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Daily Intelligence Briefing - January 3, 2018
FEATURED TOPIC: WASTE RECYCLING & SCRAP MARKET GOT DEALT A MAJOR BLOW; WINNERS & LOSERS EMERGE
Every day, nearly 4,000 shipping containers full of recyclables leave US ports bound for China. Last year, this amounted to more than $5.2 billion worth of scrap originating from the U.S. In fact, the Chinese countryside is dotted with villages and businesses dedicated to separating plastics, paper, electronic waste and textiles, and then sending these materials to factories for reprocessing.
But, on January 1, China’s new “National Sword” policy went into effect, officially banning imports of 24 types of recycled materials including various plastics ( PET, PE, PVC and PS), as well as unsorted mixed paper, textiles, and some trace metals. China is by far the biggest importer of U.S. recyclables and consumes 55% of the world’s scrap paper, so this ban represents a major disruption for the global recycling industry. In the report, we will focus on the implications for the U.S. recycling industry,
LOSERS
U.S. recycling exporters could be severely hampered. These companies are in the business of getting the trash, sorting it, and sending the recyclable materials offshore as soon as possible so they can get paid for it. Now they will have to find other foreign markets to generate those revenues, as there are no longer enough processing mills in the U.S. to handle this kind of material. The Institute of Scrap Recycling Industries predicts that U.S. exports of recycled materials could drop by as much as 20%. Take the example of Waste Management Inc., one of America’s top waste management companies, which collects and sells millions of tons of recycled items annually, with 30% of that going to China. According to a company representative, the announcement of the ban in July – six months before it officially took effect - has already hurt the company’s recycling revenues and forced it to seek out new markets possibly in India, Vietnam, Thailand and even South America.
This ban could be problematic for U.S. local governments too. In some American cities and municipalities, discarded materials and scrap are already piling up and will have to be disposed of somehow before they degrade into potential hazards. It is a setback for recycling programs across the country as trucks could stop collecting curbside disposals. Eventually, more junk such as cans, bottles, and discarded electronics will find its way to landfills instead of being reprocessed. Here's an article that lays out what the change means for all 50 states.
WINNERS
Domestic processors and some paper mills stand to gain from this new state of affairs. For years, the massive US-China trade deficit proved to be a boon for waste management companies. Container ships full of inexpensive Chinese goods would come to U.S. shores daily, but for the return trip there wasn’t much to carry back. Out of desperation, the shipping companies decided on U.S. scrap materials for the return trip, and offered such deep discounts that it was cheaper for waste companies to send the trash to China than to process it domestically. In time, the arrangement formed the basis of a circular economy: The U.S. (and the EU, and other countries) would ship waste recycling to China. This would provide China with the raw materials that eventually was returned to these countries in the form of cheap and affordable finished goods.
The collateral damage was that many U.S. processing mills eventually lost a lot of business to China with their source of cheap raw materials gone. Much of the $5.2 billion worth of scrap the U.S. sent to China last year was valuable mixed paper — such as used office paper, envelopes and junk mail. Chinese companies turn that mixed paper into pulp for making cardboard which then returns to the U.S. as packaging for electronics. For many American paper mills, such as Georgia-based Pratt Industries, this ban is an opportunity to source low-cost supply of scrap paper domestically, turn that into packaging for U.S. manufacturers, and regain some of their lost market share.
US Petrochemicals could be big winners as well. The China ban could shift about 2% of global polyethylene plastics supply from recycled to new material. The U.S. is the only country able to quickly fill the gap, thanks to a fracking boom that has helped America become the cheapest place in the world to make plastic. China has already begun buying brand new plastic to replace the recycled scrap: Imports of virgin polyethylene are up 19% while scrap polyethylene imports dropped 11%. U.S. exports of polyethylene plastic to Asia is expected to reach 5 million tons by 2020, a five-fold increase from last year, with most of it headed to the Chinese market, according to IHS Markit.
Though Beijing's new “National Sword” policy does not amount to a complete ban on all scrap imports into China, it could be extremely disruptive down the entire recycling supply chain. Not only will this cause job losses, shut down many U.S. recycling facilities, and send more waste to landfills, it could reshape a critical segment of the global economy: the cross-border flows of scrap that underpin recycling markets worldwide. Now, the big question is whether this is a short-term disruption or a fundamental shift in the U.S. recycling economy.
