Plans Indicate Continued Attraction to Equipment

1990 Equipment and Business Survey Results

Despite some misgivings over the near-term economic outlook, scrap industry executives indicate they’re looking positively ahead. According to this year’s survey, more dollars are being earmarked for traditional processing equipment, environmental compliance, and plastic scrap processing.

Such spending plans are not unique to the scrap industry, nor to this year. As we noted in our coverage last year [“Optimism About Business Continues,” July/August 1989], U.S. Department of Commerce data reported that U.S. companies planned to increase outlays for new plants and equipment by 9.1 percent in 1989--to $469 billion. As it turned out, actual spending surpassed $475 billion, according to Commerce Department figures. For equipment expenditures alone, outlays exceeded $333 billion. At the time, numerous reports were circulating suggesting that an economic downturn was just around the corner.

This year’s spending decisions--based on yesterday’s financial performances plus strategic business planning for tomorrow--call for new capital and expense spending plans. However, business leaders are asking several questions: Is now the time to plan for further expansion? Should industry take a more conservative view with respect to spending? Should spending be earmarked for replacement and maintenance as opposed to expansion? Can the U.S. economy be trusted to expand in 1990?

Despite these open-ended questions, the strength and resilience of the U.S. economy continues to astound most private and government economists. Earlier forecasts that called for a recession in 1988--and again in 1989--missed the mark and, fortunately, have helped discredit the “self-fulfilling prophecy” concept of economic forecasting.

Last year, for example, was still considered to be a very good year, as measured by the gross national product (GNP). Fourth-quarter 1989 GNP figures showed weakness (the weakest quarterly performance since 1986), but most viewed the number positively--as one of economic stability. Furthermore, the final 1989 GNP growth rate was 3 percent. This fell short of the 1988 increase of 4.4 percent and the 1987 increase of 3.7 percent. It exceeded, however, the 2.7 percent growth of 1986.

U.S. Industry May Set Spending Record

Given the growth recorded in 1989 and with no real threat that a major downturn is in the offing in 1990, U. S. businesses are looking to spend. Again, according to Department of Commerce figures, planned plant and equipment expenditures for this year, expressed in current dollars, are estimated at $512.82 billion, up 7.8 percent over last year's $475.52 billion. If this year's capital spending plans are realized, it would break the 1989 record--not to mention that it would virtually guarantee continued economic expansion through 1990, as well as help inflationary pressures by increasing productive capacity.

ISRI Members Respond--Who Are They?

Against this broad macroeconomic backdrop, Institute of Scrap Recycling Industries (ISRI) members were asked to complete a survey questionnaire mailed in late March and early April. Of the more than 1,700 questionnaires mailed, more than 300 members replied, resulting in a response rate of about 20 percent. Is this a fair representation of ReMA members and the scrap industry?

Although it has been difficult to confidently quantify this industry, we believe the responses are representative of the ReMA membership, if not of the entire scrap processing and consuming industries. According to information from past surveys, the "typical" ReMA member handles mostly ferrous metals, with smaller quantities of paper and nonferrous metals. The firm operates principally as a processing facility with less than 50 employees. When asked what the total dollar value of equipment investment was, more than half of this year's survey respondents indicated that their current level of investment in equipment is more than $1 million. Extrapolating these figures, total investment in equipment by processors (excluding multifaceted operations or scrap consumers) likely exceeds $6.5 billion.

For comparison, according to the Department of Commerce's most recent census of the scrap industry--issued this past October--there are approximately 8,300 "merchant wholesalers" of "scrap and waste materials" (SIC code 5090). Of that number, approximately 4,000 were categorized as "iron and steel scrap processors and dealers," with combined sales in 1987 of $7.97 billion. (Agents, brokers, and commission merchants were excluded from the figures.) Is this an $8-billion business? How do we add the contribution of consumers, commodity brokers, and metal traders? Do ReMA processors really have an equipment investment of $6.5 billion? Our business survey was not designed to answer these specific questions, but it can reveal what members are contemplating in terms of planned equipment expenses and types as well as reveal the business outlook for 1991. Last year, our survey revealed that ReMA members were in step with the rest of the nation's businesses; we hope to be able to say that again next year.

