Riding the Market
Supply & Demand in Selling Recyclables
Several months ago, I wrote a blog entry called “Knowing what you’ve got” to try to help people understand that recyclables are commodities and to encourage people to recognize the various grades of material they might have. However, in re-reading that post, I wanted to return to that topic to help people understand how to use that information to market their recyclables.
Like all commodities, prices fluctuate. They fluctuate seasonally within a year. They fluctuate from year to year. It is good old fashioned supply-and-demand Economics 100. If you structure your recycling pricing to ride this market, you may find yourself getting more money for your recyclables when the markets are good. You may also find that when markets are bad, you continue to get good service. If you opt for a flat fee, when the markets are bad, your hauler typically absorbs those losses and in many cases has to make up for those losses by cutting corners or otherwise diminishing service.
Generators, mills and middlemen
Ultimately, the sale of recyclables is a transaction between the person who generates the recyclable “waste” and the mill who is going to use that recyclable material to manufacture a new product. Everyone else in the process (MRFs, brokers, haulers, etc.) is a middleman. The fewer middle men between you and the mill, the higher a % of the market price you will get. Each MRF or broker between you and the mill needs to take their cut, which diminishes your cut. In some cases mills and brokers can get you access to markets you would not otherwise be able to access, because they are either aggregating enough material to get you a better price or because they are processing and cleaning up material to a spec you would not be able to meet yourself. However, always be sure that you know what you are dealing with at the mill to ensure that your middlemen are giving you the value you are paying for. In some cases, you may be able to go more directly to the mill yourself and might not need middlemen.
There are a variety of publications for each commodity that attempt to capture “the market” in a price index. Using an index can give you an independent third-party verification of what “the market” is. If you use a price index, try to find one that widely accepted and one that is indexing mill pricing rather than broker prices. Every broker has a different cost structure and I have found that mill-based price indexes are often far more reliable than broker-based price indexes. Also, make sure you have one that shows regional variations. For example, in the paper industry, Northeastern U.S. markets are more dominated by impacts from the board mills that dominate that region . On the West Coast, there are fewer board mills dominating the market but more newspaper mills, and huge effects from export demand to Asia. You want to make sure your index reflects those regional differences.
If you have paper to recycle, a subscription to the Official Board Markets Yellow sheet or Paper Stock Report might be one of the most important investments you can make. If you have scrap metal to sell to a scrap yard, consider asking them to include a copy of that month’s American Metals Market to verify their pricing.
Price ceilings and floors
So let’s say that you have decided to ride the market. What is your risk tolerance? What happens if something completely unexpected happens? How low are you willing to go? Maybe you are not quite as open to riding the market as you thought. Do you need some sort of price certainty after all? That doesn’t mean that you have to abandon your quest to ride the market. It just means that you need some parameters, a safety net of sorts. You can have both some price certainty and some market variability by using price floors. A price floor is a minimum price that will be applied to your contract. It gives you at least some budgeting certainty as to what your worst-case scenario is (either the minimum price you will get paid for your stuff, or the maximum you will have to pay to have someone take it – depending on where you set your price floor).
The inverse of that is a price ceiling. It gives your end-market some ability to manage their risk as well. A mill or broker may be willing to play the market will you. They have a rough idea where prices should go and know their competition fairly well. However, they might need some protection against the occasional wild card. Maybe that wild card is some completely unexpected overseas event that sends commodity prices completely haywire. A price ceiling gives them the risk management that they need to be able to play the market with you in a way that they don’t risk getting into a situation where they have to tear up your contract and walk away from it.
Understanding how changes in the market affect what's recyclable
Whether you design your contracts to take advantage of the markets, or try to opt for a fixed flat price for your stuff, market fluctuations will impact your program. One way is in terms of what’s “recyclable.”
As I mentioned in my “knowing what you’ve got” blog, there are really 3 things that mills look at: there is stuff they want, stuff they absolutely don’t want, and stuff they would prefer not to have but can live with a little bit of. It is that third category that has caused 95% of the confusion regarding what is and is not recyclable across the country. And much of that confusion is related to the market.
When commodity prices are high, it is a sign that the mills (either domestic or foreign) are looking for more material than they are getting. They have orders for their finished product, but need more recycled material to use as feedstock to make that finished product. Depending on how badly they need stuff, mills will typically take lower quality material or more substitute materials. That isn’t necessarily a sign that those items are “recyclable” (as it is often conveyed by middlemen). Rather it is a sign that a mill is getting increasingly desperate and will take a poorer quality feedstock and live with the added junk coming out the back end of your mill, rather than risk having no feedstock at all (in which case they can’t make their finished product and their entire business suffers).
So how does all this impact you and your program? It critically impacts your ability to actually recycle the stuff you collect for recycling. If you collect a very marginal-quality product, you have put yourself in a situation where your material really only has value when the market gets increasingly desperate and will take marginal quality stuff. When the supply of recycled materials exceeds demand from the mills, your marginal stuff will be of little or no value. To get your stuff to market in those conditions, you are going to have to spend a lot of money and further erode the value of your recyclables paying a middleman to sort through your material to get it clean enough for market.
Regardless of whether the waves are building or breaking, there is always a market wave coming. Are you ready to ride?