$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.

Ethane price hikes, China tariffs, hit US PE producers as global market weakens

Sadly, my July forecast that US-China tariffs could lead to a global polyethylene price war seems to be coming true.

As I have argued since March 2014 (US boom is a dangerous game), it was always going to be difficult for US producers to sell their vastly increased output.  The expansions were of course delayed by last year’s terrible hurricanes, but the major plants are all now in the middle of coming online.  In total, these shale gas-based expansions will increase ethylene (C2) capacity by a third and polyethylene (PE) capacity by 40% (6 million tonnes).

ICIS pricing reports this weekend confirm my concern, following China’s decision to retaliate in response to President Trump’s $200bn of tariffs on US imports from China:

Even worse, as the chart above confirms, is that US ethane feedstock spreads versus ethylene have collapsed during 2018, from around 20c/lb to 5c/lb today.   Ethane averaged 26c/gal as recently as May, but spiked to more than double this level earlier this month (and even higher, momentarily) at 55c/gal.

The issue appears to be that US producers had calculated their ethane supply/demand balances on the basis of the planned US expansions, and never expected large volumes of ethane to be exported.  Yet latest EIA data shows exports doubling from an average 95kbd in 2016 to 178kbd last year. And they are still rising, with Q2 exports 62% higher at 290kbd.

 The second chart from the latest pH Report adds a further concern to those of over-capacity and weak pricing power.

It focuses attention on the weak state of underlying demand. Even the prospect of higher oil prices only led to modest upturns earlier this year in the core olefins, aromatics and polymers value chains as companies built inventory. Polymers’ weak response is a particularly negative indicator for end-user demand.

This concern is supported by recent analysis of the European market by ICIS C2 expert, Nel Weddle.  She notes that PE is used in packaging, the manufacture of household goods, and also in the agricultural industry and adds:

“Demand has been disappointing for many sellers in September, after a fairly weak summer.  “I don’t see a big difference between now and August,” said one, “for both demand and pricing. Customers are very very quiet.”  All PE grades were available, with no shortage of any in evidence.

“The market is generally quieter than many had expected, and the threat of imports from new capacities in the US looms large – particularly with the current trade spat between the US and China meaning that product may have to find a home in Europe sooner than expected.
US producers, as would be expected, remain optimistic.  Thus LyondellBasell CEO Bob Patel has suggested that:

“Trade patterns are shifting as China sources from other regions and [US producers] are shifting to markets that are vacated.  Supply chains are adjusting but there is a bit of inventory volatility as a result. Where product has landed [in China] and has to be redirected, there is price volatility. But we think that is [transitory].”

But the detail of global PE trade suggests a more pessimistic conclusion. Data from Trade Date Monitor shows that China was easily the largest importer, taking a net 11.9 million tonnes. Turkey was the second largest importer but took just 1.7 million tonnes, around 14% of China’s volume.  And given Turkey’s economic crisis, it is hard to see even these volumes being sustainable with its interest rates now at 24% and its currency down 60% versus the US$.

As the 3rd chart confirms, the US therefore has relatively few options for exporting its new volumes:

  • Total net exports have increased 29% in January-July versus 2016, but were still only 1.8 million tonnes
  • Latin America remained the largest export market at 939kt, taking 52% of total volume
  • China volume had doubled to 524kt, but was only 29% of the total
  • Europe was the next largest market at 369kt, up 40%, but just 20% of the total
  • Other markets remain relatively small; S Africa took the largest volume in Africa at just 12kt

China’s US imports will now almost certainly reduce as the new tariffs bite.  And the onset of the US trade war is likely to further boost China’s existing aim of increasing its self-sufficiency in key areas such as PE.  Its ethylene capacity is already slated to increase by 73% by 2022, double the rate of expansion in 2012-2017 and from a higher base.  The majority of this new volume will inevitably go into PE, as it is easily the largest derivative product.

Back in May, I used the chart above to highlight how the coming price war would likely create Winners and Losers in olefin and polymer markets.  Unfortunately, developments since then make this conclusion more or less certain.  I fear that complacency based on historical performance will confirm my 2014 warning about the dangers that lie ahead.

 

The post Ethane price hikes, China tariffs, hit US PE producers as global market weakens appeared first on Chemicals & The Economy.

Plastics demand is peaking as circular economy arrives

Plastic waste Jul17The Stone Age didn’t end because we ran out of stones.  Similarly, coal is being left in the ground because we no longer need it any more.  And the same is happening to oil, as Saudi Arabia recognised last year in its Vision 2030:

“Within 20 years, we will be an economy that doesn’t depend mainly on oil“.

And so now the debate is moving on, to products such as plastics that are made from oil.

