CRUMB RUBBER PROCESSING IN THE TWENTY -FIRST CENTURY

Presented by Terry A. Gray TAG Resource Recovery at the Regional Scrap Tire Management Conference Atlanta, Georgia October 31, 2000

Third

Southeast

PERSPECTIVE

Crumb rubber has been produced for over thirty years, but producing it from whole scrap tires is still a young and rapidly evolving business. Until less than ten years ago, virtually all crumb rubber was made from buffing dust by simple size reduction and contaminant separation. Buffing dust is waste rubber removed during tire tread leveling prior to retreading. Since each separate tire section is composed of different elastomers designed to enhance specific performance requirements, crumb rubber produced from tread buffing dust is normally more uniform chemically than crumb rubber from whole tires and does not contain white specs from sidewalls. Therefore, it provides the comparison standard in some traditional markets. Today, ninety North American producers and marketers of crumb rubber are listed in the 2000 Scrap Tire and Rubber Users Directory, seventeen of them in Canada. Many of these companies use simple processes to convert buffings or factory wastes into crumb or recycled rubber products. At least thirty-five of these companies claim to use whole or shredded tires as"their raw material, including eleven within Canada. Some of these U.S. facilities were constructed in anticipation of dramatic market growth from U.S. federal ISTEA (Intermodal Surface Transportation Efficiency Act of 1991) legislation that mandated use of crumb rubber in increasing percentages of federally-funded asphalt roadway construction. Implementation of this legislation was repeatedly postponed, then totally rescinded. Other facilities have been e'ncouraged by loans and grants from states and provinces intended to show support for recycling objectives. Unrealistic market projections from equipment vendors have contributed to some facilities. As a result, on a total North American basis, there is significant excess production capacity, and established product markets are extremely price competitive. Many current participants are not profitable, and continuing business failures are probable.

The purpose of this brief historical perspective is simply to recognize that the business parameters and equipment utilized in scrap tire processing are undergoing an evolution as companies experience the realities of operations and marketing. As a result, the objective of this discussion is simply to raise some questions and hopefully provide some guidance on both technical and business considerations associated with participation in this challenging industry.
REALITY VERSUS PERCEPTION

Crumb rubber production is a good story, starting with the ability to be paid for both your raw material and product. It gets better as people salivate over apparent tipping fees of $1 or more per passenger tire and crumb selling prices of $300/ton or more. It certainly sounds like a "can't fail" dream business, but dreams rarely withstand the reality of daylight. There is more to crumb rubber production than

simply buying equipment,

then wearing a path to your bank deposit

window.

Performing meaningful "due diligence" prior to investing time and money in crumb rubber production is critical. Purchasing equipment may actually prove to be

comparatively simple once business parameters have been adequately qefined. Critical issues include at least the following parameters, based on extensive
discussions with many industry participants, some of whom trumpeted their success until the day they declared bankruptcy. The focus is on differentiating reality from initial perception. Economic Support - Some states offer significant capital and/or operating subsidies to
encourage

products. of scrap tires. If these subsidies or fees include tire collection and transportation responsibilities, then associated capital and operating costs must be recognized and deducted from the subsidy to define net e,conomic benefit to the processing business. The probability and impact of changes in subsidies or fees should also be carefully
assessed.

development of viable production of crumb rubber and recycled rubber In addition, tipping fees are normally, c.harged for collection and/or disposal

Product Markets - The rate of product market development has historically limited of both large-scale and small-scale scrap tire processing. Elapsed time and cost associated with market development is generally under-estimated and has a It is critical to major impact on the economic viability of processing operations. understand the time requirements associated with product testing, market introduction
growth

and distribution development. Accumulating product inventory while markets develop is doubly expensive because it decreases revenue anticipated from product sales while

increasing working capital requirements. The combined result can be fatal to an otherwise well-conceived operation because, sooner or later, either financial resources or regulatory agencies will limit inventory of products and tires at the site.

Product Specifications - Time spent defining product specifications and processing

requirements generally saves money in implementation and minimizes lessons learned the hard (and expensive) way. Equipment that may be perfect for one application may be technically or economically unsuitable for another. Considering evolutionary stages for markets and products can improve the probability that initial equipment purchases will have flexibility to serve future needs. Properly evaluating product volumes, specifications, and timing are probably the most critical, and commonly ignored, steps in establishing a successful processing operation. Actual market specifications significantly impact processing methods and costs. Product Pricinq - Apparent product pricing may not be real for important reasons:
(1 )

Pricing may be on a delivered basis, including significant transportation costs. At $1 .25/mile and 40,000 pounds/truckload, one-way trucking costs are about $0.01/pound for each 300 miles covered and would double if the truck returns unloaded. Transportation costs to distant markets from remote facilities can destroy net revenue. Current pricing may be negatively impacted by your competition to displace current suppliers. A new supplier often has to offer an economic advantage to be considered, then the existing supplier attempts to protect his market by matching the new offer, etc.

