China’s plastic ban and recycling launch marks end of ‘business as usual’ for plastics industry

Paradigm shifts start slowly at first, and it is easy to miss them. But then one day, they suddenly become obvious, and it becomes a scramble to catch up. That’s what happened on the waste plastic issue last week, when China decided to take action. As official news agency, Xinhua, reported:

  • “The policy measures proposed in this opinion basically cover the entire process and various links of plastic product production, circulation, use, recycling, and disposal, reflecting a system of full life cycle management
  • “Policy adjustments target both traditional areas and emerging areas such as e-commerce, express delivery, and takeaway
  • “(They focus on) plastic products that are currently in large use, relatively prominent, and strongly reflected in society, and take the lead in prohibiting or restricting production, sales, and use in some areas and regions
  • “It is important to point out that implementation will inevitably affect the production of some industries and the convenience of residents’ lives”

My former company, ICI, invented polyethylene (PE) back in 1933. PE is now the largest single polymer with volume close to 100m tonnes. More than half of this goes into single-use applications.  Yet in a major failure of the imagination, very few of us in the industry ever thought until recently about the waste this caused.  As the BBC reported after China’s decision:

“China has for years been struggling to deal with the rubbish its 1.4 billion citizens generate. The country’s largest rubbish dump – the size of around 100 football fields – is already full, 25 years ahead of schedule.”

And we are all still ignoring the economic waste involved.  Crude oil costs $60/bbl, and it costs lots more dollars to refine it/ship it/process it. And then we simply throw away the single- use plastic bags and packaging that we bring home from the shop or unwrap from the internet delivery.

Plus, of course, there is the marine waste problem, so vividly brought to life in the photo from Sir David Attenborough’s ‘Blue Planet 2 television series.

THE PLASTICS INDUSTRY MUST NOW TAKE UP THE CHALLENGE

China uses around 1/3rd of all the PE produced today. So its decisions are a game-changer for the entire global industry.

Nobody wants to do away with plastics themselves.  They are unique materials – lightweight, resilient, usually non-reactive and waterproof. They have much lower carbon intensity than competing materials such as metals, and they play an incredibly valuable role in our daily lives. Food packaging, for example, is proven to reduce food losses, wastage and health risks from contamination.

But the business model for producing plastics is broken, and needs to be challenged:

  • Does it really make sense to keep producing more oil and gas, with all the CO2 emissions this involves, and then throw away the end product?
  • If not, why aren’t we investing the necessary dollars to set up Resource Centres (as pictured) around our cities and towns, to recycle this waste plastic back into usable products?
  • And at the same time, why aren’t we developing robust contingency plans for optimising the legacy issues from the old business model

As I noted here a year ago, There’s a great future for the European plastics industry in recycled plastic, this opportunity is not just about China. Last month, new EU Commission President Ursula von der Leyen launched the EU’s Green Deal, noting:

“I am convinced that the old growth-model that is based on fossil-fuels and pollution is out of date, and it is out of touch with our planet. The European Green Deal is our new growth strategy – it is a strategy for growth that gives more back than it takes away. And we want to really make things different. We want to be the frontrunners in climate friendly industries, in clean technologies, in green financing.”

The key issue is summed up by new BP CEO, Bernard Looney. He warned at the weekend that the oil industry has to start:

“Going beyond small, ineffectual bets on low carbon investments.”

The plastics industry similarly has to step up from today’s relatively “small, ineffectual bets”. Otherwise it will run out of time to meet the 2025 recycling deadlines being set by an increasing numbers of brand owners and governments.

All paradigm shifts create Winners and Losers.  Losers will focus on recession risks and the potential impact of the corona virus. But Winners will know they need to do more than focus on these risks, if they want to generate long-term revenue and profit growth.

They will be the ones who start investing realistic sums of money, today, to turn the concept of the circular economy into reality.

Oil prices under pressure as US oil and gas output rises

WTI Nov14

Just 10 years ago, then BP CEO John Browne shocked the oil industry by suggesting that oil prices might “temporarily” rise to $40/bbl due to an imbalance of supply and demand, before falling back below $35/bbl again.

Of course, prices in fact moved much higher, as policymaker stimulus in first the US and then the G20 countries created artificially high levels of demand.  But now the Great Unwinding of this stimulus is well underway.

So is John Browne’s forecast finally about to come true, that prices will retreat again below $35/bbl?

The key issue is that the world now has an energy glut.  The stimulus programmes temporarily boosted demand, but this was not sustainable.  Their lasting legacy has instead been to create a major increase in supply, as I discussed yesterday.  There are also clear risks that supply will remain in excess of demand for years to come:

  • Major economies such as India and Indonesia have ended their $bns of fuel subsidies on cost grounds
  • Indonesia has wasted $132bn over 5 years, more than total spend on social welfare and infrastructure combined
  • India wasted $23bn in just its last financial year – money which could instead have provided millions of toilets
  • China is planning a massive increase in distributed solar power networks to reduce current pollution levels
  • CO2 conservation efforts, and increasing fuel efficiency, are also both creating permanent loss of demand

And all the time, gas has been gaining market share due to its price advantage:

  • US natural gas prices peaked around $14/MMBtu in 2006 and then rose again to $13/MMBtu in early 2008
  • But since then, they have fallen sharply and are already back within their historical range around $4/MMBtu

Now oil prices are following the same course, having been far above historical levels for a decade as the chart shows:

  • Prices have averaged $22/bbl between 1946 – 2014 in money of the day (green line)
  • Adjusted for inflation, they have averaged $45/bbl in $2014 (blue line)

Many of the new US oilfields could already live with prices of $50/bbl.  And if some producers and/or pipeline owners did go bankrupt, then new owners could buy up the assets at fire-sale prices and restart with a zero-cost basis.

Equally important is that major Gulf Cooperation Council producers such as Saudi Arabia have very little debt.  They can continue supplying for several years at these price levels, as my colleague John Richardson highlights in this post.

In this context, it is therefore very significant that Saudi Oil Minister Ali al-Naimi has made no mention of any production cuts.  Instead, he told a conference yesterday, “Saudi Arabia does not set the oil price, the market sets the price,” adding ”oil . . . for us, it’s a question of supply and demand, it’s purely business.”

OIL PRODUCERS RISK PERMANENT LOSS OF MARKET SHARE TO GAS
Of course, many “experts” still find it hard to understand why prices have been falling since the summer.  Their consensus view suggested oil prices could never fall below $100/bbl, just as the consensus had earlier argued that natural gas prices would be at least $6/MMBtu.  But as often happens, the consensus has been proved wrong.

The issue, as Bloomberg reported Tuesday, is that OPEC producers now have a simple choice. If they try to maintain current price levels, they risk permanent loss of market share to US and other producers, and to gas.  They could end up with little or no revenue in future years.  Instead their oil, like coal, would simply end up being left in the ground.

Logic suggests the real question is simply whether oil will hold the $45/bbl price level?  Or will, in the end, John Browne be proved right?  Will supply and demand rebalance nearer nominal price levels of $22/bbl?

The picture may well be clearer within a few months, unless geopolitics intervenes.  But in the meantime, many companies and investors have lost a great deal of money during recent price falls by simply following the consensus.  Had they done their own analysis, the likely impact of the Great Unwinding would have been immediately obvious.

The good news, however, is that it is not too late for them for them to avoid making the same mistake in 2015.