HERE in the meantime are some related articles on this topic (the stories are summarized in the SERVICES Section):
CHART: PUBLICLY-TRADED RECYCLING COMPANIES (CWST, WM, SRCL, WCN, ECOL) vs S&P 500
OTHER STORIES HIGHLIGHTED IN TODAY'S DIBS:
JOE MAC'S MARKET VIEWPOINT
CURRENT MRP THEMES
| Autos (S) | Electric Utilities (L) | TIPS (L) / Short-Dated UST (S) |
| Defense (L) | Industrials & Materials (L) | U.S. Financials & Regional Banks (L) |
| Emerging Markets (L) | Oil & U.S. Energy (L) | U.S. Homebuilders & Construction (L) |
| France (L), India (L) | Palladium (L) | U.S. Healthcare Providers & Pharma (S) |
| Gold & Gold Miners (L) | Robotics & Automation (L) | Video Gaming (L) |
| Lithium (L) | Steel (L) | Value over Growth (L) |
About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP's compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics.
| MAJOR DATA POINTS | Top |
| MARKETS | Top |
Media - TV networks, media companies need a streaming service to survive in 2018
The shift away from ad-supported TV and toward subscription-based streaming services detached from traditional cable TV has led to continued viewership declines at networks and a shift in Macquarie Research analysts’ views.
In a Macquarie analyst note released on Tuesday, lead analyst Tim Nollen wrote that these changing behaviors are altering the value equation around reach in TV advertising. In his view, media companies in 2018 that continue to rely on an ad-based model will struggle, while those with ad-free subscription models will win out.
n addition to the analysts’ newfound preference on companies with ad-free subscription models, Nollen wrote that they’re positive on Netflix because of improving revenue and earnings, as well as its scaled distribution and international presence. Despite Disney’s streaming service looming over the space, Netflix as a first mover is still miles ahead of its peers, Nollen wrote. MW
Bonds - Draining of QE punchbowl sobers up bond bulls
The coming year promises to be an inflection point for central banks. The Fed has started reducing the pile of the bonds it acquired after the financial crisis — a process that will accelerate. The ECB started to trim its QE programme in 2017 and is expected to end it altogether in 2018. Even the BoJ is expected to raise its bond yield target slightly this year. While markets thus far appear sanguine about the prospects, investors are eyeing the possible effects with rising trepidation. While it has not done it single-handedly, central bank support has been instrumental in levitating markets higher since the financial crisis.
US bank Wells Fargo estimates that central banks have absorbed more than all the bonds issued by G10 governments over the past two years but next year they will only buy 40 per cent of overall debt issuance. This adds up to a large demand shortfall that will have to be filled. Man GLG estimates that central banks have globally swelled the size of their balance sheets by about $15tn since 2008 with the Fed, the ECB and the BoJ accounting for most of it.
Analysts have started to sketch out what they think the impact will be and from their annual outlooks it is clear that most expect bond yields to climb noticeably — albeit not violently — as a result of less accommodative monetary policy. But the hedge fund estimates that they will be buying $3tn fewer bonds in 2018 than they have last year. FT
Cryptocurrencies - The Criminal Underworld Is Dropping Bitcoin for Another Currency
Bitcoin is losing its luster with some of its earliest and most avid fans -- criminals -- giving rise to a new breed of virtual currency. Privacy coins such as monero, designed to avoid tracking, have climbed faster over the past two months as law enforcers adopt software tools to monitor people using bitcoin. A slew of analytic firms such as Chainalysis are getting better at flagging digital hoards linked to crime or money laundering, alerting exchanges and preventing conversion into traditional cash.
Monero quadrupled in value to $349 in the final two months of 2017, according to coinmarketcap.com, placing it among a number of upstart coins that that rose faster than bitcoin, the world’s most valuable digital currency. Bitcoin roughly doubled in the same period, data compiled by Bloomberg show. In monero’s case, criminals are snapping it up because bitcoin’s underlying technology can work against them. Called blockchain, the digital ledger meticulously records which addresses send and receive transactions, including the exact time and amount -- great data to use as evidence. B
Cryptocurrencies - Putin considers ‘cryptorouble’ as Moscow seeks to evade sanctions
Russia is exploring ways to create a “cryptorouble” that could help it circumvent western sanctions as the traditionally technophobic Kremlin gets swept up in the cryptocurrency craze. Moscow officials say President Vladimir Putin has commissioned work on establishing a cryptocurrency, as state-run Russian institutions rush to embrace blockchain, the shared ledger technology on which bitcoin and other digital currencies are based.
