Davis Index: Market Intelligence for the Global Metals and Recycled Materials Markets

On May 7, Lori Lightfoot, Mayor of Chicago, suspended the review of an overdue permit to begin operations of a new shredding business on the Southeast Side of the city. In announcing her decision, she cited a request from the US Environmental Protection Agency (EPA) to halt review of the permit application. Both the Mayor and the EPA had not commented on Davis Index’s questions on the issue until the time of publication.


This was not the first delay in a drawn-out permitting process for the shredder operation. The labyrinthine tale, replete with copious negative publicity and multiple permit reviews by both city and state authorities, stretches back more than two years and has now led Southside Recycling and its parent company, Reserve Management Group (RMG), to file a federal lawsuit against the City of Chicago alleging an unlawful delay in the issuance of the final required permit. 


In the meantime, the $80mn shredder in question sits idle–fully constructed but lacking city authorization to begin operations.


How did Chicago and Southside Recycling come to this stage? The answer requires a closer look at events dating back to 2018.


The beginning 

For decades, the Labkon family operated General Iron, a shredder and retail yard that purchased all grades of ferrous and nonferrous, in Chicago North Side’s Lincoln Park. When the business began, that portion of the neighborhood was an industrial area, and the shredder was located amidst other similar businesses in one of Chicago’s Planned Manufacturing District (PMDs). As the years passed, the neighborhood changed around General Iron. Other facilities closed or moved, and the city ended the area’s designation as a PMD. Eventually, General Iron found itself as the last company standing–a single industrial occupant ringed by numerous residential, retail, and office developments that now closely surrounded its 10-acre site.


The changing nature of the area brought new neighbors, many of whom did not enjoy the recycling facility’s presence in their recently gentrified slice of the city. The prospect of a mega-development called Lincoln Yards that would be built around the shredder site only added to the pressure on the company.


Meanwhile, RMG had been quietly operating multiple ferrous, nonferrous, and electronics recycling businesses on 175 acres of former steel mill land it owned on the Southeast Side for more than two decades. Aware of the situation unfolding in Lincoln Park, RMG reached out to the Labkons to explore the possibility of acquiring General Iron with an eye towards building a new, state-of-the-art shredder operation on an unused portion of RMG’s property.


On March 16, 2018, RMG signed a letter of intent to purchase the business and non-real estate assets of General Iron. The group then began working to prepare the South Side site to host the upgraded shredding operation. 


In the fall of 2018, RMG and General Iron executives held a community meeting on the Southeast Side to present their plans to residents and environmental groups. The Chicago Zoning Board of Appeals granted a special use permit required to operate a shredder at RMG’s site on March 15, 2019. On September 10, 2019, the City of Chicago, General Iron, and RMG agreed to a term sheet outlining the companies’ pledge to shut down General Iron by the end of 2020 in exchange for the city’s “reasonable co-oper[ation] with RMG in achieving the efficient, expeditious transition of the Business to the Southside Properties.” Shortly after, on Sep 30, RMG completed its purchase of General Iron.


An activist opposition

Almost immediately, opposition to the building of the new facility on the Southeast Side emerged. While the owners of RMG and General Iron had held a public meeting with community residents and environmental groups in the fall of 2018 to outline the details of the new business they planned to build, subsequent efforts at outreach were firmly rebuffed. 


Individuals and groups on the South Side, together with General Iron’s North Side neighbors, labeled the new facility an example of environmental racism and repeatedly called the business a notorious polluter. They cite as evidence the various tickets written against General Iron in Lincoln Park, as well as an EPA investigation of the North Side business that began in 2017.


That EPA investigation, one of the first in the nation to examine emerging evidence of volatile organic compounds (VOCs) from metal shredding operations, resulted in a 2018 Administrative Consent Order (ACO) directing General Iron to control and capture its VOC emissions. This was accomplished by installing a $2mn pollution control system including a regenerative thermal oxidizer (RTO) which has been proven in EPA-supervised testing to destroy more than 98pc of VOCs. The RTO, along with other components of the pollution control system, has been transferred to the new facility and installed as part of the construction of Southside Recycling.


Such vocal opposition to the new shredder by South Side residents and national environmental advocacy groups has played a large role throughout the process. These groups have effectively organized, using social media, and have found allies in the Chicago media and academic worlds. The city and other relevant government authorities have taken notice.


A saga of permits

From the outset, Southside Recycling was aware of the extensive permits required to build and eventually operate the new business. The aforementioned special use permit was just the first in a multi-step process that is still playing out today, more than two years after the Chicago Zoning Board of Appeals issued a 15-page report granting the zoning adjustment.


Due to the nature of the equipment that Southside Recycling will utilize at its facility, the company was required to apply with the Illinois EPA (IEPA) for an air pollution control construction permit. A permit application consisting of more than 100 pages was submitted to IEPA on September 24, 2019. 


As Southside Recycling is in a part of Chicago designated as an environmental justice area, the IEPA, in accordance with its environmental justice public participation policy, issued a notification on October 1, 2019, to inform interested parties of the pending application. In response to this notice, IEPA received requests from various groups for an environmental justice analysis, public hearing, and written public comment period on Southside Recycling’s permit application.


