Tips On Turning Recycling Into Profits

Bill Moore

Many solid waste haulers, jaded by the volatile markets of the early 1990s and the downturns of recent months, equate recycling with low profits. For them, traditional collection and disposal operations still are the safest business routes.

This myopic view, however, could hurt haulers in the long run since an ever-growing percentage of the hauling business is shifting toward recycling. Indeed, the tons of materials managed through recycling is growing faster than those being disposed (see chart).

As a result, haulers are now faced with some unexpected competition. From mid-1994 to mid-1995, recycling markets experienced major up-swings and generated substantial revenue for anyone with the wherewithal to establish collection services. Consequently, many haulers found themselves competing with non-profit organizations and companies outside the municipal solid waste (MSW) industry, such as Weyerhaeuser and Jefferson-Smurfit, for recovered materials streams.

The paper companies' top priority is to secure long-term, stable supplies of raw materials to operate their mills. To that end, they've carried their recycling collection businesses a step farther and are selectively entering the solid waste management business by purchasing processing facilities. They also perform waste audits for commercial generators.

Despite this seemingly threatening trend, a wealth of opportunity still exists for the solid waste hauler. Many municipal and commercial/industrial customers are still demanding recycling services.

To respond to this demand, MSW management companies must up-grade their operations to provide more efficient and advanced recycling services - just as they would for their solid waste contracts.

Expanding recycling operations can be very profitable. As a value-added service, recycling has the potential to command premium prices in the marketplace. Over time, recycling collection equipment will become more complex and expensive. This, combined with higher capital costs and technology at the material recovery facility (MRF), will result in a higher barrier to entry for the recycling business. Eventually, higher profit margins will be the outcome.

Define Motivations And Develop A Strategy Understanding the motivations behind setting up a recycling program is critical for recycling service pro-viders and purchasers. For example, a recycling program that focuses mainly on public relations and provides poor service will not achieve significant tonnage diversion. The cost per ton of materials recycled also will be extraordinarily high. Similarly, if a program diverts only 5 percent of the waste stream in an area of the country with a $25 disposal cost, the program is not an economical waste management solution.

Unfortunately, many municipal recycling programs suffer from improper motivation. City and county officials must study this issue carefully before drawing up a re-quest for proposals (RFP) for recycling services. They must keep in mind that equipment use on trucks and at the MRF is highly sensitive to economies of scale (i.e. the more tons handled, the lower the overall cost).

At the other end of the spectrum are programs like the city of Seattle's, where residents and haulers are economically motivated to divert waste from disposal. In these programs, once the diversion rate rises above 20 to 25 percent, the overall costs decrease and can compete with higher-end disposal options such as waste to energy.

Once motivations are defined, private haulers must decide how recycling fits into their overall business strategy. Recycling must be viewed not only as a public relations tool but also as another way of handling the materials generated by a hauler's customers. A hauler's strategy must take into account the collection services offered, whether it will be involved in materials recovery and its plan for selling materials to end markets.

When developing a strategy to market materials and negotiate contracts, haulers should consider: * export versus domestic markets;

* local versus long distance markets (frequently governed by whether a MRF is rail-served);

* whether to sell on a spot basis or through short- or long-term contracts;

* the "floor pricing," or minimum guaranteed pricing, necessary for each commodity to provide the proper economics for an operation; and

* each commodity's quality specifications, deliverable forms and price cycle.

More favorable pricing may be negotiated when the market is heading towards a high. To determine roughly where pricing will go, haulers can use reports on supply and demand for existing and new recovered material and the status of the overall economy. The Chicago Board of Trade (CBOT) also has established a new system for selling recovered commodities.

Meanwhile, manufacturers' use of recovered materials continues to rise. The U.S. pulp and paper industry dramatically expanded its capacity to use recovered paper in the mid 1990s. As we reach recovery limits for many materials in the second half of this decade, the industry expects to see the strongest average prices in history.

However, secondary material prices are always bounded by the market forces for virgin raw materials and finished product pricing. No matter how strong the demand, if a manufacturing industry is in the bottom of its business cycle, prices for recovered raw materials will suffer. A classic example of this occurred this fall, when demand for corrugated packaging materials (linerboard and medium) slackened due to weakening in the overall economy. Paper mill downtime led to a dramatic price drop in OCC.

Some examples of partnerships between hauling companies and end users include Laidlaw's exclusive supply position for old newspapers for the Avenor mills in Canada and WMX's partnership with American National Can for a variety of glass and metal containers. Other small-scale partnering can range from informal verbal agreements to long-standing contractual arrangements.

Expanding Services More and more frequently, commercial generators ex-pect a waste audit to be performed on their waste stream to characterize and prioritize the management of different fractions. Some companies perform audits as a stand-alone business. Other, non-traditional solid waste industry players, such as paper recycling firms, also perform audits and have been somewhat more aggressive than haulers in this area.

Waste audits are best performed by persons familiar with all aspects of solid waste collection and disposal. The best approach is to consider audits as a routine part of hauling services. Since performing waste audits is akin to a consulting service, some companies use a specialized internal group for this service.

In order to offer specialized recycling services such as waste audits and still remain profitable, achieving high route density is key. Coordinating routes also increases customers' satisfaction with service and price. In fact, the solid waste hauling mentality fits the recycling business perfectly: Pick up the most materials possible with the fewest miles of truck movement. Continued advancements in collection vehicle design will help achieve this goal. The clear trend in recycling today is toward collecting larger amounts of mixed materials and compacting them to achieve the higher payloads necessary to run vehicles efficiently.

Due to the high demand for materials early this year, some companies sought to move beyond their traditional collection areas into lower density collection zones. However, it's difficult to establish a productive business by collecting small volumes of recyclable materials in areas with low concentrations of generators. A better strategy is to fill in existing routes with small generators in between large collection accounts. This is possible even in the most thoroughly worked recycling market.

In fact, the most efficient way to improve the economics of a recycling program is to collect more materials from existing customers. This is particularly true in office pa-per recycling where few buildings, large or small, are collecting the maximum level of recyclable paper. Haulers can help boost tonnages by stepping outside of their normal role and working to increase customer awareness. This holds true for residential recycling programs as well.

The MRF's Role Today's increasingly mixed recyclables streams require technological improvements at the material recovery facility. As sorting techniques evolve, haulers must stay a-breast and be a part of inventing new technologies. In many cases, this will require innovative partnering with experts in the material handling arena, including equipment suppliers. Similar partnering in the past played a role in the evolution of MSW compaction vehicles, particularly front and rear load packers. Further, when WMX Technologies acquired Resource Recycling Technology and CRINC, additional MRF technology came with the companies.

As these strategies suggest, recycling can be a profitable business; otherwise, it will collapse under its own weight. Generators, including cities and counties, must understand what it takes to establish and to operate a recycling program that its citizens desire and deserve.