Recycling's Wake-up Call

The current state of the secondary materials markets has generated every kind of exclamation and explanation. We know, for example, the probable whys of the down market (oversupply, the US and Chinese economies, the drop in oil prices, or the US credit crisis, to name a few). We’ve also seen some cancelled programs and bankruptcy protection actions. As I have listened to it all over the last few months, three thoughts keep coming back to me.

First, regardless of whether we’re a local government, nonprofit, or private business, we all know that counting on revenues from the marketplace is a risky tactic. We generally have no direct control over the erratic nature of price fluctuations. We do know, however—at least those who have done their homework—that pricing fluctuations can be counted on to vacillate up and down energetically over short periods of time.

Second, while the recent downturn was certainly faster and steeper than we’ve experienced before, it was hardly unprecedented. Over the last several years, materials pricing has dropped precipitously several times: From 1989 to 1993, late 1995 to 1996, and in 2001, we experienced conditions when the cost of collection, processing, and transfer were greater than available revenues. Each of these downturns was followed by a period of recovery, which we can expect again in 2009 and 2010.

Finally, there were indications, editorials, and warnings that the domestic and international demand for secondary materials enjoyed during 2007 and most of 2008 was unstable and not going to last. These included early observations about scrap steel (exploding prices in late 2007 followed by a decline in 2008), and ongoing 2008 commentary about unsustainable prices and waning demand (for example, the slowdowns in construction and manufacturing in post-Olympic China). Combined with the impending recession in the US, the experts suggested that a correction in the markets was inevitable for months.

OK…so maybe we weren’t surprised by the fact of a downturn as much as by the severity of it. What can we expect in the next few months?

Based on historical prices paid by fiber markets in the west and northwest, we can show that suppliers have essentially the same long-term earning potential today as they did in late summer 2007. Trend lines generated from several years of pricing data through August 2007 top out at about the same price as trend lines generated through February 2009. In other words, the high market prices we’ve experienced from early 2007 through mid-2008 balanced out the low market prices we’ve seen in the last five months. So while we may not be way ahead of the game, the long-term scenario is not as bad as it feels.

And during the first two months of this year, there have been some signs of recovery. While market corrections are obviously still in play, pricing is inching up for many materials. There are reports that some regional markets (especially in the east) are paying slightly higher than usual prices in relation to published indices. And some fiber experts are predicting that prices in 2009 will reach at least the levels we saw in the late 1990s through the mid-2000s.

So how do we find the sliver lining in the current crisis? How do we play this game smarter next time? Being proactive is only good business. Here are a few thoughts.

• Operate like a business. Even public entities (generally on the extreme supply side and often separated from end markets by processing and brokering steps) need to adopt sound business practices to maximize their ability to balance budgets and offset costs. Failing this, it ultimately won’t matter how high market prices go.
• Know your product and ensure consistent delivery to the next buyer in the chain. Buyers can’t be expected to stay in business if they don’t have a base of reliable suppliers who can commit to meeting product standards and quantities provided month to month.
• Plan for risk-taking measures to fail. Don’t rely exclusively on market revenues.
• Unbundle service expenses from revenue sharing.
• Be aware and active in regional efforts for creative reuse, market development, and product stewardship.
• Concentrate on sound, long-term relationships with processors, brokers, and/or end markets. Those on the supply side who can be counted on to maintain quality and quantity will fare better in down markets.
• As most processing facilities are limited to one or two days of materials storage, the lack of a willing market and the inability to move product creates an immediate crisis (cost of warehousing/real estate, local/state regulatory violations, degrading products, etc.).
• Develop effective sales strategies. Some suppliers play the spot market successfully while others find contracts a safer, more conservative vehicle to establish pricing that ensures predictable revenues.

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Pricing can be structured numerous ways. Consideration should be given to the following.

• Keep processing/brokering/transportation costs paid by the supplier separate from recyclables revenues earned.
• Find a revenue sharing strategy that supports both parties. Note that fixed revenues are not as common but minimize risks, while revenues tied to market indices allow parties to share in the ups and downs but provide minimal ability to predict earnings.
• Establish a multi-tiered revenue strategy that can be a combination of set earnings plus a share of fluctuating market prices or could include an average earning plus an “up market” earning applicable in times of elevated market pricing. Most industry experts predict that floor prices will not be as common in future contracts, but we may see revenue ceilings and possibly even quantity limits to address oversupply conditions.
• Be aware of regional and “vertical” purchasing advantages. Suppliers located closer to end markets will have an advantage, as will those who sell to processors already tied to end-users (for example, Weyerhaeuser and International Paper).
• Include incentives (fair revenue sharing) and disincentives (performance bonds) to encourage adherence to contract terms even in tough times.

Good market conditions can lull us into a sense of “no worries” when we stop paying attention to the marketplace dynamics. 2008 showed us that we don’t have this luxury in the future.

Author's Bio: Laurie Batchelder Adams serves as director of SWANA’s Waste Reduction, Recycling & Composting Technical Division.