Where Does the Waste Management Industry Stand Economically?

Overall, the waste management business is on good economic footing; pricing and volume are healthy; asset utilization is up; and there is robust consumer engagement. These are among insights shared by Michael E. Hoffman, group head Diversified Industrials and managing director, Equity Research for Stifel at the WasteExpo session: "Top Takeaways from 2021 Investor Summit." Hoffman went on to discuss predictions about inflation, labor issues and what operators should know if they are thinking of selling, among topics.

On the landfill side, most companies’ businesses are at or better than pre-COVID levels.

“Inflation has been in the low to mid 2’s; now there are conversations about it creeping up maybe to over 3,” Hoffman said.

Wages are at 3.5 to 4.5%. And freight is up as is insurance due to demand enabling insurance companies to charge exorbitant rates.

CPI is on pace to be 4.1% in 2021.

Hoffman posed an interesting question: Is inflation temporary, influenced by disruptions to businesses and the supply chain from COVID-19? While he had had no definitive answer, he suggested operators on the municipal side be prepared for rate adjustments. He said there has been little pushback from customers. “They know we have inflation.”

Labor is an ongoing issue. “You can’t find mechanics or drivers. But the reality is that for a long time millennials (born in the early 80’s to mid 90’s) and zoomers (late 90’s to early 10’s) do not want to drive for a living,” Hoffman said.

He told attendees: “Get yourself into schools. Start having conversations [with students explaining to them] these are honorable jobs and [they] can find career paths … you will not be a driver forever.”

Normally recessions are followed by a sharp recovery. Hoffman predicted new business formations, which lead to commercial growth.

The period from 2014 until just before the pandemic was one of the most profitable times in the trash industry, with the housing cycle being a large part of that, driving new business formations and high profitability.

Housing dipped during the pandemic, but for the last 12 months there has been growth, though so far no meaningful movement in new business formation. Hoffman forecast a 3 to 5% small business bankruptcy rate due to the pandemic.

There have been conversations around electrifying fleets in an industry that is working to cut its emissions, with nearly 30% of trash trucks now powered with compressed natural gas (CNG). A transition to electric would be expensive; the capital cost for electric is currently two to three times more than diesel and CNG, according to Hoffman. And keeping batteries charged for highway driving is a challenge, “so it’s hard to say where fuel cells will go.”

And any rate, he projected the industry will lead on how to get to zero emissions and is heading to some form of electric.

There has been a lot of attention on PFAS and the need to remove these toxic and widespread chemicals from the environment. This will impact the solid waste industry.

“Today we can remove it … but we can’t destroy it. So, the big message is, it will cost money to remove it, but it can be done … the solid waste industry should be part of the solution for long-term control of PFAS,” he said, emphasizing there is potential for revenue.

Another hot topic was environmental justice policy, intended to protect minorities and low-income citizens from disproportionately high exposure to pollution. New Jersey recently passed legislation with clear guidelines, and other states are looking to pass similar laws.

The industry just wants a defined set of rules to factor into planning and development and new business growth in the context of supporting environmental justice framework, Hoffman surmised. He thinks the focus on this issue could bring business opportunity, for instance should more buildings become LEED certified (Leadership in Energy and Environmental Design) there will be requirements for reporting recycling and other sustainability efforts and outcomes.

“I can see municipal bids will start requiring certain [levels of] recycled content. And I think the garbage industry will have extraordinary sway on the vendor system including … moving to zero emissions such as through electrification,” he said.

He discussed what he called the new Administration’s push for higher taxes, which he claimed will have “damning effects on the economic cycle,” as opposed to when more capital stays in businesses that redeploy it and get to keep more of the return.

The passage of an infrastructure bill would be a positive for the economy and industry he said. Legislation would likely focus on areas such as roads, bridges, airports, and fiber optics. Some in the solid waste management industry are hoping to see waste management services incorporated, such as composting and other ways to reduce emissions and address climate change.

Hoffman moved on to commodities pricing, which has improved since plummets after China implemented its National Sword policy. Large processors and recyclers are adapting by converting to process fees where value is adjusted to reflect true processing costs. Those costs are high largely because of the need for updated equipment, including technology designed to manage the changing waste stream.

Organics collection is a front and center focus, with states and the federal government setting aggressive waste reduction targets. While this brings opportunity, setting up infrastructure to recover and manage organics is expensive.

This will call for subsidies, Hoffman said, “it works in California because California subsidizes. They are prepared to pay.”

The key is for operators to be able to scale their organics operations.

Institutional kitchens are a good place. It’s somewhat profitable, Hoffman advised.

He touched on anaerobic digestion (AD) as a means to effectively process organics for beneficial uses but said at the city level these operations are too expensive, with high tipping fees for residual and high power costs. He predicted that if AD becomes economically feasible the industry will put more capital into it.

Another trend, though done by few, is for larger companies to invest outside of traditional municipal solid waste, namely industrial waste.

For instance, some are managing solids, as well as wastewater and disposal of other liquids.

There has not been much big investment yet he said, “But customers are asking them to do more, and the scope of that waste management model is big.”