150 businesses representing over 20% of the global plastic packaging market have now agreed to start building a circular economy for plastics with the Ellen MacArthur Foundation.
As a first step, Coca-Cola has revealed that it produced 3MT of plastic packaging in 2017 – equivalent to 200k bottles/minute, around 20% of the 500bn PET bottles used every year. Altogether, Coke, Mars, Nestlé and Danone currently produce 8MT/year of plastic packaging and have now committed to:
- Eliminate unnecessary plastic packaging and move from single-use to reusable packaging
- Innovate to ensure 100% of plastic packaging can be easily and safely reused, recycled, or composted by 2025
- Create a circular economy in plastic by significantly increasing the volumes of plastic reused or recycled into new packaging.
The drive behind the Foundation’s initiative is two-fold:
- To eliminate plastic waste and pollution at its source
- To capture the $60bn opportunity to replace fossil fuels with recycled material
Encouragingly, over 100 companies in the consumer packaging and retail sector have now committed to making 100% of their plastic packaging reusable, recyclable, or compostable by 2025.
Perhaps even more importantly, they plan to actually use an average of 25% recycled content in plastic packaging by 2025 – 10x today’s global average. This will create a 5MT/year demand for recycled plastic by 2025. And clearly, many more companies are likely to join them. As I noted a year ago (Goodbye to “business as usual” model for plastics‘):
“The impact of the sustainability agenda and the drive towards the circular economy is becoming ever-stronger. The initial catalyst for this demand was the World Economic Forum’s 2016 report on ‘The New Plastics Economy’, which warned that on current trends, the oceans would contain more plastics than fish (by weight) by 2050 – a clearly unacceptable outcome. 2017’s BBC documentary Blue Planet 2, narrated by the legendary Sir David Attenborough, then catalysed public concern over the impact of single use plastic in packaging and other applications.”
PLASTICS INDUSTRY NOW HAS TO SOLVE THE TECHNICAL CHALLENGES
The issue now is around making this happen. It’s relatively easy for the consuming companies to issue declarations of intent. But as we note in the latest pH Report, it’s much harder for plastics producers to come up with the necessary solutions:
“The problem is that technical solutions to the issue do not currently exist. It is possible to imagine that new single-layer polymers can be developed to replace multi-layer polymer packaging, and hence become suitable for mechanical recycling. It is also possible to believe that pyrolysis technologies can be adapted to enable the introduction of chemical recycling. But the timescale for moving through the development stage in both key areas into even a phased European roll-out is very short.”
Already, however, Borealis and Indorama have begun to set targets for using recycled content. Indorama plans to increase its processing of recycled PET from 100kt today to 750kt by 2025. And as Dow CEO Jim Fitterling said last week:
“The industry needs to tackle this ocean waste and develop ways to reuse plastics. There are no deniers out there that we have a plastics-waste issue. The challenge is that the plastics industry has developed around a linear value-chain. A line connects the hydrocarbons from the wellhead to either the environment or to landfills once consumers discard them. The discarded plastic does not re-enter the chain.
“The industry needs to adopt a circular value-chain, in which the waste is reused. For this to be successful, some kind of value needs to be attached to plastic waste. Without this, consumers have little incentive to recover plastic waste in a form that would be useful to manufacturers.”
As McKinsey’s chart shows, this is potentially a $60bn opportunity for the industry. It is also likely, as I noted back in June, that the ‘Plastics recycling paradigm shift will create Winners and Losers‘:
“For 30 years, plastics producers have primarily focused upstream on securing cost-competitive feedstock supply. Now, almost overnight, they find themselves being forced by consumers, legislators and brand owners to refocus downstream on the sustainability agenda. It is a dramatic shift, and one which is likely to create Winners and Losers over a relatively short space of time.”
The Winners will be those companies who focus on the emerging opportunity to eliminate the physical and financial waste created by single use packaging. As the European Commission has noted, it is absurd that only 5% of the value of plastic packaging is currently retained in the EU economy after a single use, at a cost of €70bn-€105bn annually.
On a global scale, this waste is simply unaffordable, as the UN Environment Assembly confirmed on Friday when voting to “significantly reduce” the volume of single-use plastics by 2030.
