Scrap heap challenge

Written by: Ian Hetherington | Published:

Ian Hetherington, director general of the British Metals Recycling Association, discusses the current state of the UK scrap metal industry, the trends that are affecting the sector – from falling prices to the sometimes flimsy enforcement of regulation – and what the coming months have in store for metal recyclers

While the UK's scrap metal sector has maintained a healthy position in some respects, there are fiscal challenges that could slow or even halt the progress and growth in the £5 billion industry.

Despite the general economic well-being in the UK, the domestic scrap industry is facing difficulties. Over the past 18 months we have seen a trend for continuing shortages of metal scrap and uncertain markets for recycled metals which characterised 2014 and have continued into the first half of 2015.

It has long been hoped that the shortfall in scrap volumes would be bolstered by improved levels of activity in the demolition and engineering sectors. However this has been a long time coming and we continue to wait for an uplift in these sectors.

The ferrous markets have been hit particularly hard, with the value of shredded steel falling, effectively removing premiums for these grades.

Prices challenge

Perhaps the biggest challenge for the producers of this secondary raw material is the low level of primary raw material prices across the world at the moment.

Iron ore for instance is particularly cheap currently and this has had a significant and inevitable impact on the demand for recycled secondary raw materials. Steel mills, foundries and metal works of all kinds will nearly always make a choice about the raw materials they employ on purely economic grounds, not on the basis of a recycling target set by what they feel to be a distant bureaucracy.

The reduction in CO2 emissions as well as the energy savings and resource efficiency gained by using scrap are also trumped by the perceived economic gains of using (currently) cheaper raw materials.

While this is one of the fairly obvious realities of any commodity market, it is not one necessarily recognised by policy makers and regulators, which continue to plough on with upping recycling targets and hiking regulatory costs.

As of January this year the UK must reach a 95% target for the re-use, recycling and energy recovery from each end-of-life vehicle (ELV) under the EU's ELV Directive – 85% must be recycled or re-used and the additional 10% can be achieved using energy recovery from the combustion of non-recyclable automotive shredder residue (ASR).

While the industry has moved rapidly to make the significant investment needed to achieve the target, it is very ambitious and there is little financial incentive for the recycler.

Economic realities?

In this sort of commercial environment where regulatory and legislative controls do not reflect or tolerate economic realities, profits will continue to be elusive. In the broader economic sense it is also the case that regulatory costs continue to rise well ahead of inflation – the metal recycling industry's bottom line is very much on the line at the moment.

Despite this financial uncertainty as key sectors continue to be depressed, the metal recycling industry as a whole has continued to invest, innovate and achieve ever higher recycling rates in key areas. In February, the Department for Business, Innovation & Skills announced that internal 2014 UK targets for waste electrical and electronic equipment (WEEE) collection were exceeded by more than 1,000 tonnes. The UK is currently working towards a WEEE collection target for 2015 of 506,878 tonnes – an increase of approximately 16,000 tonnes against last year and 20,000 tonnes over and above the EU member state target of 484,661 tonnes.

In the face of diminishing demand by the UK steel mills, UK metal recyclers have been forced to seek out new markets. As a consequence, 2014 saw a growth in exports of recycled metal.

We continue to be the European powerhouse when it comes to recycled steel exporting – in 2014 the UK was the biggest exporter to non-EU nations (+4.9% from 2013 to 4.973 million tonnes) and the fourth largest within the EU (-9.3% from 2013 to two million tonnes).

What the industry needs now

In order for this level of success to be seen across the board the metal recycling industry needs a stable long-term regulatory environment and the certainty of robust even-handed enforcement of the rules in order to get on with its business.

There has been a large number of dramatic regulatory changes to the way the industry operates over the past 20 years, many of them for the good. Site permitting, EU recycling targets, scrap metal dealer licensing and controls and a ban on cash payments as well as industrial emissions directives for metal shredders, to name but a few.

However, as the costs of complying with regulation increase, so do the rewards for those who avoid compliance. The result is that the 'non-compliant' gain an ever increasing competitive advantage over those who strive to work within the legislative requirements.

As a result, many in the scrap industry see their position in a highly competitive market being eroded by non-compliant operators.

Effective policing of these extremely complex regulatory systems is extremely costly and is a genuine challenge for police, local authorities and regulators alike, in the face of dramatically reducing budgets. The much-vaunted level playing field, created by fair and universal regulation, is being seen as an increasingly distant dream.

Coach and horses

Regulation is cheap while enforcement (or the costs associated with poor enforcement) is extremely expensive. For example, The Scrap Metal Dealers Act in England in Wales was welcomed by many including the board of the BMRA, but two years on we are aware that many individuals and businesses are still driving a coach and horses through the key provisions of the Act.

The industry is acutely aware of the problem, however local licensing authorities and police continue to stand by and fail to enforce the law while pleading shortage of manpower and other priorities competing for scarce resources.

The scarcity of scrap metal combined with the lack of visible policing of the Act and derisory sentences for the few that have been found guilty of breaking the law are also leading some unscrupulous dealers to test the system to its limits.

The British metals recycling industry is a genuine success story, but it is currently operating in an environment that sees regulatory compliance, recycling targets and environmental considerations squared off against financial success.

In order for some equilibrium to be restored, a comprehensive set of core policies in this arena must be implemented to provide certainty and inform industry investment decisions over the next five years.

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