Broken Recycling Markets Part IV – Best Household Practices

As recycling commodity markets have swooned the past few years and this former source of city revenue has now become a costs item, what’s a responsible household to do?

recycling_bin

The first response is that households can’t do this alone. Recycling involves a complex interconnected chain between raw material producer, manufacturer, transporter, retailer, consumer, and waste processor. Household consumer behavior is only one link in the chain. I’m addressing the household link in the chain here mostly because I figure I have more household consumers reading this column than I have of managers of packaging manufacturers and managers of retail operations.

So, what’s a guy and his big household recycling bin supposed to do? 

Until recycling processors change their engineering methods for efficiently separating materials, “less is (probably) more” when it comes to what we put in the recycling bin. Like, if you’re not sure, probably just leave it out. Even if you are sure, try to make sure you are sure, you know? We tend to suffer from a classic behavioral finance error, when it comes to our bins. That error is overconfidence, and putting things in “just in case” they can be recycled. That’s costly.

republic_services

Republic Services, the nation’s second-largest waste management company reports that 41 percent of households received a “failing grade” on knowing what is, or is not, recyclable.

Josephine Valencia, recycling manager at San Antonio’s Solid Waste Department, explained to me that when the city has surveyed people about what they think goes into the recycling bin, they find that people are vastly overly confident about the wrong things. We think we know what we can recycle, but we are frequently wrong.

Metal

With clean metal soup cans and aluminum beverage cans – these are unreservedly still good for the bin. More than that, they represent the single highest value commodity that you can put into your municipal bin. So, you’re making money for your city when you put those in there. 

But what about other metals? Tin foil? Small metal pieces? Metal mixed with plastic packaging? Chances are these aren’t at all recoverable by recycling processors. You’re just raising the cost of processing when you include these in your bin.

Plastic

Plastic single-use water bottles? Those actually are fine and have a market value. Milk jugs too, and even heavier plastic bottles. Practically all other plastics though are headed for the landfill. 

About two years ago San Antonio said we could gather our single-use plastic bags into bundles of 30-40 bags, in the shape of a soccer ball. I learned those are headed to the landfill as well, with plastic prices where they are now. That made me sad. Many large retailers will take back the plastic bags, but that extra layer of effort is, well, not something I currently do. I liked making the soccer balls, darnit!

recycling_plastic

Paper

Paper is more fraught than I expected.  It turns out most recycling processors were not built for the volume of small Amazon-style cardboard boxes we produce in 2019. Until that gets fixed at the processing plant, most of these are not getting efficiently recycled, to my chagrin. 

Mixed paper is hardly worth anything these days, and cities are currently paying processors to take it off their hands.  

Glass

And then there’s glass. This is a money loser for cities. It’s mentally difficult to landfill glass because it’s quite recyclable. And yet, the finance guy in me knows I’m just raising costs when I put glass in the bin. I’m torn. 

Mixed Packaging

Most all mixed-packaging, which increasingly fills our shopping carts, is not recyclable. Your favorite thin salty chips come in in that cylindrical can made up of paper but with a metal lining inside? Totally not recyclable.

The metal trays from your favorite fast food barbecue place are not recyclable.

Plastic toys are generally not recyclable.

Plasticware from your take-out restaurant is not recyclable.

Generally plastics that aren’t a water bottle, milk jug or cleaned plastic can’t be recycled.

Clothing is not recyclable. Bring it to Goodwill.

And for goodness’ sakes, diapers are not recyclable. That’s for the trash bin only.

“When in doubt, leave it out” is what the experts keep telling me. By putting iffy items into the recycling bin you are simply raising the cost of processing, which gets passed on to municipalities one way or another, which we ultimately cover in our taxes.

I’m a markets guy, so I tend to think that recycling doesn’t have a chance unless we align dollars and self-interest with best waste management practices. I’ve come to appreciate that this is 

1. Super-duper complicated and 

2. Sustainable financially and environmentally only if everyone in the waste production and management chain is working together. It’s so complicated that it’s far easier to come up with questions rather than solutions or answers. 

Big Questions for the Future

A few fundamental questions that learning about this raised for me:

Can households be trained better to recycle only the limited number of financially viable commodities like cans, tins, water bottles, and clean plastic jugs?

