Recycling industry feels strain of falling prices
At the exit, ready to be carted away by truck, are large bales of plastic, which will remain in Britain for reprocessing as water bottles, and bundles of paper and cardboard, which will be shipped to China for reuse as packaging for iPhones and TVs.
Two years ago Biffa, which runs the plant in north London, would have received £400 for each tonne of recycled plastic. But now — with a glut of oil on the market — it receives just £300. A bundle of recycled paper and cardboard used to cost £80 a tonne three years ago. In June it slumped to just £55, according to figures from Let’s Recycle UK, the trade website.
The fall in prices for recycled goods has put pressure on every part of the waste management industry. “Recycling is a commodities business,” says Ian Wakelin, chief executive of Biffa, which collects waste from more than 2.4m households for 36 local authorities in the UK.
“Everything we do competes with virgin material prices. The industry used to be happy to take the risk of commodity price volatility. But when it became clear that this was a prolonged slump, that became difficult.”
Plastic has suffered most. With new plastics made from the byproducts of oil and gas production, it has become cheaper for the manufacturers of water bottles, ice cream containers and yoghurt pots to buy their raw materials new, rather than recycled.
But nearly all material prices have plummeted. The price of steel cans has nearly halved over the past two years from £125 a tonne two years ago to between £45 and £70 in June, while the price of clothes in textile banks has dropped by about £100 to just £160 a tonne.
For some waste management companies, the pressure has become unbearable. Although most companies earn the bulk of revenues from collecting waste, “the recycling business still needs to be profitable in its own right”, says Mr Wakelin.
Kier Group, the FTSE 250 construction and environmental services company, decided to leave the industry after warning in July that it would take a £33m loss on its recycling business in the 2016 financial year.
Many of Kier’s eight to 10 year contracts were agreed years ago when oil was $80 a barrel. But with the price now at $40 to $50 a barrel, Kier said it would pull out of recycling as contracts came to an end. The division “continues to be affected by the low oil price and, consequently, the price of recyclates,” the company said.
The London-based Closed Loop, Britain’s biggest plastic bottle recycling plant, cited competition with virgin materials when it was put into administration in May. It has since been acquired by Veolia, the French waste management company, which can bring economies of scale to the business.
Others such as Pennon, which owns Viridor, the waste management company, have mothballed plants, while many — including Cory Environmental Services, which served four local authorities, have been taken over amid a wave of consolidation in the industry. Biffa, for example, has made nine acquisitions in the past year, helping operating profits to rise from £49.1m to £62.5m in the year to March 2016.
For the most part, however, the larger companies have survived by renegotiating contracts with city authorities, preserving their recycling business albeit at slimmer margins.
“Every time a contract comes up we have to try to raise the price and negotiate a risk share,” says Mr Wakelin. “The one thing we don’t want is to be locked into fixed seven or eight year contracts.”
Until recently, recycling could be lucrative for town halls in Britain. When commodity prices were high, recycling companies would sometimes even pay local authorities for waste that had been cleanly separated by households and business. But with prices for recycled products low, companies are passing on the costs to town halls so that they share the volatility in the market.
Chris Loughlin, chief executive of Pennon, which services about 150 local authorities in Britain, expects the trend toward “sharing commodity risk and reward with clients” to increase. The past few years have been “difficult as a result of weak commodity prices”, he says.
This has put pressure on town halls. Marcus Gover, chief executive of Wrap, which lobbies for the recycling industry, says it is a “challenge for local authorities”. “Councils are facing a tough time so although it’s a small part of their budgets, every penny counts. They will be trying hard to get the best price,” he says.
The upside is that councils could also benefit under the risk-share model if commodity prices rise. Regardless of this, Mr Wakelin argues that the business model needs to change if recycling rates are to be driven higher and the industry put on a more sustainable basis.
With concerns about Brexit and a potential recession mounting, it is an awkward time for the recycling industry to be under pressure.
The environmental benefits of recycling are well accepted but much of the progress has been driven by legislation from the EU. In the UK about 45 per cent of household rubbish is recycled — up from less than 5 per cent in 2000 — but under EU targets this should rise to 50 per cent by 2020. Ultimately — at least without subsidies — landfill is always cheaper, though less environmentally friendly.
Mr Wakelin is relaxed about the effects of Brexit on the industry. “I don’t think the government would row back on recycling,” he says. “I have every confidence we can work it out.”