The following is a largely stream-of-thought article on the recycling side of waste management systems in North America. I could have used “United States” instead, but this issue is broader in scope than that. Many people are using the term “crisis” regarding a change in Chinese policy. I think we can learn more if we approach the issue as “from crisis, opportunity“. This is my own work and does not reflect the policies or opinions of my employer, the Connecticut Department of Energy and Environmental Protection.
When it comes to the recycling side of the solid waste industry in 2019 there is one King Kong-sized boogeyman. High Prices? Bad Markets? Excessive Transport Costs? All those problems and more are thrown at the feet of “China Sword“, one of the names given to a Chinese pivot away from importing post-consumer recyclables from North America. This policy is tied to surging costs and shrinking profits in the waste management industry.
The Chinese Recycling Market Genesis Story goes like this: For over 20 years China’s expanding manufacturing industries were sending container ships full of consumer goods to the North America. These ships would unload at a major port such as Long Beach, CA, but there were insufficient corresponding North American exports to fill the containers for the return trip. The economics of transporting a load of empty containers back to China were terrible, so bringing back *anything* was preferable. Thus a “black hole” for post-consumer materials was born. Those containers were filled with post-consumer recyclable material from North American households and businesses. From the North American perspective it was a miracle. No domestic processing requiring labor and machinery and electricity was required, only cheap rail shipments to the west coast, and the material was GONE. On the Chinese side the main end product for these materials was packaging for Chinese electronics and other consumer products, which would be exported to North America, and then theoretically returned to China to be born again as new packaging.
If that sounds too good to be true, it was. The quality of the material being delivered to North American docks was terrible. Much of it had high rates of contamination, or worse, involved good looking material on the outside and garbage on the inside. It is likely that none of this material would have been accepted for processing at a North American facility. As we will see, the costs involved in removing that contamination strip the materials of their intrinsic value. It was not long before the Chinese decided they would not be a dumping ground for this poor quality material. None of this was (or should have been) a surprise to North American brokers. Any serious student of recycling processes, markets, materials, and policies is not buying onto a “magical end market”. The charade continued until the proverbial well ran dry. At that point a crisis was born. China hit the brakes. Where importing poor-quality recycled materials may have been economically sound at one time, that time came to an end. China’s economic path from a producer of trinkets to a producer of iPhones led to a mature modern economy, with global economic ties and massive earnings.
It appeared to be a sudden reversal from the perspective of the US. But how could it have been. Waste management is a multi-billion dollar industry, employing economists, international business analysts, experts in everything from curbside collection to trade policy, and it revolves around the banking industry. That banking industry is doing their own due diligence. How could the entire industry, the transportation industry, and their financiers have overlooked this iceberg? My cynicism tells me they didn’t.
Much like the Chinese consumer goods of the 2000’s, North American recyclables were overwhelmingly destined for export markets. There had been very little investment in processing infrastructure on this side of the Pacific. Likewise, there had been no reason for collection programs to stress high quality over sheer volume. The export markets had not demanded it, and domestic markets were glad to limit themselves to materials such as white office paper and high-quality plastics, both known for low contamination rates and high value. Pre-Sword, if a municipal collection program was getting paid $20/ton for mixed recyclables, why would there be a reason to worry? As seen from the generation/collection side of the process it seemed like a status quo had been established, and there was very little indication it would change. Processors were offering 5- and 10-year contracts with guaranteed rebates. Generators and trash haulers were writing those rebates into their cash-flow calculations. Ah… Good Times! Not many were aware that this model relied on a distant market with a rapidly growing consumer sector and a government with the ability to alter course on a dime. The ones who were aware seem to have been satisfied to ride the wave until it crashed.
And crash it did. The closure of the Chinese market caused a virtual evaporation of system capacity. Post-consumer material had nowhere to go. The end markets (purchasers of separated recyclables) who would take the material demanded very low contamination rates (Between 1 and 5%, and lower). China had set their acceptable rate at 1.5% and then lowered it to 0.5%. As far as North American MRFs (Material Recovery Facilities or MRFs, pronounced “murfs”) were concerned this rate was impossible to achieve. Without a huge low-cost destination for post-consumer materials, the focus began to shift from quantity to quality. Many MRFs were running their material through their processing line a second time to reduce contamination. This effectively halves their capacity and doubles their labor and energy costs per ton. The result is spiking costs.
As 2019 progresses, the old contracts fade away, and the shock over post-Sword economics sinks in. Processing a ton of recycling might cost as much as disposing of a ton of trash (or more), a previously unthinkable scenario. Where there were once $20/ton rebates, the cost to deliver recyclables to a MRF (called a tip-fee) was suddenly $25-$75/ton. States, municipalities, corporations, MRFs and brokers are all wondering who will pay for these new costs. In cases where long-term contracts with rebate pricing were in force, they were either torn up or the contractee was hit with higher “claw-back” costs in their next contract (making up for losses under the old rebate contract. Some scenarios involved both tearing up a contract as well as claw-back pricing. Could it be that the closure of the Chinese “Magic Market” exposed North American markets to the actual costs of their waste management policies? Can I make that any more of a leading question?
