Trash collector and landfill owner Waste Management (NYSE:WM) announced last week that it has entered into a joint development agreement [JDA] with cellulosic sugars producer Renmatix to explore the conversion of trash into sugars (as well contribute to the latter's recent $75 million capital raise). Don't worry - successful commercialization of this pathway won't mean that the stuff in the back of your local garbage truck will end up in your baked goods. Renmatix's goal is the production of cheap sugars that can serve as feedstock for biobased fuels and products.
Monosaccharides in the form of cane sugar [sucrose] and depolymerized corn starch [glucose] currently serve as the largest sources of biofuel feedstock in the U.S. and Brazil. This use of edible carbohydrates as biofuel feedstock has caused quite a bit of controversy, however, and advanced pathways capable of producing biofuels from lignocellulose- and waste-derived sugars have gained public and government support as a result. Advanced biofuels producers such as Amyris (NASDAQ:AMRS), Dupont (NYSE:DD) subsidiary Dupont Biofuels, and Solazyme (NASDAQ:SZYM) have developed the ability to produce advanced biofuels from monosaccharides via microbial conversion but have failed to locate a source of inexpensive sugar feedstock. Expensive feedstock always equals an expensive product, so Renmatix is attempting to meet this demand by producing inexpensive sugars from lignocellulose and municipal solid waste [MSW]. MSW has a number of advantages as a biofuels feedstock over lignocellulose and, as the largest integrated waste services provider in the U.S., Waste Management is responsible for collecting much of the country's domestic supply.
This article reviews the economics of the U.S. sugar market and discusses why this JDA has the potential to give Waste Management access to this potentially high-value market.
Sugar feedstock economics
A quick look at sugar prices in the U.S. reveals one reason why biofuel producers are seeking alternative sources of sugars. The U.S. imposes a stiff tariff on cane sugar imports, which has caused the domestic price of cane sugar to be roughly twice that of the world price since 1960 (see figure). By keeping the price of U.S. cane sugar so much higher than the world price for so long, this tariff has shaped U.S. industry and is the primary explanation for the country's reliance on corn as its main source of both biofuel and food sweetener (the latter in the form of high fructose corn syrup, or HFCS).
Historical U.S. and world raw sugar prices, 1960-2010 (Source: USDA).
With cane sugar out as a biofuel feedstock in the U.S. due to its relatively high price and corn sugar unattractive due to the "food versus fuel" controversy, advanced biofuel producers are left with feedstocks such as lignocellulose and MSW. The downside to rural lignocellulose such as switchgrass and corn stover is the high cost of converting it to monosaccharides. While independent production cost estimates of Renmatix's supercritical hydrolysis pathway are not available, one analysis of cellulosic ethanol production from corn stover via enzymatic hydrolysis and different pretreatments shows that the pretreatment and hydrolysis costs add $3-4/gallon gasoline equivalent [gge] to the pathway's minimum fuel selling price [MFSP]. Combine this with the high projected cost of rural lignocellulosic feedstock at the biorefinery gate ($70-120/metric ton) and it is easy to see why lignocellulose has yet to become a major biofuel feedstock.
MSW of the type collected by Waste Management offers a number of advantages over bioenergy crops and crop refuse. First, it is already being cost-effectively "harvested" on a large scale by companies such as Waste Management. Second, the economics of MSW are quite different from those of rural lignocellulosic biomass; whereas the latter must be purchased from the producer, MSW producers (e.g., homes, offices, etc.) pay companies such as Waste Management to take the feedstock from them (so-called "tipping fees"). Finally, much MSW comes in lignin-free form (e.g., office paper, cardboard, paperboard, etc.), which greatly eases the conversion process (much of the aforementioned rural lignocellulose pretreatment cost is necessitated by the presence of lignin). MSW does have disadvantages as well: metals and plastics must be separated from the cellulosic waste, and each load must be transported outside of urban areas for conversion (otherwise the processing facility risks incurring prohibitively high land and regulatory costs). Overall, however, MSW changes the paradigm of feedstock economics.
Trash as a valuable feedstock
Waste Management derives its revenue from trash collection and disposal; Renmatix hopes to derive its revenue from the sale of lignocellulose- and MSW-derived monosaccharides. The JDA is based on the premise that, by combining certain aspects of the two operations, the JDA will develop an additional revenue stream for Waste Management in the form of MSW sales (as opposed to just collection) and grant Renmatix access an inexpensive and plentiful feedstock for monosaccharide production. While the lack of independent cost data on the Renmatix supercritical hydrolysis pathway makes it impossible to quantify the exact price the company will be willing to pay for MSW in the future, a look at projected fermentable monosaccharide prices in the U.S. demonstrates why the conversion of MSW to sugars could be quite valuable for Waste Management.
Microbial conversion achieves maximum efficiency when the sugar feedstock contains a high proportion of monosaccharides. Dextrose is one name for such a sugar feedstock. The cane sugar tariff and resulting dependency on corn sugar in the U.S. has led to a very strong historical correlation between the prices of dextrose and HFCS:
Correlation between dextrose and HFCS prices (cents/lb), 2000-2011 (Source: USDA).
This correlation enables the calculation of projected dextrose prices from 2012-2020 based on projected HFCS prices [pdf]. The result shows that while dextrose prices are not expected to return to their historical highs anytime soon, they will still average 29 cents/lb over the next 9 years. This equals $640/MT, which is only about 33% lower than the projected price of gasoline over the same period. In other words, based on current market conditions, dextrose will continue to be relatively valuable in the near future.
Historical and projected dextrose prices, 1980-2020 (Sources: USDA, FAPRI).
That's not to say that Waste Management can expect to receive several hundred dollars for every metric ton of waste that it sells to Renmatix; in addition to needing to cover the latter's production costs currently estimated at 4 cents/lb by Renmatix, but probably higher), advanced biofuel producers will not purchase MSW-derived monosaccharides from Renmatix unless they are cost-competitive with those from more conventional sources. That said, receiving even a fraction of that amount for the MSW that it is already being paid to collect would represent an attractive new revenue stream for Waste Management if it were to provide enough MSW to Renmatix for commercial-scale monosaccharide production.
Waste Management is following in the footsteps of companies such as Chesapeake Energy (NYSE:CHK), Darling International (NYSE:DAR), and Tyson Foods (NYSE:TSN), all of which have entered into either investment agreements or joint ventures with biofuel producers to use the former's low-value products (natural gas in the case of Chesapeake, meat processing waste in the cases of Darling and Tyson) as biofuel feedstock, thereby (hopefully) improving demand and raising their market value. Should the JDA result in the cost-effective conversion of MSW to monosaccharides, Waste Management will derive additional value from the trash that it is already being paid to collect, transport, and dispose of. Given its current market size, this value could have a substantial impact on the company's revenues.
While it is too early in the JDA to quantify how much of an impact the successful adoption of Waste Management's MSW as feedstock for Renmatix's sugars would have on the former's revenues, investors should keep an eye on the JDA's progress due to the high value of its potential applications. As the largest integrated waste services provider in the U.S., Waste Management has one of the country's most developed MSW supply chains and is at a significant advantage over other advanced biofuel feedstock suppliers as a result. Independent information on the yields and operating costs of the Renmatix supercritical hydrolysis pathway is necessary before any estimates of the pathway's value to Waste Management can be made. More information should become available as the JDA progresses, however, and those investors who follow its progress will be well-positioned to take advantage of a favorable outcome.