UK: How Shanks and McEwan got rich on rubbish.

UK: How Shanks and McEwan got rich on rubbish. - It may be a lot of garbage to some but it's gold to Shanks and McEwan. By Shirley Skeel.

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Last Updated: 31 Aug 2010

It may be a lot of garbage to some but it's gold to Shanks and McEwan. By Shirley Skeel.

"How do I feel as a human being?" David Wheeler looked up sharply, as though surprised that his interrogator should have guessed his species. Frowning, he caught himself quickly. "If I had any doubts, I would shut it down," he came back coolly.

It was just as an outside critic of the company had said. David Wheeler, a square, thick-browed man who left Shell seven years ago and joined Rechem Environmental Services "for something more exciting", was indeed a down the line company man: "We do it right and that's it."

Wheeler's pointed reply was to a question on how he felt about public fears over the safety of his Pontypool incinerator, the notorious dumping point for some of the world's most hazardous chemical wastes. (Remember the Soviet ship Karin B, which was carrying toxic waste from Canada and was turned away from port after port? It was on its way to Rechem's plant in Pontypool, South Wales.)

The fact that Wheeler responded with the only possible acceptable answer reveals little about Wheeler and even less about Rechem, the incinerator arm of waste management company Shanks and McEwan. But it indicates everything about the high price that goes with making money out of other people's problems. For Shanks and McEwan is indeed hauling it in. With the six million tonnes of garbage that industry and households shovelled into its lap last year, the group put £24 million, or another 37%, on its pre-tax bottom line, while notching up its fifth year of 20% per annum growth in earnings per share.

Shanks and McEwan is regarded by many as a star performer in a dynamic and blossoming £5 billion market. For garbage, you see, is no longer garbage. It is a rich quality product churned out of one end of every lifecycle as unerringly as consumables are poured in at the other.

Shanks and McEwan and its Rechem arm, which until last year was independent, can claim to have been the UK leaders in recognising that the 100 million tonnes per annum of marketable garbage was heading for true sophistication. Shanks's chief executive, Roger Hewitt, played a leading role alongside chairman Peter Runciman in deciding to take the quality, high capital cost disposal route in 1986. Hewitt, a genial, bespectacled man said by admirers to "work his balls off", took the plunge dictated by his convictions in 1986 when he purchased £33 million worth of clay pits from Hanson Trust's London Brick Landfill. The scoffing from competitors over such folly was almost audible.

Yet today Shanks and McEwan is included in many a "green company" list for its work in disposing of waste at its 12 UK landfill sites, which, grassed over when full, become golf courses or picnic sites. And greener still, with envy, are its competitors. One rival says that the value of Shanks's 83 million cubic metres of licensed landfill, with options on another 110, is "often hyped up". But as suitable holes close to the major cities get scarcer, the price of this "air space" is climbing unrelentingly. It is no small advantage for Shanks to have rights to as much space as all of its major rivals combined - even if the future price and locations turn out not to be ideal.

Shanks's broker, Hoare Govett, quotes a report claiming that by 2000 AD only Bedfordshire, Buckinghamshire and Oxfordshire will have enough air space left to bring in outside waste. And "these landfills will be able to charge a greatly increased price per tonne".

Add to this a few facts: Shanks purchased its pits at less than £1 a cubic metre, while the same today would cost £2.50 to £3.50; its main sites north-west of London and near Glasgow are well placed with direct rail links; it has top-rate technology; and it owns two of the three UK incinerators licensed to handle hazardous waste. No wonder the company's share price soared to a price/earnings ratio of over 40 in 1989 - though the recession has taken that to a more sober 24.

This is not to suggest that Roger Hewitt and Rechem managing director David Wheeler are on an easy ride. Though Shanks is the UK leader, with a market share which Roger Hewitt puts at 10% (analysts put it much lower), the competition is stiffening fast. The market is highly fragmented, with maybe 2,500 players, but it has seen a rash of takeovers and new entrants, like water companies Severn Trent and Northumbrian and the American giant Waste Management in partnership with Wessex Water.

