Waste Management recycling will be profitable ‘come hell or high water’

By Ken McEntee

(The Paper Stock Report) While recovered paper prices continue to fall, Waste Management said it has renegotiated customer contracts to ensure that it can recover its material processing costs.

Speaking on a conference call to announce the company’s full year and fourth quarter 2014 financial report, David P. Steiner, president and CEO, said falling recyclable commodity prices have created margins that are too small to recover processing costs. In response, Waste Management has renegotiated contracts to ensure that processing costs will always be recovered, even if the company has to charge customers to accept recyclables.

“We're going to use the opportunity to make sure that we restructure our business such that we can make it profitable come hell or high water,” Steiner said, adding that it isn’t only Waste Management that has been impacted by weak recyclable markets.

“We need to take some steps to really fix the recycling business. because if you look at not just at Waste Management, but across the entire recycling industry, you're seeing a stark divestment in recycling assets,” he said. “You're seeing a lot of the smaller players starting to close up shop. That gives us a great opportunity to restructure the recycling business, to restructure it to where we can make a guaranteed return every year, which means we can invest in recycling assets. We cannot invest in recycling assets in a situation where nobody has any idea where commodity prices are going. So, for the benefit not just of Waste Management, but I think for the viability of recycling in the United States, we have to have some core fundamental changes to make the business long-term viable.”

Steiner said Waste Management’s recycling operations performed well in the face of declining commodity prices. For the full year, the company’s recycling line of business increased about $0.03 per share when compared to 2013.

“This improvement was driven by better operating cost performance, offsetting a more than 5 percent decline in OCC (old corrugated container) prices,” Steiner said. “Our managers did a great job managing their rebates and costs, as commodity prices declined throughout the year. Until recently, we had expected our recycling operations to remain flat in 2015. However, the recent slowdown in Western U.S. ports has had a dramatic effect on the movement of commodities overseas.”

He said lower Chinese demand for recyclables has also affected commodity prices.

“In the last few weeks, we've seen another drop in commodity prices such that we now expect recycling to have a negative effect on 2015 earnings of between $0.03 and $0.05 per share,” he said. “That assumes that we do not see another drop in commodity prices, and given current uncertainty in the market, that's certainly possible. In the face of weaker commodity prices, we must continue to take actions to ensure the viability of recycling over the long-term.”

Specifically, that refers to the renegotiation of processing contracts.

“We need to take a stronger stance to ensure that we recover our full processing costs,” said James C. Fish – CFO and executive vice president. “Processing costs increased due to circumstances beyond our control like the Chinese Green Fence. We need to recover those costs. So as we've said in the past, our strategy in pricing our recycle business is to recover our processing costs before we split the commodity value. Our contracts will also contain force majeure language to cover increases in processing costs beyond our control, and if our processing costs are higher than the commodity values, our customers will have to pay for the difference.”

The viability of recycling, Steiner said, is based on a simple equation.

“In the past, what the industry has done is said we'll sell the commodity for a certain price and then whatever our processing cost is we'll be able to pocket the difference,” he said. “The reality is as commodity prices have come down, you have instances where our processing cost is higher than what we are selling the commodity for. And so you can't have the business model where it says we'll sell the commodity, split the proceeds and hopefully cover our operating costs. The way we're changing the contracts is to say, look, we are going to recover our operating costs, whatever those might be and however those might be affected by things that we can't control like the Chinese Green Fence. So we're going to recover our processing costs. And if we're able to sell the commodity for more than our processing costs, then we'll split the proceeds with the customer. If our processing costs are higher than what we can sell the commodities for, we're going to have to charge our customers in order to recycle. And that's the only way that we can make recycling viable for the long-term.”

Fish, however, suggested that all of the contract changes have not been implemented and noted that January’s overall recyclable commodity prices fell $10 per ton, following by further declines in February, Fish said

“We finished the year 2014 at $98 (per ton) and we saw a January drop about $10, so to $89, and that impacts us on the 6 million tons that we actually pick up and take to our MRFs, about $60 million in revenue, which equates to somewhere in that $0.03 to $0.05 range on the EPS line,” he said “We think in January, the cost control that we put into place fully compensated for that which is why we were prepared to come on a call and say we thought it'd be flat. And then with the February decline, we just have not been able to put the more stringent contract changes and cost controls in place yet. So can we do that? That is our plan.”

