Salvaging a profit from clunkers

As a car crusher rumbles in the background, waiting for its next victim, Tony Faust stands at the end of his dusty salvage lot looking upon rows and rows of scrapped vehicles, counting the ones marked “C4C.” Those “cash for clunkers” now total 25, but he expects to process as many as 500 before the program ends.

“It’s hard to say how many we’re going to get,” said Faust, co-owner of Viking Auto Salvage in Northfield, Minn.

Faust, like many other local yard owners who were expected to be big winners from the cash-for-clunkers program, is now trying to squeeze even the smallest of profits from the old gas guzzlers, which car owners were quick to scrap in return for federal money.

Normally when salvage yards take in a scrapped car, they pull out the engine and any other highly valuable parts, then lay the car out in the yard for sometimes over a year, until its less-valuable parts are all stripped and it’s finally crushed and sold for scrap metal.

But the popular “cash for clunkers” program, officially called the Car Allowance Rebate System Act (CARS), has junked that system with tight federal restrictions that complicate the process while speeding up the timeline for salvage yards.

While CARS has boosted new car sales, the old clunkers don’t easily turn a profit for salvage yards because generally, their parts are not very valuable. Most of the clunkers coming in are older SUVs and pickup trucks, and parts from those types of vehicles are not as valuable as parts from newer, damaged vehicles salvage yards buy from insurance companies, Faust said.

“We’re not chasing these things because they’re just not that valuable to us,” he said.

The hurdles are many, scrap yard owners say. Clunkers arrive at the junkyard with dead engines, which under CARS rules were already destroyed by the dealer by replacing the oil with a combination of sand and sodium silicate.

Salvage yards that take in clunkers, besides registering them with the state, have to register with the federal government twice: once when they receive the vehicles and again when they are recycled.

According to the CARS act, salvage yards are only allowed to hold onto the clunkers for 180 days. Faust said he holds onto a regular scrapped car, one not coming from the clunkers program, for 400 days. He lets them sit in the yard in case any of the parts are needed down the road.

And the last chance to make money off the vehicle?when it is crushed into scrap metal?also is iffy. The price for scrap metal is fairly low now and some in the industry worry that the sudden injection of clunkers into the market will drive down steel prices even more.

So far, Minnesota salvage yards have only seen a small fraction of the clunker vehicles because most dealerships are holding onto them until the federal government approves the deals.

Walser Automotive Group, one of the bigger car dealers in the area, has over 1,000 cash-for-clunkers deals in the works, and it has hundreds of vehicles waiting to be scrapped, which the company started processing Monday, said Doug Sprinthall, Walser’s director of new vehicle operations.

They’re waiting to get approvals, Sprinthall said, because they don’t want to scrap a car and then find out it was rejected by the CARS program. “Imagine telling someone they’re not getting their money and we already scrapped your car,” he said.

Sprinthall said that because of technical problems with the CARS program, there have been numerous problems with getting cars approved even when they are eligible.

Mark Hortman, CEO of John’s Auto Parts in Blaine, Minn., said he has about 300 clunkers so far and dealers have promised to eventually sell the salvage yard 1,300 vehicles.

He said so far, some of the vehicles have been in decent shape and have usable parts, so he’s still willing to put up with the strict regulations.

“A gluttony of parts is never a bad thing in our industry,” said Hortman, whose yard receives about 4,000 car parts requests a day. “But from our end it’s tough logistically, it’s a nightmare.”

In the beginning, many salvage yard owners thought they would be allowed to use the clunker engines, said Mike Fasig, owner of Speedy Auto Removal in Minneapolis. Fasig said there was a lot of confusion when the program was getting started. He isn’t taking any clunkers because he didn’t get on the approved salvage yard list. Car dealers are only allowed to sell their clunkers to salvage yards that are approved by the federal government?there are over 200 on the list in Minnesota.

“The rules weren’t clear until the last minute,” Fasig said. “We were all pretty excited about this in the beginning; now I don’t know how this is going to play out. Nobody knows.”

Faust said he’s been willing to put up with the restrictions in hopes he can eke out a gain. He sells scrap steel at about $155 per ton, and at that rate he can get about $200 to $300 for the average clunker.

(c) 2009, Star Tribune (Minneapolis) Source: McClatchy-Tribune Information Services.