China’s plastic ban and recycling launch marks end of ‘business as usual’ for plastics industry

Paradigm shifts start slowly at first, and it is easy to miss them. But then one day, they suddenly become obvious, and it becomes a scramble to catch up. That’s what happened on the waste plastic issue last week, when China decided to take action. As official news agency, Xinhua, reported:

  • “The policy measures proposed in this opinion basically cover the entire process and various links of plastic product production, circulation, use, recycling, and disposal, reflecting a system of full life cycle management
  • “Policy adjustments target both traditional areas and emerging areas such as e-commerce, express delivery, and takeaway
  • “(They focus on) plastic products that are currently in large use, relatively prominent, and strongly reflected in society, and take the lead in prohibiting or restricting production, sales, and use in some areas and regions
  • “It is important to point out that implementation will inevitably affect the production of some industries and the convenience of residents’ lives”

My former company, ICI, invented polyethylene (PE) back in 1933. PE is now the largest single polymer with volume close to 100m tonnes. More than half of this goes into single-use applications.  Yet in a major failure of the imagination, very few of us in the industry ever thought until recently about the waste this caused.  As the BBC reported after China’s decision:

“China has for years been struggling to deal with the rubbish its 1.4 billion citizens generate. The country’s largest rubbish dump – the size of around 100 football fields – is already full, 25 years ahead of schedule.”

And we are all still ignoring the economic waste involved.  Crude oil costs $60/bbl, and it costs lots more dollars to refine it/ship it/process it. And then we simply throw away the single- use plastic bags and packaging that we bring home from the shop or unwrap from the internet delivery.

Plus, of course, there is the marine waste problem, so vividly brought to life in the photo from Sir David Attenborough’s ‘Blue Planet 2 television series.

THE PLASTICS INDUSTRY MUST NOW TAKE UP THE CHALLENGE

China uses around 1/3rd of all the PE produced today. So its decisions are a game-changer for the entire global industry.

Nobody wants to do away with plastics themselves.  They are unique materials – lightweight, resilient, usually non-reactive and waterproof. They have much lower carbon intensity than competing materials such as metals, and they play an incredibly valuable role in our daily lives. Food packaging, for example, is proven to reduce food losses, wastage and health risks from contamination.

But the business model for producing plastics is broken, and needs to be challenged:

  • Does it really make sense to keep producing more oil and gas, with all the CO2 emissions this involves, and then throw away the end product?
  • If not, why aren’t we investing the necessary dollars to set up Resource Centres (as pictured) around our cities and towns, to recycle this waste plastic back into usable products?
  • And at the same time, why aren’t we developing robust contingency plans for optimising the legacy issues from the old business model

As I noted here a year ago, There’s a great future for the European plastics industry in recycled plastic, this opportunity is not just about China. Last month, new EU Commission President Ursula von der Leyen launched the EU’s Green Deal, noting:

“I am convinced that the old growth-model that is based on fossil-fuels and pollution is out of date, and it is out of touch with our planet. The European Green Deal is our new growth strategy – it is a strategy for growth that gives more back than it takes away. And we want to really make things different. We want to be the frontrunners in climate friendly industries, in clean technologies, in green financing.”

The key issue is summed up by new BP CEO, Bernard Looney. He warned at the weekend that the oil industry has to start:

“Going beyond small, ineffectual bets on low carbon investments.”

The plastics industry similarly has to step up from today’s relatively “small, ineffectual bets”. Otherwise it will run out of time to meet the 2025 recycling deadlines being set by an increasing numbers of brand owners and governments.

All paradigm shifts create Winners and Losers.  Losers will focus on recession risks and the potential impact of the corona virus. But Winners will know they need to do more than focus on these risks, if they want to generate long-term revenue and profit growth.

They will be the ones who start investing realistic sums of money, today, to turn the concept of the circular economy into reality.

Portugal shows the way to climate neutrality by 2050

“If you don’t know where you are going, any road will do”. The Irish proverb’s logic shows us the way forward on the greatest challenge that we face today, of achieving climate neutrality by 2050.

As the President of the European Petrochemical Association, Marc Schuller, highlighted last month when issuing a ‘call to action’:

“The Youth of the the world is calling for ambition and transformation. There is a new sense of urgency and as business leaders we should ensure that we embrace it and that our response as an industry is keeping up with this new pace of change and level of ambition.”

Governments also have a major role to play.  And it is important that they speak in language that ordinary people can understand.

This is why Portugal’s Roadmap for Carbon Neutrality 2050 is so important.  As the chart shows, it positions climate neutrality as an opportunity. Most people, after all, would prefer to be up with the peleton – challenging for the yellow jersey and the lead, not stuck at the back.

There is also very little doubt that climate change is taking place.  After all, as the chart on the right shows, the global population has more than trebled since 1950, from 2.5bn to 7.8bn today.  An increase of this size must have a major impact on the world in which we live.

The chart on the left shows one aspect of this impact in terms of the rise in surface temperatures from 1960, versus 1850-1900.  We have good data for both periods, and so the data’s reliability is high.