Fish added that Waste Management is going to be more aggressive in setting contractual limitations on contamination levels for materials going to processing plants, and impose contractual remedies for contamination in excess of those limitations.

“Contamination above 10 percent leads to higher processing costs, and we need to continue to get assurances from our customers that they will either give us clean material or compensate us for higher processing costs,” Fish said. “This will ensure that we only pay a rebate for the net volumes produced and not pay our customers for residue.”

Fish noted that glass has always been a difficult commodity to recycle and an economic challenge.

“Unlike other recycled materials, recycled glass must compete with an abundant supply of virgin materials,’ he said. “As a result, glass recycling does not provide the same environmental benefits to the society and it's always been financially challenging for recyclers. In addition, glass is difficult to handle, hard on equipment, and as of today, only one company takes recycled glass for MRFs, so our options are significantly limited. With most commodities, we get paid to deliver recycled materials. Glass is the only commodity where we aren't paid for the outbound product. We actually have to pay to send it to a processor. We certainly recognize that our cities and communities want to divert glass because it is the second largest recyclable by weight. But given the many challenges associated with glass, we need to charge extra if a customer wants to recycle.”

James E. Trevathan – COO and executive vice president, noted that Harrisburg, Pa., has stopped taking glass in its residential recycling collections.

“They recognize that the value of recycling the material is just not just positive,” he said. “There's no real market for it, and they've decided not recycle glass. So that's a positive sign for us.”

Looking forward at recyclable commodity markets, Fish noted a weaker Chinese economy.

“There are quality issues with outbound product,” he said. “And there is, of course, the (West Coast port slowdown). One of the concerns we have, honestly, about the port strike is that there's a lot of products sitting idle at this point. When that does eventually get resolved, all that product ends up out on the market, which could have a dampening effect on commodity pricing.”

email ken@recycle.cc

Canadian rail strike over; what about U.S. ports?

“At least the Canadian government has the balls to step into the fray and get them back to work,” said a Canadian broker. “What is Obama doing for the West Coast of the U.S.?” 

By Ken McEntee

(The Paper Stock Report) Almost as quickly as it started, the Canadian rail strike ended. Canadian Pacific (CP) and the Teamsters Canada Rail Conference (TCRC) agreed on February 16 to enter into binding arbitration, putting an end to the work stoppage by CP's locomotive engineers and conductors.
Meanwhile, recovered paper traders are wondering when the U.S. federal government is going to take action to end a West Coast port slowdown that is holding up import and export activity.

“At least the Canadian government has the balls to step into the fray and get them back to work,” said a Canadian broker. “What is Obama doing for the West Coast of the U.S.?”

Meanwhile, in an appearance this week on CNBC’s Mad Money investment show, Waste Management President and CEO David Steiner called on the federal government to be more proactive.

“We have tens of thousands of materials that are ready to be shipped to China but it can’t be shipped because of the slow down at the ports,” Steiner said. “We’re joining with all the American businesses saying let’s do something to get this resolved. Let’s be a little more proactive at the federal government level to get this resolved and not hurt the economy more than it has already been.”

In Canada, an arbitrator was to be appointed by the federal government to oversee binding arbitration talks.

"This decision ensures both sides will get back to the table, and gets us back to moving Canada's economy forward," said E. Hunter Harrison, CEO of CP. “While we would have preferred a negotiated settlement, this is the right thing to do at this time."

Restructure contracts

Steiner also told Mad Money host Jim Cramer that Waste Management has restructure its contracts for recyclables.

“When the commodity prices go down so that your processing costs are actually higher than what you can sell the materials for, that’s a recipe for disinvestment into recycling,” Steiner said. “So what we told customers is we need to restructure to make sure that we can make money long term in recycling, not just so waste management can do better, but so that we can do better for the environment, because as a business, we have to make money to invest in recycling assets.”

Waste Management last week reported that recyclable commodity prices had a negative $0.03 per diluted share effect on the fourth quarter of 2014, but were more than offset by benefits from operational improvements in the recycling line of business. Overall, recycling operations positively affected earnings by $0.01 per diluted share in the fourth quarter when compared to the fourth quarter of 2013, despite an average old corrugated container price decline of 24 percent.

