LONDON (ICIS)–On Friday 15 May, industry
association Plastics Recyclers Europe (PRE)
issued a statement urging the EU and member
states to include recycling as one of the
sectors supported by their recovery plans and
to continue implementing measures under its
Circular Economy umbrella because of the
current pressure on the industry.
PRE warned that the plastics recycling industry
is closing production as a result of the
crisis, citing low demand on the back of
convertor closures, and the low price of virgin
plastics along with decreased global activity.
“If the situation is to persist and no actions
are taken to remedy the sector, plastics
recycling will cease to be profitable,
hampering the attainment of the EU recycling
targets and putting in jeopardy the transition
towards circular plastics. In such a case,
recyclable plastic waste will have no
alternatives but to be sent to landfill or
incineration,” PRE President and Director,
Group Recycling at CeDo, Ton Emans said in the
press release.
It is certainly true that the recycling
industry is facing significant short-term
disruption and strain as a result of the
COVID-19 pandemic including financial pressure
not seen since the global economic downturn in
2008.
Packaging demand in April fell by 20-30% across
European recycled polymers because of
substitution back to virgin, despite underlying
packaging demand remaining strong due to
homeworkers using more packaged goods.
Demand for non-packaging applications has
ground to a virtual standstill due to
widespread closures, particularly from key
end-uses such as automotive and outdoor
furniture, which have been most severely
affected. In recycled polymer markets such as
recycled polypropylene (R-PP), for example,
where the majority of end-use is for
non-packaging applications such as automotive,
outdoor furniture, construction and flower pots
– almost all European flower pots are now made
from R-PP – demand in April fell by around 50%
year-on-year.
As demand weakened, recyclers increasingly
idled operations or switched to working purely
from stock.
Cash reserves at recyclers are typically
significantly lower than petrochemical firms,
and many rely on short-term debt financing to
fund investment. With strong consumer and
regulatory pressure leading to a raft of Fast
Moving Consumer Goods (FMCG) brand targets for
2025 across recycled polymer markets
pre-coronavirus investment levels were high,
increasing the debt-burden once coronavirus
hit.
As a result, there have been widespread
concerns over potential bankruptcies in parts
of the chain depending on the approach banks
take to debt refinancing.
Weak demand, the threat of bankruptcy in parts
of the chain, and an unwillingness to launch
new supply chains amid the current disruption
have meant that underlying market growth in
less well-established mechanical recycling
industries such as recycled polyolefins – which
had previously been strong – has ground to a
halt.
For maturing recycling markets such as recycled
polyolefins (R-PO) growth in 2020 had been
expected to be strong because of increased use
from the cosmetics and household goods
packaging sectors.
With long testing cycles of around 18-months
and multiple projects that had been delayed,
consumption had been expected to increase
sharply from the second quarter.
My colleagues Matt Tudball, Helen McGeough and
I have written extensively in the past about
the shortages of suitable material to meet FMCG
targets – particularly for food-grade material.
Delays to investment now make it increasingly
likely that there will not be enough material
to hit 2025 brand and regulatory targets,
resulting in increased competition for material
and an increased disconnect between virgin and
recycled material pricing.
Strong demand and lack of supply had already
resulted in a disconnect between virgin and
recycled polymer prices for grades most
attractive to the packaging sector. A
two-tier market between packaging applications
– where prices are now largely driven by demand
and sustainability factors- and non-packaging
applications – where prices remain driven by
cost-saving against virgin, had arisen.
The charts here show the spread between virgin
and recycled polymer grades – with zero on the
graph representing price parity, above zero
meaning recycling prices are more expensive
than virgin and below zero meaning they are
cheaper.
The first is the spread between R-PET
colourless flakes and food-grade pellets and
Virgin PET spot values
The second graph shows the R-HDPE pellet price
spreads with virgin HDPE film spot prices
The final graph shows the spread between
natural R-PP pellet prices (which are a mix of
homopolymer and copolymer) and the various
grades of virgin spot prices.
All three graphs show the increase in
volatility since the spread of the pandemic in
March. This volatility has increased
uncertainty in the market, and multiple players
have switched from contract to spot pricing as
a result – particularly in France where
pre-pandemic post-consumer waste prices were
typically agreed on a quarterly basis but are
now typically being concluded on a spot basis
across all recycled polymers.
FMCG brands remain committed to their recycling
targets, with no delay so far announced. Some
regulations, such as the Italy plastics tax
that was due to come in to effect in June, have
been pushed back. There has been an absence of
new legislation, but no regulation has been
abandoned and there has been no sign of any
shift in regulatory approach once the
coronavirus crisis has been overcome. There has
also been no signal of any change in consumer
attitudes to recycling, with the pressure to
avoid waste remaining high.