The plastics industry now finds itself in the position of the chlorine industry 30 years’ ago, over the impact of CFCs on the ozone layer. The Winners will grasp the opportunity to start building a more circular economy. The Losers will risk going out of business as their licence to operate is challenged.
“Once upon a time, Granny and Grandad used to go to a large shop on the motorway to buy their furniture. They used to stagger around carrying Billy bookshelves and Dombas wardrobes, before treating themselves to Swedish meatballs in the canteen. And then Grandad would spend the rest of the weekend trying to assemble the furniture, whilst Granny turned up the volume on her radio to drown out his swearing.
“What, Granny, you actually bought furniture? But why did you buy when you could just rent it, and change it when you wanted something different?”
That future isn’t very far away. In fact, if you live in Switzerland, you’ll be able to rent furniture from IKEA stores this month on a trial basis. As the boss of Inter IKEA told the Financial Times last week:
“We will work together with partners so you can actually lease your furniture. When that leasing period is over, you hand it back and you might lease something else. And instead of throwing those away, we refurbish them a little and we could sell them, prolonging the lifecycle of the products. The trial is the first in a series of tests that IKEA hopes could lead to “scalable subscription services” for different types of furniture.”
Of course, IKEA aren’t the first company to be moving in the direction of subscribing rather than selling. Not many people buy CDs or videos these days, after all, but instead subscribe to streaming services that enable them to download what they want, when they want it.
But what is new, as the chart from Prof Michael Wade of IMD shows, is that it illustrates a growing move by consumer product groups and manufacturers to follow this lead. And behind the move is an early effort to put the principles of the circular economy into practice, as IKEA describe:
“You could say leasing is another way of financing a kitchen. When this circular model is up and running, we have a much bigger interest in not just selling a product but seeing what happens with it and that the consumer takes care of it. He added that Ikea now designed kitchens so that it was possible to change the cupboard doors without needing to rip out the whole set-up. “It’s interesting if you as a consumer say ‘I can change and adapt and modernise my kitchen if that’s a subscription model’”.”
It also marks a further departure from the concept of globalisation, which has dominated business for a generation. Globalisation was essential for the world of the BabyBoomers, where the world’s population went from 2.5bn in 1950 to 6.1bn by 2000. There just wasn’t enough “stuff” to go round in the rich Western countries, and so companies were forced to develop global supply chains to satisfy demand.
But today, as the chart describes, smart companies like IKEA are starting to plan for a world where services rather than products will be the main driver for revenue and profit growth. Rather than building in obsolescence, so that the consumer was forced to make repeat purchases, the new business model is based on providing a solution that can evolve with the consumer’s needs.
It will also, necessarily, operate on a local scale. It will make no sense, for example, for IKEA to be continually shipping kitchen doors across the world, because the customer doesn’t want a pink colour any more.
The same principle is being applied by the Circular Plastics Alliance in Europe, which is focused on 5 key areas to turn 10 million tonnes/year of recycled plastics into new products within the next 6 years – Collection and sorting; Product design for recycling; Recycled plastic content in products; Monitoring systems; R&D and investments, including chemical recycling.
The days of Granny and Grandad choosing to actually “own” their furniture may well be coming to an end. And for companies, the challenge of developing new business models is no longer something they can put off till the future. Those that recognise the opportunity created by the growing demand for products that are more sustainable, affordable and sustainable will be the Winners in this New Normal world.
Europe’s petrochemical sector must prepare now for the trade war, US start-ups, Brexit and the circular economy, as I discuss in this interview with Will Beacham of ICIS news at the European Petrochemical Association Conference.
With higher tariff barriers going up between the US and China, the market in Europe is likely to experience an influx of polymers and other chemicals from exporters looking for a new home for their production, International eChem chairman, Paul Hodges said.
Speaking on the sidelines of the European Petrochemical Association’s annual meeting in Vienna, he said: “The thing we have to watch out for is displaced product which can’t go from the US any more to China and therefore will likely come to Europe.”
In addition to polyethylene, there is an indirect effect as domestic demand in China is also falling, he said, leaving other Asian producers which usually export there to also seek new markets and targeting Europe.
“The US isn’t buying so many consumer goods from China any more – and that seems to be the case because container ships going from China to the US for Thanksgiving and Christmas aren’t full. So NE and SE Asian chemical producers haven’t got the business they expect in China and are exporting to Europe instead. We don’t know how disruptive this will be but it has quite a lot of potential.”
