Good morning, and thank you for the opportunity to be here at the Recycling Council of British Columbia’s 28th annual convention. I’d like to offer a special thank you Karen Asp for the invitation to come speak. This morning I have been asked to talk about recycling industry markets. To do that I am going to cover a number of key commodity market areas and provide an overview of the major trends we at Recycling Today see affecting those commodities. I am also going to provide an overview of some of the macro-trends we see impacting the industry as it continues to develop and mature.

To begin I would like to give a brief overview of the Recycling Today Media Group that will help to provide an understanding of our perspective on the market. (Slide 1) Recycling Today magazine was founded in 1963 as Secondary Raw Materials magazine and is our flagship publication. Its roots, and original title, are important in that it reflects our continued belief today, that to be successful, the recycling industry must view itself as a manufacturer of specification raw materials, or basic materials, for industry. Over our nearly four decades of service to the recycling industry our product line has grown (Slide 2) to include the Paper Recycling Markets Directory, the North American Scrap Metals Directory, the Recycling Today Equipment & Services Buyers’ Guide, the C&D Recycler Buyers’ Guide, C&D Recycler magazine, www.RecyclingToday.com, the Recycling Today, Fibre Market News and C&D UPDATE e-newsletters and the Paper Recycling Conference & Tradeshow. This family of informational products touches virtually every sector of the recycling industry and is the most comprehensive portfolio of informational resources serving the industry.

Metals

The recycling sector that I am going to cover first this morning is metals recycling because it is arguably the most mature of all recycling markets. This sector spans ferrous (Iron and Steel), aluminum, copper and brass (red metals), specialty metals and precious metals. I’m going to restrict my comments to ferrous, aluminum and red metals. The recycling of metals reaches back to biblical times, as evidenced in a quote from Isaiah, Chapter 2 (Slide 4) "they shall beat their swords into plowshares, and their spears into pruning hooks." (Filler Slide) That quote evidences the long-standing value metals have had as well as societies desire to re-use, or recycle, them. In North America the metals recycling sector began rapid development in support of WWII and the following rapid growth of the industrial economy. During this period many entrepreneurs who saw “treasure in another’s garbage” built substantial businesses recycling all forms of industrial scrap and obsolete metals. Today this industry sector has grown into a highly sophisticated market utilizing high-end industrial technology and driven by global markets.

Over the past decade the consumption of ferrous scrap in North America, and arguably the world, has grown significantly driven by the rapid development of Mini-Mill steel manufacturing. Mini Mills utilize a very large percentage of scrap as their raw material in the steel making process. This compares to more traditional integrated steel mills, using open hearth or Basic Oxygen Furnaces, BOF’s, whose scrap consumption constitutes only between 10 and 30 percent of their raw material needs. (Slide 5, brief description of slide)

This industry sector has been in a down market cycle for the past two to three years as evidenced by the pricing of the bellwether grade, number 1 bundles. (Slide 6, brief description of slide) (Filler Slide)  Steel mill utilization rates dropped to a low of 60% in December of 2001. Today the market is seeing a modest strengthening as steel mill utilization rates have climbed back to the 90% range and pricing on #1 bundles has rebounded to US$92 last month. There are an enormous number of factors that impact the strength of the North American steel business that go beyond the scope of this presentation. However, it is our general belief that we will see this market sector continue to strengthen as the economic health of the industry, and the economy of the region in general, strengthen.

The red metals business in North America has changed dramatically over the past number of years. This has been largely driven by the declining number of consumers for this material in the region. In 1990 there were more than a dozen secondary smelters of copper scrap in the US, today there are none, none. In 1960 there were dozens of brass mills in the US. Today there are less than two-dozen. As a result, this business has essentially become an export market with much of this material being shipped to the Pacific Rim or Eastern Europe for processing and consumption. This has meant that dealers in this market have moved away from much of the processing they use to do to simply loading the material into containers for export.

