Strategic Overview - MRF Operations PDF

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Strategic Review – SUEZ Spring Farm Materials Recovery Facility (MRF) MRF Industry - Market players

1. Key competitors – VISY, Polytrade, IQRenew (new emergent on Central Coast), Cleanaway (CDS – container deposit scheme coordinator) Market size – estimated at 450Kt p.a. SUEZ share 12% There is no Association that unites the recycling players VISY are the main operator and have the competitive advantage that they own downstream “beneficiation” processes that provide greater services than just the separation process conducted by the MRFs. These beneficiation processes are domestic include paper milling, plastics recovery and reuse. Whereas other MRF providers (including SUEZ) have to export product for recycling. Exporting will be banned in 2022 by the Federal government unless domestic beneficiation is completed prior to export. This places VISY at a strategic advantage.

2. SUEZ SF MRF is a commercial enterprise supported by large local government contracts. The main factors influencing the business include: a. Economic – falling commodity prices due the “China Sword” policy which banned the importation of unprocessed recycled commodities. Higher contamination rates experienced from feedstock – usually local government residents no source separately into the “yellow bin” correctly. Nappies are a key contaminant. Reduced outlets has forced offtakers to enforce stricter contamination thresholds that have caused MRF operators to upgrade technologies else landfill more materials at high costs. Council contracts are usually long-term and fixed so no pass through of risk to Councils/Local Govt. Products such as Mixed Paper now have no beneficial reuse so MRF companies such as SUEZ have to provide more specific sorting methods to obtain paper & cardboard into specific grades. Mixed Plastics are also at risk and MRF companies must upgrade facilities to extract grades such as HDPE, PP, PET etc to extract value from the commodity stream. The changes in economic conditions has seen the SF MRF become a loss-making entity. b. Legal – Federal govt banning exports of non-processed recyclable materials from 2022. Refer COAG ban (link enclosed) https://www.environment.gov.au/protection/waste-resource-recovery/coag-waste-export-ban-consultation

EPA closely regulates the industry and ensures MRF operators remain in licence conditions and do not create any environmental harm in relation to odour, noise, stockpiles (safety & fire), water and land contaminants

c. Technological – Industry has had to modernise processes to meet exporters expectations in light to the COAG ban and China Sword. Technology can only separate to a certain degree if the feedstock is heavily contaminated. Most technology is built in China or Europe and is expensive plant, the cost of which cannot be passed back to customers in most occasions. SUEZ has upgraded its SF plant recently with Ballistic separators and OCC screen technology to improve the separation of paper grades and reduce contamination. Whilst this has secured offtake of product, it has created additional residuals which increases landfill costs to the business. It is a double-edge sword; upgrade to maintain business continuity but pay for fixed plant and additional disposal costs. d. Social – the public expects environmental companies like SUEZ to be creative and innovative when it comes to recycling. However the economics often do not support the investment, and government grants although available are not sufficient. 3. Key Success factors include: a. Diversion from landfill – historically 80 % was considered industry best practice, but now customers expect nothing less than 90% b. Beneficial reuse – evidence that SUEZ has placed the commodities in a downstream business that repurposes the paper, plastic, steel, aluminium, glass into a secondary life. For example, recycled crushed glass included in road making or brick manufacture. c. Cost per tonne processed – production efficiency and throughput, equipment utilisation, and reduced disposal costs d. Volumes processed – constrained somewhat by licence conditions but a successful business would be at full capacity 4. The SUEZ SF MRF competes with many other SUEZ operations for key resources such as: a. Capital allocation b. Technological support c. Legal and Financial support d. Strategic investment funding SUEZ operates other business such as water treatment, landfills, waste processing and collections activities which all compete for resources particularly investment capital. As the SF MRF is currently loss-making, it struggles to compete with other businesses that can create a greater return for investment. However, SUEZ still regards the MRF activities as strategic to its overall recycling service offering and as such regards any investment in the MRF as vital for business continuity and growth. However the investment needs to be aligned to recycling goals and supported by strategic partnerships with