Can households some day be trained to actually separate their commodities into more valuable sorted bins, as is done in Europe and Japan?

Will consumers prioritize buying recyclable packaging materials in a way that will force manufacturers and retailers to respond to market demand?

Can manufacturers be incentivized to create more recycled and recyclable packaging, rather than mixing paper, plastic and metal in a way that can’t conceivably be recovered from household waste?

Can retailers be incentivized to serve as the feedback mechanism for channeling consumer preferences to food manufacturers?

Can recycling processers adjust their collecting and sorting processes in a cost-effective way to constantly-changing packaging?

Will municipal, state, and national government policies nudge – in a sustainable way – for more efficient recovery and reuse of materials?

The recycling market is in a period of transition caused by a market slump.

An optimistic view would be that technological and engineering changes, combined with household changes, can mitigate and even solve our problems in the future.

Energy and environment expert Rachel Meidl of Rice University’s Baker Institute says she doesn’t see the China ban or current commodity slumps “as a crippling force. I see it as an opportunity to prepare and strategize for the next generation of recycling and innovation. A long-term sustainable solution would be investing in R&D and scaling up infrastructure to recycle or recover” more commodities. 

That, combined with household behavior, would help over the medium and long run. I don’t know enough whether to be optimistic or pessimistic about the current crisis. I’m going to try to do better with my bin though, and leave the rest to the experts.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts

Broken Recylcing Markets Part I – China Ban, market swoon

Broken Recycling Markets Part II – Commodity Markets slump

Broken Recycling Markets Part III – Hit on City Budgets

Organic Recycling – Green in Being Green

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Recycling Part III – Bottom Line For Cities

reuse_reduce_recycle

In the past decade most cities have benefitted financially from developing robust recycling programs, helping cities financially in two ways. First, by diverting tons of waste away from landfill, cities reduce their landfill costs. Second, by hiring recycling processors who can resell and share profits from the resale of secondary commodities like metal, paper, and plastic, cities have earned positive revenues from their programs.

A slump in commodity prices as well as other market factors, however, have fundamentally shifted this second factor in the municipal economics of recycling. A snapshot of San Antonio and Houston contracts illustrates the market change over just the past three years. 

Houston has seen a swift financial change in their recycling deal. 

Houston

Before 2016, Houston had enjoyed a contract with Waste Management in which the processor would not charge anything to haul recyclables, and would split the upside of revenues as it sold recovered materials into the secondary commodity markets. Recycling made money for Houston, with no financial downside.

houston_skyline
Houston skyline

At the end of that contract in 2016, however, Houston endured temporary contracts and exposure to faltering markets. Between 2016 and 2019, the city paid $92 per ton for hauling and processing, a cost per ton that ended up costing the city an average of $120,000 per month. Also, under temporary contracts, there was no predictability to what the program could cost. 

Houston’s new contract with Spanish processor FCC went into effect in March 2019, requiring the city to pay $87.05 per ton of recycled waste. Like most municipal contracts, Houston can share in the revenue that FCC generates through secondary sales, and use that revenue to offset the costs of hauling and processing. 

Says Sarah Mason, Division Manager of Recycling at Houston’s Solid Waste Management Department “We were aware that the commodities market was on the downside at the time we were working out the [present 2019] contract.” 

Given that exposure, Mason says, they negotiated a maximum net cost of $19 per ton, even if recovered commodity revenues remained weak. Houston has hit the $19 cap every month the contract has been in effect. This cost cap has cut recycling costs to about a third, or an average of $41,000 per month. Still, it’s a contract that reflects the new altered dynamics of the recycling market in 2019. A former revenue source has become a net cost to the city budget.

Meanwhile, a three hours’ drive west on I-10, San Antonio has a few years remaining on its contract, one negotiated in better times. 

San Antonio

Costs to haul and process recycled materials are just over $36 per ton through 2024, according to their contract with Republic Services, which by comparison with Houston seems quite low. An additional “contamination” fee for non-recycled waste that gets mixed in with the recyclables typically raises the costs by another $12.50 per ton. San Antonio’s experience is that contamination fee typically kicks in every month.

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San Antonio skyline

In good years, prior to 2017, San Antonio expected secondary commodity revenues to more than offset its costs. The city enjoyed a 50/50 split on revenues above costs. If revenues brought in $72 per ton, the entire program would be paid for. 

