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)