The move began several years ago with the growing concern over plastic bags.  Consumers decided they no longer wanted to live in a world filled with waste bags.  Now, in a landmark new Study*, the debate is evolving to focus on the question of ‘What happens to plastic after we have used it?’   As the chart shows:

  The world has produced 8.3bn tonnes of plastic over the past 60 years
  Almost all of it, 91% in fact, has since been thrown away, never to be used again
  But it hasn’t simply disappeared, as plastic takes around 400 years to degrade
  Instead, the Study finds, 79% is filling up landfills or littering the environment and “at some point, much of it ends up in the oceans, the final sink

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.

RT Jul17
The good news is that potential solutions are being developed.  As the video shows, Recycling Technologies, for example (where I am a director), is now trialling technology that will recycle end-of-life plastic into virgin plastic, wax and oils.  Other companies are also hard at work on different solutions.  And more and more effort is focused on finding ways of removing plastic from the sea, as I noted last year:

 “95% of plastic packaging material value is currently lost after just a short first-use cycle
  By 2050, there will be more plastics in the ocean than fish by weight, if current policies continue
  Clearly, this state of affairs cannot be allowed to continue.”

SUSTAINABILITY IS REPLACING GLOBALISATION AS A KEY DRIVER FOR THE ECONOMY
But there is another side to this debate that is just about to move into the headlines.  That is the simple question of “How do we stop putting more and more plastic into the environment?”  Cleaning up the current mess is clearly critically important.  But the world is also starting to realise that it needs to stop creating the problem in the first place.

As always, there are a number of potential solutions potentially available:

  The arrival of 3D printing dramatically reduces the volume of plastic needed to make a finished product.  It operates on a very efficient “additive basis”, only using the volume that is needed, and producing very little waste
  Digitalisation offers the opportunity to avoid the use of plastics – with music, for example, most people today listen via streaming services and no longer buy CDs made of plastic
  The ‘sharing economy’ also reduces demand for plastic – new business models such as car-sharing, ride hailing and autonomous cars enable people to be mobile without needing to own a car

The key issue is that the world is moving to adopt the principles of the circular economy as the Ellen MacArthur Foundation notes:

“Underpinned by a transition to renewable energy sources, the circular model builds economic, natural and social capital.”

This paradigm shift clearly creates major challenges for those countries and companies wedded to producing ever-increasing volumes of plastic.  OPEC has an unpleasant shock ahead of it, for example, as its demand forecasts are based on a belief that:

“Over one-third of the total demand increase between 2015 and 2040 comes from the road transportation sector (6.2 mb/d). Strong growth is also foreseen in the petrochemicals sector (3.4 mb/d)”

They are forgetting the basic principle that, “What cannot continue forever, won’t continue“.  After all, it took just 25 years for cars to replace horses a century ago.  More recently, countries such as China and India went straight to mobile phones, and didn’t bother with landlines.  And as I noted last year, underlying demand patterns are also now changing as a result of today’s ageing populations:

  In the BabyBoomer-led SuperCycle, the growing population of young people needed globalisation in order to supply their needs. And they were not too worried about possible side-effects, due to the confidence of youth
  But today’s globally ageing populations do not require vast new quantities of everything to be produced. And being older, they are naturally more suspicious of change, and tend to see more downside than upside

Services Jul17Of course, change is always difficult because it creates winners and losers.  That is why “business as usual” is such a popular strategy.  It is therefore critically important that companies begin to prepare today to be among the winners in the world of the circular economy. As we all know:

There is no such thing as a mature industry, only mature firms. And industries inhabited by mature firms often present great opportunities for the innovative”.

As the 3rd chart shows, the winners in the field of plastics will be those companies and countries that focus on using their skills and expertise to develop service-based businesses.  These will aim at providing sustainable solutions for people’s needs in the fields of mobility, packaging and other essential areas. The losers will be those who bury their heads in the sand, and hope that nothing will ever change.

 

* The detailed paper is in Science Advances, ‘Production, use, and fate of all plastics ever made

Trump policies to impact global supply chains, US stock markets

Shiller Jan17

Wall Street’s post-election rally suggests that many investors currently have the wrong idea about Donald Trump. They have decided he is a new Ronald Reagan, with policies that will deliver a major bull market.

But those promoting this narrative have forgotten their history. Both men certainly share a link with the entertainment industry. But Reagan took office towards the end of one of the worst recessions in the 20th century. By contrast, Trump takes office at the end of an 8-year bull market.

