Businessweek, July 24, 2008
by Roben Farzad
Surrounded by a canyon of neatly stacked trash bundles, Bob Cappadona, area manager of Casella Waste (CWST) Systems' 65,000-square-foot recycling facility in Auburn, Mass., can't believe the record prices his garbage is commanding. "Aluminum cans, $900 a bale. Tin cans, $150. No. 2 clear plastic, $300. Cardboard, $70. Mixed paper, $40." He barely conceals his glee as he explains the effects of a recent spike in metals prices: "We get an extra $100 a ton!"
Cappadona's numbers are compelling, but the global implications of the trash boom only really hit you when you see the enormous pallets being carted away from the plant. You realize that recyclers can make vast profits from combing through ordinary rubbish, processing it, and then reselling it to other companies. And that leads to another, bigger thought: Trash is no longer just an environmental liability. It is becoming a financial asset. And it is everywhere.
Or so it would seem.
The possibilities have venture capitalists and buyout firms scrambling to invest in a melange of quirky startups that might have provoked belly laughs from these same financiers five years ago. The broad category of "waste and recycling," which includes everything from materials recovery to sewage biotechnology, drew a record $622 million of investment in 2007, compared with $245 million a year earlier and just $20 million in 2001, according to Cleantech Group, a green investing consultancy. Sober investors are throwing money not only at established recyclers like Casella Waste, but also at bolder ventures like Warrenville (Ill.) trash-to-ethanol startup Coskata and Austin-based e-waste recycler TechTurn, so confident are they that there's real cash in trash.
More than anything, it's the commodities boom—or bubble, if you prefer—that's nudging garbage to the asset side of earth's balance sheet. The calculus is simple: As the prices of oil and other raw materials rise, recycled products become more attractive. Consider that 8% of global oil production is siphoned off to make plastic each year. Recycled plastic, however, requires 80% less energy to produce. Recycled aluminum burns up 95% less energy. Recycled iron and steel use 74% less, while paper requires 64% less. The money piles up quickly: One ton of recycled aluminum saves an average of $700 in electricity. The Environmental Protection Agency estimates that if the recycling rate were to increase by just five points, to 35%, this would save the equivalent of almost 2 billion gallons of gasoline annually.
The recycling industry, a loose and unruly assortment of startups and multinationals, can barely keep up with demand. Today virtually all steel made by giants Nucor (NUE) and AK Steel (AKS) comes from scrap metal—a boon for recyclers such as Chicago-based Metal Management, whose sales jumped 40% from 2006 to 2007 before the company was acquired by Australian competitor Sims Group.
The great reappraisal of trash has even prompted a Wall Street analyst to cordon off recycling in a separate investment category, like consumer goods or emerging markets. Eric Prouty of Boston-based brokerage Canaccord Adams started following recyclers full-time in 2006; now he covers 11 publicly traded companies. Since its inception late in 2006, Prouty's six-stock Buy list has returned 180%, trouncing the Standard & Poor's (MHP) 500-stock index's 2% rise. His year-old "Best Ideas" list of eight stocks has shot up 150%, compared with the broad market's 6% gain. "Recycling," says Prouty, "might be the most overlooked beneficiary of the commodities boom."
Of course, there's been similar excitement before. In the 1970s and again in the early 1990s, oil prices zoomed and joyless austerity began to seep into American culture. Governors signed deposit laws, and cities and towns launched recycling programs. Investors started buying up scrap metal outfits, sure they were catching a big business wave. But commodity prices tanked in the mid '80s and again in the early '90s and the movement each time lost steam. Elaborate municipal recycling programs no longer made economic sense and were abandoned, even in environmentally conscious garbage havens like New York. Scrap metal became a joke on Wall Street. Lassitude ruled. Today's recycling boom could suffer a similar fate. "If commodity prices fall, people will be unwilling to bear higher tax rates from cities to maintain unprofitable recycling programs," warns John Charles, president of the Cascade Policy Institute, a nonpartisan think tank in Portland, Ore.
The optimists point to a new factor they say will help the industry withstand the next commodities bust: the green movement. Global warming has finally pierced the American popular consciousness. Once marginalized, eco-activists are resonating with a litany of complaints: The U.S. generates the world's greatest volume of per capita waste, yet badly lags in recycling; Americans are too thoughtless to reuse plastic water bottles; electronic waste from discarded computers and cell phones is leaching toxins into the soil; and on and on.
