2018 will see Winners and Losers appear in plastics markets

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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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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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