Global circular economy – how achievable is this in a pandemic and low crude oil environment?
Helen McGeough, Senior Analyst- Plastic Recycling, ICIS
Following the wave of outrage at the plastic pollution crisis aimed at parties from governments to the plastics industry, recycling has come to the fore as holding a significant role in creating a circular economy, assisting with improved waste management of plastics.
The rise of regulation and industries, namely FMCGs, commitment to sustainability goals saw a rise in recycling activity and this was set to grow in 2020. However, no one could have predicted the dramatic and sustained impact the coronavirus pandemic, the subsequent crash in crude oil prices, and demand drop-off would have on the world’s recycled polymer markets.
The aftereffects of coronavirus lockdowns have resulted in substitution back to virgin polymers, weak demand, delayed investments, a lack of underlying growth, and financial strain across the recycling industry. It has put a hiatus on progress towards a global circular economy.
“Low virgin polymer prices, caused by a crash in oil prices, have driven some sectors to revert to virgin polymers since the pandemic started in the second quarter, particularly for non-packaging applications.”
Pandemic impact to extend beyond 2020
The economic impact of the coronavirus is likely to remain the dominant driver of the recycling market in the second half of 2020, and longer-term, the pandemic is expected to deepen the pre-existing fault lines in the market – in particular, structural shortages of high-grade recycled material suitable for the packaging industry, and regulatory pressure on the plastics industry.
Low virgin polymer prices, caused by a crash in oil prices, have driven some sectors to revert to virgin polymers since the pandemic started in the second quarter, particularly for non-packaging applications.
For non-packaging demand, lockdown restrictions severely limited consumption for key end-use recycling markets such as construction, automotive and textile fibres. Demand from these industries had already been weakening prior to the coronavirus pandemic because of negative macroeconomic conditions.
Financial pressures throughout the supply chain
Despite weak demand and a fall in prices since the second quarter, higher grades of recycled material suitable for use in packaging remain above virgin values in Europe.
As of July, ICIS recycled polymer pricing assessments show rPET food-grade pellet (FGP) continues to see the highest differential with virgin, at 83-93% above virgin PET bottle grade values. rHDPE blow moulding natural pellets were at 50-65% above virgin HDPE values, colorless flake rPET Europe prices were 15-25% above virgin values, and rHDPE natural injection moulding pellets were 1-4% above virgin HDPE values.
Although the consumer and regulatory push for recycled content has been muted by the coronavirus, and although some FMCGs have limited recycled content in the short-term because of more immediate concerns, packaging brands appear committed to achieving the 2025 targets set out by the EU.
In Europe, structural shortages of EFSA approved food-grade material and material suitable for cosmetics and pharmaceutical primary packaging applications have continued to support margins for rPET FGP, and both grades of rHDPE natural pellets. For other grades of European recycled polymers, though, margins will remain heavily impacted by low virgin prices and non-packaging demand weakness for the rest of the year.
Distressed selling, to free up storage space as inventories peak, as well as weak demand and sharp falls in virgin values across the first half of 2020 have meant that waste costs remain too high to effectively compete with virgin without selling at a loss.
“Although the consumer and regulatory push for recycled content has been muted by the coronavirus (…) packaging brands appear committed to achieving the 2025 targets set out by the EU.”
“The US recycling market is still short in supply where infrastructure should be better funded and located. Demand for higher quality is growing, therefore, recycling infrastructure and technology will need upgrading.”
There has been talk of recyclers closing since April and, thankfully, to date, that has not been the case, but many recyclers are reducing output and extending maintenance and holiday shutdowns to avoid selling at a loss. This is not expected to change much during the traditional seasonal summer slowdown and could well remain in place into the second half 2020.
The precarious financial position of some recyclers is leaving opportunity for mergers and acquisitions to develop and it is expected there will be announcements before the end of the year of larger players acquiring plants to grow their business.
Low virgin polymer prices will see rPET flake producers and recycled polyolefin producers outside of natural rHDPE grades looking to bale suppliers to lower prices to allow them to recover some margin. However, decreases in bale prices in recent months across all three widely traded grades of recycled polymer were not significant enough to help with margins.
Margins of rPET flake producers and recycled polyolefin producers outside of natural rHDPE grades are often squeezed and for prolonged periods when there is a decline in virgin resin pricing. Clearly this restricts the viability of the business overall but also restricts the ability to invest, expand, build new or update existing lines and technology to increase both volume and quality of supply.
For Europe rPET colorless flake prices, ICIS analysis shows, with €100/tonne lower bale costs the margin would be substantially improved. This is the minimum decrease the recycling sector is looking for, but not expecting to achieve.
Given the fragile financial position of the European recycling sector, due to inflated bale prices, it lends further support for improved bale supply (volume and quality) so a greater supply of recycled polymers is made available to end markets.
Disruption in US recycle markets
The pandemic has disrupted the US recycling market with restrictions on recycling and municipal waste services. Officials and local governments turned their attention almost entirely to coronavirus issues, when prior to this new ambitious recycling programmes and regulations were continually announced from local governments and brand owners.
A recent bill introduced to Congress, the Plastic Waste Reduction and Recycling Act, however, indicates that recycling is back in the legislative eye. The Act underlines a unified approach the US federal government can take to support plastics recycling, while recycling programmes have been set and regulated at the state level. Several local governments have resumed work towards recycling, but more will be required to generate market demand in the longer term.
The US recycling market is still short in supply where infrastructure should be better funded and located. Demand for higher quality is growing, therefore, recycling infrastructure and technology will need upgrading. Pricing of recycled resins will continue to drive the market supply/demand to gain a market shift on a large scale.
