Risk sharing needed to combat market volatility

Waste management companies and councils must establish appropriate models to share the risk of volatile markets, says a new report published yesterday (17 September) by Resources & Waste UK (R&WUK).

The report, ‘Managing the Risk from Secondary Raw Material Price Movements’, was prepared by Eunomia Research & Consulting and sought to explore what price risk management mechanisms could be used to reduce the impact of the recent volatility and downturn in secondary raw material (SRM) prices on the supply chain.

Commissioned by R&WUK, the recently-created partnership between the Chartered Institution of Wastes Management (CIWM) and the Environmental Services Association (ESA), the research was funded by the ESA Education Trust.

Pressure on the market, R&WUK says, is coming from both the supply and demand ends of the recycling supply chain, with global economic trends negatively impacting the demand for commodities and the drive for higher recycling rates increasing SRM supply.

Recommendations to manage market risk

The report puts forward a number of recommendations for the UK to better manage 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.

Looking at the longer term, the report suggests bringing about more ‘fundamental change’ through actions including amending the UK’s producer responsibility regime ‘to improve the value proposition for recycling’ and setting up an independent fund to act as a buffer when market conditions are poor.

It also states that opportunities exist at a European level to address the fundamental issues associated with the recycling value chain in relation to market demand and prices for SRMs.

R&WUK says that it intends to call on the European Commission to include a range of ‘pull’ mechanisms in the upcoming Circular Economy Package, as well as measures to stimulate and support stable markets.

Among the measures it says should be considered are:

• 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 concludes that the low volumes and trading activity in SRMs compared to primary commodities are constraining the viability of ‘market-based hedging mechanisms’ like exchange-traded futures contracts and ‘over the counter’ arrangements.

Subsequently, it suggests that further work be done to investigate the feasibility of a centrally-managed investment fund to act as a buffer against price volatility.

Unresolved market volatility hinders recycling progress

Commenting after the report’s publication, R&WUK and CIWM Chief Executive Steve Lee said: “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.

“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.”

Lee added: “The role and viability of these longer term market mechanisms [depend] largely on the extent to which the forthcoming EU Circular Economy Package deals with the dysfunction in the recycling value chain. 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.”

Peter Gerstrom, board member of R&WUK and Chairman of the ESA, added: “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.

“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 per cent 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.”

Read the full ‘Managing the Risk from Secondary Raw Material Price Movements’ report.