The Challenge of Markets - The supply of recyclables is larger than the demand
Markets, markets, markets," the recycling buzzword for the 1990s, has become all too familiar to those responsible for moving materials through the recycling process. Why are markets so vital to the success of recycling? How do they behave under the current recycling fervor? What forces lie behind their development?

Traditionally, a market is created when the available supply of a product is matched by a corresponding demand. Usually, supply and demand follow each other closely, as markets evolve over time. In the rush to recycle, however, the demand for recyclable material has not always kept pace with burgeoning supplies. While state and local governments have proved effective in implementing programs to recover materials, they have had less success in finding markets for them.

Several factors contribute to this problem. The lag time between the availability of large quantities of recyclable materials and the development of manufacturing capacity to convert these materials into finished products creates supply and demand imbalances. This is especially true during the current economic recession. Also, geographic distances between the sources of recovered material and industrial consumers frequently fuel regional marketing problems, and hard-to-anticipate international economic forces further impact domestic markets. 

Finally, policies originally intended to aid in the development of this country's natural resources, such as energy subsidies, timber supports, and certain federal tax codes, encourage manufacturers to use raw, virgin materials rather than material recovered from the waste stream. To illustrate how these forces affect the recyclables marketplace, three materials that are currently experiencing marketing problems are examined here.

Green Glass
Generally speaking, recovered glass is used to produce new glass containers of the same color: Brown glass goes into new brown containers, green glass into new green containers, and so on. A number of furnaces in the United States are dedicated to clear and brown glass production, and recyclers enjoy a relatively stable market for these colors. However, only a few furnaces are dedicated to green glass production, and recyclers throughout the country report difficulty in finding markets for green cullet.

The imbalance is created largely by the import of green bottles from sources outside the United States. While only a few domestic beverage companies choose to package their products in green bottles, several foreign companies do. As a result, the amount of green glass collected by recyclers exceeds the capacity of domestic bottlers to use it.

Domestically, green glass bottle production represents about 13 percent of dedicated furnace capacity, while green containers average 23 percent of the glass-container waste stream. This difference is estimated to translate into a production capacity shortfall for green bottles of one million tons per year.

This imbalance is exacerbated in some regions of the country by market dislocation: For instance, while recyclers in the Midwest may not have difficulty securing markets because of their proximity to green glass furnaces, others, particularly in the Northeast and Northwest, are forced to either landfill or stockpile the material because of the costs associated with shipping to distant markets.

Post-Consumer Plastic Resins
Similar marketing problems currently face those recovering various post-consumer plastic resins (PCR). PCR includes items such as shampoo and laundry detergent bottles and milk jugs. The price paid to processors of these materials has been steadily declining over the past few years; a number of factors have contributed.

At least seven different plastic resins are found in the residential waste stream. Collecting, separating, bailing, and processing these resins to meet market specifications is difficult because of cross contamination of resins and the consequent contamination of the end product. Once processed, the recovered plastics have limited applications. Yet, these problems can be managed through improved public education programs, more efficient handling and processing systems, and advances in technology. The most pressing problem facing plastic recyclers is a decline in the price of virgin resin, the material that PCR must compete with for market share.

Since 1989, the price of virgin polyethylene resin, which is used to package a range of consumer products, has been decreasing, and many analysts predict that the trend will continue for several more years. Even as the recession dampened demand for plastic resins, production capacity expanded significantly in the United States. A tremendous amount of additional capacity is also planned, or under development, around the world, most notably in Saudi Arabia, the Far East, and Indonesia.

These foreign capacity expansions are hurting U.S. resin producers who have traditionally relied on overseas markets to absorb their excess supplies. In the absence of these markets, U.S. producers must either reduce production or sell their resins in the already saturated North American market. This has resulted in lower virgin resin prices and has led to 30 MarkelS for scrap aluminum are strong. /-/ere shredded aluminum can arrive by rail at a Reynolds Aluminum reclamation plant. The cans will be off-loaded and fed into a furnace for melting. the inability of PCR to compete in a number of plastics markets.

Over time, virgin resin capacity may diminish. Low prices may force some producers out of business, leading to a balance of supply and demand and to higher and more stable prices for virgin polyethylene. However, this cannot come soon enough for recycling programs that are recovering PCR. Weak PCR markets are straining municipal recycling budgets and challenging officials to find more cost-effective collection and processing systems. Some industry analysts predict that it could be several years before the price cycles of PCR and virgin plastic reverse themselves.