Sergei Glazev, an economic adviser to Mr Putin, told a recent government meeting that a cryptorouble would be a useful tool to get around international sanctions. Following a meeting in the summer with Vitalik Buterin, the Russia-born founder of cryptocurrency Ethereum, Mr Putin ordered his cabinet to come up with a framework for regulating them. FT
Cryptocurrencies - Venezuela Set to Launch Its Own Oil-Backed Cryptocurrency
According to the Venezuelan government, the country’s cryptocurrency will launch within the next few days and will be backed by 5.3 billion barrels of oil worth $267 billion. If it seems like a drastic and sudden move, consider those dire circumstances often call for dramatic action. Venezuela is currently in the midst of an overwhelming financial crisis, which the government hopes that this move will offset. However, the adoption of cryptocurrency is by no means a surefire method and the launch of the “petro” cryptocurrency was only just announced earlier in December.
Beyond oil, the crypto will additionally be backed by Venezuela’s oil, gas, gold, and diamond reserves. While the move has been referred to as a “hail mary” stunt by some, the country’s Communications Minister Jorge Rodriguez is confident that the currency will successfully launch within a couple of days. Futurism
LatAm - For 2018's Best Carry Trades, Wall Street Looks to Latin America
Investors are targeting Latin America for the most profitable carry trades in 2018, betting a region that lagged behind peers last year is poised for a comeback. Wall Street firms including Banco Bilbao Vizcaya Argentaria SA, Wells Fargo & Co. and Credit Agricole SA cite the region’s high interest rates and forecasts for faster economic growth. In Argentina, for example, a monetary policy rate of 28.75 percent is the highest in the world.
The banks are expecting a reversal from last year, when currency appreciation was the primary driver for the most profitable currency trades -- long positions in the Polish zloty and the Czech koruna funded by dollars. This time around, they’re anticipating that Latin American interest rates will provide the biggest returns even as forecasts call for most of the region’s currencies to slip. B
| FINANCE | Top |
Banks - Uber’s rise triggers financial crisis at taxi lenders
The rise of car-booking apps such as Uber and Lyft is causing a deepening financial crisis at lenders that have financed the US’s traditional taxi drivers, who are now defaulting on their debts. Regulators have warned that some co-operative lenders are so exposed to soured taxi loans that an insurance fund will need to step in to ensure depositors can get their cash.
While some listed lenders such as Capital One have posted rising losses from the yellow-cab business, smaller credit unions that specialise in the trade have run into serious financial difficulties. Melrose Credit Union, a lender with $1.5bn in assets established in 1922, is at risk of a potential liquidation as its delinquent loans have leapt fivefold over the past two years, to $670m.
Meanwhile, the value of the collateral, the medallions, has collapsed. New York City medallions were worth about $1m four years ago but some are now for sale for as little as $250,000. The taxi woes threaten to wipe out a windfall of as much as $800m that credit unions across the US had expected early next year by extracting cash from the over-capitalised insurance fund, Mr Leggett said. FT
Fintech - European fintechs are in for a lucky break
The European Commission (EC) is developing legislation designed to remove the hurdles crowdfunding platforms and marketplace lenders face in operating and scaling across single market member states, Valdis Dombrovskis, the vice-president of the European Commission (EC) told the Financial Times this week.
Startups struggle to comply with additional rules that individual member states impose on businesses on top of pan-EU laws: The new legislation is designed to remove these add-ons and create "a digital single market", Dombrovskis said. It's designed to help European fintechs achieve the same scale as their Asian and US counterparts, he explained. Draft legislation is expected in early 2018. When implemented, such legislation could have several major effects on Europe's fintech industry: Europe stands to gain more prominent fintech hubs, European fintech funding could skyrocket. BI
Mobile Payments - Number of Chinese Mobile Payments Approaches 1 Trillion
Mobile payments have been a major trend in 2017, especially for China. This comes as no surprise, with China’s expanding tech-savvy middle class causing e-commerce apps such as Alipay, WeChat and e-commerce mammoth JD.com to grow tremendously over the latter quarters of 2017.
According to a report released by internet research firm Analysys yesterday, the number of transactions in China’s B2C online retail market reached 985.4 billion in the third quarter of 2017. That’s up 39.1% from the same quarter last year. According to that report, the volume of China’s mobile payments was more than 29 trillion RMB ($4.5 trillion) in Q3’17 alone, 28% higher than the previous quarter. BankInnovation
| SERVICES | Top |
Waste Management - Mountains of US recycling pile up as China restricts imports
Every day, nearly 4,000 shipping containers full of recyclables leave US ports bound for China. China sends the US toys, clothes and electronics; in return, some of America’s largest exports back are paper, plastic and aluminum. But that equation is changing as of Jan. 1 — China is enforcing its new “National Sword” policy, which bans 24 types of solid waste, including various plastics and unsorted mixed papers, and sets a much tougher standard for contamination levels.
