1. SKM Background - Parliament of Victoria · 1. SKM Background . SKM Recycling, a family-owned...

SKM Recycling Submission to 2019 Parliament of Victoria Inquiry into Recycling and Waste Management

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1. SKM Background

SKM Recycling, a family-owned business established in 1999, is one of Australia’s leading residential recycling companies, with a long and successful history of providing recycling services to municipalities and businesses. SKM estimates it supports up to 600 jobs through its direct employment and its supply chain. SKM is based in Victoria and currently operates eight high technology facilities across Victoria (5), South Australia (1), New South Wales (1) and Tasmania (1). Council kerbside commingled collection represents greater than 90% of its business, with commercial suppliers the balance. The primary materials processed by SKM are paper, cardboard, glass, plastics, steel, tin and aluminium. SKM enters into supply agreements as the receiver of household kerbside-collected commingled recyclables from local Council recycling collection services. Councils are currently charged a fee by SKM to receive the commingled recyclables and SKM then processes the material into marketable commodities that are sold domestically and internationally.

Because of its investment, primarily in Victoria, SKM is the only kerbside recyclables processor in Australia capable of producing a finished recycled paper grade that can be sold to China in conformance with the latest Chinese specifications. Since establishment, SKM has continually invested in the Australian recycling industry through new facilities, infrastructure and leading technology:

1999 Commenced business 2003 Coolaroo (Vic) Materials Recovery Facility (MRF) open 2004 Mornington (Vic) facility open 2006 Laverton (Vic) transfer facility open 2010 Geelong (Vic) MRF open Coolaroo glass facility open 2012 Penrith (NSW) glass facility open 2013 Hallam (Vic) transfer facility open 2014 Lonsdale (SA) facility open

Hobart (Tas) facility open

2018 Laverton MRF open Coolaroo MRF rebuilt Geelong MRF upgraded Laverton plastics sorting facility open

2019 Hallam MRF planned

RWM - Submission 581

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processors must pay the cost of transporting for disposal in landfill and a gate fee of approximately $120 - 160 per tonne.

As the above table demonstrates, the recycling system is most exposed to the paper, cardboard and glass markets, comprising approximately 70% - 90% of the recycling stream processed by SKM.

3. SKM Council Contracts

SKM currently provides recycling services to over 30 Victorian Councils. Contractual arrangements with local Councils take a number of forms, as follows: 1. Direct commercial arrangement with the kerbside collection contractor as part of the individual

Council kerbside contract (e.g. Cleanaway etc.)

Contracts with collectors generally work effectively because the collector has gone through a competitive tender process with the Council and then put in place a separate direct agreement with SKM.

2. Direct contracts between individual Councils and SKM

The contracts with individual Councils take various forms depending on service requirements and generally work effectively because they are tailored to the Council’s needs and managed directly between the two parties.

3. Aggregated contract through the Metropolitan Waste and Resource Recovery Group (MWRRG),

currently utilised by 5 metropolitan Councils

Aggregated contracts have been more complex to manage, principally because of the need for Councils to reach a consensus on contractual issues, during negotiations.

4. SKM Resource Processing

Over its history, SKM has invested (and reinvested) hundreds of millions of dollars in the industry, contributing in excess of $50 million alone to the Victorian economy over the past eighteen months to install the latest recycling technology in their facilities. SKM’s operations are fully integrated with Materials Recovery Facilities at Coolaroo, Laverton, Geelong and Hobart (Tasmania), Glass Processing Plants at Coolaroo and Penrith (NSW), a Plastics Processing Plant at Laverton and a Transfer Station at Hallam. The following is an overview of the Victorian operation by site:

• Coolaroo MRF and Glass Processing Plant o Largest in the Southern Hemisphere o Throughput of 1,000 MT per day o Operational (target) uptime over 95% o Latest technology and equipment selection based on highest safety & fire standards o Paper processing to contamination levels that meets China standard o Designated a “waste and resource recovery hub of state importance” within the

Victorian Government’s Statewide Waste and Resource Recovery Infrastructure Plan June 2015


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• Laverton MRF o Throughput of 600 MT per day o Latest technology and equipment selection based on highest safety & fire standards o Paper processing to contamination levels that meets China standard o Operational since November 2017 with update in 2019

