The Economics of Recycling with ISRI’s Joe Pickard

June 29, 2015

 
John Shegerian: Welcome to another edition of Green Is Good. This is the ISRI edition of Green Is Good in beautiful downtown Vancouver, British Columbia. We’re at the Vancouver Convention Centre and we’re so excited to have back with us on Green Is Good Joe Pickard. He is the Director of Commodities of ISRI. Welcome back to Green Is Good, Joe. Joe Pickard: Thanks for having me, John. Pleasure to be here. John Shegerian: You know, Joe, I loved it when you first came on Green Is Good. I learned a lot about commodities. We’re going to be talking about commodities today. And almost everybody is talking about commodities now. It has become one of the hottest topics in the entire world. You turn on Bloomberg or CNBC or the New York Times or the Wall Street Journal commodities is the hottest topic. Joe Pickard: For better or worse, yes. John Shegerian: That’s great. So before we get to talking about the story of commodities and ISRI and the whole recycling industry as a whole with regards to commodities, for our audience that hasn’t met you before or heard you speak before, can you share a little bit about your background leading up to joining ISRI and your love and understanding of commodities and what you do. Joe Pickard: Sure. I’m an economist by training. So I am ISRI’s Chief Economist and Director of Commodities. Prior to serving at ISRI, I was the economist at the International Copper Study Group in Lisbon, Portugal. So the Copper Study Group looks not only at supply and demand dynamics for copper but also copper recycling rates, copper scrap usage, and that was one of the first exposures for me to sort of scrap and recycling statistic professionally. But I’ve had a long standing interest in recycling and economics going back to graduate school so the opportunity to work at ISRI to combine the interest in economics and commodities recycling was a perfect fit for me. John Shegerian: What year did you join ISRI? Joe Pickard: I joined ISRI in 2010. John Shegerian: 2010. So has commodities always been at the forefront of the recycling industry? Or when things are good people aren’t as concerned, but when things take a dip like what we seem to be in right now it becomes a much harder topic and the predictability becomes even more difficult? Joe Pickard: Well, it’s always a commodities business. Right? John Shegerian: Right. Joe Pickard: So our members have to go through the commodities cycle that other industries have to go through as well, and our industry has certainly seen the ups and downs not just in the current cycle, but over the last decades, we’ve gone through a number of these cycles and it’s the smart companies that are forward looking that really are great at weathering these kinds of storms. But I think with the slowdown in China today, the decrease of commodity prices that we’re seeing basically across the spectrum, we’re seeing an increased attention to commodities as you’ve seen, and that’s had a disproportionate effect on the scrap industry, because recycling is a commodities based business. John Shegerian: Let’s talk about it as an industry. How big is the recycling industry with regards to commodities? How big the commodities industry as a whole? Joe Pickard: So our industry annually recycles between 130 and 140 million metric tons per year across all commodities. The biggest by volume tends to be ferrous iron and steel scrap, where we are recycling over 70 million metric tons per year. On recovered paper and fiber, we are doing 40 to 50 million tons per year. And then we’re doing a lot on electronics. On related metals, like nonferrous and precious metals as well. But, all totaled, in the neighborhood of 135 million tons annually. John Shegerian: As a term of art, “commodity” means what? What is a commodity as a term of art, and what is not a commodity? Joe Pickard: A commodity is anything that can be traded interchangeably. So a ton of copper that you get out of the mine in Chile is going to be the same as a ton of copper, in theory, that a consumer in China would use. So if you can exchange money for a similar good that is interchangeable, basically you are looking at a commodity. John Shegerian: You know, Joe, last August, oil was somewhere trading in the $101-102 area, and I think this morning when we woke up, it had literally spiked a little bit up to 57 dollars. How does the price of oil and this whole new trend of fracking, maybe the Iran deal taking effect after June first, how do all these international economic trends – some a headlines, some are trend lines for the future – how are they affecting the price of oil and therefore then affecting the price of all the commodities as a whole? Joe Pickard: Right. And it’s a valid point because the price of oil is highly correlated to other commodities especially within the scrap industry. John Shegerian: Yeah. Joe Pickard: And the impact of these changing energy prices is sort of multifaceted on the recycling industry. So on the one hand, the recycling industry is a consumer of energy, right? So it takes energy to process scrap and recycled commodities. John Shegerian: Right. Joe Pickard: So when those input prices come down that is a positive in terms of making it more inexpensive to process