US polymer start-ups
Hodges believes that the new US polymer capacities will go ahead even if the demand is not there for the product. This is because the ethane feedstocks they use need to be extracted by the producers and sellers of natural gas who must remove ethane from the gas stream to make it safe.
For these producers some of the cost advantages have already disappeared because of rising ethane prices.
“The exports of US ethane are adding one or two more crackers to the total. And without sufficient capacity ethane prices have become higher and more volatile.”
Hodges points out that pricing power is being lost as poor demand means producers cannot pass on the effect of rising oil prices. “Margins are being hit with some falling by 50-60%,” he said.
EU targets mean that all plastic packaging must be capable of being recycled, reused or composted in Europe by 2025. For the industry this could be a huge opportunity, but only if it acts fast, said Hodges: “We have to develop the technology that allows that to happen. We will need the [regulatory] approvals and if we don’t get moving in the next 12-18 months we are in trouble.”
According to Hodges: “We are in the end game for Brexit. We talk to senior politicians from both sides who don’t think there is a parliamentary majority for any Brexit option.”
He fears that if no deal can be agreed there is a chance the UK will refuse to pay its £39bn divorce bill.
“Then what happens to chemical regulation and transport? Although the bigger companies have made preparations, only one in seven in the supply chains are getting prepared,” he added. This is why we have launched ReadyforBrexit.
You can listen to the full podcast interview by clicking here.
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My new analysis for iCIS Chemical Business highlights the paradigm shift now underway in the plastics industry.
A paradigm shift is underway in the plastics industry as public concern mounts over the impact of plastic waste on the oceans and the environment.
For 30 years, plastics producers have primarily focused upstream on securing cost-competitive feedstock supply. Now, almost overnight, they find themselves being forced by consumers, legislators and brand owners to refocus downstream on the sustainability agenda. It is a dramatic shift, and one which is likely to create Winners and Losers over a relatively short space of time.
The pace of change is startling. In January, 11 major brands, including Coca Cola, Unilever, Wal-Mart and Pepsi (and since joined by Nestlé) announced they were committed to working towards using “100% reusable, recyclable or compostable packaging by 2025“. Then in April, a UK government-led initiative saw 42 companies, responsible for over 80% of the plastics packaging sold in UK supermarkets, promise to “transform the plastic packaging system and keep plastic in the economy and out of the ocean”.
Tesco, the UK’s largest retailer, added to the pressure by beginning the move to a “closed loop system”. Clearly seeing the issue as a source of potential competitive advantage, they announced plans to remove all “hard to recycle” plastics – such as polystyrene, PVC and water-soluble bio-plastics – by the end of next year. Then last month, the EU Commission adopted new rules that will mean a minimum of 50% of all plastic packaging waste will be recycled by 2025. In addition, it has proposed drastic action, including bans, to reduce the use of the top 10 single-use plastic items found on EU beaches by 2021.
Understandably, many companies and CEOs have failed to keep up with these developments. Others have simply ignored them on the assumption they will prove to be all talk and no action. But nobody who attended the Circular Economy Forum at the recent ICIS World Polyolefins Conference could have come away believing that “business as usual” was a viable option for the future. As Borealis, Europe’s second largest polyolefin producer, explained, their vision is instead to “establish plastic waste as just another standard feedstock as the new normal” for the industry.
As the second chart shows, major plastics including polyethylene and polypropylene are now under major threat.
More than 50% of PE demand, and nearly a third of PP demand goes into single use packaging. Following the World Economic Forum’s ‘New Plastic Economy’ report in 2016, and Sir David Attenborough’s ‘Blue Planet 2’ series for the BBC, it is clear that this application is under major threat.