• Laverton Plastics Sort Facility

o Throughput of 12+ MT per hour o Latest technology including 10 optical sorting machines o Sorts HDPE, PET, PP and mixed plastics o Sorts plastic caps down to 25mm

• Geelong MRF

o Capable of throughput of 50 MT per hour o Services Geelong and the Barwon-Bellarine region o Upgraded in 2018 o Optical sorting machines o Paper processing to contamination levels that meets China standard

• Hallam Transfer Station

o Aggregates material from the south eastern region o Product goes to MRF’s and plastics and glass facilities o Intention is to upgrade facility to an MRF in 2019 o Equipment has been purchased and is on hand

In the usual course of operations, when the Hallam Transfer Station is upgraded to a state of the art MRF (planned for 2019), SKM will have the capacity to process the total annual volume of all Victorian kerbside recyclables.

5. SKM Products and Markets

All of the recyclable products SKM collects are processed and sorted into individual product grades and then made available for sale to end users both domestically and internationally who remanufacture the recyclable material into new products. Export markets for recyclables trade in US Dollars with the associated exchange rate movements and risks. At the moment, the exchange rate at approximately 65-70 cents to the US Dollar is a positive for the Australian recyclers who export. Domestic markets trade on export equivalent pricing and are therefore also exposed to exchange rate fluctuations. Paper and cardboard The primary products SKM process are paper and cardboard which make up 50% - 60% of the material stream. These paper and cardboard products are processed and graded by quality:

• OCC 95/05 and OCC 90/10

o Sold to paper mills o Converted into brown grades: corrugation and box making o Markets: Australia, China, Indonesia, Thailand, Vietnam, India Domestic 50%, Export 50%


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• ONP#8 (Old newsprint)

o Sold to paper mills o Converted to newsprint, boxboard and premium packaging o Markets: Australia, China, Korea, Indonesia, Malaysia Domestic 20% to 30%, Export 70% to 80%

• Sorted Office Paper/Office Pack #2

o Sold to paper mills o Converted to tissue, writing paper, white top for plasterboard o Markets: Australia, China, Korea, Bangladesh, India Domestic 20% to 30%, Export 70% to 80%

Glass

Glass is second highest in volume representing 23% - 33% of materials SKM processes. Glass is currently the only product within Australia that represents a circular economy. The glass is collected and sorted at an MRF and then processed through SKMs Beneficiation Plant. The Beneficiation Plant was a significant investment by SKM and ensures that more than 100,000 MT per annum is diverted from landfill. Glass processing produces the following grades:

• Furnace-Ready Cullet

o Purchaser melts down and converts into new bottles, new jars etc. and insulation o Markets: Australia

• Ground Glass products

o Used for sand substitution, road base, clean-fill replacement and landfill capping o Markets: Australia and various others Mainly domestic

Other Products

Other products make up 10% - 15% of the materials SKM processes:

• Recycled Plastics

o Products include: PET Clear PET Coloured HDPE Natural HDPE Coloured Mixed Plastics Mixed Rigid Plastics Mixed Plastic Film

• Purchaser converts into a flake or a resin which is then used in the manufacture of bottles, textiles and clothing, packaging, toys, plastic goods

• Markets: Australia, Taiwan, Thailand, Philippines, Vietnam, Indonesia, India o Historically primarily exported o Market for higher grade products strong


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o New plastics washing and pelletising plants coming on stream locally, expected to take the lower value products and more plastics overall

• Recycled Non-Ferrous and Ferrous Metal

o Products include: Used beverage cans (UBC) Steel cans Aluminium closures (from the glass Beneficiation Plant - bottle caps and can

closures) • Purchaser converts into new cans, packaging, automotive, electrical and steel making • Markets: Korea, Japan, Vietnam, Thailand, India etc.

