Editor’s Note: The following article includes edited excerpts from the keynote session, The Future of the Industry, at the 2013 Paper Recycling Conference & Trade Show, which was organized by the Recycling Today Media Group, publisher of Recycling Today, in partnership with the Paper Stock Industries (PSI) chapter of the Institute of Scrap Recycling Industries Inc. (ISRI). The event was Oct. 16-18 in Chicago.
The recycling industry has been confronted by a number of challenges in recent years related to material quality and shifting generation. When contemplating these changes, one can’t help but wonder what the future will bring. The panelists who participated in the keynote session at the 2013 Paper Recycling Conference & Trade Show were asked to call on their experience to do just that: predict where the recycling industry is headed.
Speakers Jimmy Yang, president and co-founder of Newport CH International LLC, Orange, Calif.; Shawn Lavin, president and CEO of Pioneer Industries International, Minneapolis; Bill Caesar, president of the recycling and growth business units of Houston-based Waste Management (WM); and Greg King, senior vice president and general manager of the recycling division of Norcross, Ga.-based RockTenn, shared their industry insights with attendees of the keynote session, The Future of the Industry, which was moderated by Recycling Today Media Group Publisher Jim Keefe.
Yang’s brokerage firm Newport CH International ships more than 5,000 containers per month of recyclable raw materials, including recovered fiber, plastics and scrap metals, to Southeast Asia. Newport CH International sources material from throughout the United States, South America, the United Kingdom and Europe.
Pioneer’s Lavin has nearly 40 years of experience in the recycling industry. The company offers recycling, document destruction, converting and brokerage services throughout the Midwest as well as in Texas and Oklahoma.
WM operates 50 single-stream material recovery facilities (MRFs) in North America and 130 MRFs total. Annually, the company sells roughly 11 million tons of recovered material—8 million of which runs through its MRFs and 3 million of which are brokered.
King is new to his role as senior vice president and general manager of RockTenn Recycling, but he has been with the company for 25 years in numerous other roles. RockTenn operates 25 paper mills, more than 100 corrugated container plants, 23 folding carton facilities, more than 35 display facilities and 27 recycling collection centers and single-stream MRFs. Its recycling division processes approximately 9 million tons, roughly half of which is consumed by RockTenn’s mills.
The panelists shared their views on a range of questions, including:
Q: With the advent of China’s Operation Green Fence policy, how do you think the industry will respond to meet the more stringent quality requirements that we are seeing this year?
Jimmy Yang (JY): I think that China has become a force to be reckoned with these days. … I think our industry will be mandated to respond by meeting the requirements and restrictions of Green Fence. Recycling facilities will have to up their game by increasing their investments in machinery and labor. Traders like us will be required to spend a lot more time understanding the various rules and regulations and hiring a lot more inspectors. We’ve got to constantly communicate between the mills, the port authorities, suppliers—just constantly educate everyone along the supply chain that this Green Fence, I believe, is here to stay. It will be here for awhile.
I think the market forces will eventually play themselves out. The additional costs could coast downstream or paper mills could eventually be paying a higher price for their material, depending on supply and demand.
Shawn Lavin (SL): … We believe Green Fence is going to put effort toward cleaning up the pack at the start, and that is at the generator. And when I say “generator,” I am talking about either commercially or residentially.
Bill Caesar (BC): I agree with the general comments. I don’t think the basic tenants of the Green Fence are going to go away. And I think that if any of us think that it’s a Chinese thing, we’re mistaken, because there are a number of mills in North America that have established their own green fences, which we have to deal with just as much as we have to deal with the Chinese Green Fence. Everyone is sort of taking advantage of the opportunity created by the Chinese action to push quality. That demand, I think, is not irresponsible, is not unnecessary. I had been to China two months prior to the advent of the Green Fence; I know the nature of the material that they were dealing with. Some if it was less than desirable … things had to change.