(2)

Raw Material Supply - Process and equipment performance requirements depend upon the type and quantity of waste tires to be processed. Passenger tires are ,considerably easier to process than steel belted truck tires, especially with the introduction of new, long-life truck tire carcasses containing higher percentages of reinforcing wire. If a specific type of tire casing is required, is it readily available now and in the future? In many of the less populated provinces, tire availability is a controlling factor.

Processinq Equipment/System Desiqn - Most crumb rubber processing systems are

conceptually simple and should represent a careful balance of required economics, productivity and product quality. Economic compromises may be self-defeating if salable product is not consistently produced. In developing tire processing systems, multiple components are normally assembled in series, with the design of each component optimized for its specific task. However, the impact of series operation on overall system reliability is often ignored. When multiple components are integrally interlocked in series, overall system reliability generally becomes the product of each component's reliability. For instance, the overall reliability of a process using 5

interlocked components with individual 90% -operating factors will be 0.9 X 0.9 X 0.9 X 0.9 X 0.9 or 59%. When a system is designed with this perspective, overall productivity can be enhanced by separating sections through interim storage to allow partial production when one section is not functioning. Placing equal emphasis on performance of all components can also improve productivity, even in comparatively simple systems. Attention is often focused on major equipment, while simple equipment like conveyors and transfer points become after-thoughts. However, an improperly designed transfer point that clogs frequently can have a more dramatic impact on system productivity than inadequate shredder maintenance. These are- just a few of the major points that should be addressed prior to developing a process or selecting equipment. It's generally far less expensive to define critical parameters before the system is built than it is to modify, or completely rebuild, the system later.
PROCESSING ECONOMICS

Properly constructed crumb rubber production facilities are capital-intensive. If they aren't initially, they will be by the time they operate properly or fail, whichever comes first. As a result of basic capital and operating parameters, crumb rubber production economics are extremely volume sensitive. Volume impact can be illustrated by comparing 3 processing rates for a facility producing a range of crumb products down to 30 mesh. Each facility is unique in its productivity, system equipment, layout labor costs, utility rates, product mix, etc. Since ,each operation will have different economics, the following projections are intended only to provide a basis for volume comparison purposes. A crumb rubber facility has the same basic components regardless of production capacity. Larger plants may have more components in series or parallel to increase total capacity. Smaller plants that choose to have smaller equipment generally fail. Equipment selection is dictated by tire construction and strength, so small equipment may not be durable even at low volume.
.

Approximate variable cost projections for each of these processing rates are

provided in Exhibit I. Major cost components include labor, power, maintenance, and waste disposal (if necessary). Projected labor costs include applicable taxes and benefits, and are subject to wide variation based on location. It should be noted that

working supervisors capable of identifying and implementing proper operational and maintenance procedures are a critical part of a successful operation. Crumb rubber processes require manual labor and monitoring positions regardless of processing volume, so labor is also volume sensitive. Power costs are also subject to wide variation depending upon a utility's rate basis, and motors are not generally fully loaded during operation. Base rates for maximum demand can be similar for low or high volume facilities if not carefully controlled. Maintenance costs are dependent on specific machinery and operating conditions. However, knife life is generally shorter than projected by the manufacturer, and deferring necessary replacement normally results in accelerated deterioration of other components including shafts, bearings, and cutting box. Equipment requires periodic major maintenance, as reflected in "other" costs, but this cost is often not recognized during initial operation. It can't be ignored when the machine breaks down and requires $100,000 for rebuilding. Bead wire and fluff are not recovered and recycled as easily or frequently as represented, and disposal costs can be significant. As illustrated in Exhibit I, total variable cost per tire decreases about 15% as a function of increasing volume. Limited volume sensitivity results from some of these costs being directly proportional to throughput. Operators sometimes focus their attention on variable costs and fail to recognize the impact of fixed costs. However, fixed costs are economically significant and show considerably greater variation as a function of volume since administrative and capital charges are not directly proportional to volume. Comparative fixed costs are provided in Exhibit II, including administration, ~apital, and general components. Administrative staffing is subject to wide variation depending on tire collection and product marketing requirements. Administrative savings can be self-defeating if inadequate time or resources are devoted to critical marketing or management functions. Professional services such as legal, accounting, and technical assistance are often ignored, resulting in higher ultimate cost associated with inefficient use of management time and resources. Equipment depreciation is a real cost in tire processing. Even with proper maintenance, equipment simply reaches a point where replacement is less expensive than continued repair and downtime. Insurance and property taxes can be significant. As a result, fixed costs per tire are extremely volume sensitive. Fixed costs show even greater variation if interest expenses associated with borrowed capital are included. Combined revenue from tipping fees and product sales must equal or exceed

total processing costs for a facility to remain economically viable on a long-term basis. As a result of this volume sensitivity, a small volume producer for captive use would normally find it less expensive to purchase material than to produce it. Having crumb rubber available from comparatively high volume regional crumb rubber manufacturers should prove to be an economic benefit to smaller manufacturers utilizing this raw material.
CONSTRUCTIVE SUGGESTIONS

