Metal recycling set for major growth period, according to analysts

A growing number of private equity companies are likely to invest in metal recycling as environmental pressures intensify and mineral resources dwindle to make it an increasingly attractive prospect.

In recent months private equity nterest in scrap metals, which was knocked sharply by the global economic crisis, has picked up with two headline acquisitions by First Reserve and KKR.

‘When this market really takes off, a lot of PE firms may follow First Reserve and KKR. Maybe some are in a holding position, monitoring the markets and waiting for the right time or signal to get in deeper,’ said Martin Woertler, senior partner and managing director in the Boston Consulting Group's Dusseldorf office.

In April, First Reserve Corporation entered the tight copper market through its €670 million acquisition of Europe based metal refining and recycling company Metallum. Just before that, Kohlberg Kravis Roberts & Co invested about $95.0 million through its KKR Asset Management unit KAM.L in Australian metal recycling group CMA Corporation.

Experts point out that there is a growing market in scrap, which is attractive. ‘It's easy to be very positive about this industry, and I think it's slowly growing in financial circles that this industry is something they ought to be investing in,’ said Bjorn Grufman, BIR president and managing director and majority shareholder of Swedish scrap trading and processing company Metallvrden.

Recycling reduces dependence on ore from mining. This is key at a time several governments are fretting how domestic firms can secure material for metal intensive industries such as automobiles and construction or in high tech applications such as mobile phones.

The world's easy to grab resources have run out or are fast becoming depleted, and now miners are forced to undertake projects in more remote or difficult to exploit areas.

Also, most countries increasingly are pushing their populations to recycle more. The industry's environmentally friendly image inevitably is further enhanced by the lower carbon emissions when compared with ore processing.

‘Increased volatility and uncertainty in the metals markets after the crisis may still be keeping private equity away from the sector. But to me it's obvious that metal recycling will increase in value and importance in the long term,’ BCG's Woertler explained.

BCG, which has a long history of working with companies in the mining industry, focuses on steel, copper, aluminium, nickel and titanium. As of 2010, the consultant put the global recycling percentage rate for these metals at 44%, 34%, 31%, 37% and 48%, respectively.

To illustrate future potential, Woertler said he expected carbon steel scrap utilisation in China to rise from around 140 kilograms a tonne of carbon steel to 220 kilograms a tonne by 2015.
This extra demand would push up steel scrap prices across the globe and presumably recyclers' profit margins. Similar price pressures could be seen in other metals.

Many industry watchers agree that the secondary metals industry will grow in importance.
‘With high commodities prices, this (metal scrap) is generally a sector that has attracted investment, and why not from private equity. They have been investing in commodities companies for years now, so why shouldn't they get into the physical scrap market?,’ said Commerzbank analyst Daniel Briesemann.

‘Logistics, part of our collection, will probably develop and become more sophisticated in the future. That might not bring the money they're looking for as investors, but to produce a very good recycled raw material. That might be interesting to them,’ Grufman said.

The secondary metals sector is a fragmented one, but that will change as the cost of complying with stricter environmental regulations makes it hard for small firms to survive.

‘Those smaller companies will be absorbed by larger companies. And that will then increase the profitability and therefore there will be more investor capital attracted to the industry,’ Grufman added.