Methane-spewing landfills, meanwhile, are turning into battlegrounds. Municipalities can't easily build new dumps because people refuse to live near one. The acronym "NIMBY" (Not In My Back Yard) is giving way to "BANANA" (Build Absolutely Nothing Anywhere Near Anything). Yet old landfills are closing at an alarming rate: In 1988 there were some 8,000 operating in the U.S.; today there are just over 1,700, according to the EPA. In some parts of the world the clashes are turning violent. Italy's Prime Minister, Silvio Berlusconi, dispatched soldiers to Naples, where demonstrators were protesting his efforts to open a big new landfill. Since last year, when that city declared all of its dumps full, ranges of trash have piled up.
But while the world's swelling garbage pile would seem to be a can't-miss opportunity for recyclers, one issue threatens their long-term growth prospects. Oddly enough, they can't get enough garbage, or at least the right kind. That's because all waste, like all politics, is local—which means idiosyncrasies in recycling laws and a failure on the part of politicians to see the big picture. Recycling "has historically been dominated by staid, stubborn, and inefficient industries," says Cleantech managing partner John Balbach. "There's lots of money to be saved—and made—in waste if financial discipline and profit-mindedness take hold."
That's Wall Street's bet, anyway.
A DEARTH OF CLEAN GLASS
Nowhere is the wonder of recycling more evident than at the yawning entry hangar to Casella's Auburn facility. It's the Mount Trashmore of commingled recyclables, bursting with newspapers, bottles, and the occasional Wiffle bat. Casella is known as a "single-stream" recycler: The company picks up one big bin of recyclables—newspapers, cans, glass, plastics, the works—from each home or business and empties it into a truck. At a recycling facility, massive machines sort and separate the material. Casella then sells the commodities in neatly packed bales.
As the conveyor belt starts up, everyone dons microphone-equipped hard hats, goggles, and vests. The cacophony is overwhelming as dozens of magnetized sorters, sifters, chutes, and ladders work through the pile. You might describe the scene as M.C. Escher meeting Willy Wonka's chocolate factory. Last year Vermont-based Casella, a publicly traded company formed in 1975 out of a single truck, recycled just under 4 billion pounds of waste, up 12% from 2006.
But Casella's operation isn't a cure-all. The facilities can't process glass effectively—a failure that leaves big money on the table. Outside the Auburn site, a chute erratically spits out a sickly granola of green, blue, and amber shards. Cappadona concedes the blend isn't selling well. "It's like putting rocks in the ground," adds Prouty. "Not very high-value." Buyers, it turns out, want crushed glass that's separated by color.
"If the single-stream guys tell you there's no market, it's because their product is so bad," says Tex Corley, CEO of Strategic Materials, the nation's largest pure-play glass recycler. Corley's customers clamor for recycled glass, which uses up to 40% less energy to process than the virgin kind and results in fewer emissions. Strategic Materials can't turn out enough. This year the company, owned by Chicago private equity firm Willis Stein & Partners, is on track to generate $200 million in sales.
It would do far better were it not for all the gunk. Strategic Materials throws out much of the crushed glass from single-stream providers because it arrives in a stew of "slime, chicken bones, and needles," says Corley. Processing the mess costs him four times as much it does to rejigger clean glass from municipalities that require residents and businesses to segregate recyclables by type. "If you tripled the amount of high-quality glass," says Corley, "our customers would buy every bit of it."
A growing number of municipalities are opting for single-stream operators such as Casella because the simple process makes citizens more likely to comply. "People really like the convenience of throwing everything together," says Steve McGrath, Philadelphia's director of recycling. Since the city started its single-stream program two years ago, he says, the tonnage collected has jumped by 40%, with household participation rising from less than 5% to almost twice that.
That's great, except that the giant machines used by single-stream operators mangle the glass. As long as the gap remains unbridged, millions of dollars will be squandered.
"DUMP TO PUMP"
VC investing boils down to one cosmic question: Where is the pain? Any startup CEO who's begging for money must be able to describe, quickly and clearly, the pressing need that his or her cash-hungry, high-risk proposition will address.