Much of the recent enthusiasm, not only for Shanks but also for some of its major rivals - Cleanaway (owned by GKN and Brambles), Attwoods, Leigh Interests, Blue Circle, Hales (owned by RMC), Biffa (owned by Severn Trent), Tarmac and Caird Group - is based on the new Environmental Protection Act or Green Bill, passed last October, and on expected European Community legislation. These will weed out the cowboys and steer the bulk of the business to the major players who can afford, or already meet, the higher technical standards. Industry's arm will be twisted to choose only the more responsible waste companies by the "duty of care" that the Green Bill imposes: everyone will be responsible for the safe disposal of their own waste.

The result? You guessed it. Roger Hewitt's eyebrows raise another inch above his spotted kipper tie: "That means prices must move dynamically - because of the increased risk and the guarantees expected. And one way or the other it gets back to the man in the street. We've all got to learn to pay a lot more for our waste disposal. It's a capital-hungry business."

He is not wrong. Landfill prices, now at £3.50 to £12 a tonne for solid waste, have been rising by 15% a year and, according to researcher Marketing Strategies for Industry, will continue to do so. In fact Hewitt expects that after the recession prices will rise by 15 to 20% in the first year, 25%-plus in the second year and 50 to 60% a year thereafter. This might sound extraordinary, but it is from a very low base. UK costs are a fraction of much of Europe's.

On the incineration side the signposts point in so many directions that even Rechem's David Wheeler gets dizzy. "Trying to predict which way we have to go in the future and when" is his biggest headache. Incineration now handles only 2% of the 3.5 million tonnes of hazardous waste produced each year. The rest goes to landfill. But as the law tightens and landfill costs jump, incineration is taking on a rosier glow.

Rechem has two incinerators, at Pontypool, Wales, and Fawley, Southampton, together capable of handling 72,000 tonnes a year. It has only one competitor - Cleanaway. Cleanaway moved into the solid waste incinerator market this year with a new 65,000 tonne capacity plant at Ellesmere Port which cost nearly £20 million. Planning applications are also out for another six plants, by Leigh Interests, Cory Environmental and Northumbrian Water/International Technology Corporation.

As James Capel environmental analyst Roger Hardman puts it: "The problem of getting licensed plants has created a superbly controlled market, with margins way, way higher than the laws of economics would otherwise dictate." Rechem, turning over £8 million and charging £200 to £2,000 a tonne for its services, has a diamond-studded profit margin of 37%.

Wheeler readily admits that in 1985, when former executives Richard Biffa and Malcolm Lee bought the loss-making Rechem from BET, drastic action was taken. "They said to our customers 'Hey fellas, we're going to double our prices'. And they did overnight. The market gulped (Wheeler demonstrates loudly) and said 'OK'." Five years later Biffa and Lee, who paid £1.6 million for Rechem, sold the company to Shanks and McEwan for an astonishing £172 million, drifting away with about £10 million each, plus a shared 12% of Shanks.

Wheeler now speaks breezily about the future, despite two distinct hisses in the works. Most critically, the EC is aiming to severely limit the amount of toxic waste shipped between countries. It is pressing its members to build their own high-temperature incinerators. Some 30 to 40% of Rechem's profits come from imported waste, shipped in from as far afield as Australia and South America, but chiefly from Europe.

Secondly, as waste disposal costs rise and the Government pulls more faces over its greening of Britain, industry will try harder to minimise its waste and recycle as much as possible. This will mean smaller volumes for landfill and possibly for incineration. On this point Hewitt argues that, even in the long term, volumes are unlikely to go down by more than 40% because of recycling and waste minimisation. "There is still 60% or so that has to go somewhere," he says. Shanks's philosophy of going for the higher margin wastes, he believes, will keep its profit growth up.

On the incinerator side, Wheeler likewise argues that costlier waste - more solid and concentrated material - will result from industry's recycling and minimisation efforts. Add to this a swing from landfill to incineration as new green standards bite, and he expects volumes will rise enough over time to make up for both waste minimisation and the loss of imports. "Even with the best will in the world, it will be five years before the new European incinerators are operating. You can't just say stop the imports."

A bleaker point which he does not make is duly made by his competitor, Cleanaway. Says managing director of technical services Doug Benjafield: "There will probably be more of the lower priced material (coming to incineration) because the higher priced wastes are already coming in. Average prices might well deteriorate." Benjafield also believes that the impact of waste minimisation and recycling will be significant. Indeed, reclaiming of waste has already risen from 1% in 1986 to 9% in 1990.

He remains quietly confident about his own plant because he is into this high capital exercise early, with sufficient customers to be running at 85% capacity, despite teething problems and the recession. "However, margins may be a problem with new entrants," he predicts.

