Progressive Investor Sample Article
Special Report: Investing in Recycling!
Issue 52: February/ March 2008
The State of the Recycling Industry
The recycling industry is a sterling example of how grassroot initiatives can spur the creation of bonafide industries. We've come a long way since the 1960s, when tiny non-profits drove around in vans collecting recyclables from prescient individuals who didn't want to throw their "waste" away.
In less than 40 years, the U.S. recycling industry has become a backbone of our economy. In 1968, the fledgling industry pulled in $4.6 billion in annual sales; today, revenues are roughly $236 billion [National Recycling Coalition]. The industry provides employment for 1.1 million people, up from just 79,000 in the late 1960s, and 56,000 public and private facilities processing recyclables. Our research partners Cannacord Adams estimate the industry accounts for about 2% of the $12.36 trillion U.S. gross domestic product as of last year.
The recycling industry generates more than twice the revenue than the $100 billion waste management industry [National Solid Wastes Management Association] even though much more garbage is thrown out than recycled. That's because recycled materials generate economic value - waste disposal doesn't.
Indeed, at the current rate of resource depletion, the world literally can no longer satisfy demand for paper and steel from virgin materials alone. Recycling has become an absolute necessity for industrial growth and stability. We couldn't print a newspaper, build a car, or ship a product in a cardboard box without recycled materials.
Although we usually think of the benefits of recycling as reducing waste and protecting forests and habitats from mining and clearcutting, it is also a key solution for climate change. Making new materials from old ones is a classic example of energy efficiency - it vastly reduces the amount of energy and emissions required to support our economy.
Quickie Background
At the turn of the 20th century, people made paper out of waste paper and rags when wood pulp was scarce or too expensive, and during World War II, Americans worked together to recycle scrap metal and other materials.
In the early 1990s, non-profits began urging municipalities to set up recycling programs, but industry and government balked. The U.S. was in an economic slump and demand was low for either virgin or recycled materials.
Even as they coaxed municipalities into raise tipping fees at landfills to make recycling economical, it continued to be much cheaper to dump waste into landfills. It cost $400-$1000 per ton just to collect recyclables, compared to $70 a ton to dump them in landfills. There was little money to be made selling the materials - a ton of recycled materials was valued between $15-$60.
In the mid-90s, the economy grew as did prices for recyclables. Although the economics of recycling continued to be a mosaic of collection and landfill costs, market demand, and recycling infrastructure and technology, industry invested in high tech machinery to sort, process, manufacture and ship recycled materials.
Today we see how investing in the recycling infrastructure over the years paid off. Leaching landfills closed, and stringent environmental regulations made landfills expensive to operate. Industry pushed for incineration as the solution, but citizens embraced recycling. Now the industry is not only economically viable, but profitable, thanks to significant gains in recycling technologies that made the process of recycling substantially more efficient and cost-effective.
Industrial recycling has gone far beyond municipal recycling and is where the real action is. Over the past decade and the advent of "corporate environmental responsibility," businesses have come to rely on recycling to lower energy costs, use fewer raw materials, minimize waste streams, and reduce pollution. Now, with a global market, very high costs for virgin materials and overwhelming demand, recycling helps companies achieve competitive advantage and profitability.
Just about every kind of product is recycled - paper, all metals, car parts, and carpet. Decks are commonly made completely of recycled materials. The newest category is electronics.
Advantages of Recycling
Energy savings from using recycled vs. virgin materials:
Iron and Steel: requires 74% less energy. 2/3rds of steel produced in U.S. is from recycled materials.
Non-Ferrous Metals (all other metals): requires 96% less energy for aluminum. 60% of metals are now made from scrap.
Paper: requires 36% less energy and far fewer chemicals. 51% of paper recycled in 2005.
Plastic: requires 80% less energy and reduces petroleum use. Only 17% is currently recovered for recycling.
Recycling is successful because it benefits both the environment and the economy.
Environmental Advantages:
- Less pollution: reduces or eliminates the need to extract and process virgin materials - very energy and fossil fuel-intensive processes. Less mining also eliminates the use of toxic chemicals.