those materials. On the other hand, we are seeing the reasons for the drop-off. We’ve seen a little bit of a resurgence in the oil price but the drop-off – like you noted – since the second half of last year, because we are seeing really a glut of crude oil production and demand not really keeping up with that. So we’re seeing that as a recurring story not just in crude oil but also in iron ore, where a lot of these major producers are continuing to pump out larger and larger quantities of the materials, even though prices are slumping, in an effect to capture market share. And that has a depressing effect across the commodities, which we see not just in oil and iron but also in steel and nonferrous metals and other commodities as well. John Shegerian: I just saw a BBC special on that two nights ago that said just like the Saudis – taking a page from the Saudis’ oil playbook, Rio Tinto is doing exactly what you said and it’s having the same effect as you just pointed out. Joe Pickard: That’s right. It’s the major miners. Not just Rio Tinto but BHP Billiton too. In the first quarter, they produced about 59 million tons of iron ore, which is a 20 percent increase year on year. John Shegerian: Wow. Joe Pickard: Even though prices are slumping. So you are seeing the major miners in Australia but also Brazil increasing their iron ore mine output. And now China has announced that it’s going to create some incentives to increase iron ore production within China too, which is going to further exacerbate an already supplied glut. John Shegerian: Do you believe in the thesis that has come out recently in the last week or so that iron ore prices will continue at the low rate that they are today through ’18? Is that right now the state of the art? Joe Pickard: I don’t do price forecasting per se. John Shegerian: I know. Right. Joe Pickard: But I think if you continue to see these miners pump out excess production and you see slowly improving demand but not enough to catch up with that capacity, you are going to have continued downward pressure on pricing. John Shegerian: Let’s go back to oil for a second and energy. What is going on now? Is it a major chess match between Russia, the Saudis, the frackers in America? And who is coming out ahead? And where is this whole fascinating reshifting of the paradigms going to leave us in six months or a year? What do you foresee? Joe Pickard: Well, I think on the demand side on the oil, it’s not that bad of a picture. The economy globally is actually growing, so that is a relatively positive indicator. The problem is there is this sort of race to capture market share and so the OPEC countries in particular have been very clear in their intention that they’re going to continue to increase output in an effort to sort of knock out some of the higher cost producers, including some of the producers here in North America, and I think we’ve seen that have an impact on the amount of drilling that we’re going to see here in the U.S. John Shegerian: Isn’t it true that North America now is producing more oil than the Saudis? Joe Pickard: It is. But if the Saudis and the other OPEC countries continue to provide excess supplies, that is going to make it more difficult for us to increase our production, especially higher up on the production cost code. John Shegerian: Being an economist – and you look at both forward trends and backward history to try and give better understanding to laymen like myself and our audience members – is it true or not true that our storage right now of our energy reserves is somewhere at an 80-year high or something like that? Joe Pickard: Yup. So inventories are very closely watched, and I think some of the increasing in the inventory levels has been part of the reason why we saw the selloff in crude oil prices from the second half of 2014 into early 2015. Like you noted, we’ve seen a little bit of a resurgence, but I think part of that is due to the expectation that OPEC’s efforts to squeeze out some of these higher cost producers might actually begin to start bearing fruit, and if that happens, you might see a little bit more of a rebalancing between supply and demand. John Shegerian: Oil at 100 in a couple years? Joe Pickard: I hope so. John Shegerian: Yeah. OK. Fair enough. Switching to another topic with regards to commodities, Joe, if you and I were sitting here five or six years ago, the talk of the town back then was all about brick, and you and I would be talking about the brick nations – Brazil, Russia, India, China. Is brick still alive? Or is the brick consortium and the importance of brick starting to fade and the world opening up even to bigger and better possibilities when it comes to trading commodities? Joe Pickard: I think on the commodities spectrum and especially with scrap, we’re seeing it open up. Historically, we’ve been very dependent on China as an overseas market, because we have seen such rapid Chinese growth and voracious appetite for commodities. John Shegerian: Right. Joe Pickard: So scrap exporters from the U.S. became very dependent on China for some of the commodities – like copper and aluminum were exporting upwards of 70 percent of those commodities just to China. Just to mainland China. Not even including Hong Kong. John Shegerian: Wow. Joe Pickard: So