Eight Thoughts on Current Recycling Market Upheaval

Recyclables are commodities. We keep forgetting that recyclables are commodities whose market value fluctuates due to supply and demand. In fact, their value fluctuates more than that any other commodity. Why? Recyclables are at the tail end of raw material demand because their quantity and quality are not as predictable as that of their virgin raw material competitors. While the quantity of recyclables is increasingly predictable, the quality is not.

Demand and supply. Recycling used to be an industry which was ruled by supply and demand, or, more accurately, demand and supply. As scrap industry veterans say, scrap is bought not sold. Curbside collection destroyed the normal balance between demand and supply because it created an unending supply that is unconstrained by market demand. Curbside recyclables keep rolling in regardless of whether or not manufacturers need raw materials.

We’ve been here before. The sudden rise of curbside programs caused a massive collapse of markets in the late 80’s and early 90’s. Since then we suffered one other big drop in the 90’s, two in the aughts including the horror show of 2008, a dip in 2013 and now this. Markets always bounce back. Sometimes it takes a while and the wait can be painful. Most scrap dealers expect to lose money at least one of every four years. They plan for it. Maybe curbside programs need to adopt this strategy. We need to start thinking long term, not short term, and focus on five or 10 or 15 year averages, not the price of the day.

New markets will arise. Already mills in other Asian countries are taking up the slack, but they have less total demand than China and they pay less. A recent Wall Street Journal article showed how American manufacturers are seeing value in these newly low priced recyclables as a new feedstock. After all, one industry’s pain is another’s pleasure. The increasing amount of "browns" in mixed paper is spurring this trend. We will see more North American paper mills with stock preparation systems designed to take mixed paper as a normal feedstock. But they won’t open overnight.

We now have three levels of specifications. First the Institute of Scrap Recycling Industries (ISRI) specifications which set something of a baseline—a way of communicating what is meant by Old Corrugated Containers and Mixed Paper, etc. More important, however, are the buyers specifications which don’t always conform with ISRI’s. Let’s be candid. The modern Chinese linerboard mills were built with the expectation of processing North American mixed paper. So are Pratt Industries’ mills, which are the only real U.S. market for this grade. Packers met those mills' specifications. It’s worth noting that the National Sword in February got little notice and had little impact on North American recycled paper shipments. It was the announcement of the ban in late July and the failure to issue import licenses in the fall that attracted attention. Now the Chinese government has created a third level of specifications. The new requirement of 0.3 percent contamination is an impossible standard. It’s purer than Ivory Soap and is lower than the existing, challenging to meet,1.5 percent standard. This raises the obvious question: given the need of Chinese mills for inexpensive fiber, the skyrocketing price of domestic recyclables in China and the cost to Chinese mills of importing virgin linerboard pulp from North America, what level of contamination will the government enforce? This is why quality counts. 

Paper is getting a bad rap. As Bill Moore has noted, smell does not equal garbage. Finished paper products have a low rate of moisture content. Paper in MSW has about a 6 percent moisture content due to being mixed with wet waste. Recycled fiber is probably the same or more. Bale it, put it in a container, ship it across the ocean and open the container two or three months later and of course it will smell. Which raises the question, are any companies that bale and ship paper overseas looking for ways to lower this naturally occurring decomposition? 

Keep China Beautiful. We should take the Chinese government’s desire for a clean environment seriously. The country has a growing middle class. They want to enjoy the benefits of affluence in a clean environment. Beijing this week is gloriously free of pollution but unfortunately the Party Congress is only held every five years. The Chinese people want better.

Don’t always expect rational economic behavior. After all, Richard Thaler won the Nobel Economics Prize this year for his work on behavioral economics and the reality that we don’t always make rational economic decisions. Yes, over the long term, the Chinese government is likely to come to an understanding of what is good and bad for the environment and economy. Yes, markets always bat last. But the immediate issue is how much short term pain will we will suffer.