In the early 1990s I was lucky enough to have been taught by an ecology professor who maintained that industrial systems would one day come to mirror the structure of natural ecosystems. He was referring in particular to the central role and extraordinary variety of ‘detritivores’ – organisms that break-down and recycle nutrients – and the almost complete lack of businesses in industrial systems that play this role.
Even at that time, starry-eyed environmentalists talked about a ‘circular economy’ in which waste was eradicated not just from manufacturing processes, but also throughout the life cycles of products and their components. Fast-forward to 2014, and the circular economy is attracting interest and investment from sectors as diverse as chemicals to cars, and from software to business services.
Public policy, resource prices and volatility driving a step-change
Public policy has played an important role in influencing businesses and public authorities to consider how they manage waste. Taxes on landfill, such as that in the UK which at 1st April 2014 stood at £80/tonne[i], have encouraged rapid growth in alternative waste treatment technologies. However, equally important has been the rising price of raw materials, as well as the growing volatility of these prices[ii]. According to Chatham House, the sustained high level of volatility across the commodity markets since the early 2000s marks a new trend.
In a paper ‘Remaking the industrial economy’ published in 2014, McKinsey & Co. argues that the year 2000 represented an inflection point in the real prices of raw materials and that by 2008 price increases had erased almost a century’s worth of real price declines. Prices fell precipitously with the onset of the global financial crisis in 2009 but, even in the few years since, resource prices have rebounded faster than global economic output. As McKinsey put it, ‘the era of largely ignoring resource costs is over’[iii].
While absolute scarcity is several decades away for most raw materials, more important for the economy as a whole is the growing cost of extracting useable quantities of a wide variety of raw materials from less accessible and lower quality reserves. In 1900, copper ores, for example, contained approximately 4% copper, but by 2010 the average ore grade was just over 1%[iv]. In many cases ‘urban mining’ (recovering valuable materials from waste streams) provides much greater opportunities for metal recovery. Umicore, for example, estimates that mining primary gold reserves yields only about 5g/tonne of ore. The same yield on a tonne of printed circuit boards is approximately 200/250g of gold[v]. Even back in 2008, Japan’s National Institute for Materials Science calculated that Japan’s untapped ‘urban mines’ contained 1,700 tons of indium (about 61% of known natural reserves); 60,000 tons of silver (22% of world natural reserves); 6,800 tons of gold (16%), 5.6 million tons of lead (10%), 11% of the world’s tin reserves and 10% of world’s tantalum[vi].
Necessity is driving invention
The old saying ‘Necessity is the mother of invention,’ holds true. The stipulations of policy and economics have led to an extraordinary flowering in the variety of technologies available to recover and re-use waste raw materials. Organic materials such as food waste are relatively easily dealt with through composting or anaerobic digestion. Almost all food waste from UK supermarkets is already converted into valuable biogas and fertilisers. New technologies are emerging all the time, for example, converting waste plastic into diesel, recovering phosphates from sewage to produce mineral fertilisers[vii] and even technologies for recovering the minute quantities of platinum found in street sweepings[viii].
Corporate activity is heating up
These dynamics are also leading to significant corporate activity. Orix Group, a Japanese conglomerate, recently spent over US$200m on unlisted precious metal recycling company ‘Net Japan’, and paid approximately 51x EBITDA for the business[ix]. In Europe, Suez Environnement has teamed up with several companies including Carbios and Cynar to develop services aimed at boosting the value from plastic recycling.
Waste management businesses clearly occupy an important position in the current industry structure, but this may be changing. In the UK, 35% of businesses are looking to develop relationships with companies outside the traditional waste sector to help them manage and re-use their wastes, in the process, disintermediating waste management companies[x]. Coca-Cola for example has entered into joint ventures with plastic processors in the UK and France to capture more value from recycling PET bottles. Marks & Spencer is even trialing a joint venture with Somerset Council to source plastic waste directly from household waste streams.
In the automotive sector, Renault’s Choisy-le-Roi plant, near Paris, remanufactures its automotive engines, transmissions, injection pumps and other components for resale. The operations at the plant have a radically lower environmental footprint compared with similar facilities and uses 80 per cent less energy and almost 90 per cent less water (as well as generating approximately 70 per cent less oil and detergent waste). The plant also delivers higher operating margins than Renault as a whole is achieving.
And changing business models
Manufacturing businesses like Renault, but also Ricoh in printers and Philips in medical technology, are finding that collecting used products and refurbishing or remanufacturing them, utilizing existing relationships, technologies and capital and can often generate higher margin opportunities than traditional manufacturing activity.
Across the economy, these impacts are likely to be very significant. McKinsey & Co. estimates that, in the European Union alone, the annual savings on material costs for durable products with moderate lifespans could reach $630 billion[xi]. The McKinsey & Co. research also suggests that the reduced demand for raw materials (as a result of more recycled and reused materials) could significantly affect demand-driven volatility of steel prices in the automotive, machining and transport sectors.
Selling services not products
Ultimately, selling services not products may become a stepping stone to an entirely new business model. Already, companies such as Autodesk, PTC and Dassault enable their customers to monitor the performance and location of expensive capital equipment while it is in use. For example, GE is able to monitor the in-flight performance of its jet engines. If the sensors detect anomalies, replacement parts can be ordered and potentially even be available at the destination airport before the airplane arrives. In this model, GE is offering a service as much as a product.
Philips takes this approach one stage further with its business customers and now sells lighting as a service rather than just lighting products. Customers only pay for the light, and Philips takes the technology risk and the investment cost. Critically, they also usually take the equipment back at the end of its life in order to recycle the materials or upgrade them for reuse.
These examples show that during the last few years, the confluence of resource prices and volatility, policy and technology have created new opportunities for companies to develop new products and, increasingly, new services that can produce new revenues, generate higher margins and improve productivity, while reducing environmental impacts. Companies that are innovating in this way may still be the exception rather than the rule, but I think my old professor would be quietly pleased.
[ii] Bernice Lee et al., Resource Futures – A Chatham House Report, The Royal Institute of International Affairs, December 2012 (http://www.chathamhouse.org/research/eedp/current-projects/resources-futures)
[iii] Hanh Nguyen et al., Remaking the industrial economy, McKinsey Quarterly, February 2014 (http://www.mckinsey.com/insights/manufacturing/remaking_the_industrial_economy)
[iv] ‘The key drivers behind resource growth: an analysis of the copper industry over the last 100 years’, Richard Schodde, MinEx Consulting, 3 March 2010
[v] Umicore, Recycling of technology metals: Opportunities and limitations, Capital Markets Event on Recycling, 18-19 November 2010 (http://www.umicore.com/investorrelations/en/newsPublications/presentations/2010/show_2010CMD_Recycling.pdf)
[vi] Japan’s ‘urban mines’ are comparable to the world’s leading resource nations, National Institute for Materials Science, January 2008 (http://www.nims.go.jp/eng/news/press/2008/01/p200801110.html)
[viii] Richard Gray, The streets are littered with gold, Daily Telegraph, 14 July 2013 (http://www.telegraph.co.uk/earth/environment/10177855/The-streets-are-littered-with-gold.html)
[ix] CLSA Research note
[x] Closing the Loop: risk or reward?, Edie.net, 2013
[xi] Op. Cit. iii