How Industry Consolidation Should Refocus Our Attention on Recycling Sustainability

Not long ago, a newly formed company raised dot-com millions to purchase and roll-up about 30 U.S. recycling companies. The holding company was publicly traded on the NASDAQ exchange. Earlier, I had been asked to oversee five scrap metal and plastic recycling companies in California. Once a privately held company, it was sold to the aforementioned holding company. As a consultant to the prior owner, I knew the company and its processes very well.

During my tenure as president of these mainly non-ferrous subsidiaries, the acquiring holding company made two more major scrap yard purchases. Shortly thereafter, in a total surprise, the bottom fell out of the steel market. Three existing competitor companies folded because of the company’s poor management, its overvaluation and the depressed state of the steel markets.

Our ferrous-based subsidiaries were left holding thousands of tons of steel scrap, and were forced to swallow millions of dollars in inventory write-downs, which caused cash flow to tip into negative territory. In turn, it triggered asset-based lending calls, which proved to be their demise. Their stock was once at $38, but went down to $4, before being de-listed. Within months the company filed for Chapter 11, reorganized to become profitable, re-listed and was recently sold--to a foreign publicly traded scrap company, oddly enough.

Well, the metal bubble has burst once again. Global market value equalization is on-going in most industry segments. We’re once again exposed to sharp scrap metal devaluation in the recycling sector, and companies are realizing serious losses, increased costs due to lower volumes and/or inventory devaluation.

Historically, metal traders buy more metal at lower prices, diluting steel losses. But without demand, in the short term, this action seems risky. Steel held for too long can literally rust away margins. 

Here’s a snapshot of recent price declines in the metal market:

Steel    $330 a ton-to- $80 a ton
33% Insulated  $1.00 per lb.-to- 40 cents per lb
Aluminum  85 cents down to 50 cents/lb

The current scrap metal declines are remarkable for publicly owned metal recycling companies as well. In my experience, this is ugly for stockholders and former owners who have pledged percentages of their company for the new combined stock, only to see their value decline 75% in a short period. Executives’ performance options become worthless, and it’s safe to say, it’s not a pleasant working environment for unprofitable subsidiaries and for “non-trade” supply vendors, since they’ll be financially stretched to offset low cash flow. People with metal will become jittery and ask for cash/wire transactions before delivery. I can assure you it will test the best managers.

So how does this relate to our current market? The reality of less raw materials demand (and speculation about the future) has sent global commodity prices into a downward spiral, and unless something dramatic changes, I can’t see an increase in values anytime soon. If it does rise, it may be due to currency devaluation, but I’m hoping this will not come to pass. China, once a global commodity-price driver, has slowed its buying activities. There’s one positive rumor, at least: e-waste exports to China have also slowed due to recent negative press and minor enforcement events.

With the onset of the credit crunch, higher unemployment rates and dwindling consumer confidence, as our new president-elect said in his acceptance speech, it may take an entire term in office before positive improvements are realized.

But why would I bring this up with respect to e-waste?

Until recently, there were positive signs in the market that with higher commodity pricing, domestic low-value e-waste recycling with automated mechanical processes could be self-sustaining. Companies using “high-volume mechanical e-waste treatment” systems required little or no recycling subsidies, using savings from resource output and improved commodity & environmental tracking to nearly offset costs.

Unfortunately, U.S. global equity markets and property have taken hits in valuation. As a direct consequence, potential break-even low-value e-waste management and processing is now a thing of the past.
 
Allow me to explain. Before commodities devaluation, a pre-processed old printer could yield up to 20-25 cents per pound combined broken down commodity values. Today it’s down to 13 cents per pound in value, even less in some other e-waste categories, such as keyboards. I estimate a theoretical high-volume automated L/V e-waste process would cost 13-18 cents per pound, not including triage and logistics. So here we are, in a commodity-driven world that has set-back low-value (domestic) self-sustainable e-waste recycling.

Until commodity markets improve, low-value e-waste surcharges will most likely be the normal way of doing socially responsible e-waste recycling. Of course, domestic e-waste processing is only part the problem. Demand for metal & plastics products has declined. Hence, proportional to demand, domestic metal (smelters) processors are buying at volumes proportional to their lower ingot sales.

Since Redemtech sold only to domestic mills and never shifted to higher export metal prices and consumers, we, as a relatively small metal supplier, maintain our domestic smelter capacity for all e-waste metals. The polymers markets have also softened. CRT glass is at crisis level, with very limited national processing and or Pb glass reuse. Redemtech is looking at different CRT uses and recycling solutions, but domestic CRT conversion solutions are limited.

I should mention that this is the third major metal market crash I’ve experienced in the last decade. Each had major impacts, but this one is like no other before it; I can’t recall major across-the-board market drops for both ferrous and non-ferrous metals. Nor can I recall ever before hearing, for instance, that trade partners failed to honor their contracts to avoid un-hedged commodity positions. During rapid metal market declines, millions of dollars of material were left floating and sank in transit. Letters of credits were not honored, and minor deviations in terms or quality were used as pretexts to prevent payment. Furthermore, crazy daily container demerits imposed by some ports force the metal suppliers into unfair settlement. It’s become one tough neighborhood! I guess you have to take the good with the bad. But it would seem logical that foreign port officials and national companies communicate to protect their common interests.

As commodity prices decline, e-waste will take hits on the sustainability front. In times when doing right for the environment and current global markets is not enough, we’ll find ourselves paying more for domestic low-value e-waste processing.

Under current market conditions, Redemtech understands e-waste and resource recoveries enough to estimate some of the recycling fee increases are not for profit, but will prevent closure of our partners’ facilities. Conversely, I‘ve seen some companies with potentially good e-waste processing capacity raising pricing to “what the market will bear.” I can’t really blame them if they have a substantial investment.

I’m not sure how the industry will react to existing market conditions, particularly the effects of a rumored slowdown in low-value, end-of-life electronics exports and the effect of low-value recycling fees on companies’ bottom lines. Redemtech is not immune, either. It will affect us as well.

This has forced Redemtech to approach e-waste with a commodity frame of mind in order to formulate hedge mechanisms for Redemtech’s e-waste commodity positions, and to develop innovative management methods and investments to mitigate commodity fluctuation and exposure, this will stabilize impending commodity base recycling fees to manageable levels and allow us to maintain e-waste toxin transparency.

As OEMs scramble to use less resources per unit, they replace lead with other elemental toxins (such as bismuth, perhaps the subject of a future blog entry) to manufacture their electronics. Regardless of periodic economic and market cycles, it’s probably a good time to address unregulated low-value e-waste environmental legacies and proportional resource recycling/recovery costs, or we’ll find ourselves with warehouses full of low-value e-waste and with lower resources, then saddled with paying unreasonable domestic processing fees.

Comments

[gary selliken]

The solution to the plastic problem can be solved by turning the plastic back to the original ingredients so they can be used again. This is very easy and we can put in in 8 languages. If you want to help solve this problem just let me know and I will be happy to show you.
Regards
Gary Selliken