$60bn opportunity opens up for plastics industry as need to eliminate single-use packaging grows

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.

IKEA heads into the circular world with furniture subscription trial

“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.

Fed’s magic money tree hopes to overcome smartphone sales downturn and global recession risk

Last November, I wrote one of my “most-read posts”, titled Global smartphone recession confirms consumer downturn. The only strange thing was that most people read it several weeks later on 3 January, after Apple announced its China sales had fallen due to the economic downturn.

Why did Apple and financial markets only then discover that smartphone sales were in a downturn led by China?  Our November pH Report “Smartphone sales recession highlights economic slowdown‘, had already given detailed insight into the key issues, noting that:

“It also confirms the early warning over weakening end-user demand given by developments in the global chemical industry since the start of the year. Capacity Utilisation was down again in September as end-user demand slowed. And this pattern has continued into early November, as shown by our own Volume Proxy.

The same phenomenon had occurred before the 2008 Crisis, of course, as described in The Crystal Blog.  I wrote regularly here, in the Financial Times and elsewhere about the near-certainty that we were heading for a major financial crisis. Yet very few people took any notice.

And even after the crash, the consensus chose to ignore the demographic explanation for it that John Richardson and I gave in ‘Boom, Gloom and the New Normal: How the Western BabyBoomers are Changing Demand Patterns, Again’.

Nothing seems to change.  So here we are again, with the chart showing full-year 2018 smartphone sales, and it is clear that the consumer downturn is continuing:

  • 2018 sales at 1.43bn were down 5% versus 2017, with Q4 volume down 6% versus Q4 2017
  • Strikingly, low-cost Huawei’s volume was equal to high-priced Apple’s at 206m
  • Since 2015, its volume has almost doubled whilst Apple’s has fallen 11%

And this time the financial outlook is potentially worse than in 2008.  The tide of global debt built up since 2008 means that the “World faces wave of epic debt defaults” according to the only central banker to forecast the Crisis.

“WALL STREET, WE HAVE A PROBLEM”

So why did Apple shares suddenly crash 10% on 3 January, as the chart shows? Everything that Apple reported was already known.  After all, when I wrote in November, I was using published data from Strategy Analytics which was available to anyone on their website.

The answer, unfortunately, is that markets have lost their key role of price discovery. Central banks have deliberately destroyed it with their stimulus programmes, in the belief that a strong stock market will lead to a strong economy. And this has been going on for a long time, as newly released Federal Reserve minutes confirmed last week:

  • Back in January 2013, then Fed Governor Jay Powell warned that policies “risked driving securities above fundamental values
  • He went on to warn that the result would be “there is every reason to expect a sharp and painful correction
  • Yet 6 years later, and now Fed Chairman, Powell again rushed to support the stock market last week
  • He took the prospect of interest rate rises off the table, despite US unemployment dropping for a record 100 straight months

The result is that few investors now bother to analyse what is happening in the real world.

They believe  they don’t need to, as the Fed will always be there, watching their backs. So “Bad News is Good News”, because it means the Fed and other Western central banks will immediately print more money to support stock markets.

And there is even a new concept, ‘Modern Monetary Theory’ (MMT), to justify what they are doing.

THE MAGIC MONEY TREE PROVIDES ALL THE MONEY WE NEED

There are 3 key points that are relevant to the Modern Monetary Theory:

  • The Federal government can print its own money, and does this all the time
  • The Federal government can always roll over the debt that this money-printing creates
  • The Federal government can’t ever go bankrupt, because of the above 2 points

The scholars only differ on one point.  One set believes that pumping up the stock market is therefore a legitimate role for the central bank. As then Fed Chairman Ben Bernanke argued in November 2010:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

The other set believes instead that government can and should spend as much as they like on social and other programmes:

“MMT logically argues as a consequence that there is no such thing as tax and spend when considering the activity of the government in the economy; there can only be spend and tax.

The result is that almost nobody talks about debt any more, and the need to repay it.  Whenever I talk about this, I am told – as in 2006-8 – that “I don’t understand”.  This may be true. But it may instead be true that, as I noted last month:

“Whilst Apple won’t go bankrupt any time soon, weaker companies in its supply chain certainly face this risk – as do other companies dependent on sales in China. And as their sales volumes and profits start to fall, investors similarly risk finding that large numbers of companies with “Triple B” ratings have suddenly been re-rated as “Junk”:

  • Bianco Research suggest that 14% of companies in the S&P 1500 are zombies, with their earnings unable to cover interest expenses
  • The Bank of International Settlements has already warned that Western central banks stimulus lending means that >10% of US/EU firms currently “rely on rolling over loans as their interest bill exceeds their EBIT. They are most likely to fail as liquidity starts to dry up”.