Aluminum markets have also evolved tremendously over the past five years or so. The two primary markets for aluminum scrap recycling have been for can stock (the UBC market) and the Remelt Secondary Ingot (RSI) market. Obviously, the UBC market is driven by the manufacturing of can stock for the production of new aluminum cans. As plastic continues to grow its market share in the single serve beverage market it decreases the demand for aluminum can sheet. This clearly affects the recycling of this material, however, due to the tremendous efficiency in recycling aluminum cans they continue to be recycled in significant quantities. (Slide 7, brief description of slide)(Filler Slide) The use of RSI is closely tied to the automotive manufacturing business. RSI is an important raw material in the manufacturing of engine components and other automotive applications. As a result, as the auto manufacturing sector strengthens, so to do the markets for this material. The producers of aluminum, on both the can sheet and RSI side, have consolidated dramatically over the past years in order to secure the efficiencies inherent in volume production as well as to pool the necessary resources to comply with increasingly stringent environmental regulation. 
Paper

Following metals, the paper-recycling sector represents the second largest sector of the recycling industry. However, from the perspective of post-consumer, or municipal, recycling it is the largest component of the recycling stream. Like metals recycling, paper recycling is a mature business, but one that has undergone dramatic changes. We have all likely heard stories about the old ragman who collected rags for the fiber they contained. The rags were recycled in the production of cotton paper. As the usage of paper grew, however, so did the percentage of paper that was recovered for recycling. Thus the ragman evolved into a paper recycler, or packer/dealer. Essentially, like the metals trade, recovered fiber helped to offset the need for virgin material and often represented a lower cost feedstock for paper manufacturers that was used to supplement virgin material. However, unlike the metals trade, when government mandated recycling came into play in the late 1980’s one of the primary components of the collected material was paper. This introduced significant supplies of paper to the market that, heretofore, had not been there. The introduction of all this new tonnage created a new marketplace. First, in the initial years more fiber was collected than could possibly be consumed by the mills. Mills had, by and large, been designed to accept variable percentages of recovered fiber as feedstock. It took years for the industry to reconfigure manufacturing capacity to absorb this new tonnage, and some would argue this evolution is still in play. Second, it changed the procurement of secondary fiber. In the “old days”, when mills were not demanding a particular grade, dealers simply did not collect it, they didn’t do the paper drives or whatever. With municipal collection programs this changed forever. It created a supply side that said, hey X amount of tonnage is going to be collected and be in the market every month, regardless of the demand for that material. As the paper manufacturing industry has evolved to accept increasing tonnages of recovered fiber these tremendous supply side surpluses have acted as low cost furnish. However, consumers’ still demand high quality paper, so getting the “recipe” right at the paper mill has been a tremendous challenge. This has increased manufacturing costs as well as the expense associated with bad batches. Paper mills have been steadily increasing their usage of secondary fiber. (Slide 8, brief description of slide) That is the reason that as overall production of paper in North America has grown (Slide 9), so to has the recovery of fiber (Slide 10).

The fiber source that is greatest in municipal recycling programs is old newspaper (ONP) followed by mixed paper and finally old corrugated containers (OCC). I’ll give a brief review of what we see happening in each of these sectors in the coming months.

Cardboard, or OCC, is by far is the most widely collected material. To show the fickle nature of the paper recycling industry, if I were giving this presentation just three months ago it would be full of woe. My comments would have been that market prices continue to slide, downtime is rampant at mills throughout North America, and exports are soft. How times have changed. Prices now are strengthening. Offshore demand is picking up, mills throughout North America have been buying enough to further boost prices, and end consumers are hiking prices for their finished products. The snap back over the past several months has been greeted with skepticism by recyclers. After being burned by sluggish prices, many collectors of the grade are not as likely to run out and access additional tonnage. And, with most of the world either coming off a recession, or a sharply lower economy, there doesn’t appear to be significant additional material out there to easily collect.

According to the American Forest and Paper Association, more than 23.5 million tons of OCC were collected in the year 2000, either for use within the United States or for export. That is an OCC recovery rate of some 75%. By many measures, that 75% recovery rate is very near the maximum recovery level.

So where does all this OCC go? About two thirds goes back into making containerboard. The rest goes into making recycled paperboard, some tissue, other end markets such as building products; and exports, a growing percentage of the OCC market.

