The title of the panel this morning is The Future of Processing and Collection. I think the session description said “caught in a vise,” so all of these different things from the evolving ton to commodity market trends to trends in materials are conspiring against the industry. I will talk about how they impact the business and how we view our business model as a result of all these things. I also will talk about some things that we’re doing as a company to create what we believe to be a more durable business model moving forward in this space.
According to U.S. EPA (Environmental Protection Agency) data, roughly 250 million tons of solid waste are generated in the U.S. annually. That number has been relatively constant for the last decade. For 35 years we’ve seen relative growth in generation of around 2 percent; the last decade has been flat. Generation is really a function of two things: per capita consumption and population. The population grows at about 1 percent, and we expect it to continue to grow at 1 percent, but overall generation has been flat. That means that per capita consumption or generation has been dropping. Some of that is macro—think of the crash of 2008-09 when the world came apart. That obviously impacted overall consumption. But a lot of that is also lightweighting—changing packaging design, changing distribution logistics, more efficient modes of distribution—and that impacts the stream.
The other thing that is important to us is that since 1990, less absolute tons are going into disposal today than in 1990. If you think about a company such as Republic Services, and a big part of our strategy is growth, there is no growth in disposal. There has been negative growth for 25 years. We believe that if we don’t continue to invest in diversion, we become less relevant over time.
Commodity market trends
Obviously, the U.S. economy from a global perspective is still relatively strong; the dollar is strong. I think European economies still are struggling somewhat. That, in our option, affects production in China. More products from China are exported to Europe than to North America, so a strong European economy drives strong Chinese growth. Depending on what you believe or what you’re reading, the Chinese economy is growing, 6, 7 maybe 8 percent. That is quite a bit slower than the 15 percent to 20 percent that was experienced for most of the last 15 years.
The other thing that’s occurring in China is that they’re getting much better at recycling. Recovery rates in their own country are impacting the demand that they have for North American fiber.
We’re telling ourselves that the commodity markets that we find ourselves in today are the new normal. There has been less volatility over the course of the last 12 to 24 months—I’m sure that everyone in this room understands that and realizes that—and we don’t see things taking off any time soon.
The first time I saw an iPad was 2009. I guess that was seven years ago, but it wasn’t really that long ago. There were newsprint manufacturers in North America making investments in 2010/2011, maybe even in 2012. Most of those newsprint producers are either bankrupt or making other products today. There are two newsprint mills left in North America. Demand for furnish went from 18 million tons in 2000 to about 2 million tons in 2015. That was an industry that was disrupted, and it was disrupted pretty fast.
Similarly, we’re seeing a lot of flexible packaging. Products that have historically been distributed, sold and bought in containers that were readily, easily recyclable, those products are going away. I think everyone is familiar with the trend in laundry detergent packaging away from HDPE (high-density polyethylene) bottles toward flexible pouches and similarly the transition from the soup can to the pouch. That is a trend that is going to continue. Flexible packaging from a sustainability perspective is very efficient. From a price point perspective, the pouch is a lot cheaper than a can. Just think of the efficiency of shipping the empty pouches versus the empty soup cans. You can ship hundreds of thousands of those packages in a truckload. It is very efficient and there are not a lot of raw materials going into the production of those types of materials, but they’re very hard to extract value from [at end of life]. They are very hard to process, very hard to aggregate.
When packaging is not changing, there is a lot of lightweighting. I think everyone is familiar with water bottles—they are about half the weight they were in 2000. There is a lot of talk in and around weight-based recycling goals, and North America has been around 34 percent to 35 percent for the last three years; we’ve stagnated and we’re all going backward as an industry. However, I would suggest that we’re not going backward. If you think about a product as a consumer transaction, we’re capturing more consumer transactions than we have ever captured before; they just happen to be lighter. That certainly can impact the investment thesis around material recovery facilities (MRFs).
Sometimes markets that are side by side don’t always have the same materials in their recycling programs. When you think about setting up municipal programs for the long haul, how are folks going to know and continue to do the right thing on a daily basis? Public education is a big part.
We’re thinking we want to get back to basics, keep it simple. A message that we have designed internally and that we have begun to communicate with our customers is simply this: empty, clean, dry. There are some other campaigns out there, but if we could just be empty, clean, dry, that would go a long way to help us extract value and ultimately share that value with the communities and the customers that we service.
We are working harder for less today. Materials are lighter and there’s more contamination. When you process less tons per hour, obviously, that drives your unit costs. I’m starting to think of MRFs like compost facilities. For those of you who are familiar with a compost facility, there is very little value in the product that is made, so you have to get paid at the front door and not rely on the value of material out the back door to cover the costs of the investments and the costs of the daily operation. Let’s determine what the processing costs are, let’s be transparent in that and then let’s all decide how much value is in the material, and let’s share in that.
Areas of opportunity
Streams are changing, we have to audit those streams. Public education is a huge component of successful programs. Back door, obviously if you have scale, you can leverage that selling. You can touch more end markets than if you are a smaller player. You can create transportation synergies—obviously, that drives value through the chain.
We have to get better inside the facilities; we have to operate efficiently. We have to innovate and make sure that we are changing with the changing streams. Big parts of what we formerly invested in were designed to capture newsprint. That newsprint no longer exists; that obviously impacts the investment thesis over time.
I’m starting to think of MRFs like compost facilities. For those of you who are familiar with a compost facility, there is very little value in the product that is made, so you have to get paid at the front door and not rely on the value of material out the back door to cover the costs of the investments and the costs of the daily operation.
It is important to surround yourself with the best people—customers, vendors and buyers—that you can and to stay with them. I opened by saying we need to continue to invest in this space to remain relevant over time. We need to be thinking about things like this to make sure that we have durable programs that our customers can rely on.
These are some simple things that we are discussing with our customers to make sure these programs are successful in good times and successful in bad times:
- partnership – contracts structured to cover costs (with reasonable return), with shared upside from commodities;
- service changes – potential changes can yield lower costs without a change in pricing to the community;
- flat rate increase – this is a common approach to reconciling contracts;
- commodity-based index – similar to FRF (fuel recovery fee), it enables price adjustments based on market conditions; and
- contamination fees – recognize added costs when contamination passes a certain level.
The last thing that we want to happen is for folks to give up or get away from these types of programs that allow us to extract value from valuable resources. We don’t want to get back into the wasteful mindset just because this is more expensive than it used to be or there is less value than there used to be.