Ten years from now we will probably recognize that the North American crumb rubber industry was in its early adolescence in 2000. It has gained from experiences, but still makes many mistakes, some of them more than once. It has a long journey to productive maturity. The following constructive suggestions are offered from an experienced observers perspective based on extensive discussions with current and past industry participants. Suggestions for current participants include the following:
(1 )

Marketing - Don't complain about absence of markets if your definition of marketing is offering the lowest price to pre-existing customers. The survivors will probably become proactive in market development, working with rubber product users, compounders, molders and inventors to increase market size. Hopefully, initial supply agreements will enhance revenue beyond development costs. Cooperation - Crumb rubber producers today are inherently regional, but many potential markets are national. As a result, it is economically difficult to accelerate market development through national advertising, technical data development, market research and ca"se history publishing. If regional companies chose to pool resources. 'to develop critical information, advertisements or case histories, each company would benefit in its geographic region due to inherent transportation economics. Several companies are attempting to initiate such cooperatives, but it does require a basic change in mentality and approach. Pricing - Crumb rubber producers are commonly whipsawed by existing customers based on new entrants or desperate suppliers. Prices can drop precipitously if the viability of the product or supplier are not carefully evaluated. In some cases, prices stay depressed even after the competitive product or company have failed to provide real competition. Understanding the customer's needs and competitors' products, then exercising patience in price adjustments, could help to control price erosion.

(2)

(3)

(4)

Expanding Markets - Crumb rubber producers should consider becoming more pro-active in internal or cooperative development of finished products? Some entrepreneurs may have good ideas but lack resources for demonstrating the products. Can crumb rubber producers establish themselves as sounding boards and work cooperatively with others to accelerate development of applications? Can interests of all parties be protected by supply agreements or even ownership participation? Operating Costs - Understanding "real" fixed and variable costs is a critical component in establishing appropriate product pricing for business viability. Ignoring economic reality results in business failures, and crumb rubber has had its share. Controlling operating costs by deferring maintenance is an accountant's solution and a businessman's failure. Professionalism - The industry wants, and needs, to be recognized as professional manufacturers of consistent, quality products and credible technical/marketing information. This recognition must be earned by appropriate behavior. Quality control should be real. More effort should be devoted to demonstrating the technical and economic merits of a product or application, and less to bashing its industry competitor. Suggestions for governmental agencies and regulators include:

(5)

(6)

(1 )

State regulators have a difficult challenge in attempting to force-fit maximum resource recovery objectives within limited markets and economics of scale. Perhaps states should reconsider open support of new crumb production facilities if tire supplies and/or product markets don't allow efficient operation of existing suppliers. There is no single solution to a scrap tire problem. Multiple alternatives, including crumb rubber, civil engineering and possibly even TDF, are required for successful waste tire management programs. Providing grants and low-cost loans to additional crumb rubber producers in a saturated market, as is being done in some states, lowers the capital and operating cost basis of a new entrant, making it even more difficult for existing participants to survive.

(2)

Suggestions for those considering entrance into the crumb rubber market:
(1 )

Carefully examine all critical business parameters before entering this "can't miss" opportunity. Recognize that product prices will be lower, operating costs higher and the learning curve longer than your most pessimistic projection.

(2)

Be sure that there is an adequate uncommitted waste tire supply to support projected operating rates, and that it is unlikely to be eroded by future entrants. Be sure that you fully understand your projected markets, including specifications, competitive materials, development time and pricing sensitivities.
SUMMARY

(3)

The crumb rubber industry is in its adolescent evolutionary stage, wrestling with significant obstacles to sustained profitability. Some current participants have developed a sound understanding of process operations, economics and markets. Converting this understanding into sustained profitability has been a challenge requiring a strong heart and stronger checkbook. Future participants should tread with caution, evaluating reality as carefully as possible before entering. Dealing with adolescence is difficult, but this industry will hopefully mature into a successful, profitable adult member of our industrial society.

