Forget Google—invest in scrap heaps.

Commentary about business and finance.
May 1 2006 5:41 PM

Junkyard Wars

Why scrap heaps are the gold mines of the future.

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Discarded computers. Click image to expand.
Discarded computers

The scrap metal business has long been a low-margin, low-glamour, low-prestige, high-filth business. But with soaring prices for gold, silver, and copper, scrap is suddenly precious metal. Individuals may be puzzling over whether it makes sense to melt the family jewelry, but businesses are already practicing commodity arbitrage with old junk.

When market prices rise sharply, people figure out how to extract value embedded in the commodities they already own. The high price of key raw materials—gold, silver, zinc, steel, wood—is stimulating salvage operations all over the globe. As the price of gold has risen, production of scrap gold has risen sharply, according to the Yellowbook, from 620 metric tons in 2001 to a projected 998 metric tons in 2006. In his April 22 New York Times column ($ required) Floyd Norris noted that a penny could soon be worth more than one cent, largely because of the soaring price of zinc, which comprises 97.5 percent of today's pennies.

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A similar dynamic is seen in the secondhand markets for metals far less precious than gold and copper. According to Hugo Neu, a large scrap merchant based in New Jersey, some 95 percent of cars are recycled. Schnitzer Steel, which started life as a one-person scrap operation, is now a huge recycler of ferrous metals. (Sales in its most recent quarter were $430 million.) Its operations include the Pick-n-Pull chain, a growing self-service auto dismantler. Schnitzer sells a good deal to overseas markets, which proves that McDonald's isn't the only form of junk the United States is good at exporting.

But high prices aren't the only force driving the junk business. Environmental regulations are also critical. The wood and paper industry, seeking to head off logging restrictions, has become a huge booster of paper recycling. As the American Paper and Forest Products Association crowed, in 2005 a record 51.5 percent of paper products were recycled in the United States. As part of its turnaround under new CEO Mark Hurd, Hewlett-Packard has become a big recycler. Those old monitors that the garbage man won't take away? H-P will, for a small price. In the most recent fiscal year, H-P's recycling volume rose 17 percent. And it collected "more than 2.5 million units … to be refurbished for resale or donated." It's doing so in part to reduce costs, yes. But as this article in USA Today notes, H-P needs to comply with a new Washington state law that forces "makers of TVs and computer monitors to take back products." Last year, in anticipation of new E.U. regs, H-P kicked off a hardware recycling service for European customers who buy new products.

Recycling is also a way to get consumers to buy the new model. One reason people hesitate to get a new monitor or airplane is that they don't know how to dispose of the old one, which is big and full of toxins. To ease the transition to the upgraded products, manufacturers are getting involved in what they call "End of Life care." The Wall Street Journal last week reported that Boeing "is setting up a network of companies to recycle some old jets that its new models are replacing" and to relieve customers of the problem and expense of disposing of old jets. Rival Airbus is leading a project, financed, mais oui, by an E.U. program, to recycle jets. The name: PAMELA—Process for Advanced Management of End-of-Life of Aircraft. According to this article, PAMELA aims to demonstrate that "85 percent to 95 percent of aircraft components can be recycled, reused or recovered." How very French: a government-subsidized acronym that is both beautifully feminine and banally bureaucratic.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

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