Turn It Around Recycling Is a Massive Industry with Lots of Investment Potential

When we invest in recycling companies, we’re investing in energy efficiency—it takes much less energy to make new materials from old ones than from fresh cut trees or mined metals. We’re investing in climate change solutions because when we use less energy to make products, we create fewer emissions. And recycled materials are a key feature in green buildings, which offer additional solutions to climate change.

Then there are the benefits we usually associate with recycling: reducing waste and protecting forests and habitats from mining and clear cutting. There are many mid-to-large well-established recycling companies, and including some in our portfolios affords us less volatile investments than just renewable energy companies alone.

Eric Prouty from Cannacord Adams, one of the analysts interviewed for a recent “Investing in Recycling” report, says, “Ever-escalating energy prices, commodity price inflation and scarcity, and global environmental concerns have coalesced into a “perfect storm” for the [recycling] industry.”

Recycling Takes the Lead

The recycling industry has become a backbone of our economy, pulling in $236 billion in revenues last year and employing over a million people. The industry accounted for about 2% of the U.S. gross domestic product in 2007. At the current rate of resource depletion—especially from emerging economies like China—the world can no longer satisfy demand for paper and steel from virgin materials alone.

We couldn’t print a newspaper, build a car or ship a product in a cardboard box without recycled materials. In fact, two-thirds of the steel produced in the U.S. is made from recycled materials. Making iron and steel from scrap requires 74% less energy. Making aluminum from scrap requires an astonishing 96% less energy than from virgin minerals. As of 2005, 51% of paper was recycled, using 36% less energy and far fewer chemicals. Plastic is the laggard: Although recycled plastic reduces energy use by 80%, while also lowering petroleum use, only 17% of plastics are recycled.

Industrial recycling has gone far beyond municipal recycling—that’s where the action is. Over the past decade, with the advent of “corporate environmental responsibility,” businesses have come to rely on recycling to lower energy costs, conserve raw materials, minimize waste streams and reduce pollution. With a global market, very high costs for virgin materials and overwhelming demand, recycling helps companies achieve competitive advantage and profitability.

Nearly every product is now recycled—paper, metals, car parts and carpet. Electronics are the newest category. Extremely short product lifecycles and the proliferation of cell phones, iPods and Blackberrys have made electronics the fastest growing waste stream worldwide. When the U.S. shifts to digital-only television in 2009, as many as 100 million TVs could be obsolete.

Unbelievably, about 70% of the heavy metals and 40% of the lead in U.S. landfills seeps out of dumped electronics, according to the Environmental Protection Agency. Eighty percent of e-waste is shipped to Asia and Africa, where it is simply dumped after the metals are salvaged. The European Union passed two major laws—Restriction of Hazardous Substances and the Waste Electrical and Electronic Equipment Directive—which require e-cycling as well as green product design to minimize hazardous chemicals and waste. In the U.S., manufacturers have instituted product take-back. Thirty-five states have banned electronics from landfills, setting the stage for the emerging e-cycling industry.

Industry Giants

There are about 40 publicly traded recycling firms worldwide and thousands of privately held companies. They operate in a wide range of fields: recycling ap-pliances, cell phones, mining waste, asphalt, paper, metals, vehicles and just about every mineral and product you can think of.

Some of the better-positioned companies include metals recyclers Metalico (AMEX: MEA) and Schnitzer Steel (Nasdaq: SCHN), auto parts recycler LKQ Corp. (Nasdaq: LKQX) and the largest recycler in the world, Sims Group (NYSE: SMS). As the price of petrochemicals rises along with oil, Interface (Nasdaq: IFSIA) benefits along with the recycling industry, because it uses a high percentage of recycled materials in its carpets.

Matt Patsky, managing partner for Winslow Green mutual funds, says, “The recycling industry truly offers us an important hedge against this tough market, especially the metals recyclers.”