BIG Opportunity

At roughly $236 billion in annual revenue in the U.S. alone, according to the U. S. Environmental Protection Agency, the recycling industry has grown to become a significant and vital part of the global economy today. Major industries, such as steel, paper and plastics, depend on recycled materials to meet growing global demand for a wide range of products.

We argue that the recycling industry is at a unique point in its history, benefiting from the confluence of numerous positive dynamics, including high prices for energy and metals, rising costs to extract limited natural resources and growing concerns over environmental pollution. Taken together, these trends should provide an important growth catalyst for the industry.

In this report, we present an overview of the recycling industry, examining the economic and environmental benefits of recycling as well as discussing several of the industry’s long-term growth drivers.

INCENTIVES TO RECYCLE

Conservation of natural resources has long been a core aim of environmentalists and the recycling industry. As the world population now exceeds 6 billion people, there is a growing awareness that the earth’s natural resources—including oil, water, metals and minerals—are finite. According to the U.S. Geological Survey, the demand for raw materials extracted from the earth has increased dramatically in the U.S. over the past hundred or so years.

This growth in demand, which has followed a similar path in other developed countries, is a trend that could have serious environmental and economic consequences down the road as resources become ever scarcer. In fact, the United Nations Environment Programme has stated that: “[I]n many countries, as well as for the planet as a whole, demand for natural resources (“ecological capacity”) exceeds the amount available. Countries unable to support their national consumption with their own natural resources [run] at an ecological deficit. Therefore these countries have to either import ecological capacity from other places or take it from future generations.”

A 2006 study by Yale University researchers presented evidence that certain key metals—namely copper, zinc and possibly platinum—are in danger of “running out” this century. The authors state that “providing today’s developed-country level of services for copper worldwide (as well as for zinc and, perhaps, platinum) would appear to require conversion of essentially all of the ore in the lithosphere to stock-in-use plus near-complete recycling of the metals from that point forward.” The authors go on to conclude that since the virgin stocks of several metals appear inadequate to sustain the modern quality of life for everyone on earth under contemporary technology, the scarcity value of these metals will only increase over time and will stimulate intensive recycling well above today’s levels.

This is an interesting theory that we believe is valid for the metals cited. We would note, however, that other metals, namely aluminum, steel, nickel and silver, do not have the same supply constraints. In other words, there is no imminent danger of these metals “running out” any time soon (i.e., within the next 50 years). Still, as we discuss in this report, recycling of these metals (aluminum and steel, in particular) should continue to increase given the economic and environmental benefits associated with doing so.

SOUNDING THE ALARM

Although there are no supply shortages of key metals (copper, aluminum, etc.) now, there are concerns that increasing global demand for all types of metals and minerals will pose long-term threats to individual nations’ natural resource security. Indeed, a new report from the European Commission identifies 14 raw materials (out of 41 analyzed) that are “critical” for the European Union, including platinum group metals, rare earth metals, cobalt, graphite and magnesium. The raw materials identified are essential for use in everyday products, like cell phones, but also in notable technologies like lithium-ion batteries, fiber-optic cable and thin layer photovoltaics. We would also highlight that many of these raw materials, particularly the rare earth elements, are used extensively in military applications, including missiles, radar and “smart” weapons.

The European Commission’s concern centers on the fact that the vast majority of supply of these critical raw materials comes from just a few countries: China (antimony, flourspar, gallium, germanium, graphite, indium, magnesium, rare earths, tungsten), Russia (platinum group metals), Congo (cobalt, tantalum) and Brazil (niobium and tantalum). Because production is concentrated in so few countries, there is a high risk for supply disruptions. In addition, this production concentration in many cases is compounded by low substitutability and low recycling rates, according to a Bloomberg news report.

Among the proposed solutions offered by the European Commission to address this long-range problem were:

• Updating the EU’s critical raw materials list every five years and enlarging the scope for criticality assessment;
• Policy actions to improve access to primary resources;
• Policy actions to make recycling of raw materials or raw-material-containing products more efficient;
• Encouraging substitution of certain raw materials, notably by promoting research on substitutes for critical raw materials; and
• Improving the overall material efficiency of critical raw materials.