… As Sean mentioned, we are going to start pushing back on the generators of material. For the last two or three months, we have been very active in going back to the municipalities or going back to the third parties that are bringing us material and basically renegotiating our pricing with them as a result of the levels of contamination in what they are bringing to us.
That is all sort of nice, [but] it doesn’t change what is happening with the material, it just means that we are not paying as much for it. If we are really going to change the game, then some of the activities around education at the residential level in particular are going to have to take hold. I think in the last few years, a lot of communities have stopped educating their populations.
… At the end of the day, quality expectations are what they are, and I think they are legitimate. Our challenge is to be able to figure out how to process the material cost effectively and to try to change to the extent we can the nature of the material coming into our facilities.
Greg King (GK): I share in all the comments. I think the bottom line is that there were standards that existed for years, whether or not they were followed, adhered to, measured against, you could make your own answer on that.
… There are areas around the country where the waste streams are better than others. Some of the facilities that we operate on the West Coast we have had to change the way we’ve operated them in order to comply with the Green Fence.
I think that [Operation Green Fence] doesn’t go away. There is some sunset date that is on the horizon, [but] I feel that it is here to stay.
Q: What are you seeing in terms of grade shifts in what is being collected and processed, and how do you see those trends playing out as we go forward?
SL: From our perspective, we are seeing the change in the households. People are doing more shopping at home. There’s more direct mail in the stream, less newsprint. There seems to be more PET (polyethylene terephthalate). We have adapted our facilities where we have single stream in Oklahoma City to take on those needs. Where we have two-stream facilities, it really has no impact to us.
BC: I think in general we are going to see less fiber in the recycling, and we’re likely to see more plastic. And we are not always going to see recoverable plastic. I think we are about to enter into a period where brand owners are going to make decisions based on their assessment of the carbon footprint of a piece of packaging. And that HDPE (high-density polyethylene) container, which to anyone in this room who handles plastic has a lot of value, is going to be traded out for a laminate made of exotic plastics that has absolutely no value to any of us. That will be a challenge. And the math that the brand owners are using is that they will spend less fuel to move those products, they will be cleaner for the environment, they will get more on a truck, and they will think that they have done the right thing, even if that package winds up in a landfill as opposed to being recovered and used again.
JY: I think in terms of the export market, the grades are shifting. There is going to be less and less news. There is going to be more and more news possibly going into different grades of mixed paper. And mills eventually are going to slowly try to re-source their formulas to buy different grades of paper as they develop in the United States.
GK: OCC (old corrugated containers) have gotten dirtier. When I got into this business 25 years ago, I could go into a recycled fiber plant that we owned, and it was all OCC—there was nothing else in it. The term “single stream” didn’t exist.
… Mixed paper is something now that you can make a lot of when you are running a single-stream facility, and that wouldn’t have been the case five or 10 years ago.
Q: Does anybody have any ideas what the delta between the price of ONP (old newspapers) and mixed paper will be in the short and long term?
PY: I think eventually it is going to be one mixed grade for the export market. As ONP decreases, it will probably end up in the mixed paper.
The good news is that a lot of these mills in China are really state of the art, and they can make paper out of a lot of different types of material.
But I think that is the trend. The price gap is getting narrower and narrower, and eventually it will all just get blended in. You might have an office pack type of mixed paper grade, and then you might end up having a newsy mix, which you already have these days.
Q: I wonder what your thoughts are on the increasing popularity of municipalities going to every-other-week garbage collection?
BC: That is an interesting question because it gets right to the heart of the quality of the material that we receive to be recycled.
It was a bright idea to give homeowners a small garbage can and a big recycling bin because, of course, that just means we’ll recycle more, won’t it? What it actually meant was, “When I’m not sure quite what to do with that garden hose, I think I’ll put it in the big bin.” … Then it wraps around my equipment, and I curse the day that garden hoses came into existence.
If you create the right conditions in terms of education, and I’ll even go so far as to say punishment for folks who do not follow the rules, I don’t have a problem with that service structure as you described it.