Three VC firms—Khosla Ventures, Advanced Technology Ventures, and GreatPoint Ventures—jumped at the chance to invest in cellulosic ethanol startup Coskata. Its promise: to derive $1-a-gallon ethanol from trash, chiefly from landfill methane, tires, construction debris, and other municipal waste. The company's biggest selling point for "dump-to-pump" technology is its collection of botulism-related bacteria, which feed on the gas produced by trash and excrete ethanol. Whereas corn-based ethanol yields just 1.3 times the energy used to produce it, Coskata's yield is 7.7. And while corn prices are soaring, garbage is cheap.
Todd Kimmel, a principal with Advanced Technology Ventures, founded Coskata in July, 2006, after he bought the rights to those bacteria for an undisclosed sum from the University of Oklahoma and Oklahoma State. Khosla and Advanced Technology Ventures contributed $10 million in first-round financing. In January, General Motors (GM) took a stake, in a deal that valued Coskata at around $500 million, according to people familiar with the transaction. In May, Coskata announced the construction of a 40,000-gallon plant in Pennsylvania to produce ethanol for GM's test fleet. Coskata is also looking to team up with municipalities to set up its bioreactors at local sites.
Richard Tobey was so captivated by the dump-to-pump technology that he joined Coskata in 2007 as chief engineer after spending 28 years as a top scientist at Dow Chemical (DOW). He couldn't be happier about his decision. Donning lab goggles at Coskata's 25,000-square-foot research and development facility, Tobey and chief marketing officer Wesley Bolsen sidle up to their glass-encased "bioreactor" like doting parents in a neonatal ward. The lung-like contraption houses a thick plastic tube that feeds waste gas to fibers coated with millions of oxygen-averse bacteria. After gorging on carbon monoxide and hydrogen, the microorganisms pump out ethanol in a surge of bubbles that percolates upward. "They're not picky eaters," says Bolsen, a recent recruit from ethanol engineering outfit ICM. He notes that the bacteria will ingest gas from wood trimmings and even a grim medley known as hurricane debris. They thrive on landfill methane, which is 20 times as destructive to ozone as carbon dioxide.
But Coskata still faces a hurdle. Although carbon-rich tires, plastics, and paper are especially conducive to its process, they're surprisingly difficult to obtain in the proper form. Coskata needs materials to be uncontaminated by foods and liquids. Ask Tobey how he'd react if a procession of trucks were to drop pallets of pristine plastic bottles on Coskata's front lawn and he beams: "Oh, that'd be just wonderful. And plastic bags—wow." Instead, countless tons of other untapped assets spill from landfills like Jiffy Pop.
Until that changes, Coskata won't reach its full potential. "You can drive a couple of cars on trash-to-energy, but it just doesn't scale against petroleum," says Tadeusz Patzek, an environmental engineering professor at the University of California at Berkeley. "It's like paying down just the interest when society needs to address the massive principal."
THERE'S GOLD IN E-WASTE
American ingenuity has produced an amazing array of high-tech consumer products (AAPL). The downside? An equally astounding profusion of electronic waste. The fastest-growing category of trash is also among the most dangerous: E-waste seeps lead, mercury, and other heavy metals into the soil of landfills.
In 2006, Catterton Partners, a Greenwich (Conn.) private equity firm, sensed opportunity in discarded computers and invested $50 million in TechTurn, an e-recycler. TechTurn refurbishes e-waste from companies and sells it to schools, nonprofits, and poor countries. It also recycles the precious copper, gold, and other materials from inside units it can't revamp. The company booked $40 million in sales last year, and is on track for $200 million by 2010. With 15 truckloads headed each day to its Texas and Virginia facilities, TechTurn is racing to open plants in Chicago, Nevada, Seattle, and New Jersey.
It all started with a hunch. In the late '90s, Jeff Zeigler saw that Y2K was orphaning fleet loads of functional computers. He suspected there might be an aftermarket for them, and found brisk demand in Europe and Asia. In 1999, with $3,000 in capital and "a name that I grabbed at the courthouse," the 29-year-old Zeigler set up shop as Newmarket IT. A highlight of the company's early years was helping to cast the malfunctioning printer-fax machine that would be bludgeoned to death by the lovable criminals in the 1999 cult comedy Office Space. Zeigler quickly found that there was also money to be made in cleaning hard drives and recovering metals and plastic.
