Risk sharing backed in waste sector study

The report, paid for by the ESA’s Education Trust, outlines possible ways to reduce the impact of fluctuations in secondary material values caused by volatility in world markets.

Entitled ‘Managing the risk from secondary raw material price movements’, the report was written by consultancy Eunomia. It suggests that contract or market-based mechanisms such as risk-sharing between contracting partners, hedging and Producer Responsibility could be employed to protect the supply chain.

Resources & Waste UK (R&WUK) is a new joint body created by Environmental Services Association and Chartered Institution of Wastes Management.

Cost

R&WUK 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.”

According to R&WUK, ‘healthy and stable’ markets for secondary raw materials are critical to the future of resource management, and measures to create these conditions are a prerequisite to any successful EU Circular Economy package.

Mechanisms

The organisation adds that it is essential for government – both at UK and EU level – to distinguish between the need for short term ‘coping’ mechanisms to address current volatility in the market and ‘more systemic’ long term measures to encourage the market.

The Eunomia research identifies more widespread adoption of risk-sharing between waste management firms, local authorities and reprocessors as a short term coping mechanism to protect against volatility, as well as further investigating the use of hedging mechanisms such as ‘exchange-traded future contracts’.

Commenting on the report, Peter Gerstrom, chairman of the Environmental Services Association said: “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% 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.”