- Reduced greenhouse gas emissions from incinerators and landfills; reduces the need to burn fossil fuels manufacture materials.
- Conserves natural resources and habitat by reducing the need for wood, water, and minerals.
Making products from recovered materials reduces 10 major categories of air pollutants and eight categories of water pollutants. With a national recycling rate of 30.6%, we save about 256 billion barrels of crude oil, the equivalent of taking about 22 million cars off the road each year [US EPA].
Economic Advantages:
- Dramatic energy savings
- Job creation: 1.1 million U.S. jobs with an annual payroll of $37 billion.
- Supports vital industries: paper and steel mills, iron foundries, plastics converters, computer demanufacturers, composters, and plastic lumber manufacturers.
- Saves money: in addition to selling recycled materials, towns reduce the use less fossil fuels, even after factoring in the energy required to collect and transport materials.
The recycling industry is benefiting from a confluence of trends:
- High energy prices favor increased recycling. With energy costs reaching permanently high levels, recycling is the avenue of choice. It takes much less energy to make a product from recycled than virgin materials. Example: energy accounts for 20-30% of the cost to make metals such as aluminum and zinc.
- Metal prices are rising sharply from strong demand - partly from growth in India and China - creating strong economic incentives to recycle all kinds of metals. Although metal prices fluctuate, strong continued demand is likely to keep prices high, benefiting recycling.
- Recycling benefits from the attention to climate change for its ability to reduce the energy intensity of manufacturing and methane generated by landfill waste.
- Growing recognition that natural resources are scarce, finite, and increasingly expensive to mine. Example: virgin copper and zinc supplies could be completely exhausted within decades.
- Rising concerns about pollution from discarded electronics
Recycling Industry Segments
Re-manufacturers, which recycle old materials into new products, are the largest segment of the recycling industry. This $180 billion industry - consisting of steel mills, plastics converters, glass producers, iron and steel foundries, and rubber product manufacturers - represents 75% of the industry's revenue.
The second largest segment consists of paper stock dealers and scrap metal re-processors that process recyclables, sorting and compacting materials. This segment generates $41 billion in sales or 18% of the industry.
Companies involved in reuse - motor vehicle part re-manufacturers, tire re-treaders, and computer de-manufacturers that refurbish existing products - generate $16 billion in sales or 6% of the industry.
The collection side of the industry - those that pick up curbside consumer recyclables, materials recovery facilities and material wholesalers - is the smallest segment, generating 1% of revenue, about $2 billion annually.
Non-ferrous metals and plastics have the highest economic value per ton of material; glass and yard waste have the lowest sales value. Iron, steel, paper/paperboard and tires have the highest recycling rates.
Recycling Giants: Iron and Steel
Iron and steel, known as ferrous metals, are the giants in recycling. Steel is the most recycled material worldwide, achieving a recycling rate of 75.7% in the U.S. for 2005 [Steel Recycling Institute]. About two thirds of all steel is now made from scrap, which can be recycled over and over again.
The extraordinary increase in the price of ferrous scrap over the past five years - from $100 a ton in 2001 to well over $250 ton this year is a very significant driver.
What's the most recycled consumer product? Vehicles! 100% of the steel used in cars is now recycled. Steel cans lag far behind with a 63% recycling rate, largely because people can't toss their cars in the garbage as they can with cans.
Mini-mill steel producers - which make steel from scrap - now comprise 56% of U.S. steel production, up from 38% in 1992. The technology used to make steel from scrap not only lowers feedstock costs (scrap costs less), but enables faster production.
Along with rapidly escalating energy prices, another major trend in the industry is consolidation. There are some 1200 scrap recyclers in the U.S.; even the largest has no more than a 15% market share. As the smaller players get rolled up, the industry benefits from greater pricing power, the elimination of excess capacity and greater control of output when the economy softens, raising the floor for ferrous prices.
The steel industry recycles some 76 million tons of steel and iron annually, generating $62 billion in sales and saving enough energy to power about 18 million homes. Recovering one metric ton of steel from scrap saves 2,500 pounds of iron ore, 1,400 pounds of coal, and 120 pounds of limestone [American Iron & Steel Institute]. The Institute estimates the industry has reduced greenhouse gases emitted per ton of steel shipped by 45%.
