Scrap metal prices can go up and down quickly so you'll need to take this into account if you're setting up as a scrap metal dealer. Our practical guide will help you start up and run your own scrap metal business.
- Research your target market
- Structure of the industry
- Ferrous scrap
- Non-ferrous scrap
- Establish your customer profiles, prices and terms
- Decide which services to offer
- Buy an existing business
Research your target market
It's important to do some market research before starting your business. You should make an estimate of the level of demand for scrap metal in your area, and think about how and where you will source scrap. If there are too many dealers in the area then you could find there's not enough available scrap to go around.
It makes good sense to find out whether there is enough demand for a scrap metal dealer in your area. It's important to remember that scrap metal prices can fluctuate significantly from year to year and when prices are low competition in the sector intensifies considerably. Although you can almost always sell on scrap metal if the price is right, haulage costs are high so it may be uneconomical to transport your stock significant distances in order to sell it on.
Check out the competition in your area to identify how many scrap metal dealers are already operating. A look on Yell.com and other online directories will give you an idea of the number of dealers and also of the metals they handle and the services they offer. You could also have a look at local print directories.
It may be that you will only be competing directly against some of these businesses because you will be operating in a particular way - for example collecting door to door from householders - or because you will only dealing in a certain type of metal.
Sources of scrap
Will you be able to get hold of enough scrap? Bear in mind that you will be competing with other scrap dealers for sellers' waste metals. Competition will be mainly on price paid for scrap, but you may also find that things like offering a friendly, business-like, prompt and reliable service can give you the edge. Think about where you will get your scrap from - because of frequent scrap shortages, many dealers find they often have to travel further to find good quality scrap. You'll also need to be very certain that the scrap you buy hasn't been stolen. You will need to have a regular source of scrap that you sort - and possibly process - before selling on to another dealer or mill merchant. Because of tough environmental legislation items such as fridges and vehicles are now much less attractive to the scrap metal industry because of the extra work and costs involved in sorting and disposing of all the different pollutants safely.
As part of your market research identify as many sources of scrap as possible. These might include refuse collection crews, local manufacturing and engineering firms which regularly have metal waste, and construction businesses like plumbers which need to dispose of old pipework, boilers, radiators and so on from time to time. Farmers and garages might be good sources too.
Checking out your competitors
Have a good look at existing dealers to establish:
- which metals they handle and what price they pay for scrap
- who they buy scrap from
- the metal processing and refining services they undertake
- what other services they offer
Research current trends, plus legal and tax issues
- Sector trends for scrap metal dealing businesses
- Legal issues for scrap metal dealing businesses
- VAT rules concerning scrap metal dealing businesses
Structure of the industry
The structure of the scrap metal industry can be compared to a pyramid. At the bottom are lots of small itinerant dealers who collect scrap door to door from householders and small businesses. These dealers used to be referred to as totters or rag and bone men. Traditionally they did not have a yard but collected scrap until they had filled their vehicle, at which point they sold it on to a larger scrap metal dealer. Although plenty of small and part-time dealers still operate like this, now there are fewer of these itinerant collectors and many dealers have a yard where they are able to roughly sort the different metals and perhaps stockpile them until they have collected a reasonable quantity to sell on to another larger merchant.
These larger dealers are known as yard merchants and there are fewer of these businesses as they have to invest quite considerable sums of money in expensive equipment. They process the different scrap metals they handle, getting rid of contaminated material and reducing the scrap to a manageable size. They buy scrap from smaller dealers and also from businesses such as engineering works. They may sell their scrap on to even larger merchants who can complete the refining processes before supplying the scrap to the end-users, the steel mills.
The steel mills will only accept scrap as furnace feedstock if it has been processed to very strict specifications. For example, it must be as free from contamination as possible and prepared to a certain size and thickness. Only the very largest merchants supply direct to the steel mills. They are referred to as mill merchants and occupy the position at the very top of the pyramid. These large dealers may also export scrap overseas when demand is strong.
Ferrous scrap consists of iron and steel. In tonnage terms, most of the metal handled by the metals recycling industry is ferrous, although in value terms the proportion is smaller because of the relatively low value of steel compared to most non-ferrous metals (some of which also weigh less).
Ferrous scrap may be:
- 'capital' or old scrap. These are old metal items, machinery, railings, pipework and so on which have been scrapped because they are no longer wanted or, for example, because they are part of a building which is being demolished
- process or factory scrap. This is waste metal produced by engineering workshops, factory assembly lines and so on
- circulating scrap. This is a by-product of industrial processes such as smelting
Ferrous scrap is processed ready for the steel mills and categorised according to the UK specification for iron and steel scrap. There are over 30 different grades. Information about the specifications can be obtained from:
- the British Metals Recycling Association (BMRA)
- UK Steel
- the Cast Metals Federation (CMF)
- the Letsrecycle website
Non-ferrous scrap consists of metals such as aluminium, copper, brass, lead, zinc, nickel and so on. They have a much higher value per tonne than the ferrous metals. High value metals such as silver, platinum and gold are generally traded by the kilo, pound or troy ounce, as is recovered mercury (a very specialist commodity because of its nature and toxicity).