Purchases and Orders

Approximately 90 percent of survey respondents indicated they had spent $1 million or less on equipment in 1989. The largest response rate was found in the $100,000-and-under category (37 percent), while the smallest response rate was in the more-than-$5-million category (2 percent). Interestingly, however, when asked the year before about plans for 1989, only 7 percent checked off the $1-million-and-above category. This compares to an 11 percent response rate for actual purchases in the $1-million-and-above category in 1989.

Again, this year, the majority of respondents are looking at 1990 purchases/orders at less than $100,000, with 80 percent expecting purchases of less than $250,000. At the other end of the scale, 8 percent have either purchased or ordered equipment with price tags above $1 million. This suggests that a significant number of ReMA member firms are confident that the near-term outlook is positive and, as a result, they are committing new funds.

1990 Spending Plans

As Table 2 illustrates, approximately 75 percent of the respondents are planning on equipment purchases less than $250,000; 17 percent predict they'll buy between $250,001 and $1 million worth of equipment; and 9 percent are looking at equipment purchases above the $1-million mark. (Last year, 8 percent said they planned on buying equipment priced more than $1 million in 1990.)

Looking closer at the equipment being considered, respondents identified more than 30 different items in their plans. Those most commonly checked off were forklift trucks; trailers and roll-off trailers; computers; cranes, conveyors, and balers (all types); front-end loaders; and shears. The two least frequent responses were aluminum sweat furnaces and auto flatteners and car crushers.

In addition to equipment types included on the survey form, respondents added roll-off bins, lugger boxes, exhaust hoods, plastic processing equipment, and underground storage tanks. Others generalized their responses: environmental compliance equipment, lab equipment, and furnace equipment were examples.

Regarding 1991 plans, the top responses were (in order) forklift trucks; trailers; tractors; roll-off trailers; computers; front-end loaders (tied with computers); conveyors; balers; trucks; pollution control systems; and scales.

Costs of Environment Compliance

The 1990 survey asked ReMA members to list specific types of equipment and/or systems they had to invest in as a result of environmental regulations. Less than half answered this section; however, it was evident that sizable sums of money were earmarked for environmental compliance in 1989.

In addition, nearly 60 percent anticipated additional environmentally related purchases in 1990. One firm noted that it recently completed an environmental audit and now expects to spend "a considerable amount" in 1990 and 1991.

Planning for Plastic Scrap

The survey also asked whether members were processing plastic scrap and whether they were planning on any plastic scrap processing equipment purchases in 1990 or 1991. Only 10 percent of those who answered said that they were currently operating processing equipment designed to handle plastics, but a significant 21 percent said that they plan to purchase equipment that could be used to process plastic scrap. It was obvious among certain members that processing plastic scrap is receiving serious attention this year and beyond.

1990-1991 Caution Detected?

Survey respondents offered several comments about their view of business conditions for this year and beyond: For 1990, 7 percent checked "excellent," 54 percent thought "good" was more appropriate, and 37 percent were assuming a more "moderate" year. Less than 3 percent of those surveyed felt that 1990 would rank as "poor." Last year, for comparison, a larger percentage thought that 1989 would indeed be "excellent" and virtually no one thought it would be a "poor" year. Could one read into this a slight caution about the near term?

Looking Ahead to 1991

Finally, we asked two related questions about the near-term outlook: identification of specific purchase plans and comments on 1991. The responses to the first part of the question were practically a mirror image of the responses to another question about 1990 planned purchases. The majority are looking at expenditures under $250,000 for 1991, but a significant 9 percent believe that their plans will call for a $1-million-plus commitment next year.

Respondents offered varied comments on 1991 and by and large they were positive. As one observed, "factors out of our control will dictate [business strength], namely international affairs, automotive industry strength, interest rates, and the economy in general." Interestingly, several other respondents hinted at a period of scrap tightness ahead, thereby suggesting relative high prices, but, at the same time, lower volumes processed. As one observed, "the outlook is for increased supply tightness and increased emphasis on pollution control." Another noted environmental impacts: "If prices continue at current levels, I would consider it a good year. Results of RCRA [Resource Conservation and Recovery Act] reauthorization could change my outlook." Another responded by first pointing out that, as a result of legal expenditures due to environmental regulations, he wondered (with tongue in cheek, we suspect) whether he still wanted to be in business in 1991!

