This article appeared in the November 2020 issue of Resource Recycling. Subscribe today for access to all print content.


Financial experts predict restructured contracts will lead to greater stability in the recycling sector. They also anticipate technology and corporate sustainability pushes will benefit the industry while ample consolidation will continue.

The U.S. operations of Mitsubishi UFJ Financial Group (MUFG) provides financial services to solid waste companies across the country through the bank’s environmental services coverage group. The firm focuses on large and mid-sized industry players, providing financing, loans, bond underwriting and other services.

Resource Recycling recently spoke with three experts from the bank’s environmental services group, discussing the financial health of the recycling sector compared with the wider solid waste industry as well as trends that may impact its future.

The three analysts are Robert Jones, managing director of MUFG; Fabio Lauro, vice president of MUFG; and Maria Maia, a director with MUFG’s environmental services team.

This interview has been edited for clarity and brevity.

RR: Large publicly traded haulers have seen recycling revenues go down, but overall revenues have been up. Is the waste side kind of offsetting the volatility we see in the recycling sector, or do you see stability coming out of the recycling business model where we’re seeing more and more being able to charge cities for service rather than rely on commodity prices?

Maria Maia: Fully integrated companies have the most stable cash flow production. The companies that do only recycling, over the last 10 or 15 years, have been the ones that have the least amount of stability, principally because of the commodity pricing and how they priced their contracts.

Remember, when recycling became something that everybody was talking about, the industry was kind of forced into providing recycling. Municipalities were asking because people were insisting on being able to recycle, and also municipalities were facing the fact that some landfills had to close. Governments began to say, “If it can be recycled, it must be recycled.”

So the waste industry itself was kind of forced into providing the service of recycling. And at the time, they were really not pricing it at the cost of the service. So it became more like, “We have to do this so we’re doing this,” and as an incentive to some of the municipalities they said, “OK, we will share with you any of the revenue that we get from selling the commodities.”

The municipalities looked at that as an incentive for them to offset some of the cost of providing the service to their residents – until such time as commodity pricing sunk.

When that happens, [the contracted haulers] are saying, “It’s costing me more money to collect this stuff and get rid of it, and I’m still sharing the value of the product.” And so they had to redo their contracts. Obviously the majors are the ones that kind of implemented changes, because they had the most ability to negotiate with the large municipalities, and introduced changes to their contracts.

What are those new contracts looking like?

Maia: How they’re doing their contracts today is very different than it was five or ten years ago. So even the ones that have a greater amount of recycling as part of their total revenue, they have in fact continued to offer the service, they’re just charging the municipality for the service.

With the pandemic and prior to that, with the issues of China effectively shutting down imports of a lot of our recycled products, fiber and plastics, that’s really what caused a significant change in how they manage and write their contracts with their customers for recycling.

I think going forward, we’re going to see more discipline in pricing for the service: I’m picking up the trash, that’s a service, you’re paying for that service. I’m picking up your recyclable goods, I’m getting rid of them, you have to pay me for that service. I may share some of the additional income I get from when I actually sell that end product, but in the meantime I’m getting paid to provide the service to you.

More and more major brands are making significant recycled content pledges. Is this influencing how you look at the financial health of the recycling sector? Does this make it a more attractive industry for investment?

Robert Jones: I think the two things are complementary certainly.

When you think of the waste companies that we’re working with that will be collecting the recycling, processing it in their facilities, investing in newer technology to make these recycling facilities more efficient, more effective, able to separate more material, I think the two feed off each other in a way. The fact that there is more interest on the part of some of the large manufacturers to use recycled material, and that there is a broad interest in recycling among the population, I think it supports the investments that the industry is making in building its recycling capabilities.

You hear this message up and down the industry: that it’s important that there’s an economic foundation for the recycling exercise. Creating end markets and demand for the materials, whether it’s paper or plastic, is critical so that it’s a self-sustaining exercise.

You mentioned equipment and technology and how this is driving some of the interest in the recycling industry as well. What is the investment community looking at in terms of equipment trends that could be particularly exciting within the sorting space?

Jones: Broadly speaking, what we see is, the use of robotics, for example: They stand to make these facilities more efficient, potentially safer for the employees. You can remove some of the more dangerous work, potentially, with robotics. And I think as you take a step back and think of the investment in these newer technologies collectively in the MRFs, they’ll make these facilities more capable, more effective at separating materials and producing cleaner recycled materials effectively at lower cost. So greater throughput at lower cost.

As an investor in this space, a financing provider, you see investments that generate attractive long-term returns for those reasons.

We’ve seen a lot of consolidation within the waste and recycling sector in recent years. For the smaller, independent companies that are left in the space that are not being acquired, what kind of impact do these major acquisitions have? Does it change the landscape for the smaller operators?

Fabio Lauro: I think across the spectrum, the benefit of economies of scale is present both in the solid waste space in collection and disposal, and on the recycling side as well.

With the consolidation we’re seeing on the solid waste side, and the recycling operations of the “big four” (Waste Management, Republic Services, Waste Connections and GFL Environmental) getting bigger, it’s likely to put more pressure on the smaller recycler who is not able to attract the volumes that their counterpart competitors in the local market are.

What do investors look for in a recycling firm? What makes one recycling firm more attractive than another?

Lauro: Private equity firms have been attracted to the waste management space in particular given the stability of cash flows and contracted revenue base. Private equity firms that are focusing in the recycling space, I think they would have to get comfortable with earnings visibility, revenue visibility, and a lot of that can be attributed to the new contract structure we’re seeing in the recycling space. You’re getting paid for processing the materials and not taking 100% of the commodity risk, sharing that with the customer. That will provide a more stable cash flow base.

Companies that are able to demonstrate this first and foremost will be more attractive to private equity firms in general. And then obviously private equity firms are looking for a market or industry where you can kind of grow that platform either through mergers and acquisitions or through organic growth.

Those are two factors that would be key in a private equity decision to look into investment in the recycling space.

Colin Staub is the senior reporter for Resource Recycling and can be contacted at [email protected].