Many companies look on scrap as a problem to dispose of when in fact it could be viewed as a source of incremental profit and an opportunity to achieve some measure of natural hedging against metal price volatility. Ferrous and non ferrous scrap is obviously a product of any manufacturing process that as a business one seeks to minimize. Any material that is not being transformed into a saleable finished product represents a cost that the business unit has to incur. However unlike virtually all other direct material inputs to a business, scrap has the ability to create a separate revenue stream and as such it deserves its own strategy.
Unfortunately in many companies we have seen metal scrap treated like any other waste product, let’s get it out of here as quickly as possible. Wrong, for a number of reasons. Metal scrap offers real opportunities for many companies and we will seek to analyze a few of them here.
Companies that buy ferrous or non ferrous metals usually buy a semi finished product; it may be strip, bars, raw castings, forgings and so on. They all have one thing in common – there is an underlying primary metal value and a value added premium. For copper strip, it will be the cost of the copper cathode used to make the copper, plus the value add cost of casting slab, rolling strip, annealing, packing etc.
As we all know, the business unit is Ã‹Å“at risk’ in terms of the [constantly fluctuating] material portion of the product. But, the value-add costs should be a near constant (if a company is strategically sourcing the category). This we have covered previously. Many consumers in the middle market do not have sufficient volume to hedge their metals exposure on a forward market like Comex or the LME. We have also covered elsewhere some of the techniques that can be employed to even out these fluctuations but one solution for the business is right under their noses! When strip is turned into say electrical switch gear and copper strip scrap is generated, the scrap to raw material ratio can often be quite high, 40-50% of the strip may end up as scrap. This is mostly in the form of coil left after the blanks have been punched but also internally generated rejections of parts from subsequent forming operations. The value of clean segregated copper scrap of this kind is nearly 90% of the cost of primary cathode, so for every pound of clean copper scrap the business sells it is counter balancing a pound of new copper in the production copper strip it buys. If the copper price goes up, the business unit faces a direct material cost increase but at the same time it is able to counter that with a higher scrap sale price balancing the books to the percentage of prime metal that is turned into scrap.The greater the percentage that is left as scrap the greater the insulation from fluctuating metals costs.
Now this all assumes a few things, each of which is simple to implement and monitor, but without which the opportunity is lost. Tomorrow, we’ll cover some of our strategies on managing scrap programs.