Blunting sword’s edge

When the effects of China’s National Sword customs inspection program and its import bans on recyclables, specifically recovered fiber and postconsumer plastics, reached the U.S. five years ago, the country’s recycling industry was forced to absorb the major blow and find new ways to generate revenue.

Since Sword’s implementation in 2017, the market has continued to show its volatile side with pronounced up and down periods, but material recovery facility (MRF) operators have found a path to help stabilize income by charging processing fees to municipalities.

These fees are outlined in every contract a processor enters into with a municipality and are designed to cover a MRFs’ operating costs to better withstand market turbulence. They sometimes are combined with excess contamination fees to help offset the effects this unwelcome material has on processing as well as associated disposal costs. MRF operators typically have revenue-sharing programs tied to the recovered commodities they sell, so communities see benefits, too.

“[Revenue sharing] is more of just a savings to the city,” Kanika Greenlee, interim director of solid waste for the city of Atlanta and director of the Keep Atlanta Beautiful Commission, says. “We are using some of the money we did receive for improvements to our operations,” she says, mentioning software as one of those improvements. Greenlee estimates that Atlanta has saved $1.2 million on its recycling contract in the form of commodity revenue or rebates since January of last year.

At first, surprise

Photo courtesy of Balcones Resources

Until 2017, Greenlee says the city wasn’t paying a processing fee for its recyclables but was receiving a rebate of $2.56 per ton from the MRFs it contracted with through Conyers, Georgia-based Pratt Industries. After National Sword began that year and markets took a dive, changes slowly followed.

“I would say it was a slow burn for the Southeast,” Greenlee says of Sword’s effects on recycling markets. “Our West Coast cities may have felt it earlier and a lot quicker, and it took a little time for it to come around to us and for the markets to return. They rebounded, and it looks like they’re taking a dip again,” she says as of November 2022.

Greenlee says in 2018 the city was charged a $25-per-ton processing fee, which leaped to $75 per ton in 2019. That number held through 2022, though the city’s revenue-sharing program with Pratt remains. When commodity revenue reaches $40 per ton or more, the city receives 50 percent of that profit.

“It was definitely a surprise and a huge impact to the department’s budget because you can’t really plan for that,” she says of the increase in per-ton charge. “That’s a large increase, especially when it comes in the middle of a fiscal or budget year. You can’t plan for that, so you just have to adjust as much as you can.”

In response, Atlanta City Council had to approve legislation that would pay for the increase in recycling costs, then adjust its budget accordingly for the present and future.

Atlanta also had to adjust to commodity market swings, which reached near-historic highs in some categories in 2021 before dipping to near-historic lows in the second half of 2022.

Stabilizing revenue

For Austin, Texas-based MRF operator Balcones Resources, revenue-sharing models and processing fees always have been included in its municipal contracts, and that consistency has made it easier for the company to weather ever-changing markets, says Director of Partnerships and Municipal Relations Natalie Betts.

“We’ve never had to go back to a city and renegotiate what we promised,” she says. “We’ve been able to keep our processing fee/revenue sharing model and not need to come back and say, ‘Markets have changed, we need to do this differently,’ because that setup should allow you to continue operating even when markets are down.”

Betts continues, “The processing fee should cover your operating costs, and the revenue share is meant to be, ‘We’re both invested in this program, we’re both working toward getting these commodities to market, and we’ll both share in the value of those.’ Sometimes the value is higher and sometimes the value is less. It just depends on how much it’s offsetting the processing fee.”

Processing fees vary by contract, Betts says, because different communities bring different volumes of recyclables to the company’s MRFs. Balcones, for example, has recycling contracts with the municipalities of Phoenix; San Antonio; Austin; Temple, Texas; Sarasota County, Florida; Northport, Florida; and Venice, Florida. Additional contract factors include the cost of MRF operations, the composition of the materials being processed and the potential need for a municipality to perform additional tests, such as composition studies.