Of course, correlation doesn’t always equal causation. And no doubt there are a range of other factors involved – some positive, some negative. But given the observable risks of climate change today, it makes no sense to ignore the issue and hope it will go away.

This is why voters are telling their leaders that climate change is important.  After all, what is the point of a better standard of living, if at the same time you worry that you might get flooded out of your home – or it might be burnt to cinders?

Portugal’s response is an excellent example of a government taking a lead, within the framework of the European Green Deal to be launched early next year. As the chart shows, it is focused on the key areas and aims to carry the population with it:

  • “Eliminating coal-based power generation by 2030 and achieving full decarbonization of the power generation system by 2050
  • Decarbonizing mobility by strengthening public transport, decarbonizing fleets and reducing the carbon intensity of sea and air transport
  • Expanding conservation and precision agriculture and reducing emissions associated with livestock and fertilizer use
  • Preventing waste generation, increasing recycling rates and reducing waste disposal in landfill
  • Applying carbon tax, changing consumption and production patterns, environmental education and awareness
  • Promoting skills development towards new economic opportunities” 

Of course, nobody likes change. But as the chart above shows, the world is already changing.

As I discussed last month,  the world’s population is now expanding because people are living longer, not because women are having lots of babies.

  • Nearly a third of the world’s High Income population, those earning at least $12k/year, are in the Perennials 55+ generation. Their incomes decline as they retire, and so Sustainability is critically important for them as a way of doing more with less
  • Younger people, the Millennials,  still want mobility, but owning a car doesn’t excite them. Similarly, they want the benefits provided by plastics, but they don’t want the waste and pollution generated from applications such as single-use packaging

As Portugal has realised, most people – given the choice – would like to be at the front of the pack. We all want to enjoy the opportunities that the rise of the sustainability agenda will provide.

Corporate leaders need to respond – unless they want to risk finding themselves on their own, at the back of the pack.

Day of reckoning approaches for US polyethylene expansions, and the European industry

Planning for future demand in petrochemicals and polymers used to be relatively easy during the BabyBoomer SuperCycle. The team would consult the latest IMF forecast for global and regional growth, and then debate the right ratio to use to calculate product demand.

For polyethylene (PE), the ratio was generally just above GDP at around 1.1x, on the basis that relatively more plastic was likely to be needed as the economy grew.

So when the US shale gas opportunity came along, producers were very confident that it would provide them with major cost advantage over most other Regions. And they were under major pressure to use the ethane that might be produced from the new natural gas production, as it is explosive when mixed with air in concentrations between 3% – 12.4%.

Essentially this meant the ethane was a distressed product, and had to be used in ethylene production, as there are no other major applications.

Since those early days, the US polyethylene expansions have been “an accident waiting to happen”, as I first argued when the plans were still being finalised in March 2014:

“US ethylene producers need to work out where all the new ethylene production is going to be sold before embarking on the planned frenzy of cracker construction”.

Unfortunately, the pressures from Wall Street to exploit the apparent opportunity were too great. One by one, companies gave in to peer pressure and announced expansion plans, as shown in the ICIS graphic – and were rewarded by sharp increases in their share price. As one CEO said to me at the time:

“You may be right, but every time I mention shale on an earnings call, the share price goes up $5.”

Our major Study, ‘Demand – the New Direction for Profit’, jointly produced with ICIS, took the analysis a stage further in March 2016, warning that:

“The supply-led business model – build capacity and wait for demand to catch up – will no longer work in today’s low- or-no-growth marketplace.”

And it really did seem obvious then that the key assumptions behind the expansions were wrong:

  • Oil prices were no longer above $100/bbl and so US gas-based producers didn’t have a major cost advantage
  • Global growth hadn’t returned to SuperCycle levels; China was starting to move towards self-sufficiency and would not longer need need vast import volumes
  • Globalisation was being replaced by protectionism, and plants could no longer be sited half-way across the world from their markets

But companies went ahead anyway, due to the pressure from upstream gas producers to dispose of the product, and the enthusiastic support provided by investors.

The terrible hurricanes in 2017 postponed the moment of reckoning, as plants were delayed for months due to the damage.  But then, construction picked up again and most of the new capacity is now in place – and linked to new polyethylene capacity.

Polyethylene is the largest volume polymer, and the expansions are adding 40% (6.5 million tonnes) to US capacity between 2017 – 2019.  Other Regions are of course also expanding – particularly China, as it seeks to become more self-sufficient as a result of President Trump’s trade war. The ICIS price charts therefore show a depressing picture:

  • Asian HDPE CFR prices have fallen from $1350/t to $900/t over the past year
  • US HDPE prices have fallen from 64c/lb to 53c/lb over the same period
  • And European HDPE prices have started to tumble, down from $1150/t in June to $950/t today

The reason is not hard to find, as the charts from Trade Data Monitor confirm.   Total H1 ethylene exports in the shape of PE, PVC, styrene, EDC, ethylene and other derivatives almost doubled to 4 million tonnes. And suddenly, Europe has become the main importer, with volume up from 420kt in 2018 to 1.05MT.  Most of the volume is in PE, which doubled to 3MT on a global basis.