Old Newspapers
Despite being a principal target of market development efforts, even old newspapers cannot seem to clear their market impasse. There has been a notable time lag in some regions of the country between market demand and the growing supply of recovered newspapers. Since 1988, when recycling began to take hold as a primary solid waste management strategy, the recovery rate for newspapers has increased by nearly 50 percent nationally. Although some markets, such as recycled newsprint mills, exports, and animal bedding, did emerge in response to this additional supply, the price of recyclable newspapers bottomed out in 1989. As is common in the recyclables marketplace, some regions have fared better than others. 

West Coast processors of recovered newspaper receive, on average, $30 to $40 per ton more for their material than their counterparts in the Northeast. Due to their shipping proximity to markets in the Far East, where fiber supplies are sometimes short, West Coast suppliers benefit from a relatively stable export market. More importantly, newsprint mills in the Northwestern United States and in Western Canada have recently added significant processing capacity for old newspapers, creating a strong market for waste paper. Eight drinking facilities, capable of removing ink and other contaminants and converting the paper to pulp for use in making new newsprint, are now operating in the region.

These investments in recycling capacity were spurred by two factors. First, federal regulations protecting spotted owl habitat in the Northwest restricted logging and increased the price of wood chips, causing paper mills to consider recycled production inputs as a way to contain raw material costs. Second, in 1989, California enacted legislation requiring all state newspapers to incorporate increasing levels of recycled content; newsprint producers who wanted to sell their product in the biggest market in the region had to have access to drinking capability.

Similar laws and voluntary agreements encouraging the purchase of recycled newsprint are in existence in 21 other states and the District of Columbia. Nevertheless, while these policies are having a significant impact on recycled newsprint investment decisions , regional market gaps continue to exist between drinking facilities coming on-line and the growing supply of recovered newspapers.

State governments in the Northeast and Midwest, for example, facing a possible shortage of disposal capacity, In order for a market to exist for recyclables, a number of ingredients must be present .... used aggressive solid waste legislation to stimulate the recovery of old newspapers. However, the majority of this originated from Canadian sources, and the Canadian companies are just now beginning to bring the capacity on-line that will allow them to take back their used product. As a result, the market is currently so saturated with recovered newspapers in some parts of the Northeast that suppliers are having to pay to move their material. On the bright side, the market for old newspapers seems poised to turn around even in these troubled regions.

Over the next four years, significant growth is projected in the capacity of newsprint manufacturers to consume old newspapers. Seven new deinking facilities that could potentially take recovered newspapers from the Midwest and Northeast are scheduled to be in operation by 1996, bringing the total number in Eastern North America to 20. If all these planned facilities begin operation, they will increase the current demand by over one million tons. Some analysts predict that this new demand will drive up the price of high quality recovered newspapers to as much as $60 a ton by 1994.

Ingredients for a Recyclables Market
These three examples illustrate the interaction of a number of forces that shape the market for recyclables. One obvious commonality is the impact of international market dynamics on the demand for domestically generated recyclables. Developments abroad, such as low prices for materials that recyclables compete with (virgin plastics) and the packaging choices of foreign importers (green bottles), influence domestic markets.

Reciprocally, large increases in the supply of recovered material in this country, often exceeding domestic demand, fuel increases in the export of recyclables, as seen by the growth of recovered newspaper shipments from the West Coast to markets in the Far East. Also common to the examples cited above are supply and demand dislocations that lead to notable differences in the market status for some recyclables in different geographic areas of the country. Each region has a unique demographic and industrial makeup.

For some, large markets exist virtually in the backyard (recycled newsprint mills in the Northwest); for others, supply consistently outstrips demand. Frequently, shipping materials to where they are needed is the biggest obstacle facing recyclable suppliers. These examples provide a useful framework for understanding how markets are created. In order for a market to exist for recyclables, a number of ingredients must be present; however, there is no prescribed sequence for blending these ingredients. For one thing, there needs to be an identifiable source and supply of material. Then, systems to extract materials from the waste stream and deliver them in a specified quantity and quality will be required. A facility that is able to accept and re-manufacture the recovered material into a saleable form is also necessary. And, there must be an existing or potential demand for the finished product.