If you do not create the conditions so that people know what to do and how to do it and that if they don’t do it there are penalties associated with it, then it scares the hell out of me because I have already got enough residue as it is. … It scares me if communities would try to do that without really spending the time, effort and money to educate their folks on what to do and manage it over time.
SL: The only thing I would add is that this group needs to do a better job of educating the public. I would say that if you look at the average person out there, they don’t know what is recyclable.
Q: Two of you represent companies that have been pretty instrumental in consolidation of our industry, and I’d like to know if any of you can speak to the future of further consolidation within the recycling industry?
BC: I can tell you that following our acquisition of GreenStar in February of this year that I’m full. The most important thing for me to be doing right now is to make the facilities that I have function more efficiently than they are. I’ve got a plenty big footprint. What I don’t have is a lot of well-run MRFs. I am much more focused on making the MRFs that I have run more efficiently today.
I think there will still be bits and pieces of consolidation on the margins, but I am not expecting there to be any great follow up, and I certainly feel like Waste Management has a footprint big enough to meet the needs that we have today.
GK: From my perspective since I joined the RockTenn Co., I have been part of or involved in acquisitions 50 times, and a lot of them don’t hit the radar screen. A lot of them are not going to hit because they are not considered material.
Our business model is to seek out and look for creative opportunities to return value to the share holders. There is no particular target that says you have to get to a particular size. There is no particular area, though I would say there are geographic areas that I feel like I am not saturated. So, the engineer in me is taking what is there and making it better. The engineer in me also is saying get the volumes through it to where you are considering yourself full. As a result of some of the consolidation that has taken place within our own business that we own, there is the investment model now that says where you invest at.
… The entire paper industry is still consolidating. You can’t go a month without announcements related to consolidation. Quite a few of them have recycling businesses.
SL: I’d like to add from an independent standpoint, we are convinced that the words divestiture, acquisition, closure are part of the vocabulary. In order to be profitable over the long haul, we have to be cognizant of that every day. We are looking for acquisitions, but we are also cognizant of the fact that we will either sell assets or close assets if we are not profitable.
Q: What is working in various communities in terms of successful educational programs or policing efforts to try and control that inbound quality issue?
BC: There was a time, maybe five years ago, when it was not uncommon to find a recycling coordinator in a community who was funded by that community, whose job it was to go into the schools, to go into the churches and the other community areas and teach people what to do. That job didn’t make it through the recession. There is nobody out there doing that now. I think there are still a handful of places where that sort of position exists and where you see a real benefit from that type of activity.
… Frankly, the people in this room and other rooms full of people who are involved in the recycling industry, we need to think about what we can do to educate folks. I’m not spending very much money at all on education. I need to do more of that.
But if we are all going to benefit from that type of activity, we as a group of folks who are interested in this industry, whether they be Chinese mills, domestic mills, recyclers or the municipalities themselves, we ought to think hard about doing something that changes the way this industry works because it is going to be to all our benefit.
Q: There has been the push toward single stream. Do you see that going back to more separated in the future?
BC: I have been elected to answer that question.
I don’t think we are going to move away from single stream. I hope we don’t move to one bin. My biggest concern is that the idea that has come up in the city of Houston is going to get some traction, because I think that would be the worst thing that could happen to anyone in this room. The result of that would be really, really dirty material at a very high cost.
We should be able to make single stream work. Even in the worst of the Green Fence, I had MRFs that did just beautifully. It is not that the model is broken, it is that we need to consistently deliver against the model.
Q: As a panel, how do you see the move toward sustainability, extended producer responsibility or end-of-life management affecting the industry as we go forward?
BC: In general, I like the movement toward sustainability. It creates more material that I can recycle. It has to be done smartly. It has to be done economically. I think for any of us, recovering material that has low, no or negative value isn’t sustainable. If we are going to be successful at what we are doing, if companies are going to be successful with their sustainability efforts, there has to be a system in place that captures value from that material stream. If there isn’t, then it is really just green washing.
