A building backlash against globalisation and a series of unprecedented political squabbles between the US and its trading partners have set the stage for the next global conflict. While there is no open war (as yet), we have seen a series of disruptions across world trade routes, and the resulting impact on cross-border trade finance flows. One of the areas where we have felt an impact is UK recycling.
Background – Trading Of Recycled Goods In The UK
The UK has been recycling waste for about 80 years. It started during the Second World War when British households were mobilised to separate their garbage, which was then used by the military in the manufacture of ammunition and other army related products.
After the war, the 60s was characterised by a consumerism boom, with cardboard and glass waste doubling within a decade. Recycling became necessary as a way to deal with the growing rubbish and, as a result, 25% of all UK papers in this period were from recycled sources.
Unfortunately, in the 70s, landfill and mass burn incineration saw widespread adoption and consequently, the recycling rate reduced to a paltry 3%. Thankfully, waste management was privatised in the 80s, paving the way for the modern UK recycling trade.
By 2012, 200 million tonnes of waste was generated in the UK, and 50% recycled. In 2015, the UK waste management contracting market shrunk from both falling prices and reduced local government budgets, before recovering in 2017.
The recycled products are usually handled by middlemen or traders, who can shift the goods cross-border to take advantage of different regulatory regimes (to both remove and recycle waste), and country demand profiles. Industry players are now seeking more added-value income.
The European Council and parliament have now given the UK an ambitious target to recycle 65% of urban waste by 2035. The recycling trade is expected to be worth 35 billion Euros in 2020.
Trade Finance – The recycling industry
Trade Finance is an umbrella term for many financial services designed to enable international trade, including financing products such as Letters of Credit, Bank Guarantees, Receivables Finance and Trade Loans. These financial instruments are used heavily in the trade of both primary and recycled materials – including plastics, paper and metals.
Trading recycled materials can be a tempting financial proposition. The breadth of material sources usually allows business diversification, removing reliance on one closed industry or a small pool of long-term clients. Recycled material traders can capitalise from the cast-off materials which come from industrial processes. The industry is driven by material supply, demand and government intervention. Recycling as an industry is opportunistic and constantly seeking new profit streams.
The UK market is now being driven by both extra supply, and a range of UK government incentives.
The Extra UK Supply
There is more plastic waste expected in the UK in the near future, due to a ban in China on its importation, causing a build up at recycling plants. For 20 years, UK businessmen relied on shipping plastic recycling to China, and now there is a climate of uncertainty.
That’s not all. China has also decreased the number of cardboard imports, leading to increased pressure on the British recycling industry, and ultimately having a negative price impact. The quality of productivity in UK sorting plants will have to improve, increasing the cost of the service for local Councils. Some Councils may also refuse to collect certain types of waste, to reduce volumes at sorting plants.
To reduce this pressure, some polluters are taking matters into their own hands – for example, moving away from plastic straws in favour of biodegradable paper straws.
UK Government aims and incentives
Government incentives have included both households and businesses – in the form of taxes, reliefs and schemes. A simple example is the Aggregates Levy, which impacts sand, gravel and rock that has been dug from the ground, dredged from the sea in UK waters or imported. Using alternative construction materials, such as bing, became more economical as a result of the levy.
In December 2018, the EU Waste Framework Directive revisions were agreed, with member states pledging to set recycling targets above the present rates of 50% by 2020.
This agreement ensures that there will be proper management of different waste streams, by targeting reuse, recycling and less waste going to landfill. The ultimate goal is to reduce negative impact on the environment, leading towards a circular economy model.
In 2016, the tonnage sent to landfills was 7.7 million, 22% less than the 1995 baseline value. With the newly set standards, expected values are no greater than 35% of the 1995 value.
The UK government also aimed to significantly reduce packaging waste, projecting to recycle 60% glass, 60% paper and cardboard, 50% metals, 22.5% plastics, and 15% wood by the end of 2008. After that date, Member States had the freedom to set higher national targets. In 2016, 71% of UK packaging waste was either recovered or recycled, significantly above the 60% target.
The government’s strategy on recycling seems to be working. To further preserve and protect the environment, there are additional potential incentives for the private sector.
The UK government could introduce incentives for industries to design and use simpler packaging, which is easier to recycle, and raise charges for difficult to recycle packaging. Straws could be banned in the near future, courtesy of the ‘Final Straw’ campaign by MSP Kate Forbes. This includes cotton buds and other single-use items.
The revisions also include a requirement for the government to provide incentives for waste holders to separate their waste for recycling (eg pay as you throw). According to the Environment Secretary, Michael Gove, there will be tax incentives.
The UK is well placed on global environmental trends, including tackling plastic pollution. In Central through Latin America, we see bans on plastic bags.
While incentives are good, loopholes in recycling regulations and changes in market conditions can lead to perverse outcomes. One example of this is in the cobalt market where lithium-ion manufacturers are making cheaper batteries by removing valuable elements that make recycling profitable.
High-value materials like cobalt are removed, reducing the value of recycling and unfortunately, increasing the end-of-life cost of lithium-ion batteries. This aspect of recycling is directly affected by market conditions. At the beginning of 2017, cobalt cost $32,500, jumping to $81,000 in March 2018, forcing manufacturers to design without it. Consequently, most lithium-ion batteries are now landfilled, due to lack of a incentive that has killed the recycling market for this product.
Another example is the 2000s’ bricks case in high-income countries. One common source of waste was the over-ordering of bricks and other materials for building sites, in order to avoid any delays in supply. Recycling targets provided a perverse incentive to crush and recycle any leftover raw materials, rather than to return and reuse them at another building site.
Sources of growth & opportunities from the trade war
In March 2018, US President Donald Trump announced a 25% tariff on imported steel to boost domestic manufacturers. This is expected to start a trade war with several allies, including Germany, who have promised to retaliate across a range of products according to World Trade Organisation rules.
This latest round of tariffs in the US and global sanctions create disruptions and opportunities, as import/export patterns change in those regions.
Some of the products which have been listed as targets include plastics, machinery and chemicals. However, the tariffs are focused on imports (and primary products), rather than recycled products – providing an incentive for countries to boost reuse and recycling of old metal products, to take the place of lost exports.
Even with the additional tariffs, the outcome for regional materials prices is not clear. As an example, the global steel trade is driven by several countries, and some of these like China, Japan and India can both supply more conveniently than the US, and compete on price. The steel tariff acts as an intimidation driver, which was always the US intent. The hope for traders is that as pressure increases, the potential opportunity scales.
Non-bank lenders are increasing their presence in trade finance products. As cross-border traders look for new markets, the requirement for flexible credit lines increases, and there are now a number of private lenders who can understand more complex trade scenarios and offer Letters of Credit or Bank Guarantees to traders. These players are often quicker than traditional banks and have a more entrepreneurial outlook, with higher risk tolerances – they can be comfortable with clients who take advantage of market shifts, like in recycling.
Recycling in Europe, and specifically the UK, is a relatively opaque market. However, with the government push to increase recycling rates, currency fluctuations and instability of the markets, a number of smaller traders are growing aggressively in this sector – especially plastics and metals traders.
The lack of transparency leads to mistrust, and suppliers will rarely provide buyer credit at any significant volume. With relatively vanilla trade finance structures; providing Bank Guarantees to suppliers, trade facilities and funder undertakings to access larger volumes of product with receivable lines – we have seen the unlocking of interesting potential. We hope this market continues to grow in strength.