And there is still more volume to come, with ExxonMobil now starting its new 650kt plant and LyondellBasell starting its new 500kt plant in Q4. That’s more than 1MT of new  PE output which will have to be exported into an already over-supplied market.

In addition, it is clear that public opinion and the new EU Circular Economy directive are already starting to have a major impact on demand for single use plastics. Unfortunately, over 50% of  PE output goes into this application, along with nearly a third of polypropylene.

Volume is already disappearing as consumers make the shift to more sustainable forms of packaging. It is clear that recycled material now has the potential to replace virgin product as the feedstock of choice in the future.

In turn, these paradigm shifts are creating Winners and Losers.  Next year is likely to prove very difficult for US PE exporters, as they face up to the fact that export demand has not grown as expected, and they do not have a major cost advantage.

As the picture of Fido the dog illustrates, polymer producers are the ‘flea on the tail of the oil/gas markets’:

  • Producers integrated into US natural gas production, or EU refineries, will be able to ‘roll through’ margins to the wellhead and refinery as prices go lower
  • But non-integrated European players have much less protection. Their margins will get squeezed, at the same time as demand patterns shift away from the use of virgin product

Now is therefore the time for these producers to start accelerating moves to using recycled feedstock for their production.  In another 12-18 months, if prices and margins keep on falling at current rates, it may well be too late.

There’s a great future for the European plastics industry in recycled plastic

Europe’s plastics industry is under major threat from the growing legislative and consumer backlash against plastic packaging.

As with the global industry, its licence to operate is increasingly challenged by images of plastic rubbish polluting the world’s oceans, alongside photos of baby fish dying because their parents mistakenly fed them plastic instead of food.

EU legislation on plastic packaging is already in place to respond to this concern and promote the arrival of the circular economy. The industry therefore now needs to urgently reinvent itself by developing solutions to tackle these problems and help reduce carbon footprint.

History, luckily, is on its side.  There was a similar turning point in the 1960s, when it implemented the far-sighted decision to switch from coal to oil-based feedstocks. As a result, it transformed itself into a world-leading source of the products that have now become embedded in our daily lives. And it maintained this lead for more than fifty years, until finally China’s growth allowed Asia to overtake it.

But over the past twenty years, however, it has stagnated as China became the manufacturing capital of the world since joining the World Trade Organisation in 2001. Its newest steam cracker, a core technology for the production of chemicals and plastics, started up more than twenty years ago in 1994. And over the past decade, the North American industry has seen a $200bn renaissance due to the arrival of low-cost shale based feedstocks.

This decline matters as chemicals and plastics are central to the European economy, and a key enabler for a vast range of products from autos through to personal care. The industry directly employs 1.5 million people, and a much larger number indirectly in downstream manufacturing and service roles.

Plastics are also key to tackling a number of the challenges facing our society, as the EU has highlighted in its new Circular Economy strategy:

“Light and innovative materials in cars or planes save fuel and cut CO2 emissions. High-performance insulation materials help us save on energy bills. In packaging, plastics help ensure food safety and reduce food waste.”

But at the same time, the legislation highlights the urgent need to rethink the production, use and consumption of plastics in order to avoid the environmental damage currently being created.

The problem is that reuse and recycling of end-of-use plastics remains very low by comparison with other materials such as paper, glass or metals:

  • The Commission estimates that more than 2/3rds of plastics waste currently goes into landfill or incineration
  • As a result, 95% of the value of plastic packaging material, between €70bn – €105bn annually, is lost after a very short first-use cycle
  • It also estimates that recycling all global plastic waste could save the equivalent of 3.5bn barrels of oil each year, and help curb CO2 emissions

The European plastics industry is therefore now at a crossroads, as continuing with a business as usual strategy makes little sense. After all, the new EU legislation requires all plastics packaging to be reusable or cost-effectively recyclable by 2030. And the Ellen MacArthur Foundation is successfully encouraging the world’s major brand owners and retailers to make similar commitments with an even tighter deadline of 2025.

This paradigm shift gives the European plastics industry the opportunity to stage its own renaissance. It urgently needs to start the technical development programmes that will allow it to adopt the circular economy agenda, and start substituting recycled feedstock for oil.

China, after all, is already moving down this track, with Hainan planning to ban the production, sale and use of the 120kt  single-use plastics currently used each year in the province by 2025. And the government is starting to build dozens of local “comprehensive resource utilisation” centres to boost recycling, whilst at the same time restricting the use of single-use plastics by courier and food delivery firms.

Obviously there will be costs involved.  But in principle the industry’s assets are ageing and often below world-scale. The scale of the write-offs required is therefore manageable. And by beginning the transition today via the use of chemical and mechanical recycling technologies, these costs could be amortised over a longer timeframe.

The industry has a remarkable record of generating revenue and profit growth from innovation. Reinvention to become a more service-based industry, focused initially on making a major contribution to reducing marine pollution, would enable it to regain its global leadership in an area where long-term growth is assured.

And who knows, if Hollywood were ever to issue a remake of 1967’s The Graduate, maybe Mr McGuire’s famous advice to a young Dustin Hoffman would become “There’s a great future in recycled plastics”.

$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.