If you handle a fair amount of OCC right now you’re very likely smiling because of the recent trend in prices. The reason for the improvement: a combination of a pickup in demand for the grade, stronger than expected offshore orders, especially to China, and the lack of new supply. One thing to remember is that OCC demand is tethered to the overall health of the economy. If consumers buy more products such as stereos, television sets and automobiles, demand for the boxes will increase. If, on the other hand, consumers slow their purchases due to a more difficult economic environment, the demand for the boxes will drop, and the demand for OCC will decrease. It is a classic example of basic economics – supply and demand.

So what can we expect for the future? It’s tough to say. With all the variables influencing the grade, forecasting any further than a few months out is tricky at best. However, after a pretty extended trough over the past year, my sense is that markets will likely remain reasonably strong through most of this year. Prices, which have been heating up since April, should continue to be strong. Offshore orders will keep North American mills buying ample amounts of the grade to ensure that enough material comes through their door. The overall economy should also help. With the paper industry appearing to be coming out of a fairly significant recession, enough capacity was taken off line to prevent any overcapacity from hitting the market. The wild card will definitely be Asia, principally China. Over the next several years, the demand for recovered fiber to China will soar. By 2004, when a new paper mill opens, as much as 4 million tons of recovered fiber, primarily OCC, will be needed by just ONE paper company in China.

Following on the heels of OCC is ONP, old newspaper. In the U.S. around 9.3 million tons of ONP was collected for recycling in 2001??, generating a recovery rate of some 70%. This is largely due to the abundance of curbside collection programs

Unlike OCC, the end markets for ONP are more fragmented. While around 40% goes back into making new newsprint, other end markets are also significant consumers. Recycled paperboard products such as cereal boxes, account for some 14% of the end market; exports constitute 21%; and other end markets, including animal bedding and building products, make up around 20%.

While the recovery rate is close to that of OCC, this grade hasn’t enjoyed as great a market rebound. One reason is that despite having more diverse end markets than OCC, the significant problems in the newsprint industry have taken a toll on ONP markets. While new capacity in North America has been limited, more capacity has come on line outside of this continent. This has kept finished product prices soft. Downtime has also been much sharper and longer than many other types of paper grades.

Despite these drawbacks, the grade has been enjoying some improved conditions as of late. While not generating the level of excitement that OCC has, the grade is benefiting from some mills switching from more expensive OCC to less expensive ONP. Additionally, exports to Asia have been stronger. This is helping boost markets, and prices, for the material. How long will this improved market last? That’s uncertain. While it is being pulled by the strength in OCC, the newsprint industry itself continues to struggle with slow demand and overcapacity. While a host of paperboard producers have announced plans to hike their finished product prices, newsprint producers’ ability to raise their finished product prices, always an indicator of better than expected markets, are less certain.

Mixed paper is the ultimate catchall grade. Depending on either the collector, community, or end consumer, the grade can be called “file stock”, super mixed, regular mixed, sorted office paper, sorted office pack, colored ledger, etc. While there are some basic specifications for mixed paper, the actual grade may vary widely from mill to mill.

Domestically, the recovery of mixed paper is around 8.5 million tons. This grade probably has the most diverse assortment of end markets. Roughly 20% of the mixed paper goes to recycled paperboard; another 20% goes to tissue paper, mostly institutional tissue paper products; 15% goes toward making new printing and writing paper; 5% goes to make new newsprint; about 12% goes to other types of end markets; and a whopping 28% is exported. While this grade is the most inconsistent grade by nature, it is also the most flexible, as the breadth of end markets indicates. While it is a widely recycled commodity, the total recovery rate pales in comparison to OCC and ONP. The AFPA claims a 40% recovery rate, however, their numbers focus more on the paper collected from offices. As demand continues to grow for recovered fiber, more attention will be given to accessing the mixed paper that could be collected at the curb. This is a tremendous, untapped, source of fiber.

