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CHAPTER ONE THE RECYCLING PROCESS Before starting a procurement for processing recyclables, it is critical to understand the nature of the recycling process. Generators who are initiating a contract should carefully review trade publications and assess the recycling market, including supply and demand, prices, technical developments and trends in the industry. There are three important factors to consider in order to understand the recycling market. 1.1 Recyclables are raw materials, not waste Many commercial and institutional recycling officials look at recycling as a way to keep their waste out of the landfill or other disposal facilities. While this is certainly important for these officials, it will not sustain recycling. Generators must consider recyclable materials raw materials that are part of an industrial manufacturing process. Therefore, the materials must be high quality, with little contamination, and sorted to meet the needs of the manufacturer. 1.2 There is no gold in garbage At the other end of the spectrum are recycling officials who see the "gold in garbage" Some generators of recyclables believe that recyclable materials generate high levels of revenue, and that haulers, processors and manufacturers are making high profits on recyclable materials. There are costs associated with managing recyclables. They include collection, processing (sorting and removing contaminants), compacting and baling materials. Sometimes, processors can recover these costs through the sale of materials, sometimes not. The net cost of recycling can be lower or higher than disposal depending on local conditions. As an example, processing newspaper (removing contaminants and baling the material for market) costs, on average about $25-32 per ton, exclusive of transportation. The processor must be able to cover these costs and obtain a reasonable profit, either directly through sales of the finished newspaper to a mill, or through a combination of sales and tipping fees (paid at the time of delivery). It is important to remember these fixed costs as part of any contract. 1.3 Prices for recyclables fluctuate, but average out over the long-term. Recyclables are market commodities. Their price fluctuates greatly, depending on the state of the economy. Manufacturers use recyclables in large quantities in key sectors of the economy such as automobiles, housing and retail sales. As activity in these sectors declines, the use of recycled materials also declines. As these sectors improve, so do the markets for recyclables. Business activity goes through cycles. Recyclables go through similar cycles. Prices may be very high for as long as 12-18 months, but will decline. The same thing will happen at the lower end -- prices will eventually rise. Prices for recyclables are always seeking to reach equilibrium. While this will not happen over the short-term, over the long-term, prices will average out near the middle of the peaks and valleys. Prices for recyclables can be negative (that is, the generator must pay a processor to handle the materials). The generator should understand the specific commodity market and be able to pay the processor if necessary. (See discussion in Chapter 3 on floor prices.) 1.4 Using Market Pricing Tables Indices) If an agreement fixes prices for recyclables over time, there is significant risk for both generator and processor. If market prices are consistently higher than the fixed price, it favors the processor. If prices are consistently lower than the fixed price, it will favor the generator. The processor may want to end the contract. It is important in developing contracts for generators and processors to share the risks for fluctuating prices. This involves tying prices to a market index so that as the prices go up and down, both sides share in the risks. Market price surveys (commonly known as indices) are published by various trade publications, such as Recycling Times, Fiber Market News, Mill Trade Journal and other publications. These indices give the high and low prices (based on surveys of industry representatives) for various materials in different regions of the country. Market indices are not a guarantee of the price you will receive for your materials. They are an indicator of general trends in the industry. The accuracy of the indices varies by product and even individual grade. Individual end markets (and the processors who supply them) will pay different prices depending on manufacturing processes, the types of products they produce, purchasers of material and other factors. The bid document can tie prices to the market index. The bid document can ask bidders to submit a price above or below the index (by dollars per ton or percentage). As an example, an organization is generating corrugated from their shipping operations. The organization could ask for a bid to sell the corrugated above or below the market index (in dollars per ton). Suppose Company A bids $2 above the market and Company B bids $1 below the market. If the market index was $30-40 per ton for the region, you would determine the prices as follows:
Company A would pay more money and would therefore be the successful bidder. Using the same market index above, here is an example of using a percentage of the market. Average market price is $35.00 per ton. Company A bids 90 percent of the market index; they would pay $31.50 per ton Company B bids 100 percent of the market index; they would pay $35.00 per ton Company C bids II 5 percent of the market index; they would pay $40.25 per ton. Company C would win the bid. By using the index, buyers and sellers share the risk from fluctuations in the market. back to top |
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