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Auto recycling: Rough roads ahead

by Mark Henricks

The biggest problem in the automobile recycling business boils down to one thing – lack of cars. “Salvage acquisition continues to be the number one issue affecting the industry,” said Michael E. Wilson, chief executive officer of the Automotive Recyclers Association (ARA).

The ARA is a national trade group for salvage yards, used parts dealers and scrap processors. Wilson says there are about 8,400 United States auto recycling businesses, generating about $23 billion worth each year.

The industry does a lot of good, both economically and environmentally. About 95 percent of vehicles retired from use are recycled. The process saves an estimated 85 million barrels of oil per year that would have been used to manufacture replacement parts.

Engines and transmissions are the most valuable and popular parts. However, virtually everything from upholstery to tires can be recycled into other products. In practice, about 84 percent of each vehicle is recycled one way or another.

An engine and transmission from a single car can be worth hundreds or thousands of dollars. Smaller parts, such as catalytic converters, can be worth up to $250 each due to the platinum used in the converter.

A car that has had usable parts removed and is valuable only as scrap for the oil, gasoline, antifreeze, plastics and metal it contains is still worth approximately $300 to $400. That value changes over time, but not a lot. The Automotive Recycling Index compiled by Wrecknet shows prices the last 2 years have risen 6.27 percent, while declining 7.84 percent the last year. “The scrap prices have been pretty steady,” according to Bradley Alexander, president of Affordable Auto Parts, a Painesville, Ohio, recycler.

The percentage of salvaged cars sold as scrap has also held steady. That is about 13 percent to 14 percent, according to Greg Horn, vice president of industry relations for Mitchell International in San Diego and editor of Industry Trends Report, which studies the collision repair and property insurance businesses.

The percentage of salvaged parts used to repair vehicles has increased sharply, however. “In the average estimate, about 15 percent of the parts to repair a car are used parts,” Horn said. “That’s an increase of about 5 percentage points from 5 years ago.”

Used parts can be 30 to 70 percent less costly than new parts, which makes them appealing when times are hard. The more the demand, the more valuable they become and that makes recyclers’ inventory of vehicles and parts more valuable. However, it’s bad news for makers of new parts, who have seen their dominance decline.

The new parts manufacturer’s market share fell from 74 percent as recently as 2008 down to 68 percent today, according to ARA’s Wilson. “It’s a significant drop off and they’re not taking it lightly,” Wilson says, pointing to efforts by parts manufacturers to invalidate warranties of car owners who use second parts to repair their vehicles.

Whether or not new parts manufacturers can make used parts less attractive, auto recyclers face serious issues when it comes to getting cars to recycle. For one thing, fewer cars today are declared total losses after collisions. According to Horn, 5 years ago about 19 percent of insurance claims resulted in the car being totaled. Today, it’s a little over 15 percent. That means fewer vehicles available for salvage.

Another growing problem is foreign competition. About 32 percent of vehicles sold at salvage auctions today are purchased by foreign buyers, according to Horn. “I’d say five years ago, the number was about half that,” he said.

Overseas salvage vehicle buyers come from China, Africa and the Middle East. But the biggest player is Mexico. Since 2005, at least 3 million cars have been exported to Mexico, according to Lucas Davis, a University of California business paper who has studied the salvage car market. “At the peak it was a million a year,” Davis says.

The Mexican exodus began in 2005 when export rules were eased. “It was like you turned on a faucet,” Davis said. “Massive amounts of cars were flowing.” In 2008, the Mexican government tightened its rules and the flow eased. “You still see cars going south but not in as large a volume as in 2005, 2006 and 2007,” Davis said.

Most cars going to Mexico would have been scrapped in the United States, Davis said. In Mexico, they are being kept on the road, which is good for Mexican drivers, because they are much less costly than new cars. But it’s not for United States auto recyclers. “There’s no question that they are a loser here,” Davis said.

American auto recyclers complain that foreign buyers inflate prices for salvage vehicles. Horn agreed. He calculated that in addition to the 32 percent of auctions foreign buyers win, prices in an equal number of auctions are higher because of losing foreign bids. “You’re looking at 64 percent of the salvage business being heavily impacted by foreign buyers,” he said.

Another source of competition for salvage vehicles comes from home-grown salvage operators. The major players here are so-called rogue tow-truck operators who buy wrecked or inoperable vehicles for as little as a few hundred dollars, then strip the parts and sell them online through eBay and Craigslist, Alexander said.

The problem, according to Alexander, is that these competitors rarely have required salvage and other permits, don’t transfer title properly, misrepresent themselves as private individuals, and process vehicles in facilities without environmental safeguards. “We’re being outbid by people who are unlicensed and unregulated,” he said. He and others would like to stop salvage operations by tow truck drivers and other unlicensed operators.

Auto recyclers today are joining together to lobby state governments to enforce licensing and regulatory rules, and appealing to eBay to police online sellers of used parts. Organizations such as ARA work with the federal government to promote participation in the National Motor Vehicle Title Information System, a government backed country-wide registry inaugurated in 2009 to keep stolen vehicles from being resold.

Insurance companies are pushing to open salvage auctions so that individuals without salvage licenses can also bid for cars. The new car slump, which helps increase values for used and salvage cars alike, won’t last forever, although it hasn’t lifted yet. And China and Mexico’s appetite for salvage cars remains high. The result is a complex playing field unlike anything auto recyclers have seen before.

“It’s more than a 3-D chessboard,” said ARA’s Wilson “You have all these people competing for market share for vehicles. You have the Chinese pushing to get more scrap metal. That is probably the newest part – how to compete in an open market economy. It’s one thing to have open markets. But they have to be fair and open. That’s where we’re focusing our education efforts today.”