The challenge is for us to figure out how to do that. And if we can’t do that, if the materials that one or another company is producing cannot be recovered, then we need to help them understand that and move to materials that can be recovered. I think we have seen a lot of that movement. A lot of the sustainability efforts that we have seen within companies have to do with reducing the amount of materials they generate.
What we need to do is help make sure that what they are producing is of a material that can be recovered and has value.
SL: I think if anybody ever stood behind a trasher at a pulper and saw the amount of garbage that comes out of the bottom of it, and this is material that should never have been in the stream to begin with, and it comes through our facility and damages our equipment, goes to the paper mill and damages their equipment, on to the screens and even to the product itself and damages other equipment and then yet has to go to the landfill, it says a lot about where we are right now in the education and process of what is recyclable and what is not. I hate to keep harping on that, but that is really what has changed over the last 10 years in this business … we have been having more garbage in our pack from the start all the way to the end. And nobody here wants that.
Q: What are the biggest opportunities or concerns the recycling industry faces as we look toward the future?
PY: I see a lot of opportunities in the plastics industry. … I think the plastics industry is in its infant stage, kind of like what paper was 10 or 15 years ago.
SL: All of the problems we’ve talked about today are opportunities for this group. … I’d like to be part of those solutions and participate in the value that it is going to create for everyone in this room.
On the other side of the fence, I am still bothered by this world economy we have today, and I am not as confident that we are coming out of it as strong as you read about it in the papers. When it comes to spending money, we have to be careful about how much we are going to commit with this grey cloud, I won’t call it a black cloud, hanging over our heads.
BC: I think there are two things that are tremendous opportunities. One is there is still a lot of material that goes into landfills that should be recovered and should be recycled. … There is plenty more material out there that we could and should be recovering. I am pretty optimistic that there is still growth left in this business as communities begin to understand what their opportunities are.
The second thing that gives me a lot of hope is that I throw away or I put in the wrong bale a lot of valuable material—a real lot of material—that is put in a bin by a resident with all due expectation that that bottle of PET is going to make its way into a new bottle of PET, and it doesn’t. It gets stuck in the news. It gets stuck in the mixed paper. It winds up in my residue. It gets caught up in my glass. There are huge opportunities for us to get better at pulling the material out that is coming in the front door. If we can do that, there is a great deal of value left for us to capture.
GK: The technology is there on the plastics. The technology is there on the various fiber grades. … [But] if the sky is dark and it’s going the wrong way, you are not likely to dump a bunch of money into it. But I think the industry could embrace additional technologies and additional investment in technology to help separate and get the valuable recyclables in the right areas where they need to go to help to preserve certain fiber streams. … You have to get paid for that, but I think there’s a whole technology piece that is part of where the industry needs to continue to progress.
Q: What kind of incentive can consumers offer to get the quality up to the level they’ll need? Is that something that could boost the quality level, and to what degree is it being done?
BC: …Frankly the folks who are [consuming] the material ought to be thinking about paying on the yield of the material that they get. I would be all for that. I would feel like if I am going to take the time, effort and money to improve the quality of the material that I am selling, I damn well better get paid for that. If I am going to sell trash, I ought to expect to get paid like trash. If the model is that a mill pays me because I am consistently delivering higher quality, I think that is a no brainer. I would expect it to be in place.
The challenge that we have is that you are going to get paid more or less depending on where the market is on any given day. The premium for quality, while it is there, is not as apparent to everyone at any point in time.
PY: I think that in various countries, for example Korea, when they buy news, they generally have a little premium on their pricing just because of the demand and the type of quality they can accept. That also affects the pricing. The better news quality a lot of times goes to places like Korea.
Another thing is when you are talking about the super-sized mills in China … when they are buying millions of tons, it is really hard to make a difference for them when there is really only a small portion that is of a superior quality. But they have tried numerous times to differentiate better quality versus the normal stuff that comes in. Slowly, I think they are paying a premium in the waste paper markets.