The fact that Rechem is not among those seeking a new UK licence perhaps suggests that it is not all roses ahead. However, this could be due to other reasons. Rechem already has a licensed site at Bonnybrook in Scotland which was shut down in 1984, supposedly for economic reasons, though it followed hard on the heels of a scare that made the headlines: local babies born with deformed eyes. (Rechem was subsequently given a clean bill of health.)

The group could also expand its existing Pontypool plant on to land purchased next door - if it could get planning permission from the Torfaen Borough Council. The council's environmental health director, Dave Thomas, says that residents are hardly happy to be "looked on as the dustbin of the world" as it is, so opposition would be strong. Shanks denies any plans on either front, although it is "looking at all the options". One analyst claims a large capital spend on expansion is on the horizon.

Quite possibly the only "plot" hatching in Shanks and McEwan's mind is for a fresh focus on Europe, rather than the UK. Indeed, just the mention of Europe so arouses the otherwise restrained Roger Hewitt that his public affairs chief has to cut in roughly and veto some still confidential details. Shanks is already in a joint venture with Italian firm Ecodeco and is awaiting planning permission for a new incinerator there. Another joint venture "in a similar region" is being tied up and, according to Wheeler, "we are very interested and quite active" in Eastern Europe.

The EC move towards members' self-reliance in waste disposal is expected to offer some exciting options in Greece, Spain, Portugal and Italy, none of which has any high-temperature incinerators. And says Wheeler: "The rest of the world is your oyster."

Roger Hewitt speaks blithely of doubling the £500 million market capitalisation of Shanks and McEwan within three or four years. He sees its UK market share rising from his 10% estimate to 15 to 18% within five years by way of acquisitions and organic growth. He also targets profit margins at 30% across the company, compared with 25%-plus now.

He is not speaking idly. But neither is it a game without its fouler moments. In 1984 there were the "cyclops baby" scares at Bonnybrook, and throughout the long hot summer of '89, Shanks battled with the media and public over the PCB (the hazardous chemical polychlorinated biphenyl) shipment from Canada. Relations remain bad with Pontypool residents, who complain of the smell, minor "explosions" and the PCB-loaded trucks. Rechem monitors the area for PCB contamination non-stop, but nonetheless it is being subject to an independent inquiry ordered by Welsh Secretary David Hunt.

In Clwyd, Shanks has also had to prostrate itself before a public inquiry over a new waste site which it wants to put in a loop of the River Dee. The council is dead against it and a decision has still to come from the Welsh Secretary.

The company wins some, it loses some. But built into its future there always remains a question mark - if, in its own eyes, a small one. As Mick Morrey, project director for the respected environmental consultant Aspinwalls, comments ruefully when queried about the River Dee scheme: "Nothing is absolutely failure proof. It's a question of how small the risk is to be before you take it." The same could be said for Shanks's incinerator plants and landfill pits. It is hard not to ask: what do we not know now that we might know in 50 years' time?

Certainly Greenpeace considers importing PCBs by sea to be dangerous. And even the methane-releasing landfill sites are regarded as an unwanted contributor to the greenhouse effect. Not to mention the ongoing risk of water aquifer contamination. Greenpeace says that waste reduction and recycling are the only real solution. But the recycling, according to spokesman Blake Lee-Hardwood, will only be widely attractive to industry if waste costs hit £15 a tonne, compared with rates as low as £3.50 now.

Still, recycling is catching on. Attwoods chief executive Kin Foreman says that in the United States his firm's recycling business has grown from zero to a £200 million turnover in four years.

Not a company to miss opportunities, Shanks and McEwan is already into methane power generation at some of its landfill sites and is studying the recycling business. But Hewitt is sceptical. "There are difficult questions to answer about how recycling can be done," he says. "Manufacturers hold their heads in their hands and say 'We don't know what it means to us'." At this point, Shanks does not know what it means to it either.

Contrary to Hewitt's sunny outlook for the future, one major competitor declares that margins of 20% are getting "harder and harder" to maintain. This is partly recession talk, partly uncertainty as to just how this tumultuous industry - riddled with politics - is going to finally unfold. Still, it has to be said that Shanks and McEwan does have a spanking good start. And someone is going to have to pick up the garbage when all the parading is done.

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