China is the largest importer of recovered materials in the world, accounting for approximately 27% of global scrap imports.  In July, China informed the World Trade Organization (WTO) that it will be imposing a ban on importing 24 types of scrap as of September 2017. In its response to the ban, the Institute of Scrap Recycling Industries (ISRI) suggests that the current language used by China does not differentiate between waste (garbage with no value) and scrap (defined by ISRI as valuable commodities). ISRI interprets China’s language as potentially targeting all post-consumer commodities, even relatively clean commodities such as (11) Old Corrugated Cardboard (OCC).

While this may seem like a drastic measure, often dirty or even hazardous waste has been found in mixed recovered materials imported into the country. Additionally, the yields of certain commodities have diminished as the types of packaging supplied by producers continue to change. Producers continue to lightweight their packaging, and move to flexible and laminated packages, which produces new challenges not only to MRFs sorting them but to end markets. While this ban is meant to reduce the importation of contaminated and hazardous materials, the repercussions could be significant.

This is not the first time China has implemented a policy to curb the inflow of contaminated scrap. China’s first crackdown was in 2013 when it implemented its Green Fence Policy, which similarly targeted the importation of low grade paper and plastics. Also, beginning in 2017 China implemented the “National Sword 2017” policy to crack down on imports of scrap, specifically targeting low grade plastics.

So how does this affect the Ontario recycling market? If you combine the Chinese activity with the closure of several large North American recycling facilities including Resolute Forest Products’ paper mill in Thorold, ON, Entropex entering receivership (now reopened as ReVital Polymers) and the recent closure of a QRS Plastic Recycling Facility in Baltimore, the market threats become quite real for Ontario.

Historic Trends in Ontario

Potential Ontario market impacts are best understood in light of year over year commodity pricing trends which have been volatile for all commodities.  As Figure 1 illustrates, the composite index over the past decade has seen large annual swings. (Note: The 2017 composite index pricing is based on the first 7 months only).

Source: CIF Price Sheet as compiled by Reclay StewardEdge Inc.

The graph above shows municipalities were hard hit by the global financial crisis in 2009. It took two years to reach the same commodity pricing levels as before the crash and prices fell off 25% in 2012. Currently, municipalities are experiencing a significant price spike largely driven by fibre products (see Figure 2). OCC has reached a high, unmatched since the late 1990s.

Note: 2017 OBB insufficient data

Even as fibre pricing experiences a high, the same can’t be said for plastics and metals. For most plastics and metals, pricing has seen flat to little growth, with some materials trending downwards. In particular, PET and Mixed Plastics have struggled in recent years due to low oil and natural gas prices, which have driven down the price of virgin materials in comparison to recyclables.

This concern is highlighted by the announcement earlier in 2017; a Canadian and Kuwaiti firm formed the Canada Kuwait Petrochemical Corp. (CKPC), which intends to produce 1.2 billion-lb/year of propylene monomer and polypropylene resin in Alberta. This new large scale project, along with other similar plants under development globally, can be anticipated to flood the market with low price virgin materials, further threating Ontario’s recycling industry.

Note: In 2013 municipalities began reporting prices for 3-7 plastics instead of Plastic Tubs

If China does follow through with its proposed ban, global markets may see a potential glut of supply and plummeting prices for these commodities. Based on the current language of China’s proposed ban, ISRI estimates it would affect 2.9 million tons or $532 million (USD) of US exports for mixed paper and plastics. During the 2013 Green Fence implementation, other markets in Vietnam, Malaysia and India had begun to prop up the industry by undertaking additional sorting before shipping into China.  These efforts overcame the 2013 regulatory barriers but at a significant loss in revenue and market capacity.  Similar efforts maybe necessary to address the new regulations.

Bottom Line:
There are some real threats pending, and significant levels of uncertainty ahead for the recycling industry, not only in Ontario, but globally. These threats could result in a significant decline of commodity pricing due to additional closures of reclaimers, specifically plastic reclaimers, and the potential for municipalities to cease collection of certain materials. In addition, the types of packaging introduced by producers are increasingly complex, which introduces new sorting challenges.

However, as Ontario moves towards full producer responsibility there is opportunity to address these issues. Companies like Tetra Pak, Kellogg, Unilever, Walmart and many others  continue to push toward aggressive sustainable and zero waste goals and development of domestic market capacity. Perhaps the pending ban(s) and legislated recycling targets will spark opportunities for further domestic market development in Ontario.

The recycling market has fluctuated for decades and this is no exception, but near term market forces are combining to put greater than usual pressure on commodity pricing in 2018 and beyond. For MRFs and municipalities, the key to weathering this storm is the production of high quality bales. As in the past, MRFs producing reliable quality will typically find a home for their materials  . Locking into longer term agreements with end markets is also recommended to ensure access to limited domestic reprocessing capacity.

MRFs that are unable to address bale quality issues may need to seek reprocessing markets in developing countries, like Vietnam, South Korea and Malaysia. This alternative may be the most cost effective option to address quality issues from some MRFs, but will come at a cost. They can anticipate competing against large quantities of available American single stream material for the remaining available reprocessing capacity and without well established relationships and the associated risks of shipping overseas, can expect challenges. It is important, therefore, that municipalities continue to monitor their operations and material quality given the ever reducing tolerance for contamination anticipated in all markets.

Originally posted by Continuous Improvement Fund (CIF) on September 6, 2017