LOW RECYCLING RATES

As analysts following the recycling industry, we are particularly interested in the EU’s focus on increasing recycling efforts. Generally speaking, end-of-life recycling rates for many metals are moderate or poor, according to a recent UN report. In fact, only a limited number of metals (iron/steel, palladium and platinum) have recycling rates above 50 percent, while many metals show rates below 25 percent or even below 1 percent (for many specialty metals), according to the UN. As the European Commission report indicates, increased recycling is one of the imperatives to address long-term natural resource security concerns.

There is growing recognition that the world’s natural resources are scarce, finite and costly to acquire. Since most of the “easy” (i.e., inexpensive) extraction of natural resources has largely been done already, we conclude that recycling will play an even more decisive role in ensuring that nations maintain economical and sustainable access to critical raw materials.

“HOARDING” A CONCERN

As nations recognize the value of strategic raw materials, there is concern over natural resource “hoarding” in which countries stockpile these commodities and limit exports of them. China is perhaps the most obvious example of this, since the country has been aggressively importing various metals (copper, aluminum, etc.) and recently capped production on rare earth metals and imposed a moratorium on all new mining licenses until June 2011.

China is not alone, however, as these recent examples demonstrate:

• South Africa recently decided to ban aluminum scrap exports, a move that seems to have been halted by the Bureau of International Recycling’s International Trade Council.
• India is considering completely banning iron ore exports. The Steel Ministry of India recently voiced the idea of “completely banning” exports of iron ore, stating that as a non-renewable natural resource akin to coal and petroleum products, iron ore resources should be kept within the country. India produced roughly 230 million metric tons of iron ore in the last fiscal year, of which 106 million metric tons were exported.

We continue to think that the idea of resource “hoarding” of both natural resources and recyclables is an important long-term trend to monitor given the implications for free trade and global market prices of these commodities.

UNDERSCORING THE NEED

In addition to the scarcity of natural resources and the possibility that supplies of some materials may be exhausted in the decades ahead, there are compelling environmental reasons for recycling as well. The extraction of all raw materials from the earth always comes with an environmental cost. For example, mining requires the use of toxic chemicals such as cyanide, mercury and sulphuric acid to separate metal from ore.

As standards of living rise throughout the world, governments increasingly are recognizing the environmental cost and potential dangers of landfilling discarded products that contain toxic metals. We conclude that more stringent environmental legislation governing these activities will be the likely result.

Indeed, the European Union already has passed two major directives governing the manufacture and disposal of electronics equipment: Restriction of Hazardous Substances (RoHS) and Waste Electrical and Electronic Equipment (WEEE), which went into effect in July 2006, restricting the use of six hazardous materials (lead, mercury, cadmium, chromium VI and two types of flame retardants—PBB (polybrominated biphenyl) and PBDE (polybrominated diphenyl ether)—used in some plastics in the manufacture of electronic equipment. The WEEE directive imposes specific targets for the recovery and recycling of electronics equipment.

This directive, therefore, imposes a significant new burden on manufacturers: They must now design electronic products using materials and methods that enhance the products’ ultimate recoverability and re-usability. Because environmental legislation … raises the costs of production, we conclude that industries affected by such legislation will increasingly look toward recycling to reduce their environmental impact and lower their costs.

We conclude that e-cycling represents the next big “wave” of recycling given the tons of environmentally dangerous electronic waste generated each year.

Although few e-cyclers are publicly traded today, we expect that the potential growth of the market will act as a catalyst for many private e-cyclers to come to the public investment markets in the next few years.

The authors are analysts with Canaccord Genuity, the global capital markets group of Canaccord Financial. Eric Prouty, who is based in the company’s Boston office, can be reached at eprouty@canaccordgenuity.com. Eric Glover, who is based in the company’s San Francisco office, can be contacted at eglover@canaccordgenuity.com. 

The full text of this report is available here.