Fire engulfed the SKM Recycling plant in Coolaroo about 3.30am, sending plumes of acrid smoke across Melbourne's northern suburbs and as far afield as the city's bayside.

The early morning blaze, which is believed to have started in a baling machine and quickly spread to a hydraulic system and the rest of the 24-hour processing plant, caused hundreds of thousands of dollars worth of damage.

It is believed to be the second fire at the SKM facility in a week. The first blaze reportedly raged inside the plant for up to nine hours last Monday.

The same plant was gutted by fire 10 years ago, a worker told Channel Nine.

Neighbouring business owner, Metim Sen, claimed there was a fire nearly every four to six months at the plant.

"And we're scared all the time," he said.

The Coolaroo plant services 14 councils in Victoria and processes more than 500 tonnes of cardboard, plastic, glass, paper and aluminium each weekday.

These councils include the suburbs of Boroondara, Cardinia, Glen Eira, Hobsons Bay, Hume, Moonee Valley, Nillumbik, Mornington Peninsula, Casey Brimbank, Melbourne City, Port Phillip and Wyndham.

SKM is just one of three processors that handles recycling from curbside council collections and reportedly services around 1.2 million people.

The body responsible for the city's waste said bin collections would go ahead as normal, with trucks full of recycling already being diverted to another SKM facility in Geelong.

"These diversions will continue until the situation at Coolaroo is resolved," a spokeswoman for the Metropolitan Waste and Resource Recovery Group said.

She said the Geelong plant had the capacity to handle 720 tonnes of waste per day and workers would start extra shifts on Tuesday night.

The fire was unlikely to impact on residential rubbish collections in the short term, environmental consultant Matt Genever​ said.

"Collection should continue as normal for residents," Mr Genever, the managing director of Reincarnate, said.

"SKM is once removed from rubbish collection, so residents and council rubbish collections shouldn't be affected by the fire."

He said the recycling material would likely be diverted to other sorting centres. "Some of the material may get stockpiled, although there are risks there because it can lead to further fires."

Mr Genever said there was a risk some of the material would not be recycled.

"Some of it may get diverted to landfill, although the materials that ... go to Coolaroo are on the higher side of the recycling chain. Paper, cardboard, aluminium, tin cans – most of those things have good global markets for them so they tend to get recycled pretty well."

It's unclear how long the Coolaroo recycling plant will be out of action, as the Metropolitan Fire Brigade continues to assess the damage.

"SKM will be able to assess the impacts of the fire once the MFB has finished at the site and will provide more information on any long term impacts at that time," the Metropolitan Waste and Resource Recovery Group spokeswoman said.

Forty-five employees inside the factory at the time escaped without injury.

The Visy Industries paper recycling factory in Campbellfield also suffered a fire in February last year.