o All exported. Currently little or no capacity in Australia

6. China’s National Sword and Blue Sky Policy

Prior to the implementation of China’s National Sword Policy in late-2017 Councils were being paid by SKM (and other recyclers) for their recyclable material. This operated as a type of profit share with the Councils receiving a fixed price and the recycler dealing with the movement in market price, foreign exchange and contamination for each product and managing the associated risks. The introduction of China’s National Sword Policy, a forerunner to the Blue Sky Policy introduced in March 2018, set the acceptable contamination rate for recycled paper imported into China at 0.5%, while the average contamination from SKM product prior to the policy was averaging approximately 3% - 5%, and industry average may well have been higher. The contamination rate of 0.5% is well below the level of contamination in exported recyclable paper from major economies like the USA and including Australia. As a result, a stable and dependable market for leading prices was closed off for any supplier that couldn’t meet the Policy. Consequently, the Asian region became ‘flooded’ with paper and cardboard which would have normally gone to China and, the price crashed by around $200 US per MT. In Victoria, recyclers moved to renegotiate contracts, with their businesses under financial threat as a result of the market collapse. Councils which had been receiving a rebate per tonne for the material (representing hundreds of millions of dollars contributed to local government by SKM over the years) were required to pay a gate fee. During this time, SKM did not stop receiving recyclables from Councils. While the opportunity existed, SKM chose not to enforce Force Majeure clauses in Council contracts, instead choosing to honour its social license and values as a recycling company and keep the recycling system operating.

The Victorian Government intervened with an assistance package of $15 million for Councils to assist in covering the additional cost as a result of the gate fee until 30th June 2018. Post June-2018, the gate fee was included in Councils waste levy or where a waste levy does not exist, via the Council rates (i.e. passed on to the ratepayer). The assistance package also provided Councils the ability to renegotiate contracts without going to tender and required that a Council must go to market for the provision of the recycling service by 30 June 2020 (unless subsequent arrangements have been put in place), even though they were still potentially under contract.


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For most processors both domestically and internationally who were selling a major portion of their paper and cardboard product into China, the impact was significant.

7. SKM’s Response to the China Crisis

Prior to the China crisis, SKM had identified concerns about the vulnerability of the local and international recycling market and the Victorian kerbside recycling infrastructure and took the decision to invest heavily to upgrade its MRF’s and other facilities to the latest technology. This included a state-of-the-art plastics sorting facility at Laverton to maximise the opportunities with plastics, with plans to add a further state of the art MRF at Hallam. The objective of SKM’s strategy was to ensure that the maximum value from both an economic and environmental view point could be achieved from the recycled material, to deliver value to Councils and their residents and to continue to run a viable business. The upgrading of SKM facilities however was not without challenges. At the time the upgrades were occurring China’s National Sword Policy’s next iteration, the Blue Sky Policy, was being implemented and the business was also dealing with the impact of the Coolaroo fire. The recycling system is a “push” process, the householder places material in the kerbside recycling bin whether the recycler has the capacity to receive it or not. The recycler therefore has to deal with movement in stock on site as markets open and close daily. This challenge becomes much more complex as facilities are being upgraded, which takes time and requires ongoing testing to achieve maximum throughput and quality, resulting in a reduction in throughput. This occurred during the upgrades of SKMs MRF’s and the plastics facility. During this period, SKM determined to meet the China standard for paper and cardboard contamination which initially resulted in the plant throughput dropping to almost 50%, with resulting increases in the temporary storage of un-processed materials. SKM did not send (and has not sent) material to landfill to deal with the increased need to store un-processed materials. The only material that has been (and is) sent to landfill is material that is contaminated and cannot be recycled (and should not be put in the kerbside recycling bin in the first place) and therefore has no market value. SKM received no direct financial or other support from the Victorian government during this period of transition. While the operating efficiency of the MRF’s and associated facilities has improved significantly, to a point where paper is now being sold into China, the issue of the “push” nature of the recycling system, poor prices for products, significantly higher costs to produce quality products, policy uncertainty in China and to an extent Victoria makes it an ongoing challenge to operate a commercially viable business that minimises the storage of materials, provides good service to the citizen and Councils and ensures that recyclable material is appropriately utilised.


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8. The Future of the Chinese Market There is ongoing uncertainty around the future of the Chinese market. China has stated publicly that they will “eliminate the imports of solid wastes by the end of 2020”. There is much discussion in the industry internationally as to what this may mean, for example, is clean recyclable material going to be classified as solid waste.