China notified the World Trade Organization about the ban in July, essentially saying the country would no longer act as the world’s trash dump. Currently, China consumes 55 percent of the world’s scrap paper and is a major destination for other recyclables. The ban will undoubtedly hurt recycling operators in China that rely on the import of raw materials. But delivering a cleaner China is paramount for Communist Party politicians.
“This is not a little disruption,” says Susan Collins, president of the Container Recycling Institute, a research organization based in Southern California. “This is a big disruption to a bigger industry than most people would think it is, because it’s sort of an invisible process. You put your stuff out at the curb, and it goes away — nobody thinks about it as being a multibillion industry in this country.”
China has relaxed the rules in the past few months, shifting acceptable fiber contamination rates from 0.3 percent to 0.5 percent, but those levels are still a near impossible standard for US recyclers. PRI
Waste Management - China's Ban On "Foreign Waste" May Aid the Spread of AI in the US
As China’s economy increasingly shifts to services, reducing its dependence on the polluting manufacturing industry, its government is getting more serious about environmental protection. To crack down on this issue, China registered a filing with the World Trade Organization (WTO) back in July listing 24 materials it planned to forbid from import.
Big recycling cities, such as San Francisco, Los Angeles, and San Jose, will have to rethink their entire waste management chain to ensure they can meet the higher quality standards now demanded by their major partner. Unfortunately, human workers can only sort recycling so quickly, and they can’t always keep up with the mountains of “recyclable” goods that reach U.S. recycling centers.
As Steve Miller, CEO of the firm Bulk Handling Systems, told NPR, a human worker can pick about 30 pieces of recyclable materials per minute from amongst the waste that passes them by on a conveyor belt. A new generation of recycling robots equipped with spider-like arms and controlled by cameras and artificial intelligence (AI) can up this number to 80 picks, according to Miller. Neural networks can help the robot make such a distinction, allowing it to learn how to precisely sort any type of confusing waste. Futurism
Waste Management - China plastics ban will cause ‘chaos’ for global waste industry
The global waste industry is about to be thrown into turmoil as China is set to implement its threat to shut its door on almost all categories of plastic and poor quality cardboard and paper.
Ireland, which has little capacity to recycle plastic, has been trying to locate newer markets since the possibility emerged earlier this year. UK and US markets are going to be hit badly because of their reliance on China for massive amounts of their waste. In the absence of alternatives, those operating in what is a commodity market face chaos in the short-term, according to UK waste management experts; a view endorsed by the environmental group Greenpeace International.
The World Trade Organisation ended talks with China over the impending ban with no change to the Chinese position. After discussions with recycling representatives in the US and Europe, it was clear no one was prepared for the new standards. Some experts predict the ban will mean British recyclers have to find storage next year for 350,000 tons of plastic. IT
Waste Management - Future grim for half of Hong Kong recyclers with new China waste import rules
Half of the recyclers in Hong Kong – especially those in the plastics business – are at risk of closure with mainland China implementing more stringent requirements for importing waste next year, a university study has found. The future of plastic recycling is particularly grim because none of the local plants visited by researchers contain the facilities needed to meet the new requirements.
The Baptist University study found that 70 per cent of the 205 recycling plants visited were small businesses with fewer than five workers. Half of the companies reported that they were losing money even before the new regulations. Of 64 firms that deal with plastic waste, Wong said none owned facilities that turned scrap plastic into clean pellets to be exported to the mainland as industrial raw material, a new requirement in contrast to the current practice to crush, package and ship it.
The government formed the Recycling Fund two years ago and recently earmarked HK$20 million (US$2.56 million) to help local recyclers buy machines to improve the quality of their products. But Lau Yung-pui, of the Hong Kong Recycling Chamber of Commerce, said many of the workers were old and unskilled in filling out the forms, and he urged the government to simplify the applications. SCMP
Waste Management - UK faces build-up of plastic waste
Britain has been shipping up to 500,000 tonnes of plastic for recycling in China every year, but now the trade has been stopped. The UK Recycling Association’s chief executive, Simon Ellin, told the BBC he had no idea how the problem would be solved in the short term. "It's a huge blow for us... a game-changer for our industry," he said. "We've relied on China so long for our waste… 55% of paper, 25% plus of plastics.
Louise Edge, from Greenpeace, told the BBC: "Incineration is the wrong answer - it's a high-carbon non-renewable form of generating electricity. It also creates toxic chemicals and heavy metals… If you build incinerators it creates a market for the next 20 years for single-use plastics, which is the very thing we need to be reducing right now."