The big drawback with this grade is the value of the material. Due to its uncertain and inconsistent nature, the grade carries a low value. While OCC can spike up with better demand, mixed paper rarely carries any premium price. If you consider the potential mixed paper stream you can see why. Along with good clean white paper, the mixed paper stream also may include old magazines, envelopes with plastic windows and gummy labels, telephone directories, cereal boxes, food wrapping, staples, paperclips, etc. This can create significant problems as many of these materials are deemed either out-throws or outright contaminants. So, when a consumer receives the mixed paper, as much as 40% of it could end up being unusable. Most mills crave a consistent raw material. That can be achieved by using OCC and ONP. Clean office paper also is a sought after commodity. However, a bale of mixed paper has a host of materials that can decrease the quality of the finished product. That is why mixed paper often goes into a product that does not need a high quality finish, products such as the brown paper towels seen at many institutions, the inside of a shoebox or the inside of a corrugated box.

While this grade lacks many of the redeeming qualities of other paper stock grades, due to the abundance of the material still available for collection, it is a grade that holds great promise. As demand for recovered fiber continues to grow, there will be greater pressure to collect more mixed paper. As the technology at paper mills improves a wide range of mixed paper will be able to be used. Finally, because the value of mixed paper is far lower than that of OCC and, most of the time, ONP bargain shoppers will seek out greater amounts of this material to be used as an extender, blending in more of this fiber with the pricier OCC and ONP. It is a grade that offers potential to boost recovery rates in municipal collection programs.

Plastics

To some extent, the story of plastics recycling shows what happens when recycling advocates put the cart before the horse. Often times in the past—and still today in many regions of North America—plastic containers have been collected only to find that there is no reliable end market within reach.

The reasons for this are varied, but one of the most basic is due to the complexity of plastic as a material. While metals are often alloyed, they can be melted and purified. Similarly, used paper can be de-inked and re-pulped in a series of established industrial processes.

Even one resin of plastic, however, can consist of a variety of organic and synthetic compounds. Adding to the difficulty is that many plastic containers contain layers of different barriers pressed together during the production process. While a clear bottle may look like a uniform piece of molded plastic to the casual observer, it is often more complex than meets the eye.

But the plastics industry has been aggressive in its ability to capture packaging market share, and with that success has come the responsibility to recycle the plastic bottles, jugs and jars that it is producing by the billions.

Some packaging manufacturers have been reluctant to introduce large amounts of recycled plastic into their processes, claiming hurdles related to their production processes, inferior appearance of bottles, or health and cleanliness-related reasons in the food and beverage segments. But by volume, the use of secondary materials is growing, and recyclers are hopeful that Coca-Cola, as one key example, will follow through with its pledge to use secondary materials in the U.S.

Entrepreneurs—seeing the growing stream of raw material collected in recycling bins across North America—have begun to introduce products made from recycled plastic. Plastic lumber and decking, hard plastic bin and container models and other high-volume uses are being found for the secondary flakes and pellets made from recycled plastic.

Makers of higher-end plastic components—such as auto interior parts and copying machines—are also finding ways to sandwich inner layers of recycled plastic material into their processes. This way, less attractive, mixed-color recycled plastic can be used in the production of objects that need to have a uniform look on the outside.

The numbers in the U.S. show that the amount of recycled plastic collected and consumed each year is increasing (Slide 11, with a brief explanation) (Filler Slide) — but typically not at a rate that can keep up with the tremendous amount of new plastic products being sent into the waste and recycling stream.

According to the American Plastics Council, there are currently more than 1,600 companies involved in handling or processing post-consumer recycled plastic in the U.S. They process more than 750,000 tons of post-consumer plastic bottles, with #1 PET and #2 HDPE containers making up the vast majority of that. But even all this activity is only enough to capture between 18 and 22 percent of the post-consumer plastic stream in any given year.

In the U.S., where many states do not have deposit and return systems, collection remains a problem, especially for beverage containers. Even though production of plastic bottles has skyrocketed, potential users of secondary plastic are still concerned that they may not have access to an adequate supply if they commit to using recycled plastic.

Methods of collecting single-serve plastic bottles—which are often consumed far from home and the curbside bin—remain a key point of emphasis for recyclers and recycling organizations in North America.

Electronics Recycling

A rapidly developing segment of the recycling industry is the recycling of electronics, or E-Scrap. This is a category of material that is growing in leaps and bounds based upon the continuing application of technology in more and more areas of our everyday lives. The rapid pace of technological innovation, which makes new technology outdated nearly as soon as it hits the consuming public, compounds this. The disposal of this material represents a tremendous liability to our society due to the toxic nature of many of its components. At the same time, many of these components have value either as is or as secondary raw materials.

