Raw material prices fluctuate frequently, making it difficult for waste management and recycling companies to accurately project raw material revenues and plan accordingly. The risk inherent in the commodity market can be a barrier to business growth and sustained innovation, as a decline in a key commodity can significantly reduce the cash available to spend on equipment, facilities or improving the workforce. Risk management is essential when engaging in the commodities market, and strong relationships with stakeholders, especially public sector bodies, can help weather fluctuations in the sector.
The raw materials risk situation
The price of raw materials is extremely dependent on supply and demand, and increased recycling can lead to lower demand for raw materials. As more and more environmental services companies have goods to sell to processing plants, the market value of these materials will decrease. The United States Environmental Protection Agency conducted a landmark study in 2015, covering historical raw material costs across a variety of industries. In general, the average cost of commodities decreased significantly per ton over the research period. Large annual fluctuations were common in the study. For example, HDPE, PET, and aluminum cans all experienced significant price increases in 1995 and 2011, but then declined rapidly from 1995 to 1996 and then from 2008 to 2009. These types of rapid changes need to be taken taken into account in waste management and environmental services activities. patterns, especially since political decisions and similar macroeconomic issues can also have a major impact on the market.
For example, a Seeking Alpha report explained that an import ban on 24 types of recyclable materials and solid waste in China led to lower commodity prices throughout 2018. The rule went into effect in January 2018 and specifically aimed to limit the importation of paper and plastic from the North. America, although the legislation had a global impact. This type of measure has led to significant changes in commodity prices and can disrupt the sector, causing companies to rethink their export strategies, invest in local recycling facilities or adapt to new dynamics in industry.
Respond to commodity risk
Preparing for fluctuating costs is key when it comes to raw materials, and many recycling companies have stayed afloat by strengthening their position in the vast waste management landscape. According to IbisWorld, revenue from the recycling facility market has been tepid, with revenue growing only marginally in 2018, reaching $6 billion. Lower commodity prices have been one of the main factors limiting growth. However, the public interest in recycling has led to significant investment in the practice between state and local governments, creating stability at a time when commodity prices are proving problematic.
Fostering stronger relationships with key stakeholders can go a long way in managing commodity risk. To illustrate this, a Let’s Recycle report detailed how a workshop organized by industry leader SUEZ addressed commodity risk. The workshop was organized largely in response to China’s new policies. While the waste management company itself was prepared to deal with changing prices, it realized that its public sector partners would not necessarily handle the situation as well and organized the small conference specifically to inform the agencies she works with on how to tackle the problem. situation effectively.
While SUEZ approached this issue from a UK-centric perspective, its operations provide a key example of how to manage commodity risk. As the public sector embraces recycling in response to consumer demand, advances in services for municipal markets can go a long way in fostering value creation.
Adopting new strategies to resist commodity risk requires capital, and that’s where Comerica Bank can help. We offer specialized loan options intended for environmental services and can help organizations adapt to an ever-changing market while supporting innovation.
Comerica ranks first among the top 25 U.S. financial holding companies as of March 31, 2022, based on commercial and industrial loans outstanding as a percentage of assets. Data provided by S&P Global Market Intelligence.
This information is provided for general educational purposes only and is not intended to be used as legal or compliance advice.
This article is provided for informational purposes only. Although the information it contains has been compiled from the source[s] which are believed to be reliable and accurate, Comerica Bank does not warrant their accuracy. Accordingly, it should not be considered or relied upon as an exhaustive statement on any subject.