Non-Ferrous Metals
Any metal other than iron and steel is considered non-ferrous: aluminum, copper, lead, zinc, nickel, titanium, cobalt, chromium, and precious metals (ie., silver and gold). This group generates about $28 billion in sales [National Recycling Institute].
The global aluminum industry is the first industry to commit to achieving greenhouse gas neutrality. The target date is 2017.
Aluminum is by far the most valuable material households recycle. For many communities, it often subsidizes the cost of recycling less valuable materials. Using recycled aluminum eliminates almost 96% of the energy and emissions that would be produced if it were made from pure bauxite ore. Indeed, virgin aluminum is a primary source of perfluorocarbons (PFCs), greenhouse gases that are thousands of times more potent than carbon dioxide, according to the EPA.
The aluminum industry recycled 52% of the 51 billion aluminum cans produced last year, and almost 90% of that used in vehicles [Aluminum Association]. Since 1888, about 75% of the aluminum produced is still in use, says leading manufacturer Alcoa. Insatiable demand from China and the trend toward using aluminum to make lighter, more fuel efficient cars, is significantly increasingly the market for aluminum.
Paper/ Paperboard
With about $50.5 billion in annual sales, recycling paper and paperboard is the second largest recycling sector. 37% of the raw material used to make all paper products now comes from recycled paper.
Plastic
Plastic is the third largest sector with $28 billion in sales [National Recycling Institute]. Despite demand from plastic recyclers, plastics have a mere 20% recycling rate, down from 40% in 1994. The huge growth in bottled water, which is rarely recycled, have pulled recycled rates down because most of it is consumed away from home where it's difficult to recycle. And few container deposit laws cover plastic water bottles.
The impact on the environment is substantial: it takes 1.5 million barrels of oil to satisfy U.S. demand for bottled water [Earth Policy Institute]. The number of plastic bottles used has more than tripled since 1996 - to 200 bottles per person per year!
Source: Container Recycling Institute.
Electronics Recycling
Extremely short product lifecycles and the proliferation of gadgets like cell phones, iPods and Blackberrys, has made electronics the fastest growing waste stream worldwide. When the U.S. shifts to digital-only television in 2009, as many as 100 million TVs could be obsolete.
Unbelievably, about 70% of the heavy metals and 40% of the lead in U.S. landfills seep out of dumped electronics, according to the EPA. And 80% of e-waste is shipped to Asia and Africa, where it is simply dumped after the metals are salvaged.
High prices for metal scrap, and pressure for recycling from government regulation and NGOs, will benefit the burgeoning e-cycling industry going forward.
The European Union passed two major laws - Restriction of Hazardous Substances (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE)) - which require e-cycling as well as green product design to minimize hazardous chemicals and waste.
In effect since July 2006, RoHS restricts the use of six hazardous chemicals in electronic equipment manufacture - lead, mercury, cadmium, chromium VI, and two flame retardants. WEEE encourages green design by mandating that electronic products contain certain percentages of recyclable materials.
In the U.S., manufacturers have taken on product take-back. 35 states have banned electronics from landfills, setting the stage for the emerging e-cycling industry.
Several large recyclers and about 400 small recyclers in the U.S. generate $700 million in annual sales from processing 1.5 billion pounds of electronics [International Association of Electronics Recyclers (IAER)]. They recover about 900 million pounds of materials - an impressive 60% recycling rate.
IAER predicts the industry will process three billion pounds a year by 2010, making the development of an efficient infrastructure the key issue for the industry.
Waste Management Raises Bar
Underscoring the importance of resource optimization and sustainability, Waste Management (NYSE: WMI), the largest waste management firm in North America, recently announced it would significantly increase recycling volumes and waste-to-energy production over the next 12 years.
WMI says it will more than double recycling by 2020 - from the current eight million tons a year to 20 million tons - through single stream recycling and e-cycling, and it plans to double waste-to-energy production by 2020, with an emphasis on landfill gas.
The move is further evidence of a paradigm shift in the waste management business where "trash" is viewed as a valuable resource to be mined, rather than as a nuisance to be landfilled.
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