Q: How do you view the brokerage business as a part of your overall business and where do you think it is going to go?
JY: I think traders and brokers like ourselves we have to diversify. Paper is getting very competitive. The margins are slimming down, they are not as good as they used to be. Generation is down.
However, on the flip side, the barriers of entry for getting into this industry also are getting tougher and tougher with all the various AQSIQ (General Administration of Quality Supervision, Inspection and Quarantine) requirements from the Chinese government and the CCIC (China Certification and Inspection Group) self-inspection type of privilege. I don’t think any new companies can really get into this industry any more.
In terms of just the pure paper traders, we need to diversify. … We are still very positive, we just have to diversify and open up different types of products and seek more different opportunities and work smarter.
SL: If I could add that what we saw over the last five years I think had a lot to do with the global crash. What we saw was a compression in the markets where we could sell and the creativity we could bring to it. I saw people become order takers as opposed to marketers of paper. Where I think some of these generators looked at the commission being the only thing they could manage and thereby squeezing the opportunity.
… where we’re successful is where we put the hardest amount of work in and create the most value. But we do need a diverse market. We need to have greater opportunity out there.
BC: Waste Management’s brokerage business is a very important part of our overall business. The folks who sell our material sell all our material. It is essential to the success of our business that we have a robust, a global and a well-managed brokerage organization. We are going to have it whether margins are thin or fat. We are going to have it whether prices are high or low. It is part of what we do. I don’t know that we are necessarily trying to expand just the brokerage part of it. We are trying to manage all of the tons that we have and leverage what we have in order to provide our customers with the best material and the best prices we can.
GK: … We run all the tons trough a trading model. You need visibility to both ends of it. You need to see the supply side, the demand side.
… When you are serving a national account, you have to play in the brokerage model because if you are picking up tons behind a store that is in West Texas, yet you don’t have a physical plant, but you have the national agreement for that particular customer, finding the best recipient for that … volume, you need the model that says here is the opportunity that exists.
Q: I wonder what you all might see as advantages to running Super MRFs versus perhaps a smaller facility, particularly given today’s environment?
BC: I might be the only one who operates something that could be considered a Super MRF, though I don’t refer to any of my MRFs as Super MRFs. I would also define that more as a traditional single stream. If you are referring to Super MRFs as those MRFs that are going to handle much more dirty streams, I have absolutely no interest in mixed waste processing facilities. I know that there are some places in the country where folks are moving in that direction. We are not going to be the first ones to move in that direction. We may be the last ones to move in that direction. But in terms of large-scale single-stream MRFs, I think there is a great benefit to having scale. I think you are able to leverage the capital that you are putting into those facilities more effectively if you are of a certain scale. You are able to leverage the learning and the operational skills that you have.
Smaller scale for us can be a challenge just because the capital structure doesn’t match up with the opportunity to generate earnings off of the amount of material that flows through there. I think that there is a sweet spot in the size of MRF. There are going to be some that are bigger than others. But, at the end of the day, I would rather have a larger MRF in a high-density population area than a small MRF in a low-population-density area.
GK: I think you size the facility for the market it services. … An idle asset that is not fully utilized is not returning the value of that investment. I think that there are markets that you go into that you size it appropriately and you design it for a target operating rate. You don’t want to have to put another line next to it down the road.
Q: As the newspaper business is shrinking, what kind of impact does that have on the recycling industry in general?
BC: A bad one. I mean the trend in newspaper readership and size … those things are not helpful to us. We have to figure out how to manage them, but in general I would just say they are not good.
PY: I’d like to add that that is not only in the United States, either. That is a global issue. I was just in China about two weeks ago, and literally you talk to the publishers over there and they have shrunk like 35 percent.
GK: It forces a behavior where you have got to get fiber so it forces someone who has relied on the news stream to say, “OK, what do I substitute?” And in some cases, that goes into the virgin area. If you don’t have a particular supply of a particular product to make your product, then you go into the market and ask what you can substitute in lieu of that.