Indeed, the economic fallout from COVID-19 may
make further legislation more likely in the
mid-term since plastic taxes, deposit
return schemes and extended producer
responsibility initiatives are simultaneously
potentially revenue generating and unlikely to
draw negative public reaction at a time when
central governments are looking to recoup
emergency expenditure. This could make them an
attractive option for governments across the
globe once the economic recovery is under way.
This begs the question that if FMCGs remain
committed to their brand targets, why is
substitution back to virgin occurring in the
short-term in the packaging sector?
The answer may in part lie in the disconnect
between FMCG brands and packaging
manufacturers. Many packaging manufacturers are
owned by private equity firms creating a
heavier focus on short-term profits and a
greater emphasis on the spread between virgin
and recycled prices, and margins between waste
costs and recycled material prices.
In this context, PRE is correct to highlight
the pressure from falling virgin values,
although as we’ve seen above there was already
a disconnect between virgin and recycled values
in many polymer markets that pre-dates the
crisis.
Virgin polymer prices have fallen sharply in
response to COVID-19, particularly following
the crash in crude oil values. This has placed
significant pressure on non-packaging recycling
grades in April and May, and a growing
disconnect between virgin and recycled values
has also added pressure on packaging grades so
that recycled values do not price too high
above virgin.
The exception to this is R-PET food-grade
pellets, which have been largely disconnected
from virgin values since 2011, where supply
chains are well established, volume commitments
are typically longer term, and where the brunt
of current 2025 legislative targets are
focussed. R-PET food-grade pellet values are
currently almost double virgin PET values.
Nevertheless, even outside of R-PET,
substitution back to virgin is not the sole
result of low virgin values. It is also being
driven by security of supply concerns, ease of
use, and limited workforces.
This reduction in demand may well prove to be a
short-term consequence of COVID-19 logistics
disruption, with consumption returning
alongside workforces once lockdown restrictions
ease.
Nevertheless, the longer-term consequences of
potential supply-chain bankruptcies and lack of
investment will be felt for far longer if they
result in further availability restrictions in
the mid-term.
Because of this, PRE’s call for governments to
support the industry is likely necessary to
shore up struggling businesses and to prevent
longer-term threat to the achievability of
sustainability targets.
“It is evident that legislation drives demand,
as seen by the SUP Directive and impact on the
food grade R-PET market. The disconnect
to virgin prices in this market emerged prior
to COVID-19 but has held firm throughout the
pandemic when other commitment from other
markets has fallen by the
wayside. However, it should not be
the case that plastic users and packaging
producers should opt for recycled feedstocks
simply based on costs, or solely in response to
legislation. The climate crisis and
plastic pollution remain critical issues for
the plastics industry to address and the
ambition for a circular economy has not
diminished. Therefore, supply chains across all
sectors needs to assess priorities in line with
this purpose and how short-term decisions will
impact long term business prospects” Helen
McGeough, Senior Analyst, Plastics Recycling at
iICIS said.
Any bankruptcy or lost investment in any
recycling chain resulting from COVID-19 is a
tragedy for sustainability. Nevertheless, in
all crises there is a level of opportunity.
The specific potential opportunities in the
present crisis lie with brand owners and
petrochemical firms.
The sustainability agenda is unlikely to
subside in the mid-to-long term. Without
investment, shortages are likely, and some
firms can be expected to miss their targets.
Brand owners and petrochemical firms can no
longer ignore sustainability without facing
significant consumer backlash, regulatory
consequences and potential lost business.
Many of these firms, though, do not have
established supply chains in the recycling
industry and in some cases lack internal
expertise.
The crisis creates the opportunity for smart
firms with deeper pockets and higher cash
reserves than is typical in the recycling chain
to invest and act as a bulwark for the
industry.
At the same time, it would in the longer-term
ensure these firms achieved their targets and
embed them more deeply in supply chains at a
time when investment is likely to come at a
discount. It would also signal a deep-seated
commitment to the sustainability agenda.
Some firms are already doing this, and although
investment announcements have slowed, they have
not disappeared.
Perhaps the most noteworthy of recent
investment announcements is L’Oreal’s €150m
social and environmental fund, launched to
directly help tackle the impact of the economic
fallout from COVID-19.
€50m of the fund will be used to promote the
circular economy with the aim of developing new
solutions and business models to boost the
recycling and management of plastic waste.
While the sustainability agenda may be on hold
for some companies because of the current
crisis, for those that are able, acting now
will ensure they are not caught-short in the
future.
ICIS has launched a new Europe recycled
polypropylene (R-PP) price report covering
post-consumer and post-industrial bales, flakes
and pellets. To subscribe to the new report, or
for further information, please contact
[email protected].
Click
here to see regulatory targets and a
list of chemical and mechanical recyclers on
the ICIS Circular Economy topic page.