This issue is further complicated by the Trade War currently threatened between USA and China. The USA, was the biggest exporter of recyclable paper and cardboard to China, until the introduction of China’s National Sword and Blue Sky Policies. If China determines to reduce the contamination rate of materials further, or close the door to recycled material completely, the market will need to further adapt. The primary options are: • Reduce the level of contamination at the household end, such as through improved product

separation and better education of householders, which will increase the capacity of SKMs plants by approximately 10% and reduce the processing costs

• SKM intensify the removal of contaminants, which will reduce the capacity of SKMs plants, increase the volume of contaminants going to landfill and therefore increase cost to the recycler

If China determine not to accept any product in the future, this will be a major crisis. If this does occur, markets will most likely “re-balance” over the longer term as new paper mills are built outside China, however in the short to medium term countries that are not self-sufficient in recycled raw materials for their manufacturing needs will become more flooded with material than they are now. This will likely result in a further reduction in price for the recyclable product, and/or Australia will need to establish value-add solutions for the recycled material locally.

The challenge in developing the Australian market for value-added solutions is whether domestic or international markets exist to make this commercially viable. Within these circumstances, the Victorian Government requirement that Councils (that haven’t made other arrangements already) tender recycling services by 30 June 2020 appears to be misguided, for the following reasons; 1. As outlined, the future of the Chinese market is unclear, which represents a real risk at a time

when recyclers will be responding to tenders. Existing recyclers may therefore not be in a position to respond

2. Is it unlikely that any business or financial institution will invest in the recycling sector without the certainty of supply of recyclables (and relatively stable commercial conditions) post-2020

3. Aggregated contracts (and therefore volumes) could be counter-productive because the

commitment required from the industry may be too big in an uncertain environment (i.e. bigger volumes require bigger investment)


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9. The Challenges for Recycling in the Short, Medium and Long-term

In SKM’s view, the primary challenges for the recycling industry in the short, medium and long-term include:

• With paper and cardboard representing 50% - 60% of recyclables in the normal recycling bin, the continuing existence of long term viable markets for these products will be fundamental to the success of the recycling system. There are however real challenges in achieving this:

o The dependence on the export market with a world surplus as a result of China’s actions

o China’s National Sword and Blue Sky Policies being unclear post-2020 providing no certainty to the market

o The China policies’ influence on business investment decisions o The risks associated with the State requiring Councils to negotiate new contracts

for recycling services at a time when world markets are uncertain

• The State Government Policy settings under which the recycling industry operates do not seem to take into account or effectively deal with:

o The “push” nature of the business and the volatility of the commodity markets o That industry has to deal with daily outside influences which they cannot control

and may be at odds with their commercial viability o That the most impacted operators in the market during volatility are businesses

who process and trade in recyclable material such as SKM and Polytrade o How industry is to deal with the storage of materials during market volatility o The uncertainty of the regulatory framework, including changes to rules in relation

to capacity to store materials o The fact that critical capital investment in the recycling industry is through private

investment founded in commercial considerations, which in the future will be influenced by market conditions, government regulation and profitability

o That recyclers effectively have 100% responsibility and accountability for the system which is not a fair or accurate reflection on how the industry is overseen and regulated

o The implications for the State if a major recycler such as SKM ceases business with the potential for an additional 400,000 MT per annum of recyclable material being sent to landfill and the impact on existing landfill capacity

• The medium to long-term solution to the market volatility is to achieve a form of circular economy in Australia. The ability to achieve this is dependent on our capacity to create economically viable markets for recycled products. The establishment of new pulp mills to utilise the paper stream represents an opportunity however this will only occur if commercial conditions support it and new markets are developed. The same applies to other products in the recycling stream

• Other actions such as increased education, improved separation and reduced contamination at the household level will assist recyclers to reduce cost and lower contamination. Container deposit legislation may also improve the recovery of glass etc. however care needs to be


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taken to ensure that the model does not undermine what is already a challenged industry

• Finally, if the Victorian Government believes that an effective recycling system is critical to the Victorian community, then financial, regulatory and education support needs to be provided to the industry. Industry has the ability to identify and realise the solutions to deal with the challenges that exist in the market but requires genuine partnership with Government, based on commercial reality. Currently, all risk sits with the recyclers.


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