PARADIGM SHIFTS CREATE WINNERS AND LOSERS
The third chart highlights how business models are already starting to change. The current model was highly successful during the BabyBoomer-led economic supercycle, when demand grew on a constant basis. Companies could choose to compete via cost leadership or value-added strategies, or via a focus on premium products or service-orientation. But now the middle ground is starting to disappear: as demand growth is slowing and profits will be squeezed as competition intensifies. We are instead going back to the polarised model that existed before the 1980s:
- Upstream-integrated companies can choose to adopt a Feedstock Focus and roll-through their margins to the well-head (in the case of ethane) or refinery (in the case of naphtha) as margins come under pressure
- Those without this ability, however, need to instead adopt a Market Focus, as intensifying competition will squeeze non-integrated companies without the safety net of an upstream margin
- Market Focused companies have the opportunity to respond to brand-owner and legislative pressure by basing their feedstock needs on recycled plastic rather than naphtha, ethane and other virgin feedstocks
- They will need to develop new metrics to measure their progress as they start to build their capability to use recycled feedstocks and create long-term relationships with brand-owners and other stakeholders
Paradigm shifts generally produce winners and losers. In this case, the winners will be those plastics producers who adapt to the new opportunity created by the need to produce recycled plastic. This will clearly require investment in recycling facilities, but the sums involved are small compared to the cost of building new olefin crackers or refinery capacity. And in many countries, producers can even expect to be paid to take the recycled plastic as a feedstock, when the alternative is the cost of sending it to landfill.
The losers, of course, will be existing feedstock suppliers:
- Many oil majors have assumed that rising demand for petrochemicals will help to compensate for demand lost to electrification in the transport sector
- OPEC’s World Oil Outlook 2040 saw petrochemicals as providing “significant growth” for the future
- The International Energy Agency will also need to revisit its assumptions about future demand growth as the impact of the new paradigm becomes more apparent.
As National Geographic has reported, the world has produced around 8.3 billion tonnes of plastic over the past 60 years, and only 9 per cent of this has been recycled. This is a shocking waste of a valuable resource. The paradigm shift now underway is well overdue and should prove very profitable for those companies prepared to seize the opportunities it creates.
Please click here if you would like to download the article.
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Two major challenges face petrochemical and polymer producers and consumers in 2018:
- The likely disruption created by the arrival of the ethylene/polyethylene expansions in the US
- The growth of the circular economy and the need to dramatically increase recycling capacity
My new interview with Will Beacham, deputy editor of ICIS Chemical Business, focuses on both these key issues and suggests they will create Winners and Losers.
The new US product will likely change the global market. Its ethane feedstock is essentially a distressed product, which has to be removed to enable the shale gas to be sold. It is also clear that this 40% expansion of USA polyethylene capacity, around 6 million tonnes, cannot be sold into the US domestic market, which is already very mature:
- US net exports have actually been in decline in recent years, so it will also be a challenge to export the volumes
- President Trump’s apparent wish to start a trade war with China will make that market difficult to access
- It is likely, therefore, that a significant volume will end up arriving in Europe, causing a price war
We have seen price wars before, and the “Winners” are usually the integrated producers, who can roll through margins from the well-head or the refinery into ethylene and polyethylene sales.
The economics of this are relatively simple. In the US, producers will have to absorb lower margins on the small percentage of shale gas that is used as ethane feed into the cracker. Similarly in Europe, refinery-integrated producers will have to absorb lower margins on the small percentage of oil that is used as naphtha feed into the cracker.
As the chart shows, this development will be good news for ethylene consumers. As Huntsman CEO, Peter Huntsman noted a year ago:
“There is a wave of ethylene that is going to be hitting the North American markets quite substantially over the next couple of years. I’d rather be a spot buyer than a contract buyer. I can’t imagine with all of the ethylene that is going to be coming to the market that it’s not going to be a buying opportunity.”
In turn, of course, this will pressure other plastics via inter-polymer competition
Non-integrated producers clearly face more difficult times. And like the integrated producers, they share the challenge being posed by the rise of sustainability concerns, particularly over the 8 million tonnes of plastic that currently finds its way into the oceans every year.
This issue has been building for years, and clearly consumers are now starting to demand action from brand owners and governments.
In turn, this opens up major new opportunities for companies who are prepared to realign their business models with the New Plastics Economy concepts set out by the Ellen MacArthur Foundation and the World Economic Forum.
The New Plastics Economy is a collaborative initiative involving leading participants from across the global plastic packaging value chain, as the second chart illustrates. It has already prompted action from the European Union, which has now set out its EU Strategy for Plastics in the Circular Economy. This aims to:
“Transform the way plastics and plastics products are designed, produced, used and recycled. By 2030, all plastics packaging should be recyclable. The Strategy also highlights the need for specific measures, possibly a legislative instrument, to reduce the impact of single-use plastics, particularly in our seas and oceans.”
