The UK waste and recycling sectorThe waste sector continues its transformation whilst overcoming current recessionary pressuresThe UK waste and recycling sector has undergone drastic change over the past 14 years since Landfill Tax was first introduced. From a focus on how to cope with increasing volumes of waste to be collected and processed, the emphasis has transformed to one of recycling, smart treatment and recovery of materials for use in many industries. The sector presents many opportunities for investors and operators, particularly in areas of the market where compliance with EU and UK legislation is lagging behind expectations. The sector also presents risks in the form of exposure to global commodity market prices, for materials such as metal and paper; the technological challenges of gearing up proven waste management processes to work on an industrial scale; and inflationary factors such as fuel prices. During the recession this market has been severely challenged. According to KPMG’s research, a conservative estimate suggests Profit Before Tax aggregate for the sector is down year on year by in excess of £160m As a result, many companies have gone into administration; are significantly restructuring to meet lenders’ requirements; or may be sold to other groups with existing strengths, as was the case with the recent sale of Wincanton’s recycling business to Sims Group UK for £17.5m. Overview
Until recently, most of the waste generated in the UK was deposited in landfills or incinerated, but strict UK and EU regulations are now targeted at improving the means of waste disposal, developing new technologies for energy recovery, and a shift of focus from waste disposal to waste minimisation. As a result, recycling has become a key component of the UK’s waste management strategy and the UK waste management market ranks among the most attractive in Europe. With the UK lagging behind other European nations in reaching the required EU waste management directives; there are both catch-up opportunities for operators and new opportunities, such as material recycling and incineration with energy from waste (EfW). EfW technologies can contribute up to 50 percent of the UK renewable energy target by 2020; however, this is contingent on the pace of investment and availability of suitable feedstock and achieving planning permissions and environmental permits. The market is increasingly difficult to enter given the high levels of investment regulatory compliance required and public-private collaboration is common in the sector. Waste management processes and projects require significant levels of investment capital and local authorities tend to work with waste management companies in the form of long-term PFI contracts of increasing scope, value, duration and complexity. The market remains regionally focused and fragmented, with some 4,500 waste collection treatment, recovery and disposal businesses in operation. Typically, these businesses fall within the £100k-2.5m turnover band and specialise in niche waste activities. Alongside these are larger, integrated waste management companies (IWMs) with higher levels of turnover derived from joined up activities across the sector. The largest five organisations account for 55 percent of the market. These are Veolia Environmental Services, Biffa, SITA, WRG (Waste Recycling Group) and Viridor. Further consolidation within the market is expected through these larger businesses acquiring smaller, specialist operators or seeking to bolt on recycling operations and acquire next-generation waste management and recycling skills. A transformed sectorThe transformation within the market has been fuelled by regulatory, legislative and fiscal changes coupled with increasing awareness of the impact of waste management by UK citizens and the consequent demand for business to be ‘greener’. This heightened awareness has mainly been achieved through household recycling schemes and school education programmes. As a result, recycling has been adopted as a worthy national habit. Proof of this is that the recycling rate for domestic waste increased from 7.5% in 1996/7 to 34.5% in 2007/8. More streams of waste are now included within the controlled segment of the market and this trend is set to continue. Technological advances have generally kept pace with the changes in the market with improved processes for incineration and energy recovery. Many of these processes are not yet operating at industrial scale and will require further investment and the obtaining of planning consents to operate in municipal locations. Obtaining such planning consents has been a struggle and SITA UK recently called for a "shift in mindset" from councillors to understand the energy potential of waste after his company issued figures showing that, between 2007 and 2009, only 35 out of 68 planning applications for EfW facilities were approved. The continual change within the sector has lead to a requirement for new skills, particularly to stimulate and respond to trading interest in recycled materials in the physical commodities markets in Europe and the Far East. This new commercial avenue comes with its own risks as highlighted by the fall in the value of recycled mixed papers on the commodities markets from around £50 per tonne in June 2008 to below £8 per tonne by December 2008 (Source: letsrecycle.com). For those waste companies in the secondary paper market, such a price drop could have led to business failure. Indeed through 2009, many smaller companies went into administration. These included the waste management arms of companies in related industries (eg road haulage and construction) and many niche recyclers. Current risksIn addition to the permanent business risks associated with materials trading in the commodities markets, as you would imagine many waste companies are facing tough times due to recessionary pressures. According to KPMG associate partner, Mark Whelan: “The UK recycling market was one of the hardest hit by the economic downturn. The market depends heavily on sectors such as automotive, consumer goods and construction. Reduced demand from these sectors due to the global credit crunch had a serious negative impact. “For example, prices of recyclates started plummeting, leaving recycling companies with huge unsold inventory levels. The price of used newspaper fell from around £100 per tonne to £25 per tonne. The price of steel cans plummeted from around £235 a tonne to nearly zero. In some cases, the cost of new products was substantially lower than that of recycled products.” The most significant factor driving this falling price trend was the slump in demand from China - an important export destination of recyclates from the UK (about 2.5m tonnes of paper and 500,000 tonnes of plastic bottles, polythene and other plastics were exported to China in 2007). The changes in the sector have proved particularly challenging for traditional waste management businesses, particularly those with large landfill portfolios who have suffered from lower levels of domestic waste due to local authority recycling initiatives diverting waste away from landfill; lower levels of commercial, industrial and construction waste due to current recessionary pressures and a longer term move away from industrial activity and pre-treatment regulations. The combination of these effects and the impact of Landfill Tax has resulted in less waste being sent to landfill. For the newer businesses, securing lines of investment finance is more challenging in this phase of the economic cycle and puts a brake on outright growth. For lenders to this sector, the risks of business collapse are similar to those across the UK economy as a whole. The overall lending exposure to UK banks from the sector is currently £2bn. OutlookAlthough the UK waste and recycling market is set to grow at a healthy pace once the economy is back on its feet, the short to medium term will remain challenging. Many waste infrastructure projects have been cancelled or delayed and bank funding for waste projects is still difficult to obtain. With pace of economic recovery slower than anticipated, we expect to see a few more insolvencies before the market picks up; the government’s focus is clearly on other sectors at present, and private sector companies and PE providers are also likely to hold back investment as they wait for a full recovery. Looking forward, the key driver for future growth is the opportunity arising from legislative burdens to transform what has been a landfill-centred industry to one centred on reducing waste, re-using and recycling, material recovery and energy generation, plus changing demands on the sector from UK citizens. Recycling and EfW are expected to be the strongest drivers of new investment. Feedback & commentsTo provide feedback on this Sector Foresight, or to suggest other sectors you would like us to cover, please email hayley.willans@kpmg.co.uk To view previous editions of Sector Foresight, please visit our webpage. |
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