In the last year, some municipalities and material recovery facility (MRF) operators have been renegotiating their recyclables processing contracts because of market fluctuations that have affected the value of recovered commodities. These fluctuations, which include recent declines in the value of bales of mixed paper and plastics related to China’s National Sword customs inspection regime and import ban, have thrown off the economics that formed the foundation of the revenue agreements in these contracts.
Michael Timpane spoke during the Contracting Control session at the 2017 Paper & Plastics Recycling Conference. The conference, which was organized by the Recycling Today Media Group, was held Oct. 11-13 in Chicago. According to Timpane, MRFs are not considered part of the recycling service, though the cleaning services they provide are necessary to get incoming material into a commodity state. Timpane, who works out of Florida as a principal and vice president of process optimization and material recovery for RRS, which is based in Ann Arbor, Michigan, suggested that contracts should take the price of these cleaning services into account. For recycling to be successful, he said, it must be based on a fee-for-service model.
Timpane addressed a number of other areas that MRF operators should take into consideration when they head to the negotiation table.
Timpane said municipal recycling services have evolved to compete with the convenience of solid waste services thanks to the introduction of single-stream collection. The number of single-stream programs in the U.S. has tripled in the last 15 years, with more than 3,000 municipalities offering this service. MRF capacity has more than doubled in that time, he added.
While this method of collection has increased participation and diversion, it also has increased residue rates at the MRF. The average residue rate for single-stream MRFs is 18 percent, he said, with residue increasing as programs’ permissiveness increases.
With the performance of single-stream MRFs, he said they “clean to minimum standards” but “have a hard time getting to maximum standards.”
Timpane contrasted MRF operations with those of scrap metals processing companies, saying scrap recyclers largely buy their material source separated and only sort scrap when it provides a price advantage. Scrap processors have little residue and use the spot market to regulate contract-related risk. MRFs, on the other hand, he said, take commingled material and process it regardless of their ability to sell or price it.
Timpane advised that, for these reasons, MRF operators lessen their material risk by drafting contracts to ensure their cleaning services are paid for first.
The recycling stream is changing. Newspapers, glass containers and steel cans are decreasing in prevalence. Meanwhile, corrugated containers; polyethylene terephthalate (PET) bottles and jars; other forms of plastic packaging; and plastic bags, sacks and wraps are increasing in prevalence, Timpane said. MRFs increasingly are handling more types of material, but these items tend to be less valuable than the materials they are supplanting.
Given the changing nature of the recycling stream, a MRF should audit incoming material once or twice annually, he suggested. This enables the MRF to refresh its revenue basis based on its actual experience. Haulers, MRFs and communities alike should use these audit results to enforce the allowable materials residents are placing in their recycling bins. Timpane also advised that new agreements between MRF operators and municipalities include charge-backs to the municipality or hauler for contaminated single-stream material that is delivered to the MRF.
The composite average price for recyclables as of Oct. 1, 2017, was $71 per ton, declining from an average price of $104 per ton as of May 1, 2017, Timpane said. He added that commodity pricing declines 1.3 percent per year naturally, according to data from the World Bank. This is due to improvements in exploration, extraction and substitution. Longer contracts, therefore, present more risk related to commodity pricing, Timpane said, while reminding attendees that a contract’s economic basis should not be over-reliant on commodities revenue.
The evolving material stream and increased contamination have contributed to escalating processing costs at MRFs. Timpane said MRFs’ processing costs have increased by nearly 40 percent in the last eight years. These factors also have contributed to the growing complexity of these facilities. Modern MRFs require qualified management, more linear feet to accommodate sorting systems and more peripherals and types of machinery.
Timpane urged MRF operators to fix their floor pricing based on their profits rather than on their costs. He also advised basing minimum performance on the presence of available recyclables in the incoming material stream and not on the total tonnage of incoming material, which will include nonrecyclables, saying, “If it’s based on inbound materials, you are never going to get to your number.”
Collection costs for municipal solid waste (MSW) and recycling also have been increasing over time. While monthly residential service contracts have increased to an average cost of $6.20 per household from $3.50 per household in eight years, Timpane said, recycling collection only accounts for 30 percent of residents’ overall garbage bills, making it relatively affordable compared with other services.
Educating the resident
Education is essential to successful recycling programs because of residential turnover and the changing material stream, Timpane said. “Single-stream contamination has, and will, worsen without it.”
However, he added, education can suffer during bad commodity years, which presents a risk to the municipality in the form of culpability for poor quality and risk to the hauler in the form of lower revenue or higher fees from the MRF.
Contracts should include funding for education enforcement, Timpane said, adding that “municipalities are the only ones that can enforce education.” He suggested including a clause in the contract specifying municipal enforcement of recycling education. “Community-based social marketing is the best way to do this,” Timpane said, noting that this has nothing to do with social media, which he said offers little value.
“Single-stream contamination has, and will, worsen without [education].” – Michael Timpane, principal and vice president, RRS, Ann Arbor, Michigan
Incorporating best practices
Timpane offered a number of best practices that he said are not used consistently in formulating contracts.
These included the right to reject material and refuse service at the MRF. This is important when excessive contamination or dangerous materials are present in incoming loads. Contracts also should define what the MRF is unable to accept and how these materials should be handled if they are delivered to the facility. Such clauses are “rarely used but essential,” he said, and can even encompass unsafe driver behavior.
Contracts also should specify inbound and outbound material specs and minimum grades to be made.
While contracts commonly include language related to force majeure disruptions, Timpane said acceptable instances should be spelled out and should include market disruptions, work stoppages and changes to law, such as the establishment of “pay as you throw” and changes to existing bottle deposit systems.
Additionally, he advised setting limitations on tours and other special services, which can interfere with the efficient operation of the MRF. Timpane suggested including language in contracts specifying quarterly (or more frequent) meetings between the MRF operator and the municipality. The MRF operator should use these meetings as a forum to provide feedback on quality, volume and markets. However, receiving feedback shouldn’t be restricted to these meetings, he added.
Municipal recycling contracts “do not run by themselves,” Timpane said, but require ongoing maintenance in the field, at the office and with customers. Timpane advised conference attendees to “talk to your customers a lot,” and urged them to “make that extra call.”