet that it provides non-scrap hauling services on a daily basis. “It’s not an easy thing to do, there are plenty of headaches associated with it, but we think there’s great value in that long term,” Getter says. Cohen also has 100 rail cars it can make available to customers as part of a scrap buying agreement, Dumes says.

5. Market Your Expertise 

Scrap processors and brokers can help customers meet goals such as achieving zero waste, improving efficiency, lowering costs, or getting better prices for their scrap. Dixon says his company routinely offers to review a company’s scrap-handling processes when it bids on a contract. He might suggest using larger containers workers can dump less frequently, automating or outsourcing some of the work, and other efficiency improvements. “At the end of the day, it’s about separating yourself from your competition, and this is one way you can do it, a tool you can pull out of the bag,” Dixon says.

Such “back-door audits” can include reviewing a company’s scrap contracts to ensure they’re priced fairly and the material is managed properly, Friedman says. He recommends charging for such audits, even if it’s a nominal amount. People will value your expertise more if you put a price on it, he notes.

Sadoff Iron & Metal’s expertise is creating scrap feedstocks that meet highly technical specifications for its foundry customers. “Not everybody wants to do this,” Lasky says, but “this is an area of the market that needs to be served,” and customers will pay a premium for the specialized material because “there is a recognition that it does cost more to produce the product.”

Sims Metal Management (New York) took marketing its expertise to a new level last year by launching Converge Engineering (Roseville, Calif.), a firm that designs, constructs, and installs entire recycling plants or upgrades to existing plants.

Sims developed these skills out of necessity, says Rafael Reveles, Converge’s president. In the early days of electronics processing, there was no such thing as a turnkey plant. “We developed the staff, skills, tools, and means to build our own equipment,” he says. “As new technology developed,” such as 3-D modeling, computer-aided design, and 3-D LIDAR scanning, “we embraced and used those so we stay at the cutting edge of technology and have a well-rounded skill set.” After many years working on Sims’ metals-processing and electronics-processing facilities, “we had the opportunity to branch out and offer services to others.”

In addition to its design and installation services, Converge conducts facility assessments, in which “we look for the opportunity to improve performance, safety, [and] environmental [compliance],” Reveles says. The firm respects its clients’ confidentiality and offers nondisclosure agreements, he notes, reassuring those who might be concerned about it sharing proprietary information with its parent company.

6. Get the Producer to Pay

TerraCycle (Trenton, N.J.) might have the most unusual business model for a scrap recycling company. It gets brand owners and retailers to subsidize the collection and recycling of hard-to-recycle items—from writing implements to chip bags to cigarette butts. “Consumers are increasingly looking for companies and products that have strong social and environmental platforms,” say Michael Waas, global vice president for brand partnerships, and Brett Stevens, vice president for material procurement and sales, who jointly answered questions about the company in an e-mail. “Of all the different aspects of sustainability, consumers care the most about whether they can recycle a product [or] package.” 

Even though collection and processing are subsidized, the processed commodities must have an end user to complete the life cycle. “Not everything that TerraCycle collects can be turned into a material that manufacturers or end users want to buy,” Stevens says. “In some cases, we have to price our material significantly lower than [its] virgin or even recycled counterparts, and in other cases, we sometimes have to give the material away for free. … We don’t have the same pressures [as other scrap companies] to sell the material at ‘market rate’ to make a profit.”

Chip bag material, for example, can sell for 10 to 20 percent below comparable virgin or postconsumer recycled resin prices, Stevens says. “Beach plastic,” on the other hand, is selling at “a significant premium—as high as 10 times—over PCR or virgin,” they say. They justify charging those premiums for the beach plastic “by the incredible [return on investment] they provide to our customers,” they say. “Everything from the media coverage these material integrations generate, to the incremental display space that they earn, must be factored in.”

How does the subsidy work? “We roll all of the costs associated with collecting and recycling the waste into a single per-pound [charge],” Waas and Stevens say. “This cost is different for almost every waste stream, as there are a number of factors that contribute to the total and they vary by stream.” The brand owners and retailers get the “authentic sustainability” of seeing their product or packaging recycled, and TerraCycle helps them “drive awareness of the recycling platform through earned media, digital/social media, at retail, and various types of contests.”

TerraCycle’s proportion of revenue from brand owner partnerships versus that from scrap commodity sales “varies tremendously based on the type of waste stream and the size of the program,” Waas says. Notably, the company does not own any processing or manufacturing facilities. “We employ a group of polymer scientists and engineers who know the different equipment and processing techniques that are available in the marketplace,” Stevens explains. “When it comes to identifying who owns the equipment to do the job we need, that is where our industry experience and networking shine.”

Why Diversify?

Pickard sees an interest in new revenue streams from younger generations of recyclers taking over the management of family scrap operations. “My impression is [they] are more open to evaluating and looking at these different options than [was] the older generation,” he says. Also, he points out, during the most recent scrap commodity downturn, “a lot of the focus was on cutting processing and production costs.” Companies have “cut their costs as much as they can, so there’s going to have to be emphasis on the other side of the equation.”

Diversifying revenue streams has “been a necessity and has allowed us to be profitable over the years, regardless of commodities markets,” Balcones Resources’ Getter says. “It’s easier said than done, but we’re fortunate to have a very forward-thinking management team and board of directors that have supported these initiatives over the years.”

If you’re considering such measures, “stop talking about it and do it,” Getter urges. “There’s a point in time you have to jump out of the plane and hope the parachute opens.”


Rachel H. Pollack is editorial director of Scrap.


Making the Broader Case for Recycling

Have recyclers been undervaluing what they do? Even when scrap prices factor in costs such as warehousing, transportation, processing, regulatory compliance, and marketing, the price might not be capturing the broader benefits of recycling, argues Marty Seaman, partner and executive vice president of Resource Recycling Systems (Ann Arbor, Mich.). “There’s the benefit of not putting [material in a] landfill, there’s the greenhouse gas [reductions], there are more jobs created in recycling versus landfilling, there are all the other benefits that are very real,” he says. “Depending on the customer, those may be more important values than those few pennies or those few dollars [they’re paying] for that material.” In the end, he says, “if you don’t make the trade, if you don’t turn [scrap] into something new, if it doesn’t get there, then none of those other benefits really come true.” 

Manufacturers or brand owners face huge “existential risks” to their image or brand if they don’t do what they say they’re doing—or what their customers expect them to do—with their material streams, Seaman points out. That might give recyclers some leverage. “Can you get to a fair model that rewards the value added and also some of that downside risk” of not recycling? This is especially important where recyclers face pressure to “move materials that never make sense to move” from a scrap value, he says. From the manufacturer’s perspective, they might want to recycle that material because they want it for an input or they want to avoid landfilling or incineration, he says. Seaman sees a growing opportunity to capitalize on this desire to do the right thing. “This is where we say to the [brand owners] … maybe you need to pay a couple more pennies for resin, you might need to be part of that risk profile” to ensure the material gets recycled, he says.

Scrap companies of all stripes are looking at how alternative revenue sources can provide stability in an era of fluctuating scrap prices and demand.
  • 2018
  • Mar_Apr

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