“[Composition] impacts what the revenue share is going to be,” Betts says. “If you have a higher percentage of trash [in your recycling stream], then your revenue share is going to be less, whereas a higher percentage that is truly recyclable [will bring back more]. That will impact what a community ultimately sees in their rebate or price.”

Balcones issues monthly rebates to its communities, with processing fees set at a specified amount per ton. Revenue share is based on the blended value of all the commodities, plus an agreed-upon price index that Betts says the company prefers to have written into its contracts.

Similarly, WM Vice President of Recycling Brent Bell says 80 percent of the inbound material the Houston-based company processes at its MRFs includes a fee to recover processing costs.

“[The fees] are usually set for the term of the contract, with increases allowed for the Consumer Price Index [CPI], but varies in different geographies based on the various labor rates and costs,” he says. “Also, stream composition and contamination play a factor to determine the type of material being processed.”

Contamination counts

Another factor shaping recycling contracts is the use of contamination fees, which can be charged to a municipality if a certain percentage of its materials prove to be unrecyclable.

Betts says Balcones handles them two ways: composition studies conducted twice per year on materials or a contamination percentage written into a contract at its outset that a community must adhere to to avoid the fee.

“We’ll do a study of a customer’s material twice a year, run a sample of that material and evaluate what percentage is contamination and trash, and that percentage won’t get a revenue share,” Betts says. “So, if it’s 15 percent, for example, then that’s their financial incentive to reduce the residual because the more they can reduce it, they are bringing in more valuable commodities, and they’re going to be paying less processing fee.”

In Bell’s view, ending contamination starts with education, and WM has tried to inform its customers how to spot contamination in their loads.

“[It can be] taking pictures and informing the customers on how to recycle the right items in their bins,” Bell says. “Contamination fees are part of the contract and are designed to encourage customers to make sure we have a clean recycling stream to process and sell into sustainable end markets.”

Times change

Photo courtesy of Casella Waste

Through up and down markets, MRF operators and the communities they work with have seen tangible benefits since National Sword altered recovered commodity revenue streams.

Processing and contamination fees have helped stabilize operators, while revenue sharing with communities can help cover labor, fuel, equipment costs and more when markets are favorable.

MRFs’ approach to contracting with municipalities has evolved over time. For instance, Greenlee says MRFs increasingly have used revenue sharing and rebates when contracting with communities in recent years.

“Five, seven years ago, it wasn’t a discussion or an option,” she says. “But I think as the market is rebounding, they’re more open to it. But recycling markets are volatile. Just like the stock market, they have a lot of sensitivities, and there are a lot of factors at play, and we see it taking a slight downturn right now,” she says in November 2022. “But I think that’s the biggest thing.”

Bell says using larger recycling bins is a trend that can lead to higher recycling rates, along with localized education to decrease contamination.

“We also are transparent with customers on material composition as that impacts their economics,” Bell says. “For example, plastics are typically three to four times higher in value than the average material in the recycling bin, so if customers can increase the amount of plastics—PET [polyethylene terephthalate], HDPE [high-density polyethylene]—then their economics can improve.”

Betts says a more-recent trend that can affect when contracts are put out to bid is the ongoing supply chain issues that followed the onset of the COVID-19 pandemic, which have created longer lead times of 12-plus months for equipment purchases. In light of that, she advises communities to prepare to put their recycling contracts out to bid sooner than usual if their current contracts are nearing their expirations to reflect that equipment backlog.

“That’s a lot of time in advance, but I want to encourage people that if they have a contract that’s coming up in the next couple years, the time to start on that is now, or yesterday, just so that you can have the widest swath of potential bidders,” Betts says. “Whereas previously you could’ve said, ‘Sure, we can get new equipment in 12 months,’ that’s not the case anymore. Those order timelines are longer and longer, and so that really impacts what communities need to do.”

The author is associate editor of Recycling Today and can be reached at cvoloschuk@gie.net.