I think as Chinese economic growth has started to wane, we really need to find other markets internationally. And I think there are some real opportunities overseas outside of China. John Shegerian: Is India going to start taking on the role that China had? Is that in the near future or is that a more distant future? Joe Pickard: Well, I think the growth that we saw in China was kind of a once-in-a-generation kind of growth story. John Shegerian: OK. Joe Pickard: I think it’s ongoing it’s just moderating the rate of growth. I think India has tremendous potential as well. I don’t know that we’re going to see the same kind of explosive growth in India – for a number of reasons – that we’re seeing in China. But today, at least, Indian economic growth is probably as good or better than in China. John Shegerian: China, are we just taking a pause and then we will come back again or is this leveling off here to stay for the foreseeable future? Joe Pickard: I’d say we’re going to see more moderate growth in China than what we saw in the last decade for the next probably short term at the very least. John Shegerian: GDP a minimum of 6.5 percent? Joe Pickard: I’d say this year the expectation is 7 percent. GDP is always a little bit of a tricky story in China, because it seems like Chinese growth tends to meet the exact target that Beijing sets frequently. John Shegerian: It just happens. Joe Pickard: Which is great. John Shegerian: Right. Joe Pickard: But I think over the next couple of years the expectations are below 7 percent growth – probably 2015, ‘16, ‘17. John Shegerian: No kidding. For our audience out there that just joined us, we’ve got back on Green Is Good Joe Pickard. He is the Director of Commodities for ISRI. To learn more about what Joe does and his colleagues do at ISRI, please go to www.ISRI.org. This is the ISRI edition of Green Is Good coming from the Vancouver Convention Centre in downtown Vancouver, British Columbia. Joe, ISRI just commissioned a report on the economic impact of the recycling industry. Can you give our audience a little preview of what is in this report? And how can they get access to this important report? Joe Pickard: Sure. So the report will be available on our website. We are in the process of updating it now, so give us till the beginning of next week maybe. John Shegerian: OK. Joe Pickard: So that would be April 27th or 28th it should be available? John Shegerian: Right. Joe Pickard: Just a sneak preview of the sort of big numbers that came out of the report. John Shegerian: Yeah. Joe Pickard: Total economic impact of the recycling industry in the United States. One-hundred-and-five billion dollars this year is the expectation. John Shegerian: Annualized. Joe Pickard: Correct. Yeah. John Shegerian: Wow. Joe Pickard: The industry directly employs about 150,000 people, but if you include the jobs that are supported by the industry, whether it’s our equipment suppliers or others who are supported by scrap recycling, that number expands to about 470,000 jobs. John Shegerian: Wow. Joe Pickard: Yeah. John Shegerian: How does our industry, the recycling industry, compare to other industries in the United States? Joe Pickard: It’s comparable-sized to a lot of major manufacturing sectors. It’s bigger than, I think, all professional sports leagues combined. John Shegerian: Wow. Joe Pickard: It makes a huge impact on our economy for sure. John Shegerian: Right. Right. And you said 150,000 jobs. What kinds of jobs are these typically? Joe Pickard: Typically, extremely well-paying jobs. We see the scrap recycling industry is sort of the first stage in the manufacturing sector. We’re really the backbone of manufacturing, because we supply such high-quality but necessary raw material goods to manufacturing. So these are really manufacturing jobs that make a positive contribution, not just to the local economies and to state coffers, but to the nation as a whole. John Shegerian: Talk a little bit more about the local economies. What kind of impact does the recycling industry have? Is it more national or is it more local with regards to cities and states and local municipalities? Joe Pickard: Well, we’ve got scrap recycling facilities in every state in the country and ISRI members alone have over 3,000 processing facilities from coast-to-coast, and so we are basically everywhere, making huge impacts in local communities as well. John Shegerian: Speak to the issue of recycling as, again, an international opportunity and how it helps balance our trade issues here in the United States. Joe Pickard: Sure. So in the U.S. we are blessed with having a really large supply of scrap on hand. We have enough scrap not only to meet the needs of our domestic industry, but we can also export to countries around the world so exports have become an increasingly important share of our industry’s revenues. If you look back at the year 2000, exports were about 18 percent of our industry’s revenues. By 2010, that number had increased to about 38 percent. So while most of the scrap that gets processed in the U.S. is still consumed here, the export has been an increasingly important share. Today, we’re exporting all around the world and exports are typically in the neighborhood of about 40 million metric tons. Last year, we were