Recovered revenues above $72 per ton ended up as a net revenue-generator for San Antonio. In addition, Republic agreed that if recoveries didn’t fully match costs, the city could roll over its net costs, with a promise of owing nothing if recoveries over the life of the contract proved insufficient. That’s how confident Republic must have been in its ability to make money from recovered paper, plastic, and metal, under the old contract, negotiated in the 2013/2014 period.

Financial data shared by Josephine Valencia of recycling manager of the Solid Waste Management Department of San Antonio show net revenues have on average been negative in 2018 and 2019. Net 2018 revenues from recycling averaged negative $2.60 per ton in 2018, and worsened to an average of negative $9.45 per ton, reflecting declining commodity markets. The average recycling costs would be over $60,000 per month in 2019, although Republic will eventually absorb those monthly losses if commodity markets do not recover. San Antonio’s contract lasts through 2024, but if present conditions persisted the city could expect that kind of cost would factor into any new negotiated contract.

In other words, future municipal recycling contacts – if commodity market conditions do not change – will lock in recycling as a loss-maker rather than revenue-generator for cities in the future. Valencia confirmed that Houston and San Antonio’s shift from monthly gain to monthly loss are probably happening nationwide, at least in cities that employ the popular “single bin” method of household recycling. 

Don’t forget landfill-cost comparison

The contracted costs from Houston and San Antonio simplify the total financial picture somewhat, because they do not reflect at least one big factor. Recycling lowers waste management costs overall by redirecting waste away from landfills. The City of San Antonio estimates 2018 and 2019 savings from reduced landfilling at approximately $1.5 million and $1 million respectively, according to Valencia, on a total waste management budget of $150 million. That’s not nothing, and provides a compelling reason to continue the programs, even as they do not produce the positive cash flows of the past.

A version of this post ran in the San Antonio Express News and Houston Chronicle

Please see related posts

Broken Recycling Markets Part I – The Plastic Ban and Commodity Swoon

Broken Recycling Markets Part II – Commodity Market Prices

Recycling Part IV – Best Household Practices

Organic Recycling – Green to Green

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Another worrywart post on Financial Sustainability

This time, with better math!

A little while ago I wrote that, as a fiduciary, I worried about the sustainability of endowments and retiree portfolios, which traditionally have drawn 5% and 4% respectively from assets per year, in the conventional belief that this is ‘sustainable.’ 

These 4% and 5% rules of thumb for the past 50 years guided fiduciaries and retirees that live off of savings, or endowment managers who parcel out funds annually to run non-profits such as schools and hospitals.

My argument was admittedly simplistic – basically, that with bond yields as low as they are (2% on 10-year bonds) nobody has a prayer at financial sustainability without going far out on the risk spectrum – essentially all stocks, or all risky assets – just to break even with a 4% or 5% draw.  I specifically did not consider forward-looking projections when arguing for the unsustainability of current endowment or retiree practices.

We can’t see the future, I said, so I can’t predict.  All I can know is that you’ve got to take a lot of risk if you want to stay sustainable, and that’s not very comfortable for most of us.

I was pleased to see a more sophisticated presentation of this idea, which actually makes a mathematical and credible case for low future return expectations. 

Basically, their conclusion is the same, only their math is better.

Not Great Expectations

The embedded picture is explained best by the Economist, but I’ll try to express it as well, to save you the click-through.

A quantitative strategist at hedge fund AQR Group built this picture, which purports to show the expected real return of a 60/40 stock/bond portfolio available today.

Equity returns are calculated by averaging:

1. The Earnings/Price ratio of a broad basket of stocks[1] and

2. Dividend yield plus 1.5% (to allow for long-run growth.) 

Bond returns are calculated as the difference between 10 year US Treasury bond yields and inflation expectations.

All of these are totally reasonable ways of calculating expected future real returns based on a 60/40 stock/bond mix.  The picture we get, according to AQR, is that real return on assets may be reasonably projected as the lowest in over 100 years, at somewhere below 3%.

I’m left pretty worried for retirees and endowment managers drawing 4% and 5% from their principal every year. 



[1] Specifically the inverse of the Shiller P/E.  Don’t ask me,Wikipedia it yourself.

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