In the early days of electronics recycling electronic components contained significant volumes of precious metals. The value of these metals alone made the recovery of this material economically viable. The revenue generated by the recovery of these metals not only paid for the recovery process, but covered the costs associated with proper disposal of the non-recycled components while also generating a profit for the recycler. Over the years, however, electronics manufacturers have consistently reduced the volume of precious metals contained in these materials through increased manufacturing efficiency, the introduction of lower cost conductors and micro-processing technology. This has meant that the recycler has been left with far less precious metals to recover. This fact has forced a change in the way electronic scrap is recycled.

Another facet of this business that has changed is the businesses engaged in the process. When electronics recycling started it was most often an add-on activity for a traditional scrap dealer or precious metals refiner. They understood the metals business and since the recycling of electronic scrap was largely geared towards this process it was a natural extension of their business. As the recycling of electronic scrap has become more complex, necessitating the recovery of items such as integrated circuits, computer chips, plastics and other metallic materials, as well as manually intensive, many of these more traditional recyclers have exited the market. This created a market void that, in part, has led to more exporting of this material to third world countries where the cost of labor is cheap. As discussed in the session earlier today this has created many problems for the developed world, and these developing nations.

Entrepreneurs from the recycling sector as well as the electronics industry have, however, increasingly been viewing the mountains of electronics scrap as mountains of opportunity. Businesses have been developing new technologies, and applications for old technologies, to solve this recycling challenge. It is my feeling that to create an economically viable business model the recycling of electronics will go the way the recycling of automobiles has gone.

Today an automobile is stripped of its obviously resalable, high vale components. What remains is crushed into a uniform package and shredded. On the backend of the shredding application all the output is run through an initial separation process to separate the ferrous scrap stream from the rest of the material. The mixed material stream continues through eddy current separation that separates the nonferrous metals stream from the nonmetallic streams. The nonferrous metals are then separated further through a variety of technologies into aluminum (by specific alloy), copper, bronze and zinc. The plastics may also be separated by polymer and the remaining material is either converted to a fuel material or disposed of. Today some 98%???? Of an automobile is recycled. This process demands consistent and significant volume throughput to be economically viable due to the high fixed costs involved. Similar technology has begun to be applied to the recycling of electronics. Firms such as Micro-Metalics and United Recycling have installed shredding plants with extensive downstream separation technology. Like the pioneers of auto shredding operations these processors are at the frontiers edge of a new technology. However, even at this early edge of the developmental curve, they have demonstrated the model is economically viable.

As businesses and consumers begin to demand a domestic, environmentally sound, recycling solution for electronic scrap processors capable of providing that service will be positioned for growth. The materials that are recovered in this process are functioning electronic equipment that has a market as is or can be refurbished; integrated circuits and circuit boards; precious, nonferrous and ferrous metals and plastics and polymers.  These materials have a variety of established or developing markets. Of course, as with virtually any materials recycling process, there will be some waste generated at the end. It is nevertheless clear that the recycling of electronics scrap will grow considerably in the coming years. 

Macro Trends in the Recycling Industry

I’ll move now from covering specific materials to covering some of the “big picture” trends that we see in the recycling industry. The first is…

Consolidation and Globalization

As I mentioned in my opening comments the recycling industry is a manufacturer of specification raw materials for manufacturing. Generally these materials are basic materials that are commodities and traded in global markets. Scrap paper generated in North America competes with scrap paper generated in the European Union for mill consumption in Asia, and so on. In order to effectively compete in global markets suppliers must be capable of offering the secondary commodities they process at the lowest possible price. 

With a fairly fixed environment to procure material, either through a mandated municipal collection program or by purchasing the material from generators, processors have been increasingly looking to consolidate business operations in order to move more tonnage through a facility or group of facilities. Consolidated facilities that process more tonnage are able to capture a number of efficiencies. First, they are able to use machinery with the highest possible processing capacity. This allows them to process more tons per hour. Second, they are able to spread the cost of investment over more tons processed. This means they are able to more easily rationalize the cost of using the most modern, efficient processing technology. Third, because the increased capacity of their plants is more tied to the processing equipment and technology they utilize than their labor force they are often able to experience a lower labor cost per ton processed.

