By Aganatrade of http://bizcovering.com

Since there is no published article on this subject matter that deals mainly on the Philippine market, I am now sharing all the information that I have for those who are contemplating to start a business, for those who wants to explore, for those who would like to see how the junk business in the Philippines go, and how lucrative/risky this business is.

Understanding the basic terms

HMS1&2 is hard metal scrap or heavy melting scrap/steel, as described internationally.  Local junk shops call it either SOLID, or MIXED. Solid means 1/4 inch thick or more, that which include used rails, ship’s remnants, heavy equipments, and the like. While MIXED means 50% of the thin ones like galvanized iron, and 50% heavily rusted metal, wrought iron, etc.  Solid metal commands a higher buying price and obviously the mixed ones commands a standard rate.  Foundry is where the junk shops deliver their collected metal scrap, while some of them are lucky enough to serve international orders.

In the international parlance, HMS 1 has a ratio of 80:20 which means 80% purely solid metal, and 20% thin sheets. While HMS 2 are really the rusty galvanized iron, tin scrap and all the rejected solid metal scrap.  International buyers seldom buy HMS2, so this type normally goes to the local foundry.  Merchants stuff their container with low grade metal sheets in between solid metal because it ensures compact packing.  One truckload must contain the maximum capacity, and solid metal weight occupies a small space within the container, while the galvanized form occupies space more. 

At the local foundry, acceptance of deliveries are limited to those without radiation, bomb components, sand and mud, and rust is at a minimum level.  Sizes must also conform to the size of their furnace, 1 meter by 1 meter is the safest cut per piece. 

Internationally accepted are the ones that comply with ISRI codes.  There are a whole bunch of these codes, ranging from 201 to 206, which stipulates the sizes and types.

Local codes or ethics for scrap recycling is not available in the Philippines.  I am assuming this is one among the overlooked, unregulated industry that is profitable.  Many junk shop owners are already earning big time specially during 2008 when scrap metal prices were astoundingly high. Days after the Beijing Olympics, trading price plummeted to an all-time low, where speculative buyers lost a fortune.  Index and reference buying rates are also taken and based from the foundries buying rate.  Normally, junk shops buy from walk-ins at Php3-4 lower than the foundry to ensure at least a Php1 mark-up.  If the truck they used loaded 10 tons, they earn 10,000 net for that day.  If they deliver 30 trucks per month, that’s a good 300,000 pesos only from metal scrap. 

Philippine local foundry pays within 15 days upon delivery, and there are available financiers who purchase your delivery ticket at a discounted rate, so the merchant can purchase anew.  Direct exporters buy in cold cash, but a little lower than the foundry.  If you deliver regularly, the direct exporters offer cash advances to the merchants, so delivery is a lot faster.  Those direct exporters are complying with a minimum quota and they collect payments against L/C (letters of credit) from foreign buyers. 

Another form that is commonly practiced is buying a factory that has closed, on stock lot basis.  One has to have the natural ability to estimate the contents before buying.  Demolition cost is thereby added on to the estimated contents, and the buy offer should at least assure a 40% net so that when the estimates fail, there would be a considerable allowance for contingencies.  One may have a difficulty estimating what cannot be seen, and if it will be based on speculation, then the buyer is bound to loose.  

Buying a sunken ship is also one option, but this is the most difficult to estimate since this is located under water, and you’ll need a good and honest diver to assess the situation.  Cost is quite low compared to buildings, and there is a lot of copper content if the vessel is still intact. Salvaging operation is quite expensive, because your diving team must be skilled enough to do the work as fast as they could.

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