Prof Robert Shiller’s CAPE Index (based on average inflation-adjusted earnings for the past 10 years), provides the best long-term view of the US stock market, going back over a century to 1881.  As the chart shows:

   Ronald Reagan took office in January 1980, when the CAPE Index was 9.4
   It fell to 6.6 in July/August 1981 at the bottom of the recession, when the S&P 500 was just 109
   At the end of Reagan’s Presidency it was still only at 14.7, and the S&P 500 was at just 277
   Today, Donald Trump takes office with the CAPE ratio at 28.5 and the S&P at 2271, after an 8-year rally

Is it really credible as a Base Case that the rally could continue for another 8 years?  After all, Trump himself claimed back in September that the US Federal Reserve was being “highly political” in refusing to raise interest rates:

They’re keeping the rates down so that everything else doesn’t go down. We have a very false economy. At some point the rates are going to have to change. The only thing that is strong is the artificial stock market.”

Common sense would also tell us that Trump is about to make sweeping changes in economic and trade policy.  He made his position very clear in October with his Gettysburg speech.  And his Inauguration Speech on Friday explicitly broke with the key thrust of post-War American foreign policy:

We assembled here today are issuing a new decree to be heard in every city in every foreign capital and in every hall of power. From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first. Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families.

Change on this scale is never easy to achieve, and usually starts by creating major disruption.  The expected benefits take much longer to appear.  This, of course, is why “business as usual” is such a popular strategy.  But it is clear that Trump is perfectly prepared to take this risk.  As he said at the start of the speech:

“We will face challenges. We will confront hardships. But we will get the job done.

Many companies and investors are still hoping nothing will change.  But CEOs such as Andrew Liveris at Dow Chemical and Mark Fields at Ford have already realised we are entering a New Normal world:

   Liveris told a Trump rally last month that jobs would be “repatriated” from outside the USA when Dow’s new R&D centre opened, adding as the Wall Street Journal reported “This decision is because of this man and these policies,” Mr. Liveris said from the stage of the 6,000-seat Deltaplex Arena here, adding, “I tingle with pride listening to you.”
  Fields personally told Trump of their decision to cancel the Mexican plant and invest in Michigan, sayingOur view is that we see a more positive U.S. manufacturing business environment under President-elect Trump and the pro-growth policies and proposals that he’s talking about”.

The reversal of US trade policies will impact companies all around the world.  The White House website has already confirmed the planned withdrawal from the TransPacific Partnership – and from NAFTA, if Mexico and Canada refuse to negotiate a new deal.  China is certain to be targeted as well. Protectionism will start to replace globalisation.

This means that today’s global supply chains are set for major disruption.  This will directly impact anyone currently selling to the US, and US companies currently selling overseas.  It will also impact every supply chain that involves a final sale either to or from the US.  The Great Reckoning for the policy failures since 2009 is now well underway:

   The Dow Jones Industrial Average’s repeated failure to break the 20,000 level may well be a warning sign
   Japan’s Nikkei Index was also poised to hit 40,000 when closing at 38,916 on 29 December 1989 – but never did

Sometimes, as US writer Mark Twain noted, “History doesn’t repeat itself, but it often rhymes”.

The unseen costs of a Dow-DuPont merger

DowDuPontaThe unseen costs of the proposed Dow-DuPont merger are certain to be much larger than those we can currently describe.  Both companies will effectively be more reactive to external developments, rather than pro-active, due to the internal focus that will be required to develop and implement the merger and divestment processes.  This cost could well be large, given today’s chaotic world of feedstocks and product demand.

Just think for a moment about what is going to happen.  These 2 great businesses will require many of their best and brightest people to ignore what is happening in the outside world – the collapse in the oil price, China’s New Normal direction, major fluctuations in currencies and interest rates, climate change developments after COP 21 – and instead divert their focus internally onto an endless stream of “Who does What” type questions.  The chart above, from the Wall Street Journal, gives a taste of the complexity involved.

How many opportunities will be missed as a result?  How many problems will be ignored?  There must be a major cost from having so many key people being distracted from their real purpose over such an extended timeframe. These are the costs that are always conveniently ignored when plans of this kind are proposed.  Even supposing the promised $3bn/year of savings will be achieved – how much more value could have been created by simply allowing people to run the existing businesses without such major distractions taking place all around them?

And, of course, deliberately, I have left the really critical issues till last.  Most so-called “activists” believe that businesses can effectively be run by spreadsheet – one even said to me once, that he didn’t see the point of having a CEO.  Instead, they focus on refining the algebraic formulas that will supposedly drive delivery of the numbers.  But life is rarely that simple, particularly when the outside world is as uncertain as today:

  • Farmers are already complaining about a potential loss of competition amongst their suppliers – and their worries are understandable, given that their incomes are already in decline as commodity markets collapse.
  • Suppliers will also be more reluctant to invest in joint development of new products, once cost-cutting emails demanding price reductions start arriving in their InBoxes
  • Employees know that the word “synergy” is code for job losses, and are well aware that these will likely increase quite quickly to demonstrate early success to Wall Street

Competitors, of course, will be laughing all the way to the bank.  Christmas has come early for them, and will keep coming for the next few years.  They will know they now have an inbuilt advantage, no matter how difficult things might become as the Great Unwinding continues, as Dow and DuPont move into semi-reactive mode for the duration.

