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Hedging recyclate commodities market challenging, says industry

A proposal to introduce financial instruments to hedge volatility in the recycling market provoked a mixed reaction from industry, with some sceptical about its feasibility and some welcoming the idea.

In a letter to attendees of the Investor Symposium held in May by Defra and WRAP, resource minister Lord de Mauley said it would be beneficial to introduce hedging to the waste and resource market.

This would mirror practices of traditional commodity markets, where so called “futures contracts” are employed. Futures represent a pledge to make a certain transaction at a future date at a pre-agreed price. Futures are sold on the futures market and investors make a gain or loss if future prices are lower or higher than the pre-agreed.

But some industry insiders said the UK recycling market’s peculiar features could make it difficult for futures to be introduced, at least in the near future.

Tim Gent, director at glass reprocessor Recresco, said the UK recycling market was influenced by more external factors than other commodities markets and was more ‘political’. “Take for example China’s Operation Green Fence, or the PRN system,” he said.

A PRN market operator told MRW the UK recycling market was significantly more volatile than any other commodity market, and recycling futures could offer too low profits margins to attract investors.

“From a speculative point of view, it is a hard business to predict,” he said. “There are too many parameters coming into play, such as currency risks, export risks, policy risks, all these moving around and changing in a brief period of time, on top of natural changes in materials value and in PRNs.”

Recyclate quality confidence needed

Malcolm Valentine, director at consultancy The Resource Forum, gave the proposal a cautious welcome. He noted that the UK recycling market was limited in comparison to the global reach of commodities markets but said: “As markets develop and there is more appreciation in the industry that waste equals resource, and of the quality of feedstock increases, the introduction of a market mechanism such futures trading makes a lot of sense.”

Paul Levett, director at consultancy Waste Transition, also welcomed the concept of a futures market, but highlighted: “It cannot work effectively without confidence about quality, which relies on the MRF code of practice, PRN reform and enforcement of export regulations regarding poor quality material.”

Secondary materials price stability

Some industry insiders said the introduction of recyclate futures could help bring more stability to materials prices and promote the sign-off of long-term contracts, echoing arguments made by Lord de Mauley.

Recresco’s Gent said if the system were in place, he would want to join it, because it would help spread the risk of price changes with investors, making long-term contracts more viable. Long-term contracts in the glass sector became “practically inexistent” following dramatic increases in glass PRN prices at the end of 2012, he said.

Forms of forward market trading are already in place in the industry, although investors or price speculators are not involved. In March 2011, The Environment Exchange (t2e) launched an online trading platform that allows participants to secure price and volume of recovered paper and to pay or deliver those contracts at an agreed time in the future, in a maximum timeframe of 13 weeks.

Angus Macpherson, managing director, The Environment Exchange (t2e), said:

Angus MacPherson

“As might be anticipated we agree with the Minister and embrace his vision. In the recycling industry huge leaps have been made in both the end markets for products of recyclate and the technology, which has improved the product and reduced the costs of production. Yet the management of the supply side has changed little over thousands of years despite the number of variables increasing exponentially.

“In this resource scarce world the management of these risks is becoming more and more complex and expensive. The introduction of a liquid marketplace for forward and futures contracts in which these risks can be offset, hedged, has proved beneficial for trading in other commodities and is an opportunity that should not be overlooked.

“However, such a structure does not appear overnight and needs not only a clear aim, which has been provided, but also commitment at all levels as well as pragmatic and determined delivery. t2e has started this journey with the launch of its recovered paper marketplace.”


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