Earlier in the year, Adam Małyszko, CEO of the Association of Car Recycling (FORS) in Poland, spoke to Auto Recycling World about his views on where the vehicle recycling industry was headed. We caught up with Adam to see whether or not his predictions about 2022 were accurate.
There is a possibility that we are likely to face the growing threat of a global crisis that will affect the car recycling industry. Among the factors that systematically increase the aforementioned threat, one cannot ignore such factors as inflation, increase in the minimum wage, energy prices, decrease in the price of raw materials recovered from ELVs, and finally, the decrease in the amount of ELVs submitted for dismantling.
Since the beginning of 2022, we have seen a drastic increase in inflation in countries around the world. The pandemic and the war in Ukraine (I’m talking about the war, intentionally avoiding the Russian propaganda term “special operation”) contributed greatly to this surge in inflation; War is an entirely different dimension of the problem.
In some European countries such as Lithuania, Latvia and Estonia, inflation levels in July 2022 exceeded 20%. In others, inflation growth was less drastic. In Japan, for example, it is currently at only 2.4%, whereas in January 2022, inflation was 0%. Huge inflation on a global scale has therefore caused a decline in the monetary purchasing power, which in turn has contributed to a reduction in demand for non-essential goods. New cars are an example of such goods. The average decline in sales of new cars in Europe has exceeded 20%. The same is true for other goods. And this situation has resulted in reduced production, shutdowns or production stoppages.
Companies that use loans have faced the need to revise their business plans as the cost of borrowing has increased significantly. In turn, companies with a surplus of money are looking for solutions to make their funds devalue as little as possible.
The slump in investment and credit risk has led banks to offer very low-interest rates on deposit. Such a slowdown is a straight road to crisis.
Minimum wage increase
The increase in minimum wages will mostly affect companies that recover a relatively large number of parts for reuse. Parts dismantling cannot be done by machines – it must be done by a human – a skilled worker. Every worker seeing the rise in inflation and the increase in the minimum wage set by governments in many countries demands that their own salary be increased as well. This means that used parts should become more and more expensive. And an expensive used part may no longer compete with a new part and its replacements, as manufacturing may prove cheaper than disassembly. There will therefore be a reduction in the range of low-cost used parts offered by ELV dismantling station operators. As a result, sales and profitability of vehicle dismantling companies will decrease, which is not yet the reason to cease operations.
Increase in energy prices
Drastic increases in fuel, electricity and gas prices will be particularly burdensome for companies that process ELVs to recover raw materials. High production costs mean that dismantling station operators must apply ever higher margins.
In market realities, however, this is not always possible due to “competition” in the form of the shadow economy, which has far lower costs. In Poland, for example, individuals, including those operating illegally in the shadow economy, have electricity and gas prices many times lower.
The increase in energy prices resulted in waste management costs increase; This applies to the waste that has no added value, such as tires, glass, plastics, operating fluids, light fraction after body shredding, etc. The operators in the shadow economy do not bear this kind of cost. They have ways to illegally dispose of unwanted waste from dismantling. The shadow economy exists in all countries; In Poland, it represents as much as 70% of the market! In many other countries it is responsible for about 50% of the entire market. Only in very few countries does this rate not exceed 10%. This situation has a very strong impact on the profitability of ELV dismantling businesses.
Decline in raw materials prices recovered from ELVs
After sharp increases in raw material prices in February, March, April and May 2022, including raw materials that are recovered from ELVs (mainly: scrap metals, aluminum and copper), we are currently facing equally large declines. As a result, revenues from raw material sales fell by almost 50%. With much lower revenues from raw materials and with expensive inventory in stock, it is difficult to make a good margin that would cover rising costs. I believe that many companies that only dismantle ELVs for raw materials may become unprofitable in the second half of 2022.
Decrease in the number of ELVs handed over for dismantling
All of the factors described above have contributed to a significant decrease in the number of ELVs transferred to legal dismantling stations. From 2020 to 2021, we had record numbers of ELVs dismantled, both at legal and illegal dismantling stations. In Poland, about 3.2 – 3.5 million ELVs were dismantled within two years, including about 2.1- 2.4 million by illegal operators. With reduced production and sales of new cars and the disposal of a very large number of run-down cars, the market for cars on the world’s roads has definitely shrunk. During the pandemic, when raw materials prices were high, especially for catalytic converters, the less-controlled shadow economy grew very strongly and took over a very large part of the market.
In the current situation, in countries where there is no system of economic incentives for the last owner of an ELV, it is very difficult, not to say impossible, to compete with illegal operators. Fewer ELVs mean fewer sales, therefore, fewer opportunities to make enough profit to cover costs.
Are we already in a crisis, or is it yet to come?
In my opinion, August, September, and October are the breakthrough months. The financial results of these months will show to what extent our industry will be affected by the economic downturn and whether we really have a crisis to face. Probably to a lesser extent, the economic downturn or crisis will affect companies that specialize in recovering spare parts. In a crisis, there may be more demand for cheaper parts. Companies that have not drawn loans and companies that use alternative energy sources will also be less affected by the crisis.
A pinch of optimism
Paradoxically, the crisis may be an opportunity for vehicle dismantling operations. As a result of the economic downturn, the availability of valuable ferrous and non-ferrous metal waste generated in the production of various products will decrease. Thus, there will be an increased demand for the waste/raw materials generated during ELV dismantling. In a crisis, vehicle users will also look more often to online used parts stores. And the multitude of car models and makes stimulates the growth of the used parts global market.
I think that professional dismantling businesses will seize this opportunity and will be able to survive the approaching lean period with peace of mind and perhaps expand even more. Let it be my wish for all car recyclers.