Does Recycling Pay?Does Recycling Pay?

One of the fundamental questions in waste management has long been, “Does recycling have value beyond its environmental appeal? Is it a financially sound business?” The wild fluctuations of the recycling commodities market have historically added a good deal of complexity to the debate.

David Steiner, Houston-based Waste Management Inc.’s president and CEO, recently brought this question to the fore with comments at a recent Business for Social Responsibility conference that characterized the profitability of recycling as facing serious challenges.

He elaborated on his thoughts in a internal blog posted on the company’s website Dec. 30. In it, Steiner cites the changing waste stream, with the dramatic decline of paper generation and the growth of plastics volume and types. Weight has declined, he notes. Meanwhile, China’s Green Fence policy means that nation is pickier about what it will accept as it seeks to cut down on contamination.

“Simply put, the sustained profitability of recycling is confronting behavioral and global changes beyond our immediate control,” Steiner writes. “We must all work together to ensure ongoing, economically sustainable programs in communities across the country.”

Prompted by Steiner’s initial remarks, Waste360 talked to several industry CEOs and executives to get their takes on recycling’s financial viability.

Advanced Disposal

Charlie Appleby, chairman and CEO of Ponte Vedra, Fla.-based Advanced Disposal Services Inc., says he agrees with Steiner’s basic sentiment. “We have to restructure the way that we do this business where we can make a reasonable return on our investment regardless of commodity pricing,” he says. “We need to change the way we do business where we share both the upside and downside risks. We get paid for those significant costs we incur but then as commodity prices go up our customers … can share in that. But there’s a floor at which we have to be paid in order to collect and process this stuff.”

Appleby points out that as much as 20 percent to 30 percent of single-stream material is not recoverable using current technologies. Glass, for example, doesn’t have much value as a recycled commodity in many cases – another point shared with Steiner. And tipping fees can be a significant part of the recycling value equation, varying widely around the United States.

The public sees recyclable commodities as valuable material waiting to be claimed. “But the public probably doesn’t really appreciate the fact that there are significant costs associated with the collection of recyclables and the processing of recyclables,” Appleby says.

That compensation can be built into a collection contract with a municipality, or it can take the form of a separate fee to pick up the recyclables. Those fees can, in effect, act like subsidies.

“We have to recover those significant costs we have and we’ve got to realize an appropriate return on our investment on trucks and equipment and these recycling facilities into a predictable stream of cash flow regardless of commodity prices.”

A key factor is technology, which Appleby says needs to catch up to the perception of how recyclables are processed. “I know technology will improve, and as the cost of virgin materials increases it will allow perhaps these recyclable commodities to demand a consistently higher price.”

Appleby describes Advanced’s approach to recycling as “integrated geographic hubs,” anchored by a company-owned disposal or recycling facility at the center, with operations built around that to feed the facility. That allows the firm to avoid dependence on third-party volume. And despite Appleby’s concerns, he stresses that recycling is key to the industry’s future. “I don’t want to sound like it’s all gloom and doom; it’s not. Recycling is here to stay. It’s one of the core services and strengths of our industry,” he says. “We need to figure out a way to make this things as profitable as possible for us.”

ReCommunity

Unlike Advanced Disposal, Charlotte, N.C.-based ReCommunity Recycling is a pure play recycling company with no other business interests. But CEO James Devlin also agrees with Steiner’s perspective.

“If you look at where commodity prices and values have fallen over the last 18 months, it makes it extremely difficult to make more investments in recycling and diversion when you can’t generate a fair rate of return,” Devlin says. “For anything to be environmentally sustainable it has to be economically sustainable. I think that’s really important as we work with our municipal partners on changing the paradigm by which revenue is generated by the company and we share with our communities.”

Devlin says ReCommunity is profitable but does not make a fair rate of return. “If you’re investing in projects and your return on those projects is less than your cost of money or capital, over time you destroy value.”

And recent prices for recyclables have done that, he says. “It can’t be that our return and compensation will only work when commodity values are at a cyclical high; that’s not a good sustainable business model.”

Another factor that could help companies like ReCommunity would be to pass along these cost changes through laws and regulation. “If you look at Green Fence, that’s a change in law. We need to be able to pass those costs of compliance through to our customers or impute that to our revenue share. That’s really important for us.”

Progressive Waste

Customers of Vaughan, Ontario-based Progressive Waste Solutions Ltd., understand the need to pay a fair price for collection, but the actual value of the material gets lost due to pricing volatility, says Joseph Quarin, Progressive’s vice chairman and CEO.

“It’s very difficult to make the large investments that are required to effectively separate the materials the way that I think is going to be required for reuse if we’re going to have to take all of the risk that comes with the marketplace,” he says.

Quarin notes that a much more sophisticated infrastructure is required today, with a shift from a manual to a mechanized process that’s made for a higher quality product.

“We’re working toward building a much more sustainable model for the collection and processing of the material,” Quarin says. “I think it really is an opportunity for our industry to respond to our societal desires or demands that are out there. But at the same time we need to be able to find a way to get a return; otherwise it’s just not an area that we’re going to be in.”

Another factor that can work against recyclables, Quarin says, is that when the price of recycling gets high customers quickly find substitutes, such as virgin material, even if they have to use a base amount of recycable material to claim that the product is recycled.