1990 Equipment and Business Survey Results

Despite some misgivings over the near-term economic outlook, scrap industry executives indicate they’re looking positively ahead. According to this year’s survey, more dollars are being earmarked for traditional processing equipment, environmental compliance, and plastic scrap processing.

Such spending plans are not unique to the scrap industry, nor to this year. As we noted in our coverage last year [“Optimism About Business Continues,” July/August 1989], U.S. Department of Commerce data reported that U.S. companies planned to increase outlays for new plants and equipment by 9.1 percent in 1989--to $469 billion. As it turned out, actual spending surpassed $475 billion, according to Commerce Department figures. For equipment expenditures alone, outlays exceeded $333 billion. At the time, numerous reports were circulating suggesting that an economic downturn was just around the corner.

This year’s spending decisions--based on yesterday’s financial performances plus strategic business planning for tomorrow--call for new capital and expense spending plans. However, business leaders are asking several questions: Is now the time to plan for further expansion? Should industry take a more conservative view with respect to spending? Should spending be earmarked for replacement and maintenance as opposed to expansion? Can the U.S. economy be trusted to expand in 1990?

Despite these open-ended questions, the strength and resilience of the U.S. economy continues to astound most private and government economists. Earlier forecasts that called for a recession in 1988--and again in 1989--missed the mark and, fortunately, have helped discredit the “self-fulfilling prophecy” concept of economic forecasting.

Last year, for example, was still considered to be a very good year, as measured by the gross national product (GNP). Fourth-quarter 1989 GNP figures showed weakness (the weakest quarterly performance since 1986), but most viewed the number positively--as one of economic stability. Furthermore, the final 1989 GNP growth rate was 3 percent. This fell short of the 1988 increase of 4.4 percent and the 1987 increase of 3.7 percent. It exceeded, however, the 2.7 percent growth of 1986.

U.S. Industry May Set Spending Record

Given the growth recorded in 1989 and with no real threat that a major downturn is in the offing in 1990, U. S. businesses are looking to spend. Again, according to Department of Commerce figures, planned plant and equipment expenditures for this year, expressed in current dollars, are estimated at $512.82 billion, up 7.8 percent over last year's $475.52 billion. If this year's capital spending plans are realized, it would break the 1989 record--not to mention that it would virtually guarantee continued economic expansion through 1990, as well as help inflationary pressures by increasing productive capacity.

ISRI Members Respond--Who Are They?

Against this broad macroeconomic backdrop, Institute of Scrap Recycling Industries (ISRI) members were asked to complete a survey questionnaire mailed in late March and early April. Of the more than 1,700 questionnaires mailed, more than 300 members replied, resulting in a response rate of about 20 percent. Is this a fair representation of ReMA members and the scrap industry?

Although it has been difficult to confidently quantify this industry, we believe the responses are representative of the ReMA membership, if not of the entire scrap processing and consuming industries. According to information from past surveys, the "typical" ReMA member handles mostly ferrous metals, with smaller quantities of paper and nonferrous metals. The firm operates principally as a processing facility with less than 50 employees. When asked what the total dollar value of equipment investment was, more than half of this year's survey respondents indicated that their current level of investment in equipment is more than $1 million. Extrapolating these figures, total investment in equipment by processors (excluding multifaceted operations or scrap consumers) likely exceeds $6.5 billion.

For comparison, according to the Department of Commerce's most recent census of the scrap industry--issued this past October--there are approximately 8,300 "merchant wholesalers" of "scrap and waste materials" (SIC code 5090). Of that number, approximately 4,000 were categorized as "iron and steel scrap processors and dealers," with combined sales in 1987 of $7.97 billion. (Agents, brokers, and commission merchants were excluded from the figures.) Is this an $8-billion business? How do we add the contribution of consumers, commodity brokers, and metal traders? Do ReMA processors really have an equipment investment of $6.5 billion? Our business survey was not designed to answer these specific questions, but it can reveal what members are contemplating in terms of planned equipment expenses and types as well as reveal the business outlook for 1991. Last year, our survey revealed that ReMA members were in step with the rest of the nation's businesses; we hope to be able to say that again next year.

