$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.

Plastics recycling paradigm shift will create Winners and Losers

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.

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Sustainability now the key driver for plastics industry profits

‘What is this block of waste plastic doing on an Arctic ice-floe’, thousand of miles from where it was manufactured?  Even more worrying is the question, ‘what will happen to it next?’  As David Attenborough’s ‘Blue Planet II‘ programmes have shown, plastic can break down into micro-particles after it has been used.  And these micro-particles can then enter the food chain and the water supply:

  • Around 150 million tonnes of plastic “disappear” from the world’s waste stream each year according to the BBC
  • The United Nations estimates each square mile of sea contains 46000 pieces of waste plastic
  • In turn, this plastic breaks up into micro-plastics, which can be eaten by fish and birds, and absorbed by plankton
  • And then, as well as harming wildlife, it may well enter the food chain
  • Micro-plastics also enter the water supply, and have even been found in drinking water at Trump Tower in the US

Now governments are starting to take action, with last week’s UN meeting of environment ministers formally agreeing that “the flow of plastics into the ocean must be stopped”.  As the official Conference statement noted:

“We have been so bad at looking after our planet that we have very little room to make more mistakes…. we are sending a powerful message that we will listen to the science, change the way we consume and produce, and tackle pollution in all its forms across the globe.”

As I noted back in July at the launch of a major Study on waste plastic:

“Nobody is claiming that this waste was created deliberately. Nobody is claiming that plastics aren’t incredibly useful – they are, and they have saved millions of lives via their use in food packaging and other critical applications. The problem is simply, ‘What happens next?’ As one of the Study authors warns:

““We weren’t aware of the implications for plastic ending up in our environment until it was already there. Now we have a situation where we have to come from behind to catch up.””

We also know how this story will end, because we have seen it played out many times over the past 75 years.

As the photo on the left shows from 1953, most major Western cities used to be covered in smog during the winter, with people routinely wearing masks to try and protect themselves.  The same is still true today in China and many cities in the Emerging Markets, as the photo on the right confirms.

  • The smog problem was caused by coal, and governments were forced by popular pressure to greatly reduce its use in the West.  Too many people were dying, or developing major lung and other diseases
  • Then there were similar environmental problems with lead in gasoline, and with pollution from cigarette smoke.  Again, governments moved to ban the use of lead, and to ban or restrict smoking in public places

The simple fact is that as societies become richer, people become more demanding about the quality of their lives.  It is no longer enough to tell them that they are lucky to be alive, and to have some food to eat and water to drink.  We can see the same development in China today, where President Xi knows that he has to tackle pollution, if the Communist Party wants to stay in power.  As I noted last week:

Joint inspection teams from the Ministry of Environmental Protection, the party’s anti-graft watchdog and its personnel arm have already punished 18,000 polluting companies with fines of $132m, and disciplined 12,000 officials.

October’s 5-yearly National People’s Congress stepped up the enforcement measures:

“For those areas that have suffered ecological damage, their leaders and cadres will be held responsible for life,” said Yang Weimin, the deputy director of the Communist Party’s Office of the Central Leading Group on Financial and Economic Affairs. “Our people will be able to see stars at night and hear birds chirp.”

Smart companies and investors in the plastics industry already know “business as usual” strategies are no longer viable.  Instead, they are starting to map out the enormous opportunities that these changes will create.

The issue is simply that plastic waste is no longer just seen as being unsightly.  It is now recognised as a major environmental hazard. As the 3rd chart shows, 480bn plastic bottles were sold in 2016 around the world, but only 7% were recycled.  This waste is becoming unacceptable to public opinion. As a result, the UK government is now considering a tax or ban on all single use items.

Equally important is that the momentum for change has been building for a decade, as one can see from a look back over some of my posts on plastic bags:

Globalisation was the great trend of the past 30 years, and it changed the world very profoundly.  Today, the focus is on sustainability and the development of the circular economy.

It is an exciting time for people who want to solve the problem of plastics pollution by thinking “out of the box”, and developing the more service-driven businesses of the future.

 

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