Swifter recovery in Latin America
In Colombia and Argentina recycling has not been suspended during the pandemic and recovery should be smoother than elsewhere in the region. The gradual reopening of kerbside collections, drop-off locations and MRFs (materials recovery facilities) in Mexico and Brazil started in early July and should steadily recover plastic waste supply to pre-pandemic volumes. The Latin American recycling market is expected to recover relatively quickly due to the informal sectors’ income being dependent on recycling activity.
In the mid/long-term, demand for high quality recycled resins is expected to grow in the region, especially in Mexico, Brazil, Colombia, Argentina, and Chile, driven by global brands’ pledges. Supply volume is still expected to be limited as well as low quality, due to the informal role of waste pickers and the low value supply chain. However, in the longer term, improved prices of recycled polymers, and materials with recycled content, are likely to encourage supply chain developments.
Increased investment into Asia
In Asia scheduled bans on single-use plastic have been postponed due to the pandemic, most likely to be implemented in 2021. This has not restricted investment in the region, with recycling becoming the preferred end-of-life route for plastics.
“Supply volume is still expected to be limited as well as low quality, due to the informal role of waste pickers and the low value supply chain.”
“Other developments include chemical recycling, where Japan appears to be leading progress including a new joint venture which involves 12 major brand owners.”
Australia has set aside USD 190 million fund to boost recycling following a phased export curb. Investment in new capacity and other market developments in Asia are primarily brand led, often using joint ventures (JV), such as the Coca-Cola and Indorama plant in the Philippines slated to start up in 2021 with rPET capacity of 30,000 tonnes. Coca Cola and Dynapack’s JV to build a bottle-to-bottle recycling plant in Indonesia is estimated to reduce virgin resin usage by approximately 25,000 tonnes/year by 2022.
Other developments include chemical recycling, where Japan appears to be leading progress including a new joint venture, R Plus Japan, which involves 12 major brand owners. Investment in innovation has come from Circulate Capital which is investing USD 106 million in small to medium sized enterprises.
There continues to be a greater focus on informal workers as both the public and private sectors rely on waste pickers for waste management with the informal sector in southeast Asia estimated to capture approximately 15% of generated waste, highlighting the lack of waste management infrastructure in the region. The informal sector has been particularly affected by the coronavirus and health risks in picking through potentially hazardous waste.
This lockdown has also impacted the trade of waste, with increasingly stringent policies in place, such as a 2% contamination limit on recycled paper and plastic introduced in Indonesia. More regulation can be anticipated in the coming months as the region attempts to protect its population and markets.
The role of legislation
Monitoring legislative developments in other regions can contribute to formulating a strategy for the GCC, understanding the impact on and response from industry and consumers. Although the GCC has taken the first steps towards circular economy principles for the plastics sector.
The EU’s recently announced €800/tonne charge on non-recycled plastic packaging waste has caused a lot of interest within Europe, especially given the 1 January 2021 implementation date
The new charge will be paid by EU nations on all non-recycled plastic packaging waste. National contributions will be calculated by the EU Commission using existing reporting obligations under the packaging waste Directive (Directive 94/62/ECC) and its implementing Decision (Decision (EU) 2019/665.
Under that directive member states provide data on plastics packaging and recycling, which is published on the Eurostat website.
The charge will be used to fund the coronavirus recovery package and charged at nation state level.
The charge is not a tax, although commonly referred to as one, because it is payable at state level rather than by individuals or corporations. Nation states could, however, seek to recover the cost of the charge through taxation.
“The EU’s recently announced €800/tonne charge on non-recycled plastic packaging waste has caused a lot of interest within Europe, especially given the 1 January 2021 implementation date.”
“Taxes on virgin plastic in Spain and Italy, and plastic packaging waste in the UK have received mixed responses.”
The methods used to meet the cost of the charge will be up to individual countries, and the EU Council has not proposed any regulatory stipulations around this. Individual countries are free to adopt different approaches and could seek to recoup the cost of meeting the charge from differing parts of the supply chain, leading to potential regulatory divergence. How nation states will incorporate this into national legislation remains the key uncertainty for plastic and recycling markets.
Taxes on virgin plastic in Spain and Italy, and plastic packaging waste in the UK have received mixed responses. Some say these taxes need to be higher to encourage use of recycled material, while others worry it may lead to substitution to other forms of packaging such as glass or paper.
A more proactive approach may be to follow the example of CITEO in France, which offers tax breaks to companies recycling material from post-consumer waste. The tax breaks led to the development of separate natural low-density polyethylene (LDPE) post-consumer material collection by subsidising the additional cost of sorting. Natural LDPE bales are currently exclusive to France because of the higher sorting costs, but this has made the production of natural rLDPE pellets suitable for primary packaging applications achievable for the first time. Before the separation of natural bales, rLDPE pellets were limited to secondary packaging applications. Incentivising the use of recycled material, rather than punishing the lack of it, may be a preferred path for countries entering into the recycled markets.
Full supply chain commitment to recycling key to progressing sustainability
The recycling markets across the globe have been impacted by the tumultuous events of 2020 and these will have a lasting effect for the remainder of the year, and beyond. Short term reactions with regards to the use of recycled polymers are impacting the longer-term prospects for circularity of plastics and true commitment to sustainability will be critical to the viability if not enhancement of the recycled supply chain. Improved infrastructure and supply chains will see greater volumes of high-quality recycled polymers available to the end markets open to using them. The development of chemical recycling and biobased feedstocks will contribute to divergence away from fossil fuel usage, but these sectors have longer timeframes for delivering to market at industrial scale. However, solid investment and sustainability commitments throughout the chain will be key to driving those improvements and new opportunities.