Gev Eduljee, external affairs director at SUEZ and an RWM ambassador, looks at the market for secondary raw materials, and how the global slump in recyclate prices is having an effect, and identified two areas of possible vulnerability for the recycling sector…
In a previous contribution to this website I commented, from a policy perspective, on the problems facing the UK recycling sector because of competition from lower-priced virgin material, coupled with a slump in the global prices for recyclates. This combination of market conditions has hit plastics recycling particularly hard, resulting in several high-profile plant closures.
But the problem is not confined to plastics – other secondary raw materials (SRM) we collect for recycling, such as metals and paper, are also affected. Because economic sectors are interconnected in terms of their raw material inputs, commodity prices tend to shadow each other, as the “Commodity Markets Outlook” for April 2015, published by the World Bank, shows. The fall in oil prices mirrors a fall in ferrous metal and precious metal prices, as well as for food products. With ferrous metals for example, a market surplus of virgin raw material (VRM) coupled with weakening demand from China has depressed prices, putting pressure on secondary metals.
The recycling sector faces two vulnerabilities. First, VRM prices are influenced by a different set of factors than for SRM. SRM prices are set according to the cost and efficiency of waste collection and processing. In the context of a typical local authority collection contract, the gate fee based on these costs and the expected offset revenue from SRM sales, is fixed at the start of the contract period, even though trading conditions for the processed SRM may deteriorate (and indeed have) as the contract unfolds.
On the other hand, primary manufacturers exert far greater control over VRM stocks and prices. Low demand for iron could, for example, be offset by limiting mining activity.
The second vulnerability is that price volatility is especially pronounced in the SRM market. Recyclers are unable to deploy strategies to catch the commodity market at the right price point, such as stockpiling SRM or restricting the flow of collected waste into the processing facility. These activities must continue unabated irrespective of the state of the SRM market if the operator is to cover the high standing costs of waste collection and processing.
Under these adverse trading conditions, net margins in our sector have not only shrunk, but for contracts that were struck under more favourable economic times and forecasted SRM prices, have even turned negative, putting businesses and the entire SRM value chain for some materials at risk.
This is the context in which Resources & Waste UK commissioned a report investigating ways of managing SRM price risk. Presenting its initial findings at the recent conference Resourcing the Future 2015 – Austerity or Ambition?, the study places a particular focus on collection contracts between local authorities and waste management companies. Risk allocation and risk sharing mechanisms are among the contractual risk management options considered.
The financial risks related to unstable SRM prices will ultimately destabilise the entire sector. Placing our sector on a more sustainable business footing will mutually benefit both local authorities and their service providers.
Gev Eduljee is an ambassador for RWM in partnership with CIWM