Today he walks through TechTurn's new 90,000-square-foot facility in Ashland, Va., like the manager of a dystopian Costco (COST). Pallets of recovered computer desktops, laptops, printers, and monitors are stacked ceiling-high in wide aisles, surrounding long disassembly lines laced with crowbars, scan guns, and dangling cables. "We can extract 88% of a computer's value before ever getting down to its base commodities," boasts Zeigler. TechTurn puts computers through a thorough diagnostic process and hard-drive cleansing. Everything else is taken apart and recycled to the last ounce.
Zeigler makes his way through an arcade of 15 boxes, each the size of a construction dumpster. One is full of diskettes and CD ROMs destined for shredding. Zeigler brandishes a plastic monitor base from another box. "It's more than 20 cents a pound now, thanks to oil prices," he beams. A third box contains black computer mice and a fourth, white ones, all to be crushed for copper wire and plastic. Next up: aluminum heat guards and circuit boards that contain gold, palladium, and platinum. "We've seen a fourfold increase in value for these," Zeigler says, adding that a 16-square-foot box of memory sticks contains $15,000 in precious metals. Every bar-coded unit is tracked in real time, whether it's on the assembly line or awaiting attention in a locked iron cage. Employees must pass through a metal detector to get to the lunch room.
Still, the real money comes from salvaging working computers. "We don't look at hardware as e-waste," Zeigler says. "An American student can reuse an executive's laptop for maybe five years, an emerging-market customer even longer." The margins are solid. Fully functional laptops that TechTurn buys for $200 or so can be refurbished and resold at a 20% profit.
If only TechTurn could collect enough e-waste to feed the hunger for its goods. "Domestically and internationally, there is an insatiable demand for what we are selling," says Michael Farello, a partner at Catterton. "We could grow the business tenfold and still have a seemingly unlimited order backlog from schools, small businesses, and developing countries. The challenge is how much can be brought to us."
Not long ago people and businesses had few qualms tossing burned-out computers in Dumpsters. But as fears of the toxins inside e-waste have grown, some 40 states have drawn up special trash-handling rules for electronics. Worries over data pilfering make people all the more reluctant to junk old equipment. And so hidden assets sit idle in closets and basements. "People just don't know what to do with it," says Farello.
Hence the world faces a remarkable problem: There's both too much trash and too many businesses that can't get enough of it. Balance the equation, and recycling could grow by orders of magnitude. But no one has figured out how.
Remember glass recycler Tex Corley? He's merely one degree of economic separation from Donald, a 41-year-old homeless man on Manhattan's Upper West Side. That divide, so easily bridged in theory, says everything about the recycling boom.
On a cool April night, Donald roots hurriedly for returnable glass bottles in trash bags outside a Thai restaurant. He has nearly 200 in his rusty cart, having rinsed them out in a Central Park bathroom. A supermarket will pay a nickel apiece for up to 240 bottles, but only if he makes it by 10 p.m.
Donald and some fellow scavengers report that guys from New Jersey and Pennsylvania showed up in flatbed trucks months ago, offering 7 cents apiece—a two-penny premium—for unlimited quantities of color-separated returnable bottles. That is, says Donald, until the police caught wind of the underground market and told the out-of-towners to scram. In October, Mayor Michael Bloomberg, who suspended the city's glass- and plastic-recycling services in 2002 and then reinstated them, imposed stiff penalties on drivers who take curbside recyclables, often loaded with returnables Manhattanites can't be bothered to redeem.
For Donald, the crackdown means it's back to haunting grocery stores that, despite deposit laws, aren't eager to accommodate homeless men lugging bottles. "It's no good for business," says the manager of a 24-hour supermarket. With the emergency exit blocked by heaps of cans and bottles, he declares the bottle-collecting machine out of order even before his arbitrary 10 p.m. rule can kick in.
And so Donald and Tex Corley are out of luck. The glass will return to trash bins en route to some landfill. "I don't beg, I don't rob anyone," says Donald, pushing his cart up Broadway. He stops and holds up an amber bottle. "This—here, hold it—this is money. Money is on the streets. Money is in trash cans. Isn't that the stupidest thing in the world?"