For some recyclables , markets emerge because of signals from the pricing system. Companies benefit directly from reduced production costs by recycling used materials into new products. The supply of material is pulled from the waste stream and delivered to production facilities 32 Experts predict that the next four years will bring significant growth in the capacity of newsprint manufacturers to consume old newspapers. through an existing pricing structure that provides an economic incentive to do so. For instance, using recovered glass to make new containers saves glass manufacturers in raw material, energy, and equipment replacement costs.

Similar market forces are set into motion by consumer demand for products manufactured with recovered materials. By exercising a preference for recycled goods, consumers can provide the economic impetus for companies to seek supplies of recyclable material. In response to consumer demand for recycled packaging, two major soft drink companies are now using recovered plastic in the production of their bottles. The creation of other markets is supply driven. Significant financial and policy commitment to the development of infrastructures with the capability to recover materials from the waste stream is often matched by capital investment in the manufacturing capacity needed to convert those materials into new products.

One element that stimulated growth in the market for recovered newspapers in many areas was the existence of a well-developed collection and processing system. Manufacturers are more willing to invest in recycling capabilities once recovery programs have developed a track record for meeting quantity and quality requirements. In the absence of traditional marketplace incentives, government can intervene to encourage firms to use more recovered materials in their production processes. The California recycled content law for newsprint was a significant force behind the development of strong markets for old newspapers in the region.

Current Marketplace Distortions
Clearly, recycling has had many success stories. Genuine long-term commitments are being made by governments and businesses alike. Unprecedented quantities of materials are completing the recycling "loop," conserving valuable resources, and enhancing the quality of the environment. Given the relative inexperience of many markets for recyclables, especially in handling the tremendous supply of materials now being generated, volatilities are to be expected. Evolution takes time. Yet, despite the concerted efforts of both public and private sectors, there remain some basic distortions that need to be addressed by policy makers.

The way in which costs are allocated in the current economic system makes it difficult for most firms to realize monetary benefits by using recyclable (instead of virgin) materials, or by ensuring that their products can be recovered and recycled at high rates. A number of factors contribute to these inconsistent signals from the marketplace; they include a set of market flaws and policies that, in effect, fail to hold companies and consumers accountable for the financial and social costs of packaging and products once they have been discarded as waste.

Two primary factors lead to these distortions. First, the current price system fails to internalize waste management costs in a product's price, thus passing the costs to society as a whole. Second, public finance practices consistently undervalue the price of waste disposal, limiting the ability of recycling programs to realize the full savings associated with diverting waste from disposal.

One approach currently being explored by a number of state legislatures to internalize solid waste management costs is to attach advanced disposal fees to packages and products based on their impact on the environment and on the cost of managing them after they have been discarded. Volume-based garbage collection fees and virgin material fees are two other methods being suggested. The former attempts to charge individuals on the basis of the amount of garbage they set out for collection. By making individuals directly responsible for the amount of garbage they generate, these fees encourage recycling and source reduction. Conversely, the latter is a fee imposed on all materials at the level of primary processing.

Under one approach being considered, the fee would be paid directly by the processor on the basis of tons of virgin materials used as a percentage of finished products shipped. Products imported into the United States would be charged a similar fee at the point of introduction into the economy. Monies generated from the fee could be reallocated to states for their use in developing solid-waste-management infrastructure, including recycling facilities.

Addressing the second market distortion, the underpricing of waste disposal, will necessitate a similar reflection of costs in public finance decisions. One possible way of adjusting disposal charges to more accurately reflect their true costs to society is to levy a tipping fee surcharge on the amount of waste disposed of at a landfill, transfer station, mass burn incinerator (where undifferentiated, unprocessed garbage is burned), or other waste management facility. This fee could be assessed not only to generate revenue for operating recycling and source reduction programs, but also to increase the cost of least preferred methods of waste management, thereby encouraging the use of preferred methods.

Some forces that are creating bottlenecks in the recycling loop cannot be easily controlled using traditional policy tools. Influencing the international marketplace and altering the regional industrial makeup of this country are, for the most part, unrealistic options. But recycling can succeed on the grand scale envisioned by many if the two market distortions addressed above are corrected. The playing field on which recyclable materials vie for market share with virgin materials must be leveled. Recycling must be allowed to compete on equal footing with other solid waste management options. Only then will recycling reach its full potential.

This article was originally published in EPA Journal “Recycling: Closing the Loop” issue Volume 18, Number 3 July-August 1992