I fear the coming global recession will expose the wishful thinking behind the magic of the central banks’ money trees.

Global smartphone recession confirms consumer downturn


Q3 smartphone sales data show the global market in recession, as Strategy Analytics confirmed:

The global smartphone market has now declined for four consecutive quarters and is effectively in a recession.

The warning signs began in Q1, when the market plateaued for the first time, as discussed here in May:

“The global smartphone market has finally gone ex-growth as China’s slowdown continues. In turn, the market is starting to polarise – with Apple pushing further up-market whilst Chinese brands such as Xiaomi focus on volume. Samsung’s middle market positioning looks increasingly under threat.”

The chart highlights the key issues:

  • Samsung’s market share has declined from a third in 2013 to a fifth today, as its mid-market positioning leaves it without a clear value proposition for consumers
  • China’s Top 3 players have meanwhile soared from just a 12% market share to 29% today, powered by their low-cost positioning
  • Apple’s market share has remained very stable, as it has focused on the top end of the market, prioritising price over volume
  • “Others”, also usually without a clear value proposition, have seen their share drop to just 36% from a peak of 46% in Q3 2016


China remains the world’s largest smartphone market, with 103 million phones sold in Q3. But its volume was down 8% compared to Q3 2017, as the stimulus programmes continue to slow. As the Counterpoint chart shows, the market is now consolidating around a few winners:

  • Huawei are emerging as the market leader with a 23% share
  • Vivo and Oppo remain key challengers at 21%
  • But “Others” have dropped to 13%, and Samsung has almost disappeared at just 1%

As Counterpoint note, the top 5 brands now hold 86% of the market:

“The Chinese smartphone market is saturated with accelerated market consolidation. The competition in 2018 is almost a zero-sum game for the top five players. It is challenging however, even for the leading brands to create clear product differentiation. In Q3, only Huawei and vivo managed to achieve positive YoY growth among the top 5 brands.”

Meanwhile, of course, Apple continue to dominate the premium segment after the launch of the new iPhones in September.

This divergence between low-cost and premium will no doubt spread across the rest of the global market as the downturn continues.  And the main growth is likely to be in the low-cost area.

India, for example, saw volume grew 5% versus Q3 2017.  But with average per capita income less than $2000, price is all-important.  Reliance Jio’s ultra-low pricing strategy has been critical in making bandwidth affordable, and there are now over 400 million smartphone users in the country.

But iPhone sales are actually falling, and will be down by a third to just 2 million this year.  Functional phones in the $150-$250 price segment are driving sales growth, via online sales.  Q4 is expected to see these grow 65% to reach 50 million, due to their 50%-60% discounts.


The smartphone market thus continues to confirm that the BabyBoomer-led SuperCycle is over. As the chart shows, this created a new and highly profitable mid-market from the mid-1980s:

  • Before then, companies had competed on the basis of price or perceived value
  • But from the mid-1980s onwards, the mid-market became the most profitable sector
  • Now, with the Boomers retiring and stimulus programmes ended, we are going back to basics again

Instead, the market is segmenting again on the basis of price or perceived value. Chinese players compete on price, while Apple focuses on profit and is moving up-market. this means that previously profitable market leaders such as Samsung are slowly disappearing along with the mid-market segment that they supplied.

These very different strategies highlight the new world ahead for consumer markets and those who supply them.

Trump’s auto trade war adds to US demographic and debt headwinds

President Trump’s auto trade tariffs are bad news for the US and global auto industry, as the chart highlights:

  • It shows H1 sales in the 7 major markets, which account for 87% of global volume
  • Sales in China have risen nearly 4x since 2007 from 3.1m to 11.8m this year
  • Sales in the other 6 markets are almost unchanged at 23m versus 22.1m in 2007

Formerly high-flying growth markets such as Russia and Brazil have disappointed.  Even after this year’s recovery, their H1 sales were still 35% – 39% below their 2011 peak.

