Why recycling metal is an opportunity too good to waste

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Nick Pickens, Research Director, Global Mining, Wood Mackenzie, Julian Kettle, Senior Vice President, Vice Chair Metals and Mining, Wood Mackenzie

• Recycling ‘energy-transition metals’ – or metals from batteries, electric vehicles and renewable-energy products offers abundant growth potential.
• The structure of secondary supply chains must evolve, driven by policy that stimulates domestic processing and consumption.
• We expect vertical integration in key growth markets as manufacturers seek supply security but this will come at a price.

A scrap revolution is coming. Extraordinary demand growth for energy-transition metals will underpin significant investment in recycling. There are many barriers to overcome but the opportunities are vast. So, what’s driving the renewed focus on recycling metals?

Several catalysts will underpin a prolonged surge in investment in recycled metal:

• Primary metal supply constraints: The energy transition will be built on electrification, relying on technologies that are profoundly metals-intensive. Recycling will help alleviate primary supply constraints.
  
• Carbon emissions, sustainability, and a preference for secondary sources: Steel and aluminium combined account for almost 10% of global emissions. Secondary aluminium production typically has a five- to 25-times lower carbon footprint than primary production. For steel, emissions are often halved by using scrap. Recycling also keeps reusable materials out of landfills.
  
• Security of metal supply: Geopolitical instability and the reliance on China for critical minerals have become major concerns in the United States and the European Union, among other places. The use of domestically sourced recycled metal will help reduce reliance on imports or single sources.

Catalyzing the scrap metal revolution

If the world is to move toward greater circularity, structural changes to the current market dynamics are needed. Five key trends will shape the secondary market:

1. Rebalancing of secondary metal supply chains

Current market dynamics for secondary metals are incompatible with controlling climate change and securing the supply of critical materials. In many markets, there is still a significant trade imbalance.

Take copper as an example. China processes nearly 3.5 million tonnes of copper scrap each year. However, only 60% of it is from domestic sources, with the balance imported. In contrast, North America collects nearly 1.5 million tonnes per annum of secondary copper but over 40% of it is exported.

Policies designed to “onshore” the supply of scrap and disincentivize exports are becoming more frequent, notably through tighter quality standards and import restrictions.

We believe that these policies will result in the deglobalization of scrap trade, which presents an opportunity for a plethora of new scrap processing capacity.

2. Vertical integration and consolidation: closing the loop

Secondary raw material feed is scarce, trade is being disrupted and prices are volatile. There is also increased environmental, social and governance oversight in the sector, which means building new recycling capacity can be challenging despite its obvious credentials as a sustainable, low-carbon raw material source.

The best way to ensure consistent supply, quality and compliance is by owning larger segments of the value chain. However, manufacturers don’t necessarily want to be metal processors and metal processors don’t want to be scrap collectors.

There is an opportunity for new business models and innovative approaches to recycling and manufacturing. A recent transaction by Rio Tinto is a good example. A mining company at its roots, Rio Tinto’s acquisition of a 50% stake in Matalco, a major producer of recycled aluminium billet, provides it with access to upstream scrap yards across North America, securing low carbon supply.

Nascent markets, such as Electric Vehicle (EV) lithium-ion batteries, are a blank canvas in terms of market development. That presents an opportunity for innovation to emerge and close the loop.

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New regulations, trade tariffs and carbon policies will affect the cost and value of scrap. ”— Nick Pickens, Research Director, Metals & Mining | Julian Kettle, Vice Chairman, Metals & Mining

3. Alleviating tight scrap supply

Demand for secondary feed could mean tighter scrap supply unless recycling rates and utilization improve. Legislation on minimum recycled content, meanwhile, will spur demand for higher-grade material, in particular.

Recycling rates in different end-use sectors and jurisdictions vary widely. In aluminium, packaging recycling rates for used beverage cans vary from 45% in the United States to 90% in Brazil.

In copper, the electro-deposited foil manufacturing process (for foil used in EV batteries) mostly uses high-grade scrap, using clean, pure copper wire or wire rod chopped ends. As more electro-deposited foil plants are set up, competition for copper scrap will intensify.

The landscape will be shaped by how quickly and efficiently the rising pool of scrap can be mobilized through collection, sorting and processing into end-use products.

4. A revolution in recycling technology

In many mature markets, low-grade scrap is the marginal supply. Higher-cost production provides market elasticity when primary supply is tight. Technology advancements will be needed to unlock larger volumes at a lower incentive price.

Advancements in recycling technologies are already enhancing the efficiency and quality of scrap metal processing. Innovations in sensing, sorting and separation techniques are improving recovery rates and reducing waste for end-of-life products.

Digitalization and data analytics are also playing a significant role in optimizing operations and improving material tracking in the scrap metal value chain.

5. Disruption to pricing mechanisms

Global pricing mechanisms for secondary materials function like many other differentiated commodities. Price discovery is generally via price reporting agencies. The London Metal Exchange has a steel scrap futures market but none of the mechanisms are particularly transparent and there are opportunities here for traders and market participants.

Scrap metal pricing is usually based on the underlying primary metal price. So, smelters, refineries and semi-manufacturers pay a discount to the value of the contained metal. These discounts change depending on the regional supply-demand fundamentals of the scrap and primary metal.

New regulations, trade tariffs and carbon policies will affect the cost and value of scrap. Carbon prices and border adjustment mechanisms will help the underutilized scrap pool become more economical. We may see the breakdown of historical relationships between scrap, primary and utilization. Consumers’ willingness to pay for green premia will be important, as some recyclers rely on it to keep their facilities profitable.

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Challenges facing women waste pickers in Ghana

Dorcas Ansah, Accra Focal City Coordinator for the NGO Women in Informal Employment: Globalizing and Organizing (WIEGO), shared insights on the organisation’s work with women waste pickers in Accra, Ghana.

In Accra, women fill the least secure roles in solid waste management and, like elsewhere in the world, they are first to be left behind as the sector formalises.

WIEGO works with Accra’s waste pickers through the Kpone Landfill Waste Pickers Association, which advocates for a more inclusive waste management system in the region.

Women make up one-third of the landfill’s more than 300 waste pickers, who remove almost 800 tonnes of recyclable material from the landfill annually. In 2019, this work prevented the emission of an estimated 24,371 tonnes of eCO2.

Despite their environmental contributions, the workers’ livelihoods are under threat. In the midst of the COVID-19 pandemic, waste pickers learned that the government is closing the Kpone landfill and they will not be allowed to return. The government started the process of decommissioning the landfill without having ensured viable livelihood alternatives or compensation for the waste pickers as they face displacement from the site.

The waste pickers are now working to find alternative livelihoods outside of the landfill. They are scoping coastal communities that need better waste management, and they have staged a pilot for doorstep waste collection. They hope this will help convince the government to give them contracts to be formally included in the sector.

Overall, metal recycling is poised for significant growth. Businesses that recognize the opportunities in secondary markets and adapt accordingly can benefit from the economic and environmental advantages.