Packaging and Waste Management. The co-dependence.

In the US, lifestyle can seem wasteful (unless you live Oregon or such hippy state). Some instances of gratuitous waste that i’ve witnessed in NYC:

  • Single toothpicks are packaged in restaurants.
  • Tissues and utensils are served with every meal in more quantities than required.
  • 3$ Snapple in glass bottles (are they re-cycled?)
  • Use and throw coffee stirring sticks are imported from China and made from tree bark.
  • Vaccuum engines to clean subway tracks

Little wonder private companies like Waste Management Inc (NYSE: WM) can generate over 20 percent in ROE and have a wide and enduring moat.

Can this trend be extrapolated to India in the future?

Stocks of waste generating companies into plastics, films and packaging seem to be doing fairly on the BSE. Consumption is set to explode the need for packaging but what about disposal of the huge waste that will be generated?

Interestingly there seems to be no listed for-profit company of scale in the waste management industry.  There are several co-operatives and non-profits in the space but they are small and localized. There could be one or several reasons for this vaccuum:

  1. The microstructure of the Industry makes it unprofitable
  2. Waste segregation would generate higher margins but it is not a necessity like waste disposal
  3. Landfills need land and regulatory approvals, and both are hard to get in India.
  4. It is dominated by unorganized businesses and mafia

Two bullish trends are Swacch Bharat and rise in consumpion. Startups have caught onto these trends and quite a few of them have entered this space.

Given the need for land and approvals, I fear these startups face a high chance of failure. To be succesful in the business needs scale to generate favorable returns on capital employed and government sponsorship for land aquisition and permits. You need companies like Reliance or Patanjali in this space but neither seem to be very keen on waste management outside of CSR activities.

I am afraid without a profit incentive, waste management will remain a civic and municipality responsibility with the resulting inefficiencies.

As population mounts and consumption grows, this will lead to more pressure to enact stronger laws.

For this reason I am bearish on the future of run-of-the-mill plastic and packaging companies over the long run. I fear the government will come down harshly on plastic and packaging at some point.

Packaging will still be needed, and specialty films and packaging companies that innovate will enjoy a relative advantage, but building such advantages may prove costly.

Could paper companies make a comeback as packaging companies? Paper and corrugated boxes are affordable and biodegradable but prone to raw material prices. The per capita consumption of paper in the U.S. is 450 kg and in India it is 10 kg. But, the recovery is 55% to 60% in countries such as the U.S., while it is only 28% in India.

It will be interesting to watch this space play out.

Disclaimer: I am not a SEBI Registered analyst. I am writing to organize my thoughts and in good faith to share with the investor community. I do not offer Buy or Sell advice on this blog and none of my writing should be construed as a recommendation to Buy or Sell bur rather my own views. For the full disclaimer please see the About section.

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