Growth in the mature markets of the USA, Europe and Japan has only been achieved via $tns of stimulus programmes, which have left all 3 areas with vast debt burdens. Now, of course, higher interest rates are causing sales to slow again.

Only China – and India, with its very young population and relatively cheap prices – has seen steady sales growth.

Equally important is the global nature of the auto industry supply chain, where parts manufacture is as important as final assembly.  And as the New York Times reports:

“General Motors now sells many more cars in China than it does in the United States, and the largest exporter of cars from the United States by value is not an American brand, but BMW. By some calculations, the car with the highest proportion of United States and Canadian-made content is the Honda Odyssey — and even that includes roughly a quarter of foreign-made parts.”

The sanctions couldn’t have come at a worse time for the US industry, where domestic steel and aluminium users are already suing the Administration over Trump’s earlier tariff decisions.  Higher prices will only accelerate the current decline in domestic auto demand, which is being hit by 2 major negative trends.

THE AVERAGE AMERICAN IS NO LONGER DRIVING MORE MILES EACH YEAR

The second chart highlights the key longer-term issue, that Americans are driving less each year:

  • It shows annual US vehicle miles/adult versus the $/gallon gasoline price since 1970
  • Historically, Americans tended to drive more each year, unless gasoline prices rose sharply
  • Average miles driven rose from 8k miles in the 1970s to 11k miles in the 1980s, and 13k in the 1990s
  • The BabyBoomers (born 1946-64) were moving out to the suburbs and having children – so the “automobile was king”
  • Higher prices during the 1973-5 and 1980-85 oil crises slowed the trend, but didn’t change it

But in 2001, the oldest Boomers became 55, when people leave the Wealth Creator 25 – 54 age group which drives economic growth.  Average miles per adult peaked in 2004 at 13.3k miles and have since fallen by 1k to the current 12.3k level.  Mileage is back at 2011 levels, when gasoline prices were a third higher at nearly $4/gal.

The issue is that the ageing Boomers no longer have to drive to work each day, or provide a taxi service for their children.  And car ownership is no longer a key “rite of passage” for younger Millennials.  New business models (eg Uber/Lyft services and car-sharing) are far more affordable, given the high costs of car purchase and insurance.

USED CAR SALES ARE SET TO GAIN, WITH AUTO DEBT AT NEAR-RECORD LEVELS AND INTEREST RATES RISING

The third chart confirms how US auto sales have become dependent on rising levels of debt:

  • It shows average auto loans based on the total over-16 age population (most Americans can drive from 16)
  • The average loan was already rising in the Boomer-led SuperCycle, with each peak higher than before
  • But the Fed’s subprime and QE bubbles have caused it to accelerate
  • In 2006, it averaged $4k at the height of subprime bubble; since the crash, it has risen back to $3.8k
  • The QE bubble was great news for US auto sales at the time, as was subprime.  But now. interest rates are rising again.

Unsurprisingly, used-car sales are now increasing.  They were 3.4m in July versus 3.2m in June and the tariffs mean they have a growing price advantage versus new cars.  As the PureCars CEO noted:

“Prices for new cars are on the rise, and as leasing continues to grow in popularity, prices continue to go down in the used car market. Put simply, used cars are often the most realistic purchase for car shoppers.”

TRUMP’S AUTO TRADE WAR WON’T SOLVE THE DEMOGRAPHIC AND DEBT ISSUES
President Trump’s trade wars confirm his transactional approach to complex issues.  As he told Fox News last month:

“You know, the cars are the big one.  We can talk steel, we talk everything. The big thing is cars.”

But tariffs are not a “silver bullet” and cannot solve the two key issues facing the US auto industry:

  • The “demographic dividend” of the SuperCycle has been replaced by a “demographic deficit”.  Ageing Boomers are not suddenly going to start driving more, whilst affordability issues mean younger Millennials cannot “fill the gap”
  • Rising debt levels only gave the economy a “sugar high”, which is now ending as interest rates rise

As with the stimulus programmes, they will instead simply make it more difficult to develop the new policies needed for success in today’s New Normal world.

The post Trump’s auto trade war adds to US demographic and debt headwinds appeared first on Chemicals & The Economy.

