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RWM - Submission 581

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

Table of Contents

1. SKM Background ................................................................................................................................. 2


2. SKM Recyclables Processing Volume (Victoria) ................................................................................... 3
3. SKM Council Contracts ........................................................................................................................ 4
4. SKM Resource Processing ................................................................................................................... 4
5. SKM Products and Markets .................................................................................................................. 5
6. China’s National Sword and Blue Sky Policy ........................................................................................ 7
7. SKM’s Response to the China Crisis .................................................................................................... 8
8. The Future of the Chinese Market ........................................................................................................ 9
9. The Challenges for Recycling in the Short, Medium and Long-term ....................................................10

For enquiries contact:

SKM Recycling
94 Maffra Street
COOLAROO VIC 3048

Phone: +613 9309 8244


Email: info@skmrecycling.com

Report Revision
0.1 (Draft) 20 May 2019 For internal review
0.2 (Draft) 21 May 2019 Issued to client for comment
0.3 (Draft) 23 May 2019 Incorporating feedback from client
0.4 (Draft) 28 May 2019 Incorporating feedback from client
1.0 (Final) 30 May 2019 Final document for distribution

Report Preparation
Report Prepared By: Spence Consulting Group Pty Ltd, cameron@spence-consulting.com

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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

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SKM is a significant contributor to the National and Victorian community and economy, currently
directly employing over 300 people from a diverse mix of cultural and socio-economic backgrounds.

SKM recycling processes also provide significant environmental benefits*:

• 950,000 cubic metres of landfill space saved annually


• 216,480 tonnes of CO2 emissions avoided annually
• 6,673,000 gigajoules of energy saved annually
• 5,740,000kL of water saved annually

* Source: Environmental Benefits of Recycling Calculator (Department of Environment and Climate Change NSW June 2008)

SKM is one of three major recycling processors in the Victorian market:

• SKM – a recyclables processor and trader who receives recyclable material and then on-
sells the processed product for all recycling streams
• Polytrade – a recyclables processor and trader who receives recyclable material and then
on-sells the processed product for all recycling streams
• Visy – a paper manufacturer that adds value to a proportion of product received, and a
trader for the remainder

2. SKM Recyclables Processing Volume (Victoria)

Victorian kerbside collection and commercial volumes delivered to SKM amount to around 400,000
metric tonnes (MT) per annum.

Of this volume, around 360,000 MT is processed, and able to be sold into domestic and
international markets after processing. The balance is lawfully disposed of.

In the 2016 calendar year (the last year unaffected by the China’s National Sword and Blue Sky
Policies) the breakdown of Victorian recyclables processed by SKM was approximately:

Material Percentage
Paper and cardboard 50% - 60%
Glass 23% - 33%
Steel 2% - 3%
High-density polyethylene (HDPE) 3% - 4%
Other plastics 3% - 4%
Aluminium 1% – 2%
Polyethylene terephthalate (PET) 1% - 2%

The composition of recyclable materials by product is consistent with the general makeup of the
household kerbside recycling bin.

In addition, each household recycling bin will generally contain between 8% and 15%
“contaminated” materials, with an average of around 10%. This volume of contaminated material
cannot be recycled so is ultimately sent to landfill.

Processing of contaminated materials is a significant cost in the overall recycling process, with
removal of contaminated material consuming up to 10% of total plant capacity. In addition

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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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