To turn specifically to the United States, our current solid waste management practices matured under those pre-Sword conditions. The expectations of cheap markets for poorly-sorted recyclables have been baked in to our system over the course of decades. That system relies heavily on export markets. It has failed to develop domestic processing and remanufacturing capacity in the shadow of those export markets. It also relies heavily on long-haul transportation instead of local and integrated, collection, processing and remanufacture. The challenge we now face is one of self-examination, education, commitment, and investment. Can we face up to the facts regarding our laissez-faire approach to waste? The idea that we can mass-produce products and packaging, with no regard to the implications, continues to be discredited every day. Whether it is a global adjustment like China Sword, or a local town-hall budget meeting erupting into a shouting match because the money is simply not there, the current system benefits very few and places a massive economic and environmental burden on the public at large.
To return to the opening question, why would we blame China for this scenario? Do they have some kind of mandate to take poor-quality material from halfway around the world, only to spend money to separate it into useful parts, dispose of the contaminants, and hope to end up in the black? None that I know of. More to the point, considering the importance of the Chinese market to the North American waste management industry, why was there no trade agreement in force regarding recycled materials. It was basically one giant handshake deal. This is the quicksand upon which was built the economic basis of the materials management economy for over 20 years.
There is a feeling that the market will settle, costs will relax, and a “new normal” will take shape. For most people in the waste management industry from the consumer/generator to the recycled content manufacturer it can’t happen soon enough.
I intend to come back and dig deeper into these issue in future posts, but I would like to close with a few observations about where the opportunities and solutions might lie:
Strong National and State Policies: To date the waste management industry has largely been left to run itself. It is important to give credit where credit is due. The industry has developed the technology and the economic strength to process much of our nation’s waste material. However, in the end it still operates on a volume basis. The incentive to reduce waste is simply anathema to the waste management industry. This is similar to the relationship between the electric generation industry and energy efficiency. EE measures take dollars out of the system. In the waste management industry, waste reduction plays the role of energy efficiency. The industry has been able to manage waste materials through a network of landfills, waste-to-energy facilities, and recycling facilities. No industry would voluntarily takes profits off the table, and as a bloc the waste management industry lacks the scope to put a value on efficiency and develop the policies and partners to make it work. What is needed now is a strong framework to guide the conversion of that industry to one that works for the next 100 years. It simply must evolve to yoke a reduction in waste generation to improvements in separation, processing and disposal.
The Supply/Demand Void: With the market value of post-consumer recyclables at a deep low there should be a buyer to embrace this buyer’s market. Right now that seems to be limited by processing capacity and the ability to reduce contamination to the new, lower, standards. As well, separated, high quality, low contamination materials are still holding their value in the marketplace. The real boat anchor is mixed recyclables (many of us know this as Single Stream, or Blue Bin). As I was once taught, the technology required to fix a problem is exponentially greater than the technology required to create it. Creating mixed recyclables is easy. Separating them into the component parts and maintaining the integrity of those parts is exponentially more difficult and more costly. The mixed recycling days should by all rights be coming to an end. Hence…
Source-Separation. This term can be used to describe separating recyclable materials from trash, but it also means separating recyclable materials by type before they are commingled. Separating materials such a cardboard, certain plastics, textiles, food waste, electronics, metal, and packaging at the source (the consumer in most cases) yields cleaner and more valuable material without the need for expensive post-processing. This approach also reduces the total quantity of mixed recyclables, lessening the strain on MRFs trying to meet the low contamination rates the market demands.
Cooperative and Expanded MRF Infrastructure: A MRF is a fairly innocuous industrial process. Most of these facilities can be sited in a light industrial zone with access to highway and rail/ship/manufacturing infrastructure. Cities, regions, or states might find the best solution to cost is to contract with a facility to process their recyclables. By keeping the size of each facility down the transportation costs are kept down, and the amount of post-process materials (baled separated recyclables) is likewise kept to an acceptable level as considered by the host community. It is important to note that even clean separated materials sill require baling, storage and marketing. A move away from mixed recycling is not a threat to the MRF industry, but a lifeline.
Integrated Processing and Manufacturing: The conversion of post-consumer recyclables into consumer products the final link in the chain. The transportation costs involved in this process can be mitigated by locating manufacturing facilities within a short-haul of one or more MRFs. Similarly the opportunity for long-term supply contracts sets the stage for enhanced source-separation, decreased contamination, and decreased processing costs. Any MBA will tell you that this is a recipe for long-term control of both costs and materials supplies.
These approaches can all be part of the answer to “what’s next” in the aftermath of China Sword. This crisis presents and opportunity to build the next house on firmer ground, with known costs, and reliable cash flows. This is what drives investment, and ultimately creates a sustainable model with room to grow and change as future opportunities present themselves.