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Commodity pricing is extremely dependent on supply and demand, and the rise in recycling can lead to a decline in demand for raw materials.



Waste Management Financial Planning for Commodity Risk

October 29, 2018
By Comerica Bank

Commodity prices can fluctuate substantially on an annual basis, making it difficult for waste management and recycling companies to accurately project revenues related to commodities and plan accordingly. The inherent risk in the commodity market can be a stumbling block to business growth and sustained innovation as a decline in a key commodity can severely reduce cash available to spend on equipment, facilities or workforce improvements. Managing risk is critical when engaging in the commodities market, and strong relationships with stakeholders, particularly public sector agencies, can be instrumental in weathering fluctuations in the sector.

The commodity risk situation

Commodity pricing is extremely dependent on supply and demand, and the rise in recycling can lead to a decline in demand for raw materials. As more environmental services firms have goods to sell to processing plants, the market value of those materials will decline. The U.S. Environmental Protection Agency performed a landmark study in 2015, covering historic costs of commodities across a variety of sectors. In general, the average cost of commodity declined substantially per ton over the research period. Significant annual fluctuations were common in the study. For example, HDPE, PET, and aluminum cans all experienced major price increases in 1995 and 2011 but then declined quickly from 1995 to 1996 and again from 2008 to 2009. These kinds of rapid changes must be accounted for in waste management and environmental services business models, especially as political decisions and similar macroeconomic issues can also have a major impact on the market.

For example, a Seeking Alpha report explained that a ban on importing 24 types of recyclables and solid waste in China led to lower commodity prices throughout 2018. The rule went into effect in January 2018 and was specifically aimed at limiting paper and plastic importation from North America, though the legislation had a global impact. This type of measure led to significant changes in commodity pricing and can be disruptive in the sector, leading businesses to rethink their export strategies, invest in local recycling facilities or otherwise adapt to the new industry dynamics.

Responding to commodity risk

Preparing for cost fluctuation is critical when it comes to commodities, and many recycling companies have stayed afloat by strengthening their position in the broad waste management landscape. According to IbisWorld, revenues in the recycling facilities market have been tepid, with revenue only increased slightly in 2018, reaching $6 billion. Declining commodity prices have been a primary limiting factor to growth. However, public interest in recycling has led to significant investment in the practice among state and local governments, creating stability at a time when commodity prices are proving problematic.

Fostering stronger relationships with key stakeholders can go a long way in dealing with commodity risk. To illustrate this, a Let's Recycle report detailed how a workshop held by industry leader SUEZ addressed commodity risk. The workshop was held largely in response to the new policies out of China. While the waste management firm itself was prepared to deal with the change in prices, it realized that its public sector partners wouldn't necessarily handle the situation as smoothly and held the small conference specifically to inform agencies it works with on how to tackle the commodity situation effectively.

While SUEZ was tackling this issue from a UK-focused perspective, its activities serve as a key example of how to handle commodities risk. With the public sector embracing recycling in response to consumer demand, service advances aimed at municipal markets can go a long way in fostering value creation.

Enacting new strategies to withstand commodity risk requires capital, and that's where Comerica Bank can help. We offer specialized lending options aimed at environmental services and can support organizations as they work to adapt to the ever-changing market while sustaining innovation.

 

Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.