SOUTH CHICAGO HEIGHTS, Ill.-How do you make money with scrap tires? Not by turning them into tire-derived fuel (TDF), according to an official at National Tire Services Inc., one of the largest scrap tire processing companies in the U.S.
Only 10 percent of NTS's revenue comes from TDF and crumb rubber sales, although the company processes nearly 90 percent of the tires it collects.
Since its founding in late 1991, the company has seen its monthly revenue skyrocket, leaping more than thirtyfold from $23,000 in December 1991 to more than $700,000 in December 1993.
Instead of relying on end-product sales, NTS makes its money by collecting disposal fees and selling tires that can be reused or retreaded, according to Michael Kennedy, vice president of business development.
``The principle behind that is: This is a disposal problem, so most of the money comes from disposing of the tires,'' said Mr. Kennedy, who has been involved in scrap tire issues since studying engineering and solid waste management in college during the 1970s.
He worked for several years for Waste Management Inc. (now WMX Technologies Inc.), the nation's largest waste hauler, and was closely involved in establishing that company's scrap tire program.
To illustrate NTS' revenue breakdown, Mr. Kennedy gave the following example, using round numbers for ease of understanding:
If NTS charges a disposal fee of $1 per tire, for every 100 tires (about 1 ton by weight) it collects, it takes in $100. About 10 percent of those tires have resale value and earn the company $25. The remaining 90 percent of the tires are shredded and that material is sold for $10.
``It costs a lot to make and transport TDF-more than you can sell it for,'' Mr. Kennedy said.
The South Chicago Heights-based scrap tire collection, processing and disposal firm expects to generate $10 million in revenues this year while collecting 10 million tires, and Mr. Kennedy said that success comes from a balance between a moral desire to cleanly recycle tires and sound business sense.
``We're not `tree huggers,' '' he said. ``A lot of people go into this business because it's the right thing to do. It may be, but if you don't make money, you won't be around long.''
NTS has operations in 12 Western and Midwestern states and rounds up scrap tires through its own collection companies, charging disposal fees that are set in each market to cover labor, transportation and utility costs.
The company then sorts through the tires, removing about 12 percent capable of being sold as used tires or casings for retreading, according to Andy Nyby, chief operating officer. Together, disposal fees and reusable/retreadable tires account for 90 percent of the company's revenues.
The remaining tires that cannot be resold are processed into chips or crumb rubber that can be used for TDF or landfilled.
Despite the high processing and transportation costs associated with TDF, it makes sense for a company to pursue long-term contracts with end users of TDF as more and more landfills across the country ban whole tires, Mr. Kennedy said.
``If you have to shred the tire anyway, you might as well take it down to the point where it can be used as TDF and make some money off of it,'' he said, noting sales from shredded tires keep disposal costs down.
Last year, NTS inked a 10-year agreement with Wisconsin Power & Light Co. for 70,000 tons of TDF a year-the equivalent of 7 million passenger tires. The company also has contracts with Lone Star Cement Co. in Texas and the Tennessee Valley Authority in Memphis, Tenn.
Still, Mr. Kennedy said the low resale value of shredded tire products and the large processing costs make it improbable ``there will (ever) be the situation when people say (to tire dealers): `I'll take your tires for free' or `I'll buy your tires.' ''
The emphasis on profitability has been the cornerstone of NTS's blitzkrieg growth. The company, which expects to expand into six additional states by the end of 1994, has acquired six collection and scrap tire processing firms since becoming a publicly held company and launching an initial public offering in May 1992.
NTS is looking to expand into areas with an adequate supply of scrap tires, stringently enforced tire disposal legislation and long-term end users of TDF within 100 miles, Mr. Kennedy said.
That philosophy will most likely keep NTS from operating in all 50 states, Mr. Kennedy said, noting many areas in the U.S. do not meet all of the company's expansion criteria.
``If an area is not profitable for us, you won't find us there,'' he said.
Although NTS has focused on growing nationwide, there will always be a place for smaller, localized tire disposal firms, Mr. Kennedy predicted.
``It's not get big or die,'' he said. ``It's know the business; it's a business of pennies. Small companies that have carved a niche for themselves will always be around.''