The company said recycling operations improvements are not expected to keep pace with recent recycling commodity price declines such that the recycling line of business is estimated to be between a negative $0.03 and $0.05 per diluted share in 2015 compared to 2014, assuming no further degradation in the prices of commodities.

Scrap paper exports top 23 million tons in 2011

As projected by The Paper Stock Report, U.S. exports of recovered paper set a new record in 2011, approaching 23.2 million tons, based on trade data released today by the U.S. Commerce Department, Bureau of the Census. Following a slackening in export volume during November, U.S. exporters shipped more than 2 million tons of scrap paper in December, falling just shy of the record monthly volume shipped in April 2011.
Exports in 2011 topped 2010 exports by about 12 percent. Shipments to China, which accounted for about 62 percent of the total, were up 22.8 percent, meaning that taking Chinese-bound tonnage out of the equation, exports to all other markets were down compared to 2010.
Scrap paper export sales in 2011 totaled almost $3.8 billion.
Full details and analysis will be published soon in The Paper Stock Report.

Cascades invests in New York containerboard mill

Cascades invests in New York containerboard mill
June 27, 2011
Cascades Inc. said its Norampac division will invest in Greenpac Mill LLC, a corporation created with the Caisse de dépôt et placement du Québec, Jamestown Container and one other industry partner for the purpose of constructing and operating a state of the art containerboard mill to be located in New York state.

The Greenpac mill will be constructed for a total cost of $430 million on property located adjacent to an existing Norampac facility in Niagara Falls, N.Y. Greenpac will manufacture a light weight linerboard, made with 100 percent recycled fibers, on a single machine having a width of 328 inches, with an annual production capacity of 540,000 short tons. This machine will be one of the largest of its kind in North America.

Fiber supply will be carried out by Cascades and its recovery operations. Sources of old corrugated containers are numerous and significant in the region where the mill will be built, which will impact favorably Greenpac's raw material procurement, the company said. With regards to sales, customers have already been secured for more than 80 percent – or 435,000 short tons - of production. Norampac converting operations will purchase 170,000 short tons of the production.

"The investment that we are announcing today is the result of the combined efforts of Cascades and its partners and is consistent with our development strategy which aims to position the company amongst the leaders in terms of productivity and profitability in the packaging and tissue sectors," said Alain Lemaire, president and CEO of Cascades. "As we have stated in the past, we strongly believe that Cascades' future success will be dependent on our ability to offer high performance innovative products which will better meet the needs of our customers, at a cost that will be amongst the lowest in the industry. Moreover, the innovative structure of this partnership will allow us to reach this objective while maintaining the financial flexibility achieved through recent divestitures. We are also confident in regards to industry's mid and long-term perspectives and we strongly believe that Greenpac will contribute positively to our net profitability once full ramp-up is achieved."

Marc-André Dépin, president and CEO of Norampac, said the Greenpac mill will include numerous technological advances, making it a unique project of its kind in North America.

“In particular, the linerboard that will be produced on the new machine will be able to achieve optimal strength while maintaining a low basis weight thereby allowing our customers to better respond to the growing trend towards lightweight packaging," Depin said.

Moreover, the building and the machinery will be designed for optimal energy efficiency and many operations will be automated. Process water will be treated and reused in order to reduce consumption as much as possible and the state of the art management system for recycled fibers will have a positive effect on the environmental performance of the mill.

The paper machine will be manufactured by Metso, Voith will provide the stock preparation equipment and anaerobic effluent treatment plant and Siemens will provide the power and control technology.

Financing and Partnership

The $430 million cost of the project will be financed by a $140 million equity investment in Greenpac of, which $83.6 million will be invested by Cascades, $28.3 million will be invested by the Caisse and $28.1 million will be invested by Jamestown Container and another industry partner. The remainder of the financing will be in the form of debt, including senior debt in the amount of $228.9 million, which was led by GE Capital, and subordinated debt in the amount of $61 million.

Senior debt will be provided by an international banking syndicate managed by GE Capital. The subordinated debt will be provided by the Caisse and will serve to bridge expected refundable tax credits.

The construction of the mill will create 108 new jobs in the State of New York, as well as contribute to the economical development of the region.