Consolidation also offers other potential savings for recyclers. It is said that today’s recycling industry in North America is highly fragmented with significant equipment capacity that is under utilized. If a recycler is able to consolidate a number of plants in a given market into a single facility that processes a tonnage equal to the three previous plants a significant portion of the overhead to operate these facilities is removed. Specifically, administrative expenses, property taxes, facilities management and utilities, management staffing and so on. As a result you will continue to see the industry consolidate in the years ahead. Recently there were a group of nonferrous scrap processors in the Buffalo, NY region who, by joining together, achieved these efficiencies. Those of us who watch Waste Management, Inc have seen them go through a wave of these consolidations over the past number of years.

Another factor impacting consolidation is increasingly stringent environmental regulations. To comply with these regulations requires significant investment on an ongoing basis. Just being able to understand these regulations is arguably an arduous task requiring full time environmental staff and considerable legal advice. To absorb the costs associated with these regulations firms must have significant revenues, which in a commodity business means significant volume.

The globalization of the recycling markets is also an important trend. As I indicated in a number of my comments on commodity markets, the consumption of secondary commodities is very much global. Material from one continent freely travels to others for consumption, and material on one continent often moves from one nation to another. As a result, material supplies in one party of the world have a direct impact on pricing in other parts of the world. We’re even beginning to see true global companies in the recycling business. In the metals sector the Australian firm SIMS operates in Australia, Southeast Asia, the USA and the EU. SHV Holdings, out of the Netherlands, owns both the David J. Joseph Company, the largest scrap broker in the USA, and Thyssen Sonnenberg, one of the EU’s largest processors and brokers of scrap. These firms have only emerged as truly global players over the past five or so years. Clearly the path they blaze will be followed in other commodity sectors.

The Drive for Quality:

Increasingly the recycling market is being pulled towards higher quality specifications. This is driven by the increasing usage of recovered materials. When secondary commodities were a small part of a consumers overall feedstock the output quality of the finished product was largely controlled by the virgin materials being used. As recovered materials increase their percentage of the final output their quality directly impacts the quality of the finished product.

Consumers of finished goods have consistently not been willing to accept an inferior product because it is recycled. As a result manufacturers must insist on the highest quality recovered commodities in order to be able to produce the highest quality finished product. Further, in many industrial and commercial applications of material it is simply not possible to use an inferior product because it is recycled. As a result suppliers of this material must ensure its quality. For example, a newspaper publisher that uses recycled newsprint can not use that material if it will not absorb ink properly, if it is more prone to breaking in the printing process or does not have a consistent finish.

This drive for quality is affecting all recyclers at the recycling plant level. In order to ensure a consistent market, at the best pricing available, for the material you process you must produce a reliable quality. Failing to do that will, increasingly, make material more difficult to market or make it difficult to fetch the highest price available.

Commingled Processing:

Increasingly municipal recycling programs are moving to single-stream collection. This type of program allows all the recyclables included in a program to be collected in a single container. All the separation of this material is done at the recycling facility by utilizing sophisticated separation machinery.

The jury is still very much out on this new recycling formula. On one hand most communities that have implemented it claim to achieve higher participation rates from their citizens. At the same time, many also claim to see lower costs on the collection side of the ledger. On the negative side, some have said processing costs go up. The biggest con, however, is acceptance by material consumers. The most vocal opponents have been newsprint mills. As large consumers of municipal recycling program generated material they claim the process leads to an increased rate of contamination, particularly broken glass. Their position is that the programs not only result in more broken glass, but that more of the broken glass ends up in the reclaimed newsprint.

Closing comments:

Hopefully all of you have found something interesting in my comments this morning. I’ve tried to cover a lot of ground, and in so doing have not been able to cover the depth that some subjects warrant. However, my comments should provide you with a broad-brush view of how we see the recycling industry today. In the end, regardless of where a material is sourced from, the recovery and processing of secondary commodities is a business. That is a reality that we all must bear in mind.

Thank you for the opportunity to be here with you this morning.

Slide Show Presentation