Waste not want not: the changing face of the UK waste sector
17 November 2016
Landfill in the UK is in steep structural decline and the build out of alternative waste treatment infrastructure is progressing apace (although new technologies have not always delivered as promised). Further financial difficulties and M&A activity can be expected as sector consolidation continues.
Current market conditions
After several years of decline, UK waste arising from households is increasing, supported by the economy’s return to growth following the last recession. This trend is expected to continue, underpinned by rising population and household growth.
However, the market environment is becoming increasingly challenging to operate in. Tough competition, local government budget constraints and depressed prices for recycling material are keeping sector margins under pressure. Brexit has also made life tougher for waste exporters and the future direction of UK waste policy, which has previously been driven by the EU, remains uncertain.
A number of underlying trends will shape the market in the immediate future.
Larger waste management companies are better positioned to provide a full service offering. They are more efficient at processing waste and have greater (and more price certain) access to effective treatment capacity. Large integrated trade players are likely to continue to focus on strategic acquisitions of smaller, regional companies, such as Biffa’s acquisition of Cory Environmental’s waste collection business in June 2016 and the regional collection and processing business, Blakeley’s in September 2016.
The wider European market shows evidence of growing Chinese and other overseas investor interest in the sector, such as China’s Firion Investments’ acquisition of Spain’s Urbaser SA and Beijing Enterprise Holdings’ acquisition of Germany-based EEW. We expect this interest to flow through to the UK market as UK treatment infrastructure assets mature and transaction volumes increase.
Smaller and mid-market waste companies without critical mass, or a particularly strong regional position are expected to face a difficult environment. Companies operating a business model of collection services, basic pre-treatment and export out of the UK are more likely to suffer in the current trading environment, in light of strong competition for customers, escalating export costs and continuing low recyclate values.
Landfill in steep structural decline
Landfill Tax continues to increase and tonnage continues to be lost to new domestic treatment capacity and the export market. Accelerating closure dates will in turn accelerate capital expenditure spend for landfill operators as capping and remediation work begins following site closure. Whilst landfill owners with strategic locations may be better positioned in the near-term, in the long-term, the outlook for landfill has not changed. We expect an increasing number of waste businesses to seek to exit landfill as “landfill consolidators” emerge.
Against this backdrop we expect weaker operators will face on-going difficulties and the larger integrated companies will continue to act as consolidators.