Back in July 2008, I expressed major concern over the proposed merger of Lyondell and Basell – and within 6 months, my fears were confirmed by their $22bn bankruptcy.  Dow and DuPont will not go bankrupt in this way.  But my experience at ICI, and since then, leads me to worry that both companies will be weakened by the 3 years of internal upheavals that now appear to be inevitable.

And I am not alone in my concerns.  One senior chemical company executive contacted me this week, after reading Monday’s post, to give his experience of a similar large-scale merger:

Our CEO did a very good job on the integration front and delivered the synergy savings promised to the investors.  But the cost and distraction of the “armies of consultants” was huge.  The entire management became introverted, with the result that our momentum of growth more or less evaporated and we cane to rely on the savings to keep our profitability even flat.

5 questions for the Dow-DuPont merger

DowDuPont

All the evidence suggests that most mergers fail to deliver the promised value.  So those who propose them, especially when they involve such critical companies for the US and global economy as Dow Chemical and DuPont, must expect some hard questions to be asked.

Here are my 5 top questions in logical order – Why?, What? How? When? and Will it be worth it?:

Why is the deal being suggested?  A close reading of the merger proposal, as described in the press release, provides no grand vision for the deal.  Instead, the driver seems to have been pressure from two recent shareholders – Daniel Loeb’s Third Point at Dow, and Nelson Peltz’s Trian at DuPont.  Each currently own around 3% of their target company’s shares.  2 headlines in the Wall Street Journal, no soft touch in financial matters, tell the story:

What type of merger is this?  Successful mergers, the minority, create value by creating critical mass in specific market sectors.  The others, which normally fail, simply add scale for scale’s sake.  This merger mixes the 2 outcomes: its first stage is simply to add scale by creating the largest chemical company in the world.  Then Stage 2 aims to align with the first outcome by creating 3 new world-scale businesses – in agriculture, specialty chemicals and commodities/materials.  So it is hard to judge the likelihood of success, given the lack of detail on the new businesses’ portfolios and their market positioning.

How difficult will it prove to achieve the promised results?  High-powered integration teams have already been assembled to start mapping out the process to be followed, and to identify which bits of the businesses will go where.  Other teams will focus on the mechanics – the tax and organisational issues, regulatory and political risk, and confirm the timescale for Stages 1 and 2.  Armies of consultants will be drafted in to help – although most will have no real understanding of either business or its component parts.  So we can only guess at the results that will be achieved.

When will all this take place?  Dow’s less complex acquisition of Union Carbide took 18 months from August 1999 – February 2001 to complete, and its initial failure to produce the expected results led to the firing of CEO Mike Parker in 2002.  The current plan envisages the more complex Dow-DuPont merger could take up to 3 years:

  • 2016 will be occupied in working out what to do, and identifying the barriers that need to be overcome
  • 2017 will be focused on implementing the merger of the 2 companies, and finalising plans for Stage 2
  • 2018 will see the separation of the 3 businesses, who will then need to do more M&A to tidy up their portfolios

Even this timetable could prove over-optimistic if unexpected challenges emerge as details of the deal are finalised.

Will it be worth it?  Given the above, it is hard to see why anyone would want to spend the next 3 years engaged in this exercise.  The $3bn/year of claimed synergies sounds a lot at first glance – but then there is the cost of achieving those synergies.  The army of lawyers, tax experts, investment bankers, other advisers and consultants won’t come cheap – total costs could easily reach several $bns over the 3 years- and then there are all the costs of integration such as the IT systems, without which the new companies will be unable to properly function.  Plus the whole issue of integration risk, which cannot be ignored in a deal of this size and complexity – Dow and DuPont have radically different cultures, and there will also be a lot of different regulators to keep happy.

On Wednesday, I will look at the hidden costs of this proposed merger – those that never figure in the analyst reports. The most critical is that both managements will inevitably become internally focused for the next 2 – 3 years, due to the need to develop and implement the Stage 1 and Stage 2 processes.  They have already spent 4000 hours putting together just the 7-page outline document.  This means both companies will risk becoming reactive to external developments, rather than pro-active, at a time when chaos is beginning to reign in feedstock and product markets.

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 62%
Naphtha Europe, down 56%. “Naphtha remains well supported by exports to Asia, although long-range vessels are in short supply because of slow discharge of distillates imports.”
Benzene Europe, down 57%. “The usual upturn in consumption expected in January could be dampened by the wider economic unease”
PTA China, down 43%. “Downstream polyester market had started reducing operating rates beginning from the second week of December.”
HDPE US export, down 37%. “Ample supplies with little trading activity”
¥:$, down 18%
S&P 500 stock market index, up 3%