In acknowledgment of these requests, IEPA took several steps. Two virtual public meetings were held on May 14, 2020. IEPA also accepted written public comments for 77 days, during which time 329 comments were received.


Moreover, IEPA requested that Southside Recycling design and perform air dispersion modeling, considering existing emission sources in the area surrounding the site. While this was not required by any law or regulation, the company compiled the list of emission sources and performed the modeling, which ultimately showed that Southside Recycling would not create emissions in excess of any applicable health standards. The list of existing sources used in the modeling included RMG’s four existing facilities that were in operation on the company’s 175-acre site.


Given the attention surrounding Southside Recycling’s permit application, IEPA took the additional step of soliciting input on the air dispersion modeling and proposed permit conditions from the EPA. Technical staff from the federal agency’s Region 5 office reviewed the work completed by the IEPA and Southside Recycling and submitted comments on the permit, all of which were addressed by the IEPA in their Responsiveness Summary that was released upon issuance of the construction permit on June 25, 2020.


With the IEPA permit in hand, Southside Recycling began construction of its new facility.


Numerous pieces of equipment to be installed as part of the construction required Air Pollution Control (installation) permits from the Chicago Department of Public Health (CDPH). Southside Recycling applied for those permits between Jul 23 and Aug 20 last year, and, following an extensive review of the applications, the CDPH issued the installation permits on September 15, 2020.


The final permit

At this point, Southside Recycling needed just one further permit to begin operations once construction was complete. This approval, referred to as a Large Recycling Facility (LRF) permit, was also to be issued by CDPH. The LRF designation and permitting process were new – the result of the city’s decision to write more stringent rules governing recycling facilities that fit certain criteria for processing activities and material throughput. 


The LRF Rules that governed this new permit had only been released in June 2020 after an extensive public comment period which gathered feedback from a range of stakeholders including both environmental groups and recycling industry participants. Southside Recycling is the first business to apply for a permit under the new LRF Rules.


Southside Recycling submitted its initial LRF permit application to CDPH on November 12, 2020. Only after this submission did CDPH publish a new document that outlined the timeline and process by which LRF permit applications would be reviewed. CDPH’s guidelines included provisions for a 30-day written comment period and a community meeting. 


In accordance with these rules, a virtual public hearing was scheduled and held on December 10, 2020. At this meeting, CDPH announced that the comment period on Southside Recycling’s application had been extended until January 14, 2021–nearly two months after the permit application had been posted on the CDPH microsite dedicated to Southside Recycling.


On December 23, 2020, CDPH wrote to Southside Recycling to inform the company of deficiencies in its application. Southside Recycling responded to the notice of deficiency with a supplemental application that was submitted to CDPH on January 13, 2021. Upon posting the supplemental application to its microsite, CDPH announced yet another extension of the public comment period to January 29, 2021.


According to CDPH guidelines, the submission and posting of Southside Recycling’s supplemental application should have initiated a 60-day clock after which, should there be no further deficiencies, a draft permit was to be issued by March 15, 2021. The company’s lawsuit contends that numerous verbal assurances were given by CDPH officials as to the completeness and sufficiency of the revised permit application between the Jan 13 submission of the supplemental application and the Mar 15 deadline.


However, instead of being issued a draft permit on Mar 15, Southside Recycling found itself in receipt of another letter requesting further information. This letter did not specify what further information was needed by CDPH. Two days later, on Mar 17, Southside Recycling received a second letter specifying the additional requested information. 


Most of the information requested by CDPH pertained to the relationship between the new Southside Recycling business and the existing RMG companies operating on the company’s South Side property – companies that the city had regulated, permitted, and had full knowledge of since each company first began operating.


Despite both the city’s missed deadline for issuance of the draft permit and its request for information that was outside of the scope of the LRF Rules, and which was already known and publicly available from previously filed documents, Southside Recycling submitted the requested information on Mar 24. At this point, the city’s declarations regarding the application’s completeness and satisfaction of the LRF Rules resumed, according to the lawsuit. The issuance of a draft permit again seemed imminent.


Despite repeated assurances that their application was complete, and that no additional information or documentation was required, CDPH continued to delay the issuance of the permit to Southside Recycling. Noting this mismatch between the department’s actions and the words of some officials, the company wrote multiple letters to CDPH Commissioner Dr. Allison Arwady to formally request meetings on the subject. 


These requests, the company noted, were made in accordance with a section of the September 2019 agreement between the company and the city, which stated that the parties would meet at either side’s request to discuss areas of concern. Nevertheless, Southside Recycling states that they received no response from Dr. Arwady until May 10, when she sent a brief and perfunctory letter informing the company of Mayor Lightfoot’s decision to indefinitely suspend the permit review process in accordance with the EPA’s May 7 request.


Broken promises

Through much of the permitting process, RMG continued to operate the General Iron facility on the North Side. In the September 2019 agreement signed with the city, the company had agreed to shut down that facility by the end of 2020. In exchange, the agreement states that the city would reasonably cooperate to assist in the transition of the shredding business to the South Side property, making specific mention of permit reviews.