Trump’s auto trade war adds to US demographic and debt headwinds

President Trump’s auto trade tariffs are bad news for the US and global auto industry, as the chart highlights:

  • It shows H1 sales in the 7 major markets, which account for 87% of global volume
  • Sales in China have risen nearly 4x since 2007 from 3.1m to 11.8m this year
  • Sales in the other 6 markets are almost unchanged at 23m versus 22.1m in 2007

Formerly high-flying growth markets such as Russia and Brazil have disappointed.  Even after this year’s recovery, their H1 sales were still 35% – 39% below their 2011 peak.

Growth in the mature markets of the USA, Europe and Japan has only been achieved via $tns of stimulus programmes, which have left all 3 areas with vast debt burdens. Now, of course, higher interest rates are causing sales to slow again.

Only China – and India, with its very young population and relatively cheap prices – has seen steady sales growth.

Equally important is the global nature of the auto industry supply chain, where parts manufacture is as important as final assembly.  And as the New York Times reports:

“General Motors now sells many more cars in China than it does in the United States, and the largest exporter of cars from the United States by value is not an American brand, but BMW. By some calculations, the car with the highest proportion of United States and Canadian-made content is the Honda Odyssey — and even that includes roughly a quarter of foreign-made parts.”

The sanctions couldn’t have come at a worse time for the US industry, where domestic steel and aluminium users are already suing the Administration over Trump’s earlier tariff decisions.  Higher prices will only accelerate the current decline in domestic auto demand, which is being hit by 2 major negative trends.

 

THE AVERAGE AMERICAN IS NO LONGER DRIVING MORE MILES EACH YEAR

The second chart highlights the key longer-term issue, that Americans are driving less each year:

  • It shows annual US vehicle miles/adult versus the $/gallon gasoline price since 1970
  • Historically, Americans tended to drive more each year, unless gasoline prices rose sharply
  • Average miles driven rose from 8k miles in the 1970s to 11k miles in the 1980s, and 13k in the 1990s
  • The BabyBoomers (born 1946-64) were moving out to the suburbs and having children – so the “automobile was king”
  • Higher prices during the 1973-5 and 1980-85 oil crises slowed the trend, but didn’t change it

But in 2001, the oldest Boomers became 55, when people leave the Wealth Creator 25 – 54 age group which drives economic growth.  Average miles per adult peaked in 2004 at 13.3k miles and have since fallen by 1k to the current 12.3k level.  Mileage is back at 2011 levels, when gasoline prices were a third higher at nearly $4/gal.

The issue is that the ageing Boomers no longer have to drive to work each day, or provide a taxi service for their children.  And car ownership is no longer a key “rite of passage” for younger Millennials.  New business models (eg Uber/Lyft services and car-sharing) are far more affordable, given the high costs of car purchase and insurance.

 

USED CAR SALES ARE SET TO GAIN, WITH AUTO DEBT AT NEAR-RECORD LEVELS AND INTEREST RATES RISING

The third chart confirms how US auto sales have become dependent on rising levels of debt:

  • It shows average auto loans based on the total over-16 age population (most Americans can drive from 16)
  • The average loan was already rising in the Boomer-led SuperCycle, with each peak higher than before
  • But the Fed’s subprime and QE bubbles have caused it to accelerate
  • In 2006, it averaged $4k at the height of subprime bubble; since the crash, it has risen back to $3.8k

The QE bubble was great news for US auto sales at the time, as was subprime.  But now. interest rates are rising again.

Unsurprisingly, used-car sales are now increasing.  They were 3.4m in July versus 3.2m in June and the tariffs mean they have a growing price advantage versus new cars.  As the PureCars CEO noted:

“Prices for new cars are on the rise, and as leasing continues to grow in popularity, prices continue to go down in the used car market. Put simply, used cars are often the most realistic purchase for car shoppers.

 

TRUMP’S AUTO TRADE WAR WON’T SOLVE THE DEMOGRAPHIC AND DEBT ISSUES
President Trump’s trade wars confirm his transactional approach to complex issues.  As he told Fox News last month:

“You know, the cars are the big one.  We can talk steel, we talk everything. The big thing is cars.

But tariffs are not a “silver bullet” and cannot solve the two key issues facing the US auto industry:

  • The “demographic dividend” of the SuperCycle has been replaced by a “demographic deficit”.  Ageing Boomers are not suddenly going to start driving more, whilst affordability issues mean younger Millennials cannot “fill the gap”
  • Rising debt levels only gave the economy a “sugar high”, which is now ending as interest rates rise

As with the stimulus programmes, they will instead simply make it more difficult to develop the new policies needed for success in today’s New Normal world.