Episode 3 — The Recycling Chronicles

Here is the summary of the third episode of the Recycling Chronicles and some additional information 👇👇

The main take-away: recycled materials traceability both inside and outside the EU must move away from reactive to a pro-active approach

Hedging against the volatility of OCC

OCC is super volatile; Olivier highlighted the 6x jump between March 2020 and March 2021 (from 35 EUR/T to c. 200 EUR/T). OCC is much more volatile than most exchanged-traded commodities.

The current situation where purchase prices of recycled fiber are indexed on a national index such as PICS, EUWID or COPACEL does not work because the sales are concluded on a global market, not necessarily tracking the local variation.

A future contract to hedge against the volatility of recycled paper and board (OCC in particular) was launched in 2020 by NOREXECO, the Norwegian stock exchange. You can check more details here

For now, the experiment is not yet successful. The main reasons highlighted by Olivier Thomas are:

• Difficulty in finding a counterpart to hedge
• Lack of liquidity, i.e. participation of the different market stakeholders, needs to be achieved from the beginning to generate value

This attempt echoes a previous one back in the 90s in which Dominique Maguin was involved. The CBOT (Chicago Board of Trade) attempted to create an Exchange to trade recycled paper and board, and later on, Goldman Sachs and Enron started offering derivatives. Both failed. Here is the why:

• At the time quality standard was lacking to enable a commodity like Exchange and future-contracts system
• Large mills didn’t want to participate as they established extensive supply network with long-term supply contract that actually already hedge to a certain extent their supply cost
• The Exchange developed procedures for testing material quality that was too costly relative to the actual market value of recovered materials.
• The attempt (separate) with Enron to use the FUTURE contract ended with EnronOnline and the Enron scandal.

You can read on this 78 pages report on the CBOT

The future of recycled raw materials traceability is pro-activity

The ability to trade internationally recycled materials is crucial.
The ability to export recycled raw materials that Europe and the US produces in excess of local demand is a condition to reach recycling rates targeted at the local and global levels. It is also crucial for recyclers to access the international market to maximize the value of the recovered materials and generate the revenue required to implement more advanced processing capabilities and sorting schemes.

This ability is at risk if nothing changes. Why?
Changes in regulations in Asia, starting with China since 2013, the rise of plastic bashing, rising awareness of traceability scandals thanks to the Media or NGO have put the international recycled materials flow under high scrutiny.

• See an example of scandal here
• See explanations on what happened in Asia here

Australia, for instance, has now banned waste exports and only highly processed materials can now be exported.

In Europe, there will be a new “waste” shipment regulation revision at the end of the year.

Why is the Annex 7 system not enough?

Annex 7 is a reactive system. You get traceability after the entire process is over and only if all participants correctly do their part. For example, it is hard to collect the signed copy from countries where Annex 7 is not part of the regulatory framework, for instance, China.

What is needed is an auditing scheme in which all European actors participate where you have certification by an auditing firm that the destination is compliant with article 47 (REGULATION (EC) No 1013/2006). Then you don’t necessarily need some reactive control mechanism. One of the key learning from the quota and license system China had implemented was that the companies getting the license were the most advanced and professional ones.

What is happening now?

With other market players, Suez has initiated a POC on an auditing system for facilities outside of the EU. A country profile grid is ready that recaps the national regulation of the importing country and the gaps with European regulations. A European auditing firm already conducted four audits in Indonesia and Turkey. The results and feedback have been impressive: the proof assembled have resulted in excellent feedback from regulators and market participants, one of them even mentioned that within Europe, we don’t get such a good level of information on the final destination of recycled materials.

For this project to be successful, there needs to be the participation of all players in Europe. Otherwise, mills/factories outside of Europe will opt out and not agree to be audited by ten different schemes.

Can a forced reduction in the export of recycled raw materials make the European industrial sector more competitive?

Some imagine that by banning/reducing the export of recycled materials, the prices of raw materials would drop for factories, supporting their competitiveness on the global markets.

The two guests did not agree with that idea. Dominique Maguin took the example of the paper industry in Germany to answer the question. Germany was the biggest exporter of recovered paper collected in Germany to other countries in the world 20 years ago (5 MT per year). Germany is a net importer of 2 million tons, and its paper industry is 3x bigger than France (vs 2x bigger 20 years ago). This success is not the result of subsidies and lowers recycled raw materials prices. Germany made its industry as a whole more competitive, and manufacturers built new mills. Closing down the export of materials is unnecessary, and it will harm recycling rates, particularly for lower quality materials and the recycling industry.