The UK recycling industry is constantly challenged by the volatility of prices for secondary raw materials (SRM). A new report, “Managing the Risk from Secondary Raw Material Price Movements", was published last week. Funded by the Environmental Services Association Education Trust (ESAET) and prepared by Eunomia Research and Consulting for Resources & Waste UK (R&WUK), the report examines price risk management mechanisms that could be used to reduce the impact on the whole supply chain of increased volatility and downturn in SRM prices since 2011. It focuses on both contract-based and market-based mechanisms, including risk-sharing, hedging and Producer Responsibility.
The report finds that there are no easy answers, presenting recommendations for better coping with and managing the 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.
- In the longer term, it recommends exploring more fundamental change, including amending the 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 tough.
Steve Lee, Chief Executive of R&WUK 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."
In the medium term, R&WUK believes there are opportunities at European level to address the more fundamental issues associated with the recycling value chain in relation to market demand and prices for SRMs. The organisation will approaching the European Commission to ensure that any new Circular Economy package includes measures to stimulate and support healthy and stable markets, including:
- incentivising recycled content through product standards,
- variable VAT and Producer Responsibility incentives
- an EU Green Procurement framework
- improved labelling for consumers about recycled content and recyclability.
The report finds the viability of market-based hedging mechanisms, such as exchange-traded futures contracts and 'over the counter' arrangements, continues to be constrained by relatively low volumes and trading activity in SRMs compared to primary commodity markets. Therefore further work to investigate the feasibility of some form of centrally-managed investment fund which would act as a buffer against price volatility is recommended by Eunomia as a more feasible intervention.
"The role and viability of these longer term market mechanisms depends largely on the extent to which the forthcoming EU Circular Economy package deals with the dysfunction in the recycling value chain," concludes Mr Lee. "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. The success of the newly established Scottish Materials Brokerage Service, for example, will be watched with interest and R&WUK will be raising these issues with relevant departments and ministers over the coming months."
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