Purchases and Orders

Approximately 90 percent of survey respondents indicated they had spent $1 million or less on equipment in 1989. The largest response rate was found in the $100,000-and-under category (37 percent), while the smallest response rate was in the more-than-$5-million category (2 percent). Interestingly, however, when asked the year before about plans for 1989, only 7 percent checked off the $1-million-and-above category. This compares to an 11 percent response rate for actual purchases in the $1-million-and-above category in 1989.

Again, this year, the majority of respondents are looking at 1990 purchases/orders at less than $100,000, with 80 percent expecting purchases of less than $250,000. At the other end of the scale, 8 percent have either purchased or ordered equipment with price tags above $1 million. This suggests that a significant number of ReMA member firms are confident that the near-term outlook is positive and, as a result, they are committing new funds.

1990 Spending Plans

As Table 2 illustrates, approximately 75 percent of the respondents are planning on equipment purchases less than $250,000; 17 percent predict they'll buy between $250,001 and $1 million worth of equipment; and 9 percent are looking at equipment purchases above the $1-million mark. (Last year, 8 percent said they planned on buying equipment priced more than $1 million in 1990.)

Looking closer at the equipment being considered, respondents identified more than 30 different items in their plans. Those most commonly checked off were forklift trucks; trailers and roll-off trailers; computers; cranes, conveyors, and balers (all types); front-end loaders; and shears. The two least frequent responses were aluminum sweat furnaces and auto flatteners and car crushers.

In addition to equipment types included on the survey form, respondents added roll-off bins, lugger boxes, exhaust hoods, plastic processing equipment, and underground storage tanks. Others generalized their responses: environmental compliance equipment, lab equipment, and furnace equipment were examples.

Regarding 1991 plans, the top responses were (in order) forklift trucks; trailers; tractors; roll-off trailers; computers; front-end loaders (tied with computers); conveyors; balers; trucks; pollution control systems; and scales.

Costs of Environment Compliance

The 1990 survey asked ReMA members to list specific types of equipment and/or systems they had to invest in as a result of environmental regulations. Less than half answered this section; however, it was evident that sizable sums of money were earmarked for environmental compliance in 1989.

In addition, nearly 60 percent anticipated additional environmentally related purchases in 1990. One firm noted that it recently completed an environmental audit and now expects to spend "a considerable amount" in 1990 and 1991.

Planning for Plastic Scrap

The survey also asked whether members were processing plastic scrap and whether they were planning on any plastic scrap processing equipment purchases in 1990 or 1991. Only 10 percent of those who answered said that they were currently operating processing equipment designed to handle plastics, but a significant 21 percent said that they plan to purchase equipment that could be used to process plastic scrap. It was obvious among certain members that processing plastic scrap is receiving serious attention this year and beyond.

1990-1991 Caution Detected?

Survey respondents offered several comments about their view of business conditions for this year and beyond: For 1990, 7 percent checked "excellent," 54 percent thought "good" was more appropriate, and 37 percent were assuming a more "moderate" year. Less than 3 percent of those surveyed felt that 1990 would rank as "poor." Last year, for comparison, a larger percentage thought that 1989 would indeed be "excellent" and virtually no one thought it would be a "poor" year. Could one read into this a slight caution about the near term?

Looking Ahead to 1991

Finally, we asked two related questions about the near-term outlook: identification of specific purchase plans and comments on 1991. The responses to the first part of the question were practically a mirror image of the responses to another question about 1990 planned purchases. The majority are looking at expenditures under $250,000 for 1991, but a significant 9 percent believe that their plans will call for a $1-million-plus commitment next year.

Respondents offered varied comments on 1991 and by and large they were positive. As one observed, "factors out of our control will dictate [business strength], namely international affairs, automotive industry strength, interest rates, and the economy in general." Interestingly, several other respondents hinted at a period of scrap tightness ahead, thereby suggesting relative high prices, but, at the same time, lower volumes processed. As one observed, "the outlook is for increased supply tightness and increased emphasis on pollution control." Another noted environmental impacts: "If prices continue at current levels, I would consider it a good year. Results of RCRA [Resource Conservation and Recovery Act] reauthorization could change my outlook." Another responded by first pointing out that, as a result of legal expenditures due to environmental regulations, he wondered (with tongue in cheek, we suspect) whether he still wanted to be in business in 1991!