By Mike Ritchie, MRA Consulting Group
If you haven’t heard it already, the household recycling industry is in all sorts of trouble. 2018 is going to be a troubled year for most MRFs (Materials Recovery Facilities) and therefore their council clients.
The Chinese National Sword policy has bitten and bitten hard. National Sword is the Chinese government’s mechanism to restrict import licences for recycled product and limit contamination rates of those recyclables to less than 0.5%.
A 0.5% contamination rate is exceptionally low and most Australian MRF’s have been operating on a less than 5% contamination in export materials threshold for years. So National Sword required a ten-fold reduction in contamination of finished products by MRFs.
The effect has been felt throughout the supply chain in Australia but also in the USA, Canada, Asia and Europe.
The stricter controls in, and restricted numbers of, import licences to Chinese paper and plastic re-processors has seen the global price for recycled paper and plastic plummet. In the case of recycled mixed paper MRFs have received around $200-250/t for a decade. That price has fallen to between $0-$80/t since September 2017 when the Chinese Government reconfirmed National Sword to the World Trade Organisation.
In the case of mixed plastic MRFs received $250-350/t ($400-450 for sorted PET and HDPE). That price has fallen to around $50/t.
To put that in context for councils, 50-60% of all recycling tonnes from Australian households is paper and cardboard. Six percent is plastic. Along with aluminium (1%) these are usually the highest revenue streams for a MRF operator.
In recent years with buoyant commodity prices, we had even seen MRF operators paying councils to receive the recycling materials. Those days are now long gone.
A dramatic fall in sales revenue at the back gate of the MRF leaves the operator needing higher front gate revenue (the gate fee waste generators such as councils pay) to cover the loss.
To cement the pain for MRF operators, the domestic market for glass has also collapsed across Australia. Whereas glass and glass fines were previously reused in bottle making, it is now cheaper to import whole green bottles from Mexico than to make green bottles from recycled glass. The market demand for clear and amber glass has also fallen so far that the main local bottle producer, OI, has mothballed a number of glass furnaces in Australia.
Whereas glass was sold at $72/t (consistently for the last decade) for bottle-making, MRF operators are now forced to reprocess glass into sand to increase their chances of finding markets for it. Glass sand however is worth only $4-12/t as a sand replacement.
Taking into account the puts and takes of sorting costs and transport, MRF operators are now losing $50-100 per input tonne of glass. Glass represents 30-40% of all input tonnes to a MRF.
So to put it bluntly, many MRF operators are in trouble. We have already seen a number of commercial renegotiations taking place via Change in Law and Change in Waste contractual triggers.
One of the country’s large MRF operators has gone so far as to use a Force Majeure (Act of God) trigger to stop receiving kerbside recyclables from a group of 11 Councils in Victoria.
Taken with the glass collapse in Australia, we have a perfect storm hitting the recycling industry. Worse than the disruption of the Global Financial Crisis in 2009. This is far more than a downturn in the market; it is the wholesale removal of a market that once received half of the world’s recycling.
The net effect is that, in the short term, Councils can expect contract claims for gate fee increases, retention of CDS revenues where allowable, and contract terminations where the former are not available.
On my estimates the MRF gate fee increases could be as high as $100/t of input materials. A Victorian Council estimates that the increase might be almost $200/t. That will exist until alternative markets for glass, plastic and paper/cardboard open up, either here in Australia or overseas.
In the short term State and local governments will need to work with MRF operators to fund capital and process improvements in MRFs. EPAs will need to relax stockpiling controls and consider reducing or eliminating landfill levies on the residuals from MRFs.
Local governments may need to look at separated paper and container collection services to facilitate lower contamination rates.
In the medium-long term there may need to be a restructuring of how Australia does recycling. With fewer export markets, we will probably need to take a lot more responsibility for reprocessing and re-use here. That means encouraging domestic re-processing technologies (at higher costs than overseas). That will push up the system costs for recycling overall.
National Sword will hurt in the short and mid-term. But in the longer term it may generate another jobs boon in the recycling and reprocessing sector. However, this will require coordination. For this reason, I call on the Federal and State Environment Ministers to set up a Recycling Coordination Council with industry and local councils. Urgently and without delay.
As always, I welcome your feedback on this, or any other topic on ‘The Tipping Point’.
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