valued at over $20 billion. John Shegerian: Wow. Joe Pickard: That’s just the export piece alone. John Shegerian: Let’s go back to the topic of commodities, Joe. We talked about oil a little bit. We talked a little bit about steel. Talk a little bit about the precious metals, gold, silver and then also a little bit on copper. Joe Pickard: Sure. John Shegerian: Again, not asking you to take out a perfect crystal ball, but where do you start seeing the trends there? Do things look as dour for gold and silver as they do a little bit for steel or where do you see those precious metals going? Joe Pickard: Well, precious metals and gold in particular are a little bit different from the ferrous and the nonferrous. John Shegerian: Right. Joe Pickard: In that they’re a reflection not just of supply and demand but of global risk factors. So when risk aversion tends to go up, so does the price of gold, because people want safe haven assets to flock to like treasury bonds and gold as well. So we’ve seen a little bit of a weakness in precious metal prices over the last year. I think gold is probably trading around $1,200 a troy ounce today, which is still a pretty healthy level, historically speaking. But gold is such a high per-unit value item that the recycling of gold and precious metals really adds a lot to the recycling industry revenues on a dollar basis. Not necessarily on a volume basis, but on a dollar basis precious metals are extremely important. And I think the outlook – given the number of risk factors in the world today, whether it’s slower Chinese growth, whether it’s concerns about the European Union, whether it’s concerns about what’s going on in the Middle East – those risk factors all tend to be supportive of safe haven assets like gold. So that’s a positive, I think, for gold going forward. John Shegerian: It’s positive. Joe Pickard: If you look at some of the nonferrous metals, you mentioned copper. John Shegerian: Copper. Joe Pickard: I think the expectation is that China is such an important part of copper consumption. About 40 percent of global copper use is just China. The slowdown in Chinese growth has a disproportionate effect on copper prices, which is why you’ve seen copper trading at or below $6,000 a ton recently versus its heights at the height of the commodity boom above $10,000 a ton. John Shegerian: Besides China does copper also tie to the price of energy? Joe Pickard: There is a relationship certainly historically between oil prices and copper. A lot of the nonferrous metals, copper in particular but aluminum probably even more so, are energy intensive in terms of getting copper out of the ground getting aluminum out of the ground and process – boxed out, I should say – so there is a close correlation between oil and some of these nonferrous metals. John Shegerian: This report that is coming out in the next couple of days and getting published within a week or so, how often does ISRI publish this report? Joe Pickard: So this has been connected for us by an independent consulting firm in New York called John Dunham and Associates. John Shegerian: OK. Joe Pickard: This is the third version of this report that they have done. They had done previous versions in 2013 and 2011. John Shegerian: So every two years. Joe Pickard: Every two years. Yup. John Shegerian: Every two years. Got you. So we’re coming to the end of the show, Joe. What is your feeling on the future of the recycling industry? Are we just in a little lull period now and it’s going to come storming back in the future? Do you feel bullish? Where are we today? Joe Pickard: All right. So I’d say short term, we certainly had some problems – like we talked about – on the commodities front with prices coming down. John Shegerian: Right. Joe Pickard: But this is an extremely resilient industry. I think the long term prospects for the scrap and recycling industry are extremely bullish, extremely positively. For one thing, you’ve got this confluence of concerns about sustainable development, about the need for commodities. John Shegerian: Sure. Joe Pickard: And about continuing urbanization in a lot of these developing countries, which have a lot of room to grow. Not just China but also Southeast Asia, the Middle East and Latin America. I think when you combine all those elements recycling is going to be even more important going into the future and it’s even brighter prospects for the scrap recyclers. John Shegerian: That is so great. And that is a great message of hope that we’ll end today’s show on. Joe, we thank you for all the great work you do at ISRI. Joe Pickard: It’s my pleasure. John Shegerian: And for coming on the show on a regular basis and sharing with our audience your thoughts, very important thoughts. This issue of commodities is so important for this whole industry, for our economy, for these 150,000 jobs and we’re just really appreciative. You’re a sustainability superstar and obviously truly living proof that Green Is Good. This has been John Shegerian and Joe Pickard from the ISRI Green Is Good special edition here in Vancouver, British Columbia, at the Vancouver Convention Centre. Thank you for joining us. To learn more about ISRI, please go to www.ISRI.org and see us at greenisgoodradio.fm. See you on our next episode. Thank you again.