$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.

US interest rate dilemma highlights fragile global economy

McKinsey scenarios Sept15Should it really matter that the US Federal Reserve might raise US interest rates by 0.25% tomorrow?  Surely the IMF/World Bank should not need to argue that such a small increase could really be critical for the world economy?

The fact that such a debate has been taking place at all, highlights the damage done by stimulus policies to the US and global financial system, as the New York Times notes:

The banking system is almost comically awash in money. In June 2008, banks had about $10.1bn in their Fed accounts. The total is now $2.6tn. Picture all of the money in June 2008 as a single brick; the Fed has added 256 bricks of the same size. On top of that first brick, there is now a stack five stories tall”.

The volatility created by the “will she/won’t she” debate over Fed Chair Janet Yellen’s intentions has already led to enormous uncertainty in currency and other markets.  It has also confirmed the underlying fragility of the US and global economy. The Atlanta Fed’s GDP Now model is currently showing US Q3 GDP growth at just 1.5%.

As companies move into Budget season, they therefore need to focus their planning on mitigating the very real uncertainty about the outlook for 2016 – 2018.  One excellent way of doing this would be to debate the Scenarios above, developed by the McKinsey consultancy:

  • Global synchronicity describes a world where most major economies tackle their structural challenges, and are able to exit from aggregate demand stimulus smoothly
  • Rolling regional crises describes the opposite outcome. With structural challenges remaining largely unaddressed, the world economy becomes more vulnerable to regional crises and grows increasingly insular.
  • Pockets of growth describes the potential for growth to accelerate, but the major economies diverge
  • Global deceleration describes a situation where convergence takes place but at lower growth rates

Importantly, McKinsey highlight the need to understand demographic pressures, just as we have argued in Boom, Gloom and the New Normal.   It seems almost every commentator is now becoming aware of the critical importance of the changes underway, due to globally ageing populations and collapsing fertility rates.

Policymakers are virtually alone in choosing to ignore this common sense insight – as their presentations at the recent Jackson Hole, USA conference confirm.  This, of course, is why their policies have failed to spark the economic recovery they first promised 6 years ago.

  • They assured us that the 2008 Crisis was just a liquidity crisis, and said the need was to use stimulus to unblock the financial plumbing system
  • But in fact it was a balance sheet crisis, where there was too much debt – as people hadn’t saved enough to fund their extended retirement
  • They also promised us that that lower interest rates would stimulate demand
  • But in fact, the average European and Japanese household  is now headed by someone over 55, and the US is moving in that direction.  Lower interest rates actually destroy demand amongst this age group who are more dependent on their savings for spending money
  • A 5% interest rate on an average $30k saving pot would give them $1500/year to spend, or $125/month.  But instead today’s low interest rates mean they have to save more, and spend less, if they hope to have sufficient income to survive their likely 20 years of retirement

Policymakers’ theories about the economy were formed a long time ago, when the BabyBoom was well underway, and so essentially target the ‘average 40-something white male’ .  This is why they have failed to work as promised.

They ignore the complete change that has taken place in populations since 1970, with increasing female participation in the labour force, and the growth of multi-culturalism.  Biologists’ models of ‘competing populations’ would solve this problem overnight, if policymakers were prepared to look outside their own narrow field of academia.

This is why McKinsey’s Scenarios represent such a valuable contribution.  As they note in another new paper:

The world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end

Today’s New Normal world means that the strong and constant growth seen in the BabyBoomer-led SuperCycle is unlikely to return.  Thus McKinsey’s Scenario 1 is probably the most unlikely scenario of all to be realised.  And all the others imply major change is underway – whatever interest rates moves the Fed makes tomorrow.

Mckinsey says global debt now 3x global GDP, and rising

McKinsey debt Feb15A major new report from consultants McKinsey confirms my concerns over the dramatic increase in global debt levels since stimulus policies began in 2008.   As their chart above highlights:

  • Global debt has risen by $57tn to $199tn since 2007, nearly 3x global GDP
  • Government debt is up by $25tn, with three-quarters of this in the developed world
  • Household debt has risen in 4 out of 5 countries, with three-quarters of this in mortgages
  • China’s debt has risen four-fold, with half of the loans linked to property, and the shadow banking system having growth at 36%/year

As McKinsey warn:

Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points. That poses new risks to financial stability and may undermine global economic growth.

“Government debt is unsustainably high in some countries. Since 2007, government debt has grown by $25 trillion. It will continue to rise in many countries, given current economic fundamentals. Some of this debt, incurred with the encouragement of world leaders to finance bailouts and stimulus programs, stems from the crisis. Debt also rose as a result of the recession and the weak recovery.

“Household debt is reaching new peaks. Only in the core crisis countries—Ireland, Spain, the United Kingdom, and the United States—have households deleveraged. In many others, household debt-to-income ratios have continued to rise. They exceed the peak levels in the crisis countries before 2008 in some cases, including such advanced economies as Australia, Canada, Denmark, Sweden, and the Netherlands, as well as Malaysia, South Korea, and Thailand.

“China’s debt has quadrupled since 2007. Fueled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28tn by mid-2014, from $7tn in 2007. At 282 % of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany. Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable.”

McKinsey’s very detailed research thus completely confirms the conclusions of my own Research Notes, such as China bank lending: From $1tn to $10tn and back again a year ago.

It also confirms my fears about the fault-lines that have been created by the central banks’ misguided stimulus policies, as set out in the ‘Ring of Fire’ map below.

Ring of fire Feb15

China’s change to its “New Normal” policies under President Xi has already opened the fault-lines in oil markets to the Middle East and Russia, and in mining to Australia, S Africa and Brazil.  At the same time, the fault-line to the Eurozone is waiting to open as the Greek crisis develops, as is the fault-line to London’s over-priced housing market.