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Commerce · IV.02 · MMXXVI · daylight

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WORKBOOK — THE CORPORATE EXECUTIVE

Chapter IV.02 · Materials and the Return Loop

For the person with a P&L, a procurement function, a disposal contract and a quarter. This workbook uses the language of the firm without apology, because the firm's own numbers already support most of what follows — they are simply sitting in two different ledgers that nobody has put on the same page.

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THE PREMISE, STATED COMMERCIALLY

You are buying a material at one price and paying someone to take the same material away at another. Those two lines are in different parts of your accounts and almost certainly on different people's objectives. Put them together and a spread appears that you are currently paying twice to ignore.

That is not a sustainability proposition. It is a working capital observation with a capital-asset consequence, and it is worth doing arithmetic on before it is worth having a view about.

The arithmetic has one further term that nobody usually includes, and it changes every conclusion: growth. Material coming back to you this year went out L years ago, when you were smaller. So there is a hard ceiling on the share of your demand that returns can ever supply, and it is:

      c  =  ρc · Y / (1 + g)^L

Compute that before you budget anything. If your ceiling is 22 percent, a programme promising "closed loop" is promising something arithmetically unavailable, and you will have spent the money before anyone works out why the number never arrived.

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PART ONE — DISCOVERY

Days 1–30

Exercise 1.1 — The two-ledger sweep (one afternoon with your controller)

Pull two things: the materials purchasing ledger for three years, and every disposal, skip, scrap, write-off, effluent and gate-fee line for the same period. Put them on one sheet, sorted by material.

Wherever the same material appears on both sides, you have a candidate. Rank by value density — dollars per tonne of the purchased material — not by tonnage. Every loop in the Discovery movement of the chapter closed because of value density: Brazil recovers close to 98 percent of its aluminium cans with no deposit law, because the metal pays.

Exercise 1.2 — Where is it cleanest? (one week, on the floor)

Walk the process and mark the point at which each material is at its cleanest — the moment of arising, before it joins anything else. Then mark where it is currently collected. The distance between those two points is your entire yield loss, and it is usually a bin placed for the convenience of the cleaner rather than of the buyer.

One separation done once at the point of arising beats ten downstream. This is the single highest-return intervention in the chapter and it is typically a capital cost of a few thousand and a conversation with a shift supervisor.

Exercise 1.3 — The three assays (two weeks, external lab)

Take your three largest arisings and have them properly assayed. Three samples each, across different shifts, with the sampling protocol written down. Budget five figures and no more.

This is the exercise that changes the quarter. Almost every firm that does it discovers that at least one stream it pays to remove is worth money, and at least one stream it believes is worth money assays below the threshold at which anyone will take it. Both findings are worth more than the lab bill.

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PART TWO — THE ARITHMETIC

Days 31–60

Exercise 2.1 — Your four inputs, from your own systems (one week)

Do not accept an industry average for any of the four. Three of them are already in your ERP.

Exercise 2.2 — Your ceiling (one hour, and it decides the budget)

      c  =  ρc · Y / (1 + g)^L

Worked, for a firm with ρc = 0.70, Y = 0.93, L = 20, g = 3%: ρ = 0.651, 1.03^20 = 1.806, c = 36.0 percent. That is the maximum share of demand your own returns can supply, and it is close to what the global aluminium industry actually achieves — 34 percent — which is how you know the method is describing something real.

Then run the honest extreme. Set ρ = 1.00 — perfect recovery, no loss. At two percent growth and a forty-year life, c = 1/1.02^40 = 45.3 percent. Even flawless, 54.7 percent must still be bought new. Put that number in front of anyone who has written "closed loop" in a strategy document.

Exercise 2.3 — Your threshold (half a day)

For each candidate route, compute the yield below which recovery costs more energy than buying the material new:

      Y*  =  E_secondary / E_primary

  aluminium              10.0 / 170.0  =   5.9 %   never crosses in practice
  steel, EAF              6.4 /  20.0  =  32.0 %   crossed by shredder fines
  PET, mechanical        18.0 /  83.0  =  21.7 %   comfortable
  PET, chemical          55.0 /  83.0  =  66.3 %   crossed by coloured streams
  paper, total energy    18.0 /  30.0  =  60.0 %   crossed by mixed grades
  paper, purchased fuel  12.0 /  10.0  = 120.0 %   crossed at every yield

And for anything dilute, the threshold is a grade, not a yield. x* = E_feed / E_primary. A mixed metallic residue smelted at 3 MJ per kilogram of feed must assay above 3.0/45.0 = 6.67 percent copper to beat a 0.5 percent ore. Shredder residue assays one to two percent, which is why nobody buys it.

Exercise 2.4 — The contamination budget (one day, with engineering)

For every element you cannot remove, the blend is the mass-weighted mean of its inputs, so a tight specification is met only by dilution:

  f  =  (C_scrap − C_spec) / (C_spec − C_clean)

At 0.35 percent copper in end-of-life vehicle steel, reaching automotive sheet at 0.06 percent takes 5.80 parts clean iron per part scrap; reaching general flat product at 0.10 percent takes 2.78; reinforcing bar at 0.40 percent takes none. That table is your product mix decision, and it is arithmetic, not chemistry.

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PART THREE — DESIGN

Days 61–90

Exercise 3.1 — Write the specification (one week)

One page per stream: composition, tolerance, moisture, contaminant limits, sampling protocol, test method. Everything downstream is priced off this document, and until it exists you have a skip rather than a product.

