Wastecon/ISWA World Congress 2017: Solid predictions

Wastecon/ISWA World Congress 2017: Solid predictions

Stifel’s Michael Hoffman talks about the impact of markets, hurricanes and trade policy on the solid waste industry.

October 5, 2017
Kristin Smith-Ely
Municipal / IC&I Paper

Garbage companies will be gaining business from Hurricanes Harvey and Irma, but the industry still faces many challenges, chief among them are recycling contracts and the trade deficit. Michael E. Hoffman, the Baltimore-based managing director and group head of diversified industrials research for Stifel, St. Louis, shared his take on the industry during Wastecon/International Solid Waste Association (ISWA) World Congress in late September in Baltimore.

Volume and price are the two key drivers in the waste business, according to Hoffman. He said after the Great Recession volumes starting to improve in 2014, which increased operating costs and improved pricing. He noted that the last decade has experienced “anemic” gross domestic product (GDP) growth, and the Consumer Price Index (CPI), which had historically seen 4 percent per year growth, has only grown 2 percent per year for the last 15 years on average and only 1.6 percent per year since the Great Recession. The industry is seeing real headwinds with low GDP and low CPI, he noted. He also talked about the impact of the housing market on the waste industry, calling it a “true barometer” of what is driving the industry, but he added that in the current market, the situation has been a bit unpredicable.

“No one has ever experienced what we are watching today in the garbage industry,” he said, citing the slow gradual recovery in the housing cycle and an underlying consumer segment that Hoffman said is actually confident. Millennials are starting to buying houses--they may be smaller houses, but they are getting into the market--he said. The around 1 million housing starts in the last year are generating commercial and construction waste and spurring commercial waste collection businesses, Hoffman said.

He talked about pricing for recycled commodities, noting steep price increases in July and August for some paper grades. Pricing was steady through spring, but then China made its filing with the World Trade Organization and the U.S. linerboard industry cut itself short on supply. It ended up creating steep increases in July and August. During the Sept. 26 session, he said, prices per ton for old corrugated containers (OCC) were down $80 dollars per ton and old newspaper (ONP) dropped $40 per ton. Sorted office paper (SOP) seems to be holding up, Hoffman said. On top of everything else, China also not issuing import licenses to mills, making conditions even more challenging.

“In my experience, I have not seen this before,” said Hoffman. He added that he wasn’t sure what was going on behind the scenes in China to prompt these moves. He said there is uncertainty whether China will start issuing licensees in October and what the implication of that will be. If it does issue licenses, it is not apparent how soon the market will correct, Hoffman said.

“If this is the new normal, then you are faced with a meaningful revenue hit [and] no one is making a big profit his this year,” he said. That goes for equipment investments as well. “I think there is going to be a pause here and people are going to take a big deep breath and just wait and see how some of this plays out,” he predicted.

Hoffman also talked about the recent acquisition of Charlotte, North Carolina-based ReCommunity by Republic Services, Phoenix. The company bought 26 facilities, but he said it was a small investment for the assets the company got out of the deal, and 22 of the facilities are in markets that Republic serves, which may allow for some internalization, according to Hoffman.

Another area Hoffman focused on was the trade deficit. The U.S. has a $350 billion trade deficit with China. “That gap needs to close,” he said. He showed graphics indicating the trade between the U.S. and several other countries. It is close with the United Kingdom, but there are gaps with trade with the E.U., Mexico and Canada.

The North American Free Trade Agreement (NAFTA) sent middle-class jobs out of the U.S., according to Hoffman. Renegotiating trade agreements with China would be significant, he added.

“It is a good business to be in the garbage business,” Hoffman said. Coming off of two major hurricanes--Irma and Harvey--Hoffman noted Harvey caused an enormous amount of property damage. People aren’t going to leave; they are going to fix it, and wallboard and carpet waste will be generated as people rebuild, he said.

Florida and Hurricane Irma was a different sort of storm. Instead of a ton of building damage, the storm “knocked all the palm trees down,” Hoffman said. “At the end of the day, Waste Management and Waste Connections will get a boom of storm debris.”

He touched on recycling as well, saying the model is improving but that the collection side has not been corrected. Adding $3 to $4 add on a monthly rate for recycling too low, he said. It has to be $6 to $8.

Wastecon/ISWA World Congress was hosted by the Solid Waste Association of North America (SWANA), Silver Spring, Maryland, and the International Solid Waste Association (ISWA), Wien, Austria, Sept. 25-27, 2017.