Environment Secretary Michael Gove told the BBC his long-term goals were to reduce the amount of plastic in the economy overall, reduce the number of different plastics, simplify local authority rules so people can easily judge what's recyclable and what isn't as well as increase the rate of recycling. BBC
Media - TV networks, media companies need a streaming service to survive in 2018
The shift away from ad-supported TV and toward subscription-based streaming services detached from traditional cable TV has led to continued viewership declines at networks and a shift in Macquarie Research analysts’ views.
In a Macquarie analyst note released on Tuesday, lead analyst Tim Nollen wrote that these changing behaviors are altering the value equation around reach in TV advertising. In his view, media companies in 2018 that continue to rely on an ad-based model will struggle, while those with ad-free subscription models will win out.
n addition to the analysts’ newfound preference on companies with ad-free subscription models, Nollen wrote that they’re positive on Netflix because of improving revenue and earnings, as well as its scaled distribution and international presence. Despite Disney’s streaming service looming over the space, Netflix as a first mover is still miles ahead of its peers, Nollen wrote. MW
| MANUFACTURING | Top |
Factories - Global Manufacturers Strain to Keep Up With Faster Economy
Factories across the globe warned they are finding it increasingly hard to keep up with demand, potentially forcing them to raise prices as the world economy looks set to enjoy its strongest year since 2011. A slew of Purchasing Managers Indexes published on Tuesday from countries including China, Germany, France, Canada and the U.K. all pointed to deeper supply constraints. The U.S. reading from IHS Markit rose for the third month in the past four, reaching the highest since March 2015 amid “increased capacity pressures.”
Such strains on potential output may mean companies have to hire or invest more to avoid overheating, yet it could also force them to push up prices, propelling inflation enough to squeeze the expansion. JPMorgan Chase & Co. is among the banks predicting global growth will be around 4 percent this year and on Tuesday said its composite of PMI reports from around the world had reached the highest since February 2011. B
| COMMODITIES | Top |
Ags - From Soybeans to Corn, La Niña Could Shake Up Agricultural Markets in 2018
Indicators currently suggest a 75% probability of a La Niña in the coming months, according to Stefan Vogel, head of Rabobank’s agricultural commodity markets research team. The weather pattern could inject volatility into markets like grains, soybeans and palm oil next year.
La Niña is characterized by cooler-than-normal waters in tropical Pacific Ocean regions, which results in more precipitation in Southeast Asia and eastern Australia, said Kyle Tapley, a senior agricultural meteorologist at MDA Weather Services.
The same conditions also lead to drier weather in southern Brazil, eastern Argentina and the southern U.S., he said. These areas set for dryness also happen to be critical to the global supply chain of grains and oilseeds.
If the temperature in the relevant part of the Pacific falls by more than one degree Celsius, “volatility explodes to 1½ times its normal level,” CME Group’s Erik Norland said. The last severe La Niña was in 2012 and caused a record-breaking heat wave and drought across the U.S. Midwest. It eventually drove prices up to $18 a bushel for soybeans and $8 a bushel for corn, according to him. Soybeans’ average price over the past five years has been 38% below that level; corn’s has been 39% below its 2012 high. A return to those levels would constitute an 87% gain for soybeans and a 130% jump for corn. WSJ
Oil - U.S. Shale Can’t Offset Record-Low Oil Discoveries
U.S. shale production is expected to grow over the next few years as the companies that survived the worst of the downturn showed resilience in the face of the lower-for-longer oil prices. But three years of low oil prices also led to the global oil industry slashing investments in conventional oil exploration, and deferring or revisiting development plans. This has led to the lowest ever volumes of oil discoveries in 2017, Rystad Energy said last week. While the low level of discoveries is not an immediate threat to global oil supply, it could become such ten years down the road.
This year has seen less than 7 billion barrels of oil equivalent discovered globally, a volume as low as last seen in the 1940s, Rystad Energy has estimated. What worries analysts the most is the fact that this year the reserve replacement ratio—the amount of discovered resources relative to the amount of production—was a mere 11 percent, compared to 50 percent in 2012, Sonia Mladá Passos, Senior Analyst at Rystad Energy, said.
Another point of concern is that the resources discovered per field also dropped, and this could affect the commercial viability of new discoveries. According to Adam Waterous, CEO at Calgary-based Waterous Energy Fund, shale will not be able to fill in the supply gap. On the other hand, oil prices have to reach $80 a barrel and stay at that level for two years to give companies reasons to develop higher-breakeven deepwater projects offshore West Africa or Brazil, Waterous told Bloomberg. OP
| ENDNOTE | Top |
CHART - The U.S. Just Burned the Most Natural Gas Ever B
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