Exercise 3.2 — Term sheet the off-take (two weeks)

Before any capital. Formula price linked to the published primary index, a floor, assay-based rejection, and a term just past your payback. The best counterparty is somebody who already buys the primary material: they can price the discount instantly and they own an assay capability.

Exercise 3.3 — The facility case at your measured yield (one week)

  tonnes of a single grade returned per year        1,800 t
  virgin purchase price displaced                   2,450 $/t
  secondary material cost delivered                 2,150 $/t
  avoided disposal / gate fee                          95 $/t
  ----------------------------------------------------------
  margin per tonne                                    395 $/t
  gross annual benefit  1,800 × 395                711,000 $/yr
  less operating cost                              310,000 $/yr
  less verification and assay                       40,000 $/yr
  ----------------------------------------------------------
  net                                              361,000 $/yr
  facility                                       1,600,000 $
  return                                              22.6 %   vs WACC 9.0 %
  simple payback                                      4.43 years

The sensitivity that decides it is yield, not price.

  yield 100 %   net 361,000   22.6 %   clears
  yield  90 %   net 289,900   18.1 %   clears
  yield  80 %   net 218,800   13.7 %   clears
  yield  70 %   net 147,700    9.2 %   clears
  yield  65 %   net 112,150    7.0 %   fails
  yield  60 %   net  76,600    4.8 %   fails

  breakeven  Y = (0.09 × 1,600,000 + 310,000 + 40,000) / (1,800 × 395) = 0.695

Sixty-nine and a half percent. Establish it before you sign, using your own assay, not the vendor's brochure figure. "Up to eighty percent" is not a yield.

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THE BOARD PAPER

One page, six lines, and the appendix nobody reads but everybody checks

Line 1 — the two ledger entries. What we pay to buy this material, what we pay to have it removed, on the same line for the first time.

Line 2 — the assay. What the stream is, measured three times, with the sampling protocol named.

Line 3 — the ceiling. c = ρc·Y/(1+g)^L, computed from our own records, with the four inputs and where each came from. State it as a limit, not a target.

Line 4 — the threshold. The yield or grade below which this stops being worth doing, and where our measured number sits relative to it.

Line 5 — the off-take. Counterparty, formula price, floor, rejection clause, term. Signed or initialled; a letter of intent is not an off-take.

Line 6 — the decision number.

     tonnes × (virgin price − secondary cost + gate fee) × yield − opex
     ----------------------------------------------------------------   >  WACC
                       facility + verification

The appendix carries the assay certificates, the four inputs with their derivation, and the sensitivity table. Nobody reads an appendix and everybody checks one; the reason to make it good is that the first number a sceptic checks decides whether they check the second.

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THE ACCOUNTING CONVERSATION

Three treatments, and have all three with your auditors early rather than late.

The facility. Plant, depreciated normally over its useful economic life. Uncontroversial.

The stream. This is the interesting one. A material with a signed specification and an off-take contract has stopped being a disposal liability and become inventory. That reclassification is a real balance-sheet event, it is evidenced by the assay and the contract, and it is frequently larger than the facility. It is a conversation about whether an asset exists, which your auditors have every year about something.

The provision. If you currently hold a provision for disposal or remediation of this stream, a signed off-take changes its basis. Say so explicitly rather than letting it be discovered.

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THE FIVE FAILURE MODES, AND THE CONTRACT TERM FOR EACH

The last one deserves a sentence in the management accounts of its own. A loop running at constant ρ in a business growing at three percent loses share every year while performing flawlessly, and a manager who does not know the formula will read that as a failure and cut the budget for it.

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THE FIRST NINETY DAYS, ON ONE SHEET

The only two artefacts that must not slip are the assay and the off-take. Everything else can be redone in a week. Those two take calendar time that cannot be compressed, and every programme that fails in this area fails because somebody bought a machine before they had either one.

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THE CONVERSATION WITH YOUR PROCUREMENT DIRECTOR

They will raise four objections, and all four are reasonable. Here is what each one is actually asking for.

"Secondary material is inconsistent." They are asking for a specification and a rejection mechanism. Give them the assay protocol and an assay-based rejection clause and the objection converts into a term sheet. This is the objection that means yes.

"We would be exposed to one supplier." Correct, and the answer is a second qualified off-taker named in the paper before the first is signed. Note that they are describing the risk profile of their current arrangement as well.

"The saving disappears when the commodity price falls." Also correct. A floor in the formula price is the standard instrument and a mining company would ask for the same thing. Say so; it reframes the request as ordinary.

"This is a sustainability project." This is the one to answer with the arithmetic rather than the argument. It is a purchase price variance, an avoided gate fee, and a supply position. Present it in those three lines and in that order, and let anybody who wants the environmental case find it themselves.

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WHERE THE FIRM'S OWN NUMBERS ALREADY SUPPORT THIS

Four places, all of which exist today in most manufacturers:

Purchasing variance. Any secondary material that meets specification at a discount shows up immediately as favourable purchase price variance, which is already a tracked, incentivised line.

Waste and disposal cost. Already a cost centre, already rising, already reported. Avoided gate fee is a real saving in an existing line, with no new measurement regime required.

Yield and scrap. Already measured to two decimal places in any competent plant. The chapter's Y is a number your operations director already knows and has never been asked for in this context.

Security of supply. Increasingly a board topic in its own right. A secondary stream you control is supply that does not move with a foreign exchange rate, an export licence or a shipping lane. In many firms this argument closes the decision on its own, and it is the one to lead with when the commodity price is against you.

The point of all four: you are not asking for a new measurement regime. You are asking four existing numbers to be put on the same page, which is a formatting request, not an investment.