RMG’s chief executive officer Steve Joseph told Davis Index that the agreement was signed with the intention that Southside Recycling would be fully permitted by the time General Iron shut down to minimize the downtime of the business. Once it became clear that this timeline was unachievable, Joseph and his partners began contemplating the possibility of continuing to operate General Iron (which was fully and properly permitted to operate at its North Side location until 2022) beyond the December 31, 2020 shutdown date included in the agreement. When this topic was broached with the city, however, it was swiftly rejected with a threat to suspend the entire permitting process for the new business if General Iron was not closed by the agreed-upon date.


Sensing no option other than to continue relying on the city’s signed agreement to work together, RMG ceased operations of General Iron on December 31, 2020, and began the process of transferring certain equipment to Southside Recycling. More than five months later, that equipment is fully installed at Southside Recycling but cannot be turned on as the city’s indefinite halt of the permit review process drags on. The company says that this lack of clarity around the latest delay is what prompted them to file a suit.


“We have been backed into a corner,” Joseph said. “The city has announced that it will require additional studies, but still has not decided what those will be. At this point, any additional delay is clearly outside of the established rules and permitting process.” 


A new industry standard

While the permit review remains suspended by the city, a seemingly impressive and undeniably expensive shredding facility sits idle. According to Joseph, the company has spent more than $80mn to design and build an operation that will meet or exceed all environmental and health standards to which it is subject. Those standards, he says, are likely the strictest found anywhere in the US.


A tour of the site seems to back up Joseph’s statements. The pollution control equipment installed at Southside Recycling includes the RTO, filter system, wet scrubber, and various other emission control devices that had previously been used at General Iron. That system, Joseph reminded Davis Index, was cleared for use after EPA-supervised testing at the former North Side operation proved that its VOC destruction efficiency was greater than 98pc.


In addition to the pollution control equipment that was transferred from General Iron, Southside Recycling features several other enhancements when compared to the former North Side business. The new shredder is equipped with a solid enclosure–a feature that is common to shredders in Europe but rarely seen in the US, Joseph said. Southside Recycling has also built retention ponds totaling over two acres and an accompanying wastewater treatment plant to ensure process water and stormwater at the facility will meet discharge standards before entering the municipal sewer system.


The new facility also benefits from siting advantages not found in Lincoln Park. While the shuttered North Side business operated on a 10-acre parcel, Southside Recycling occupies approximately 25 acres well inside the boundaries of the 175-acre RMG property. That space and specific location within the campus property has allowed Southside Recycling to locate the shredder itself approximately half a mile from the nearest residential area–a distance about 10 times greater than the same measurement in Lincoln Park. While the closed North Side site and Southside Recycling are both accessible by barge and truck, RMG’s Southeast Side site is also serviced by rail, which adds a third option to further increase the company’s transportation efficiency.


The system’s array of pollution control equipment is far superior to any other shredding operation in Chicago or the surrounding area and is likely unmatched anywhere in the country, Joseph noted. Included as part of the new LRF Rules, Southside Recycling will also be subject to constant air monitoring, he added. The measurements from that monitoring system will be fully accessible to the city, state, and federal authorities. Scrutiny of Southside Recycling will be intense, and that high level of attention will ultimately prove whether the company can operate in compliance with the litany of regulations it is subject to, Joseph argues.


“Everyone will be watching how we run this facility,” Joseph said. “If we’re not meeting permit requirements when we are running, the regulators will know, and they’ll take action.”


The industry’s view

Suppliers of shredder feedstock are concerned about how this issue has developed. Speaking to Davis Index on condition of anonymity, they said that the outcome of this matter will unquestionably set a new precedent, especially if standards keep changing based on social justice and are not grounded in science or facts.


Southside Recycling’s new operation has the capacity to process one million tons per year. Since the December closure of the Lincoln Park facility, processing capacity in the Chicago region has been insufficient to service the local shredder feed market.


The only other large shredder in Chicago is operated by Sims. That facility is estimated to be operating at its full shredding capacity of around 25,000gt per month. The prior General Iron operation shredded approximately 60,000gt per month, leaving a large gap in local processing capacity while Southside Recycling awaits its permit.


Without Southside Recycling running, that remaining area tonnage has been moving to Indiana, Wisconsin, and Western Illinois, thus significantly reducing shredder feed pricing in the Chicago market.  The oversupply has led to prices estimated to be $40-60/gt below what they might be if the new plant were in operation. The depressed pricing has had significant negative impacts on auto wreckers, dealers, and peddlers, who have seen their collective profitability decline by hundreds of thousands of dollars per month.


Next steps

RMG and Southside Recycling filed a lawsuit in the US District Court for the Northern District of Illinois on May 17. That was followed by an additional filing on May 24 asking for expedited action and formally requesting a mandamus action that would order the city to issue the permit. At this point, it’s simply a waiting game.


“Right now, we are waiting for the legal case to play out. We believe that we have a very strong case, and we hope the court agrees,” Joseph said.

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