Nina Trentmann
Waste Management Inc. is dealing with an extraordinary amount of
change in its recycling business. Two years ago, China decided to
ban imports of mixed paper and plastic and introduced limits for
scrap metal, upending global recycling markets. The disruption
forced Waste Management, the largest residential recycler by volume
in the U.S., to re-examine its strategy.
China's shift has removed a major source of demand for
recyclables, driving down their prices. It also resulted in higher
processing costs, as many countries around the world followed the
Chinese example and set higher quality standards for imports of
recycled goods. Waste Management responded by asking municipalities
to pay more for recycling services, the so-called fee-for-service
strategy.
With that transition still in progress, the new coronavirus
struck. The Wall Street Journal spoke with Devina Rankin, Waste
Management's finance chief, about the company's new strategy and
how it has been affected by the pandemic. Edited excerpts
follow.
WSJ: How has China's decision to stop taking some recycled goods
affected the economics of recycling?
MS. RANKIN: At the peak, approximately 30% of our recycled
commodities were going to China. Today, it's below 3%. We certainly
saw downward pressure on commodity prices. [For an average
recyclable-commodities mix, which includes plastic, cardboard,
mixed office papers, newspapers, metal and aluminum], as an
example, our peak rates in 2017 were around $140 per ton, and
today, we are at around $39 per ton. That imbalance in the
supply-demand equation drove a fundamental shift in the marketplace
that we think could persist.
WSJ: What is Waste Management doing about low prices for
recyclables?
MS. RANKIN: We've made great strides on moving forward with that
fee-for-service model and are seeing tremendous value from that. In
2019, our impact to the revenue line from declining commodity
values was over $300 million, and in spite of that, we were able to
manage the overall profitability of the business to essentially
flat.
WSJ: How is your effort to make communities pay for more for
your service going?
MS. RANKIN: You have to think of our customers in segments. When
we have really short-lifecycle customer contracts, where the
customer comes to us on a day-to-day basis, we can renegotiate the
rate on a very real-time basis based on changes we're seeing in
market dynamics.
On the residential side, we tend to have longer-term contracts,
three to five years, sometimes even 10 years. While we can
proactively engage with the customer and talk about the changing
dynamics that we've seen, there's not necessarily going to be great
receptivity [to renegotiate terms while a contract is still
running]. The customer says, "We want to wait until our contract is
up so that we can renegotiate." We're kind of halfway through that
process, but because of the duration of some of our contracts,
there's going to be a long tail getting all the way through.
WSJ: Are communities cutting back on recycling if prices
increase? What is the company doing to try to convince
municipalities and residential customers to keep recycling even
though there might be an increase in price?
MS. RANKIN: What we have seen is that communities remain fairly
steadfast in their commitment to recycling. I think that larger
communities are going to be better equipped to really stand behind
that commitment because it will be shared by more people in terms
of the incremental costs. What we can do is give communities
information and insight about the environmental value and benefits
that are created from our recycling program.
WSJ: Where is all this recycling going? What happens now that
Waste Management can no longer export recyclable products to
China?
MS. RANKIN: Waste Management has successfully identified
alternative outlets for all of its recycled content. The Waste
Management volumes redirected from China have been distributed to
customers in India, other Southeast Asian countries and the
U.S.
WSJ: Is there a price per ton for recycled goods where you would
say this is no longer economically viable?
MS. RANKIN: We've not seen something in terms of commodity
prices that makes us change our view on the viability of the
business in the long term. With our focus on operating more
efficiently and providing the service for a fee, we think the
dynamics of the model have shifted enough that we will continue to
make it economically viable.
WSJ: Falling commodity prices aren't the only challenge for the
recycling industry. An increase in aspirational recycling -- people
who want to recycle but recycle the wrong things -- is another,
right?
MS. RANKIN: Cities are pushing all of us to put less in the
trash bin and more and more into the recycle bin. We all think it
is the right thing. But sometimes it's not informed.
My favorite example is the baby stroller. There was a meeting
once with some customers and community officials, where one of the
community officials believed that a baby stroller should be
recyclable because it had plastic and metal components. But today's
recycling processes are not set up to deconstruct that baby
stroller. So what we have to do is start with education.
We have education programs with schools and communities, and we
use mailers and our website to inform people.
WSJ: How much do higher contamination levels cost you?
MS. RANKIN: If we look at our gross operating expense, we have
seen that go up to about $75 per ton of recyclable material, a 10%
increase over the last couple of years. You have to slow down the
sorting process at our plants to adjust for the higher
contamination levels, increasing our labor, machinery and equipment
costs as well as increasing the cost to dispose of the waste that
we are pulling from the recycling stream. The idea would be with
the help of technology to bring it down again.
WSJ: What is your company doing in terms of improving the
recycling process at the new recycling plant in Chicago?
MS. RANKIN: The traditional recycling model uses sorters and
employees to go through a process of pulling out the contaminated
goods -- the nonrecyclable plastic or the greasy takeout box. In
our new configuration, our equipment can sort and identify recycled
content and allow the contamination to flow through as residue. We
have been running test materials through the facility over the last
few months, and we expect to be fully operational by the end of the
second quarter.
WSJ: What is happening in your recycling business since the
coronavirus crisis?
MS. RANKIN: The volumes there seem to be holding strong. What we
are seeing is a transfer of waste from our commercial customers to
our residential customers.
WSJ: Have you seen a change in terms of commodity prices for
recycled goods?
MS. RANKIN: We have seen the domestic demand hold up and even to
some extent increase from third parties who use recycled content in
their manufacturing processes. That is impacting commodity prices
and driving them higher. We see that as something that might
benefit the near term.
WSJ: Are conversations with municipalities about paying more for
recycling as a service continuing, given that municipalities don't
have a lot of visibility into what their finances might be looking
like in a few months' time?
MS. RANKIN: In this current environment, we're not going to be
focused on actively pursuing contract renegotiations. That's not
the right thing for us to be doing. We're going to be focusing on
taking care of our customers with a sensitivity that's appropriate,
given what everyone has on their plate.
Ms. Trentmann is a news editor at The Wall Street Journal's CFO
Journal in New York. She can be reached at
nina.trentmann@wsj.com.
(END) Dow Jones Newswires
March 29, 2020 22:14 ET (02:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.