Some merchants deal exclusively in non-ferrous scrap, buying in quite small quantities from smaller concerns and selling it on to refiners and foundries.
There are many different non-ferrous classifications and grades - these are listed on the Lets Recycle website.
Establish your customer profile, prices and terms
Your customers will be other scrap metal dealers who are higher up the industry 'pyramid' than you are and who will be able to process the scrap you collect to a greater extent than you are able to.
The final end-users for scrap are the steel mills and they fix the price paid to the mill merchants at the top of the pyramid which supply them with the furnace feedstock. Mill merchants in turn buy scrap from dealers further down the pyramid and the price they offer them reflects what the steel mills will pay, less a margin for operating costs and profit. Dealers further down the pyramid calculate their buying-in prices in the same way.
If you are a small concern selling to a bigger yard merchant you may be offered payment when you tip your load. Remember that your customers can't pay you in cash any more. If you are a larger concern, perhaps selling to a mill merchant, you may allow them around 14 days to pay.
Decide which services to offer
The range of services you offer will depend very much on the size of your business. For example, a very small dealer won't do much more than collect scrap from local households and small businesses, possibly sort it roughly, and then sell it to a larger merchant for processing. They don't add much value to the metal beyond sourcing and transporting it.
A larger merchant will have a yard where the scrap bought can be sorted, processed and stockpiled. When either a householder or a business visits the yard with scrap to sell a metal reception team assesses the value of the scrap metals and offers immediate payment. The weight of the scrap is established using a weighbridge or scales. Some dealers offer scrap sellers a cheque cashing service so that they can legally turn the cheque payment for the scrap into cash straight away.
You might decide to leave skips with local manufacturing businesses that produce waste metal that can be recycled. When the skip is full you collect it and replace it with an empty one. The collected scrap is weighed and you would then send to the customer details of the weight and the price you would be prepared to pay. The customer uses this information to raise an invoice to send to you.
You might decide to operate as a vehicle breaker - you would buy end of life vehicles (ELVs) and de-pollute and dismantle them before processing the metal shell.
After you have processed the scrap that you buy in you will sell it on to a larger merchant. The larger the merchant, the more they generally do to add value to the metal, for example by shredding it and getting it into a state that is suitable for the end user. The price you receive from the buyer generally includes the cost of delivery so another thing to consider is whether you will operate your own lorries or use the services of a haulage contractor.
If you decide to operate your own vehicles you could consider offering general haulage services so that the vehicles are fully utilised. Before embarking on this in a big way though it would be a good idea to research the haulage sector thoroughly. Margins are very tight in the sector and you will need to make sure you can make a profit.
You might also undertake general demolition work.
Environmental legislation requires site operators to take long term care of sites where waste is recovered or disposed of, for example installing drainage systems and sealed surfaces to prevent pollution. It also makes good commercial sense to keep your yard in a clean condition - it will help you to secure a reputation for efficiency and fair dealing and this will influence both those coming to you with scrap to sell and those to whom you want to sell scrap.
You might consider putting in place an ISO 14001 system to demonstrate that you have considered the environmental implications of your operating processes. ISO 14001 is the standard for environmental management. You can find out more on the ISO website.
Buy an existing business
You might decide to buy an existing metals recycling business rather than start your own venture from scratch. Buying a going concern can mean that:
- the yard and equipment are already in place
- there are established customers
- the business can generate income immediately
- suppliers have been identified and relationships established with them
- the business has a track record, which can help if you are looking for finance
- staff may already be in place
However, look critically at any business that you are interested in to make sure that the price you negotiate with the seller is a fair one. Try to establish why the business is for sale - for example, is the owner keen to retire or is there another personal reason for selling up.
Your market research into the sector as a whole and the locality in particular will help you to establish whether or not the owner is selling because he or she can no longer generate enough income from the business. This may not necessarily deter you - many business people are confident that they can turn a failing business around. The important thing is to have established the current position so that the price you pay for the business is not too high.
Other matters to consider include:
- the state of the premises, vehicles, skips, equipment and so on. Will you have to spend money refurbishing or replacing assets? Will the site need expenditure on it to make sure it complies with environmental legislation
- the quality and value of any stock you are buying. Check this over carefully before agreeing a price. Bear in mind that scrap prices can vary significantly from year to year
- existing staff rights
- how to retain key personnel once you've taken over
- does the business owe money that you will be responsible for
- if you are paying for goodwill, to what extent does this depend on the skills and personality of the seller
Check whether there are any unresolved environmental actions, planning or licensing disputes, or other outstanding problems which need to be dealt with.
Ask your accountant to look critically at the business accounts for the past three years and discuss with him or her the selling price in the light of what the accounts reveal. Make sure you budget for other professional fees such as legal fees and valuation and survey costs.