Precious Metals Scrap Supply Chain

by MMC Staff

Tiers of collectors, processors and refiners move metal from scrap to elemental metal. Below is a quick, pared-down description of the precious metals scrap supply chain:

·         Manufacturers generate scrap. 

·         Collectors gather and consolidate material from small scrap generators.  To attract customers, they often pay cash on the barrelhead.   Processing might be limited to consolidation.

·         Processors consolidate from collectors, prepare scrap lots by upgrading to a level of homogeneity as a sweep or melted bar to permit sampling and blending.

·         Refiners purify metal contained in prepared scrap to elemental form.  Refiners are highly specialized, adding value where they have strong technologies and a competitive advantage. 

The inclination is for the small companies to feed bigger ones up the chain.  To secure the small company’s business, big companies avoid competing for their customers.  The big companies generally have higher fixed costs, so they are willing to sacrifice some of their profit per unit to secure a regular supply of large and digestible (prepared) refining lots.  The industry keeps more or less to these bounds, but there is quite a lot of leakage at the margin:

·         There are different patterns of vertical integration between tiers.  Companies higher in the chain often have the technologies of those below, eg., many refiners process but few processors refine.

·         Processors can (and do) represent themselves as refiners.  Because refining settlements are based on assays taken from a sample, scrap generators need not be concerned with what happens to material after it is sampled or who the ultimate refiner is. 

·         Most refiners solicit a full gamut of precious metals scrap for refining, adding value where they can and subcontracting the rest to other refiners.  We know of no refiner that refines every type and grade of scrap.  Some specialize in low rather than high grades; others do gold and silver but not platinum group metals.  Some handle deleterious impurities efficiently and charge no penalty; some recover payable metals that others cannot.  Terms among refiners tend to be low, partly because refining interrelationships support specialization in an environment of general overcapacity, and partly because, at the refining stage, lots are generally quite large and warrant a volume premium.

·         To attract business from a big customer, it's "no more Mr. Nice Guy."  A refiner on the top rung will come down to the bottom of the ladder, circumventing processors and collectors if a manufacturer generates large enough volume.

·         Advantageous financing can substitute for technology as a competitive advantage at any point in the supply chain.