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Report n°2: An integrated approach to economic and social contestability in business

Upstream and downstream of the branch

For the remainder of the analysis, a few characteristics of the cycle can usefully be highlighted, looking at the input market (upstream) as opposed to the output market (downstream).

Quality of materials is a key factor in determining price, whether on the input market (recycler/collector transactions) or on the output market (recycler/steel manufacturer transactions). The criteria generally used to define the grades are the dimensions (length, width and thickness), density, agreed percentage of sterile and other materials (Cu, SN, Cr, etc.). The input and output markets can then be differentiated respectively by the absence and presence of agreed conventions on the quality of the input purchased. On the output market, there is a public classification to which the various economic parties refer, the European Steel Scrap Specification. The individual purchasers (steel manufacturers) on the output market adapt these specifications depending on the end products that they produce; which in itself is a factor inducing imperfect competition. On the input market, suppliers cannot refer to any such conventions, the in-used hierarchy of grades and the names given to the qualities vary from one recycler to another, and the ability to identify the quality of the batch depends greatly on the supplier's expertise and past experience.

Transactions on the input and output markets also differ in the means used to measure the quality of delivered material. In both cases, the buyer operates via an acceptance agent, the "reception agent" (several, in the case of transactions on the output market) who visually assesses the quality of the batches. The essential difference between these two markets resides in the fact that on the output market, the evaluation of quality is not limited to visual assessment. When needed, the steel manufacturer in the branch under consideration can rely on an objective measurement of the quality. It requires a specific costly operation. Then solely those batches of materials obtained from a supplier suspected of failing to respect the quality contracted for are tested according this objective way. The precise quality of the materials loaded into the furnace can be measured beforehand or tested during the actual production process. In this way, variations in the composition of a batch can easily be matched to the price differences mentioned; the latter are therefore easily justifiable. Whether for input or output transactions, failure to meet the quality requirements results in a sanction on the price, a reduction in the recompensed weight, or simply the rejection (definitive exclusion) of the load and any future transaction.

The existence of reference prices is another distinctive factor to be mentioned. On the output market, agents can obtain information on the reference prices and value of the metals. This information is published and easily available. No information, however, is published on possible "reference prices" or "market prices" for the input market.

Lastly, on both markets, buyers anticipate the possible presence of waste in the batches offered and emphasise the considerable risks that these wastes pose for the production tools or quality of the end product. There is one feature specific to the input market that we should underscore: the concentration of scrap flows goes hand in hand with a concentration of flows of other wastes "complementary" to the object of collection (for instance: tyres, oils, petroleum, batteries are the complementary wastes of an obsolete vehicle). This situation may raise two problems: firstly the possible absence of channels to collect and process those wastes(16); secondly the high costs and technical and administrative difficulties borne by the supplier in eliminating those complementary wastes from the collected product. These two problems inherent in the organisation of the recycling branches, with some others, provide strong incentives for suppliers not to separate the complementary waste from the ferrous materials, which are collected at the same time, and maybe even to hide such waste in the batches of scrap metal.

To account for the two main dimensions that characterise the extent of a recycling operator's economic contestability, the arguments will be discussed in sequence, starting with the production tool central to the activity of scrap metal recycling, which is the shredder. This tool is the central feature of the material processing: it separates the ferrous from the other fractions and accomplishes the actual recycling of the scrap. After shredding, the recycler does indeed have a raw material that can be sold on the output market.

The vital economic factors that determine the profitability of the recycling activity are, conventionally: (i) the costs borne in purchasing the different materials for recycling (transportation costs, purchase price of the materials for recycling and cost of handling on the firm's premises), (ii) the value of the different recyclable fractions obtained after processing the scrap and (iii) the costs of the transportation and elimination of the non re-usable waste.

Based on this simple finding, we shall consider the assets and modes of organisation of the economic transactions that directly influence the profitability and competitiveness of an activity focused on the shredding of ferrous metals.

(16) Consider, for instance, the problems of setting up activities aimed at recycling tyres.