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EXHIBIT 1

COMPARATIVE VOLUME SENSITIVITY NOMINAL 4-30 MESH CRUMB RUBBER PRODUCTION

BASIS COMPONENT $ UNITS QUANTITY 500,000 $IYEAR

PROCESSING RATE (TIRESIYEAR) 1,500,000 QUANTITY $IYEAR

QUANTITY

2,250,000 $/YEAR

$/TIRE

LABOR Manual Skilled Supervisor Subtotal

10 16.5 18

$/hour $/hour $/hour

5 1 1 7

$104,000 $34,320 $ 37,440 $175,760

$0.21 $0.07 $0.07 $0.35

10 2 2 14

$208,000 $68,640 $74,880 $351,520

$0.14 $0.05 $0.05 $0.23

15 3 3 21

$312,000 $102,960 $112,320 $527,280

$0.14 $0.05 $0.05 $0.23

POWER

900

$98,280

1200 $262,080
J $0.17 I

1200

$393,120

$0.17

MAINTENANCE Materials Labor Subtotal

WASTE DISPOSAL

20 10 30

$/ton $/ton $/ton

5,000 5,000 5,000 2000

$100,000 $ 50,000 $150,000 $30,000

$0.20 $0.10 $0.30

15,000 15,000 15,000 6053

$300,000 $150,000 $450,000 $90,788

$0.20 $0.10 $0.30

22,500 22,500 22,500 9,000

$450,000 $225,000 $675,000 $135,000

$0.20 $0.10 $0.30

ISUBTOTAL

- VARIABLE COSTS

-~

$454,040

$0.91 ,'--L!1,154,388

$0.771

1_$1,730,400 L_$o.nl

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EXHIBIT

COMPARATIVE

VOLUME SENSITIVITY

NOMINAL 4-30 MESH CRUMB RUBBER PRODUCTION

BASIS COMPONENT $
I

PROCESSING RATE (TIRES/YEARI QUANTITY 500,000 I $/YEAR

UNITS

I
$/TIRE

1,500,000
QUANTITY

I
T $/TIRET QUANTITY

I
1 1 1

$/YEAR

2,250,000 $/YEAR I

I $/TIRE

ADM INIS TRA TION Manager Op. Mgr. Sales/Service Clerical Office/Travel Prof Services Subtotal GENERAL Insurance Local Interest Subtotal Taxes 1.5% 2% 4% $ Capital $ Capital $ Capital $2,000,000 $2,000,000 $2,000,000 $30,000 $40,000 80,000 $150,000 $0.06 $0.08 $0.16 $0.30 $3,000,000 $3,000,000 $3,000,000 $45,000 $60,000 $120,000 $225,000 $0.03 $0.04 $0.08 $0.15 $3,500,000 $3,500,000 $3,500,000 $52,500 $ 70,000 $140,000 $262,500 $0.02 $0.03 $0.06
$0.12 i

$ /year $ /year $ /year $/year $/year $/year

1 0 0.5 1

$60,000 $20,000 $20,000 $25,000 $25,000 $150,000

$0.12 $0.04 $0.04 $0.05 $0.05 $0.30

$70,000 $40,000 $20,000 $40,000 $35,000 $205,000

$0.05 $0.03 $0.01 $0.03 $0.02 $0.14

1 1 1 1

$80,000 $60,000 $45,000 $20,000 $45,000 $35,000 $285,000

$0.04 $0.03 $0.02 $0.01 $0.02 $0.02 $0.13

IDEPRECIATION
ISUBTOTAL ITOTALCOST PRODUCT Crumb Steel Tipping Subtotal

~~
COSTS

$ Capital!

$2,000,000

I
I

$400,000 $700,000

- FIXED

I I

$0.80 $1.40 $2.311

I
I

$3,000,000!

$600,000

I $0.40 I
I $0.69 I

$3,500,000!

$700,000

$0.31

1 $1,030,000

I
1

$1,247,500 $2,977,9001

$0.55 $1.321

I I

1$1,154,0401 REVENUE 55%/tons 5%/tons $/ton $260 $20 $30 2,750 250 5,000 $715,000 $5,000 $150,000 $870,000

1$2,184,3881$1.461

Rubber

$1.43 $0.01 $0.30 $1.74

8,250 750 15,000

$2,145,000 $15,000 $450,000 $2,610,000

$1.43 $0.01 $0.30 $1.74

13,750 1,250 22,500

$3,575,000 $25,000 $675,000 $4,275,000

$1.59 $0.01 $0.30 $1.90

IOPERATING

MARGIN I

~.
$2,000,000

($284,04011i$D.57il I~-14% I

I
$3,000,000

$425,6121 14%

$0.28

I
$3,500,000 1-

$1,297,100

I $0.581
I

I OPERATING R.O.C. (BT)

37%I