Rumpke

Steve Sargent, director of recycling for Cincinnati-based Rumpke Consolidated Companies Inc., says that while the company’s recycling operations are profitable, they certainly have been stronger in the past. But he takes solace in the fact the industry has weathered previous commodity price downturns without pulling the plug on curbside recycling programs and has continued to invest.

An example of that investment has been in the generally beleaguered recycled glass business. Seven years ago Rumpke built its own plant to process that commodity, and today it is a successful operation.

But Sargent says numerous recycling challenges remain. He points out that companies need to invest in technology not only to improve processes but also to ultimately lower costs. He labels transportation costs as another factor Rumpke battles, both in terms of collection and transport of the material. Single stream does save on the number of truck trips.

Republic Services and Waste Connections

Senior leadership at Phoenix-based Republic Services Inc. declined to be interviewed for this article. However, the company did cite in an e-mail response remarks made by Don Slager, president and CEO, during a third quarter earnings call: “Recycling continues to grow and remains one of our core service offerings. Our recycling business generally performed in line with our expectations. However, we have experienced higher costs and reduced volumes as a result of operation Green Fence. Future investment in this line of this business will be driven by customer demand, willingness to pay, and return on invested capital. Our near-term plan is to focus on operating recent investments and leveraging our third-party network.”

Waste Connections Inc. also declined to talk for this article. Worthing Jackman, chief financial officer for the The Woodlands, Texas-based company, said in an e-mail that he didn’t think there was anything the firm could add beyond what others would say.

Covanta Energy and Recology

Covanta Energy Corp., Morristown, N.J., views the recycling market somewhat differently since it is not yet a core market for the firm. “We see it as a complement to our business profile as we move up the waste hierarchy,” says Steve Diaz, vice president, strategic services for the company. “We educate the communities, we spend some time on local levels doing various outreach programs.”

James Regan, Covanta’s manager for corporate communications and media relations, points out that the company’s recycling interests are growing, as metal recycling is the third biggest revenue stream for the firm. That metals area has been exposed to the recent fluctuations in the markets, so the firm is aware of the issues.

Similarly, San Francisco-based Recology Inc. views recycling more as a matter of company philosophy. “We’re trying to look at the trash and the stuff we pick up with a different eye,” says Paul Giusti, community and government affairs manager for Recology. “Instead of seeing it as landfilled or material that’s to be buried, it’s ‘How can we recover it, how can we put it to the best use and how can we still be profitable doing that?’”

Giusti says governments and customers as well as businesses need to look beyond what’s cheapest now and determine what’s best for the environment with the numerous ways it’s affected by product manufacturing.

Recently returning from a trip to China, where he witnessed the environmental abuse and waste generated there, Giusti adds, “If we don’t lead the way I’m not sure who will in the rest of the world.”

How Do You Solve a Problem Like Recycling?

So how to fix the problem? Sargent believes education is key, in terms of customers better understanding what’s recycled and what’s not. Along with that, companies need to make better, cleaner products.

Accessibility of service is another piece that fits with education, Sargent says. “We can educate people to go out and recycle, but if we haven’t provided them with a curbside carton or a bin or a drop-off location to go to, we’re wasting our efforts there. Those two go hand in hand, education and accessibility.”

Customers still tend to believe that their recyclables cover the cost of collecting and processing, and they don’t. “But how then do we make that cost effective as an alternative to waste disposal?” he says. “And that’s kind of our mission, to make sure our residents and our customers understand that our goal is to make recycling the cost-effective alternative to waste disposal.”

Sargent believes the markets will support recycling, and he’s cautiously optimistic that the industry can overcome its education and technology challenges.

Appleby is similarly optimistic about the outlook for recycling. “The technology today is significantly better than it was five years ago or 10 years ago,” he says. “One of the biggest reasons for innovation is the fact that you’ve got to find a way to make this thing work economically. That’s really what drives innovation.”

Devlin says it’s going to be critical to find new markets for these commodities, and to operate as efficiently as possible. Nearly three-fourths of ReCommunity’s facilities are now single stream. “We’re trying to deploy the best technologies and the best management practices to get there.”

Quarin believes the evidence is available to all about the commodity market values. “It’s going to be a more sophisticated pricing structure quite honestly on the back end. It’s going to require an element of transparency back to the customer and working collaboratively so the customer knows what’s allowed to be in the containers and what’s not allowed. The biggest challenge that we think is going to affect us going forward is, where does the separation take place?”

Single stream has increasingly put that onus on the processor, and Quarin says if that continues, it will drive the emphasis on technology. He believes it’s going to take a couple of years to find an economic model that everyone embraces.

Regardless of the waste stream, he says, the simplest economic model involves some type of government intervention with a subsidy. But that can raise other problems.

Quarin believes society is changing so that the issues may be very different in 15 years. His children, for example, are much more willing to buy products with less packaging. “They already think in terms of being more sustainable.”

Appleby makes the point about the industry’s stake in environmental responsibility. “We don’t actually create the waste, we clean it up,” he says. “I think that’s what the general public needs to understand.  If it weren’t for us it’d be a whole lot bigger problem than it is today.”

Devlin says it’s important for the industry to be a leader on the matter. “Everybody knows recycling and zero waste and sustainability are critical to our country and our society in general. There’s a better way to get there than what we are witnessing today.”

Allan Gerlat is news editor for Waste360.