St Peters Gardens, UK – A new report explores what price risk management mechanisms could be used to reduce the impact on the whole supply chain of the recent increased volatility and downturn in secondary raw material (SRM) prices since 2011. It focuses both on contract-based and market-based mechanisms, including risk-sharing, hedging and Producer Responsibility. The report was prepared by Eunomia Research and Consulting for Resources & Waste UK (R&WUK) and funded by the Environmental Services Association Education Trust (ESAET).
According to the „Managing the Risk from Secondary Raw Material Price Movements“ report, pressure is coming from both ends of the recycling supply chain, affecting both demand and supply of SRMs. Global economic trends, most notably the slowdown in the BRIC (Brazil, Russia, India, China) economies and the stuttering recovery in Europe, are impacting on demand for commodities, leading to falling prices for both primary commodities SRMs. At the same time, the drive for higher recycling rates is increasing SRM supply, and since recycling performance tends to move in one direction, supply is relatively unresponsive to demand. Falling demand relative to supply, in turn, allows end users to be more selective in respect of quality, with China’s Green Fence providing a good example of how concerns for quality can send ripples back up the supply chain.
Cross-sector collaboration proposed
„SRM price volatility has always been an issue but it has become more pronounced and bites harder in times of sustained downward trends in prices. At the same time, our industry’s exposure to this market volatility has increased as recycling rates have risen and the revenue from SRMs has become more important in offsetting overall collections cost,“ says R&WUK chief executive Steve Lee. „Not only is this putting a significant strain on our industry at present but, unresolved, it undermines our ability to deliver further improvements in recycling performance and will be a serious drag on progress towards more circular economic goals. Ultimately, fundamental change is needed at a European level to improve the value chain for recycling, but there are mitigating measures that the UK industry can explore in the meantime.“
The report puts forward a number of recommendations to better cope with and manage the market risk. In the short term, it proposes cross-sector collaboration to develop a more balanced and transparent risk sharing framework between partners in the supply chain. In the longer term, it recommends exploring more fundamental change, including amending the Producer Responsibility regime to improve the value proposition for recycling, and the setting up of an independent fund to act as a buffer when market conditions are tough.
Already good practice in risk-sharing
„R&WUK will be looking at all these recommendations in more detail during the Autumn but the first priority is to bring the key stakeholders together to explore the more widespread adoption of risk sharing approaches in collection contracts,“ says Peter Gerstrom, a founding board member of R&WUK and chairman of the Environmental Services Association.
„Recycling depends, in part, upon a thriving and competitive collections market that delivers best value and innovation, and encourages investment in the recycling value chain. Tenders where 100 percent of the price risk rests with private sector contractors are now attracting fewer bidders and addressing this issue is essential if the UK is to meet its recycling targets at least cost to the public sector. There is already good practice on risk-sharing in the marketplace and we hope that a collaborative approach based on shared learning and objectives can build on this and lead to the development of new contractual models.“
A package of ‚pull‘ mechanisms and measures
In the medium term, R&WUK also believes that there are opportunities at a European level to address the more fundamental issues associated with the recycling value chain in relation to market demand and prices for SRMs. The organisation will be looking to bring pressure to bear on the European Commission to ensure that any new Circular Economy package includes a range of ‚pull‘ mechanisms and measures to stimulate and support healthy and stable markets. Measures that should be considered include: incentivising recycled content through product standards, variable VAT and Producer Responsibility incentives; an EU Green Procurement framework; and improved labelling to better inform consumers about recycled content and recyclability.
Finally, the report finds that the viability of market-based hedging mechanisms, such as exchange-traded futures contracts and ‚over the counter‘ arrangements, continues to be constrained by the relatively low volumes and trading activity in SRMs compared to primary commodity markets. For this reason, further work to investigate the feasibility of some form of centrally-managed investment fund which would act as a buffer against price volatility is recommended by Eunomia as a more feasible intervention.
Depending on forthcoming EU Circular Economy package
„The role and viability of these longer term market mechanisms depends largely on the extent to which the forthcoming EU Circular Economy package deals with the dysfunction in the recycling value chain,“ concludes Mr Lee. „However, if UK governments remain committed to delivering increased recycling in the future, measures to reduce exposure to SRM market volatility should certainly be on the agenda. The success of the newly established Scottish Materials Brokerage Service, for example, will be watched with interest and R&WUK will be raising these issues with relevant departments and ministers over the coming months.“
Resources and Waste UK (R&WUK) is the newly created partnership between the Chartered Institution of Wastes Management (CIWM) and Environmental Services Association (ESA).