Navigating different auto recycling ecosystems
There are essentially two types of auto recyclers out there, but a lot of overlap exists between the two, and even within a business, as the price of scrap, vehicles, and their parts fluctuates.
There are businesses that look at ELVs as a collection of parts that can be reused, with a bit of material (almost exclusively metals) that can be recovered profitably. The other class of business is one that looks at an ELV as just a collection of materials – again, almost exclusively metals, and they do not have the capacity, knowledge, or plans to sell parts.
The Automotive Recyclers of Canada (ARC) and its members operate in the first category – as dismantlers of ELVs and parts sellers. Many members of the Canadian Association of Recycling Industries (CARI) operate in the second category – scrap buyers, processors, and shredders. And, of course, lots of businesses do both, and buy and sell amongst the different types of businesses, for added complexity.
In Canada, those auto recycling ecosystems are largely left on their own when it comes to direct government intervention, which is not always the case in other countries. And, like many sectors that have gone unregulated, there is a significant underground economy in the auto recycling field with unlicensed businesses and individuals operating without regard for taxation, health and safety, theft, the environment, etc.
For both auto dismantlers and scrap processors, they work off of a simple calculus when it comes to ELVs: can they generate enough revenue (parts and materials) to pay for the ELV and any transportation back to the processing facility (if it isn’t delivered), and pay for the appropriate level of preparation of the vehicle (i.e., de-pollution, VIN de-registration) so those parts and materials can be removed, stored, sold, and shipped profitably, while simultaneously investing in people, training, equipment, reporting, etc.?
It’s a simple calculus, but there are a myriad of ways to manage revenues and expenses – and plenty of ways that it can go wrong.
You can’t talk about the state of the industry without looking at the impact of the pandemic. Most auto recyclers remained open during shutdowns, as they are deemed essential businesses in their role as part of the automotive repair supply chain. Many pivoted to online and curbside pickup, with the restrictions accelerating trends towards digitization of their parts inventories, more online sales and marketing, and an understanding that a clean, professional presentation is mandatory these days.
The following issues or trends had a positive impact on the auto recycling industry: supply chain disruptions and delays for new and aftermarket parts; vehicle owners needing/wanting to hold on to their vehicles longer; and robust and sustained scrap prices including enormous increases in the platinum group metals within catalytic converters.
Let’s look at them individually, but also how they interact with one another.
Local supply chains became all the rage during the pandemic – the closer suppliers and buyers are to one another the less likely that borders, distance, and cost play a role in selecting a part. Recycled auto parts from local vehicles are always locally available. More and more repairers, insurers, consumers, and even dealers turned to local auto recyclers as sometimes the only suppliers of parts that were suddenly held up in the supply chain.
As vehicle owners held on to their vehicles longer due to economic uncertainty or the cost and availability of a suitable replacement vehicle, they became much more interested in repairing their older vehicle – and auto recyclers were once again sometimes the only suppliers of those parts.
High and sustained scrap prices, both in the ferrous, non-ferrous, and platinum group metals generally reward both the dismantler and the scrap processor. High prices aren’t always a good thing for the entire scrap supply chain, but relatively consistent prices are – and given the global stops, starts, and uncertainty, metal price fluctuations have not been as dramatic as they could have been.
The dramatic rise in the platinum group metals within catalytic converters is another story. These huge gains have brought unprecedented catalytic converter theft and ensuing attention from the media, law enforcement, and governments at all levels. More and more vehicles are showing up at auto recyclers and scrap processors without the catalytic converter in place, and this dramatically changes the economics of successfully processing that vehicle.
Governments have tried to crack down on this illegal activity by putting increasingly stringent requirements on scrap buyers – they must understand who they are buying from, where that catalytic converter may have come from, and not aid and abet the underground economy. That is a story that has still not played out.