Clearly this represents a paradigm shift for the industry, both producers and consumers.
It may seem easier to do nothing, and to hope the whole problem will go ahead. But the coincidence of the arrival of all the new US shale gas capacity makes this an unlikely outcome. Companies who do nothing are likely instead to become Losers in this rapidly changing environment.
But as I discuss in the interview, companies who are prepared to rethink their business models, and to adapt to changing consumer needs, have a potentially very bright future ahead of them. Please click here to view it.
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Polymer markets face two major challenges in coming months. The most immediate is the arrival of the major US shale gas-based ethylene and polyethylene expansions. The longer-term, but equally critical challenge, comes from growing public concern over plastic waste, particularly in the ocean.
The EU has set out its vision for a new plastics economy, where:
“All plastic packaging is reusable or recyclable in a cost-effective manner by 2030”.
Similarly, China has launched a ‘War on Pollution’, which has already led to all imports of plastic waste being banned.
Together, these developments mean there is unlikely to be a “business as usual” option for producers or consumers. A paradigm shift is under way which will change business models.
Some companies will focus on being low-cost suppliers, integrated back to the well-head or refinery. Others will become more service-led, with their revenue and profits based on exploiting the value provided by the polymer (virgin or recycled), rather than just the value of the virgin polymer itself.
The next 18 months are therefore likely to see major change, catalysed by the arrival of the new US production, as I discuss in a new analysis for ICIS Chemical Business.
The second chart indicates the potential impact of these new capacities by comparison with actual production since 2000, with 2019 volume forecast on basis of the planned capacity increases. But can this new PE volume really be sold? It certainly won’t all find a home in the US, as ExxonMobil Chemicals’ then President, Stephen Pryor, told ICIS in January 2014:
“The domestic market is what it is and therefore, part of these products, I would argue, most of these products, will have to be exported”.
And unfortunately for producers, President Trump’s new trade policies are unlikely to help them in the main potential growth market, China. As John Richardson and I noted a year ago, China’s $6tn Belt and Road Initiative:
“Creates the potential for China to lead a new free trade area including countries in Asia, Middle East, Africa and potentially Europe – just as the US appears to be withdrawing from its historical role of free trade leadership”.
The task is also made more difficult by the inventory-build that took place from June onwards as Brent oil prices rose 60% to peak at $71/bbl. As usual, buyers responded by building inventory ahead of price increases for their own raw materials. Now they are starting to destock again, slowing absolute levels of demand growth all around the world, just at the moment when the new capacity comes online.
SUSTAINABILITY CONCERNS ARE DRIVING MOVES TOWARDS A CIRCULAR ECONOMY
At the same time, the impact of the sustainability agenda and the drive towards the circular economy is becoming ever-stronger. The initial catalyst for this demand was the World Economic Forum’s 2016 report on ‘The New Plastics Economy’, which warned that on current trends, the oceans would contain more plastics than fish (by weight) by 2050 – a clearly unacceptable outcome.
Last year’s BBC documentary Blue Planet 2, narrated by the legendary Sir David Attenborough, then catalysed public concern over the impact of single use plastic in packaging and other applications. Even Queen Elizabeth has since announced that she is banning the use of plastic straws and bottles across the royal estates, as part of a move to cut back on the use of plastics “at all levels”.
Single use plastic applications in packaging are likely to be an early target for the move to recycling and the circular economy. This will have a major impact on demand, given that they currently account for more than half of PE demand:
- Two-thirds of all low density and linear low density PE is used in flexible packaging – a total of 33 million tonnes worldwide
- Nearly a quarter of high density PE is used in packaging film and sheets, and a fifth is used in injection moulding applications such as cups and crates – a total of 18 million tonnes worldwide
Virtually all of this production is potentially recyclable. Producers and consumers who want to embrace a more service-based business model therefore have a great opportunity to take a lead in creating the necessary infrastructure, in conjunction with regulators and the brand owners who actually sell the product to the end-consumer.
Please click here to read the full analysis in ICIS Chemical Business.
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