Garbage in, less garbage out

Paul DiGiacomo, Senior Analyst | May 9, 2013

  • Americans are generating more waste than ever, but a greater proportion is being recycled.
  • Recycling business is profitable, but sales depend on commodity prices and revenue is less predictable.
  • Traditional landfill waste companies may see slower growth as recycling continues to expand.

Oh, I love trash!

Anything dirty or dingy or dusty

Anything ragged or rotten or rusty

Yes, I love trash!

Oscar the Grouch’s signature song underscores our unparalleled ability to produce garbage in the United States. Since 1980, per capita waste generation has increased 21% to over four pounds per day. While that statistic is alarming, our recycling rate has advanced even faster: materials reuse has grown from 10% to 34% of the waste stream. Also, utilities burn 12% of the tonnage to produce electricity, leaving just 54% for the landfill.*

Don Slager, CEO of Republic Services, terms this change “The Evolving Ton.” The chart below shows that the diversion from landfills effectively started in 1980 and then accelerated later in the decade. At the time, new environmental regulations forced many non-compliant facilities to close and densely-populated municipalities invested in alternative disposal. For example, Waste Management owns 22 waste-to-energy plants along the U.S. coasts, with most built during the “landfill scare.”

 

In the 1990s, recycling of fiber, metals, plastics and glass gained momentum. Initially, cities and towns awarded contracts contingent on the collection of these materials and haulers treated the business as a loss-leader. But, with better processing technologies, improved density and higher recycled commodity prices, the business is solidly profitable today. Interestingly, China consumes most of our waste paper, as it cannot grow enough trees to satisfy its fiber demand.

Unlike traditional collection and disposal activities, recycling sales — and consequently profit — depend on commodity prices. Like most basic materials, rates are volatile and have dropped over 30% since the August 2011 peak. As a result, revenue is less predictable. Further, the mix is shifting to new markets. With the acquisition of R360 last year, Waste Connections processes energy waste, which fluctuates with shale drilling activity, which in turn varies with the prices of oil and natural gas.

Diversion will increase, with the separation of organics, such as food and grass clippings, as the next growth area. This shift will likely result in less profitable growth for the waste companies, as landfill waste carries the highest incremental margin. In addition, earnings volatility will likely increase due to a greater share of commodity-exposed volume.

At bedtime, Oscar tells his pet worm Slimey, “There’ll be more trash tomorrow.” He’s right — but less of it will go into the ground.

See more Market Insights from Columbia Management.

*Source: U.S. Environmental Protection Agency, 2010 Municipal Solid Waste Characterization Report.