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MAY 2007
Veolia turns to China for recycling and waste market growth
Other United States recycling and waste companies not internationally focused
E-mail the author Scrap steel is the number one recycled commodity in the world.

While most of the major United States-headquartered solid waste companies are focusing on North America operations, Paris-based Veolia Environnement S.A., is expanding worldwide by pushing further into emerging markets, especially China.

Its subsidiary, Velia Environmental Services, is expanding its waste-management business in China by increasing its investment in facilities and looking for acquisitions. Currently, local level and small players dominate most of the solid-waste market.

“Recycling will become a major industry for us in China,” Jorge Mora, the company’s chief executive for Asia, based in Beijing, told the Financial Times.

“We want to get into recycling in an organized and professional way.” Mora and public relations officials in both Paris and the United States did not respond to repeated requests for an interview regarding Veolia’s plans for China.

Despite no clear guidance from Veolia on its plans for China, the potential opportunity awaiting Veolia is huge. China has surpassed the United States as the world’s largest solid-waste generator, according to a research report by the World Bank.

Urban areas of China generated about 190 million tons of waste in 2004, according to the report. The total is expected to reach 480 million tons by 2030.

More multinationals are becoming interested in China’s solid-waste market, said Dan Hoornweg, a senior municipal engineer at the World Bank and author of the report. “Many companies don’t want to be left out of such a large potential market,” he said.

Hoornweg said there are two groups interested in the market – collection and landfill operators and incinerator companies. Potential revenues are a driving factor. He said the hurdles include low fee collection and a difficult business environment.

The World Bank report concludes that the management of waste in China has enormous domestic and international implications. For example, secondary material prices in the United States are often influenced by China’s demands for materials.

“Even though the pace of China’s solid waste improvement is significant, China has been unable to keep up with the growing demand for waste service coverage, environmental requirements for safe disposal systems, and rationalization of cost-effectiveness in service delivery,” according to the World Bank report.

Significant improvements have been made in the waste-management sector in China over the last ten years, however. Larger cities are moving toward sanitary landfills as the main disposal option for solid waste. But the report said that landfill operations and increased availability are currently China’s most pressing waste management needs.

Veolia stands out from its competitors by still investing widely in emerging markets, according to the World Bank. Veolia is growing market share, especially in China, although emerging markets still account for less than 3 percent of revenues.

Veolia expanded in all its business sectors globally in 2006, posting double-digit growth. Revenue increased 11.9 percent to €28.6 billion. Net income increased 21.9 percent to €758.7 million in 2006 compared to €622.2 million during 2005.

For 2007, Veolia expects revenue growth between 8 and 10 percent.

Veolia said it plans to focus on organic growth through existing contracts and new contracts in Europe, North America and Asia, according to its latest financial report. The solid-waste company is also looking for “value-creating acquisitions” around the globe.

Veolia currently employs more than 300,000 around the world. Its environmental segments include waste management, water management and energy management.

Despite the major growth potential in emerging countries, the general trend among large, international private operators is “disengagement and a high aversion to risk,” according to the World Bank. The report said that it might be easier for emerging countries to attract smaller, private, international operators that are less risk averse.

Bruce Parker, president and chief executive officer of the Washington DC­-based trade association, National Solid Wastes Management Association, said the major solid waste haulers headquartered in the United States are not currently operating in China. “I think that won’t change, certainly not in the near future,” he said.

Waste Management Inc. and Allied Waste Industries Inc. had international operations in the 1990’s, Parker said. “It was a disaster, because of currency exchange problems, cultural issues, and the way people in different countries pick up garbage.”

“All of our companies retrenched and they came back here,” he said.

Parker said the major solid-waste companies headquartered in North America are now focusing on cash flow. He said the major companies are repurchasing shares, giving the money back to investors as dividends, and using the cash to pay off debt.

“You just don’t want it to sit around. You want to make it work for you,” he said.

Veolia, the newest member of NSWA, is able to make its cash work in China because it is a unique company, Parker said. Veolia started as an international company, he said. “Veolia is truly an international company with tons of different divisions. It is much bigger than what we normally think of as a garbage company.”

Corey Greendale, an equity analyst covering the solid-waste sector for First Analysis Corp. in Chicago, said he would be surprised to see solid-waste companies from the United States expanding into China. “The companies would get a lot of pushback from their shareholders if they tried it. It’s such a different market,” he said.

“Everyone is currently much more focused on improving the quality of business that they have instead of trying to grow into new markets. I don’t think anyone is radically trying to grow into new markets, much less internationally,” Greendale said.

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