downstream exporters/offtakers and /or domestic manufacturers. Eg: glass processing support by strategic alliance with Downer Group. 5. I still do not what emergent means? I can say that the MRF strategy is reactive to the external pressures brought about from bans, changes required to final product, competition changes, and future local government expectations for sustainable recycling and circular economic outcomes. If SUEZ does not modernise its approach to MRF activities it will then be forced to exit this space and partner with other companies such as VISY which would make SUEZ beholden to VISY’s strategic direction. The corporate strategy is to actually grow in the MRF space by building a new modern MRF and moth-balling the old MRF at SF. The risk and cost is being evaluated and the key to the success is not only local government contracts but also sustainable offtakers that will pay for commodities as opposed to the current situation where SUEZ pays to have commodities removed. Key to the strategic play is beneficiation of paper/cardboard, plastics, and glass. Steel and aluminium will be a partnership with other industry leaders. 6. I have enclosed the Dec’18 P&L which also shows Dec’17. Our biggest issue is reduced commodity sales and increased costs. I’ll let you analyse and come back to me with questions/observations. 7. ESC (Environment / Strategy / Capability) ESC Environment

Stakeholders 1. EPA

2. Community 3. Customers

Strategy

4. SUEZ Senior

Importance 1. Regulator

Performance outcomes (2 years) 1. Licence issues due to excess storage due to offtake issues, no environmental harm or odour complaints, 2. No odour or noise complaints, SUEZ has 2. Social licence and recycled all materials received except public/brand image some glass 3. Pay for processing and 3. Have demonstrated that all paper, cardboard, plastic, steel, aluminium has contract requirements been appropriately recycled. Glass is an issue. No breach of customer requirements. 4. Approve future strategy 4. Changes in external factors (Legal,

Management

Capability

and capital investment

5. Competition

5. New entrants into market. Introduction of Container Deposit scheme (CDS) reducing volumes at MRF

5.

6. Government

6. COAG Ban / China Sword

6.

7. Competition

7. 7. Competition are adopting new technologies to improve recycling outcomes

8. Suppliers

8. Technology partners providing insight into new processing

8.

Economic etc) has facilitated a change in direction to rebuild new MRF and develop a growth strategy with certain Councils targeted New entrant IQRenew on Central Coast has attracted some Northern Sydney councils. CDS (refer link below) has taken clean feedstock out of the market for MRFs. SUEZ has attracted some additional value in CDS scheme revenue . Competition is upgrading facilities and SUEZ needs to follow this lead els it will become irrelevant in the recycling segment. The ban on unprocessed exports has forced the business to change direction and beneficiate product into a useable feedstock for other manufacturing processes. This activity has commenced but SUEZ needs further upgrade to meet contamination specifications SUEZ needs to remain at the forefront of recycling innovation but the past 2 years has seen revenues deteriorate due to old processing methods. This is reflective in the P&L reduced EBIT. SUEZ does not possess the capability to strategically compete and attract new customers to improve returns. SUEZ relies on technological advice from strategic partners who specialise in recycling equipment and throughput. The

techniques

past 2 years has seen SUEZ’s processing capability reduce as contamination increases and feedstock is reduced.

CDS “EARN & RETURN” https://www.epa.nsw.gov.au/your-environment/recycling-and-reuse/return-and-earn#:~:text=Return%20and%20Earn%20is%20the,state%20by %2040%25%20by%202020.

8. Customer Base  Mainly local government “yellow bin” kerbside pick up comingled  Some commercial recycling but this is a very small segment  Offtake customers include metal recyclers, commodity exporters, domestic manufacturers (glass mainly), domestic paper mills  Small vehicle drop-off i.e. mums and dads / small commercial enterprises

The intake market is not expected to change in the foreseeable future. The offtake market will change drastically due to COAG ban. All recycling will undergo secondary processing domestically before it can be exported to manufacturers. Goods that would be exported are pulped paper/cardboard, pelletised plastics, flaked/washed plastics, soft plastic extrusions (for fuel substitution). There is also innovative programs being investigated to turn plastics back to liquid fuel. The end use market is becoming more innovative and supported by government grants and initiatives. 9. Future direction  Innovation to find new creative solutions for recyclable waste  Sustainable reuse  Zero landfill  Responsible placement – no urban slavery

    

Strategic alliances with offtakers A “pull” model rather than “push” where the end product has a tangible value Brand enhancement through customer awareness and social media A business that provides an economic and environmental return creating value for shareholders A business that employees would be proud to work for.

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