$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.

Please click here if you would like to download the article.

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Goodbye to “business as usual” model for plastics

Polymer markets face two major challenges in coming months. The most immediate is the arrival of the major US shale gas-based ethylene and polyethylene expansions. The longer-term, but equally critical challenge, comes from growing public concern over plastic waste, particularly in the ocean.

The EU has set out its vision for a new plastics economy, where:

“All plastic packaging is reusable or recyclable in a cost-effective manner by 2030”.

Similarly, China has launched a ‘War on Pollution’, which has already led to all imports of plastic waste being banned.

Together, these developments mean there is unlikely to be a “business as usual” option for producers or consumers. A paradigm shift is under way which will change business models.

Some companies will focus on being low-cost suppliers, integrated back to the well-head or refinery. Others will become more service-led, with their revenue and profits based on exploiting the value provided by the polymer (virgin or recycled), rather than just the value of the virgin polymer itself.

The next 18 months are therefore likely to see major change, catalysed by the arrival of the new US production, as I discuss in a new analysis for ICIS Chemical Business.

The second chart indicates the potential impact of these new capacities by comparison with actual production since 2000, with 2019 volume forecast on basis of the planned capacity increases. But can this new PE volume really be sold? It certainly won’t all find a home in the US, as ExxonMobil Chemicals’ then President, Stephen Pryor, told ICIS in January 2014:

The domestic market is what it is and therefore, part of these products, I would argue, most of these products, will have to be exported”.

And unfortunately for producers, President Trump’s new trade policies are unlikely to help them in the main potential growth market, China. As John Richardson and I noted a year ago, China’s $6tn Belt and Road Initiative:

“Creates the potential for China to lead a new free trade area including countries in Asia, Middle East, Africa and potentially Europe – just as the US appears to be withdrawing from its historical role of free trade leadership”.

The task is also made more difficult by the inventory-build that took place from June onwards as Brent oil prices rose 60% to peak at $71/bbl. As usual, buyers responded by building inventory ahead of price increases for their own raw materials. Now they are starting to destock again, slowing absolute levels of demand growth all around the world, just at the moment when the new capacity comes online.

SUSTAINABILITY CONCERNS ARE DRIVING MOVES TOWARDS A CIRCULAR ECONOMY
At the same time, 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.

Last year’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. Even Queen Elizabeth has since announced that she is banning the use of plastic straws and bottles across the royal estates, as part of a move to cut back on the use of plastics “at all levels”.

Single use plastic applications in packaging are likely to be an early target for the move to recycling and the circular economy. This will have a major impact on demand, given that they currently account for more than half of PE demand:

    • Two-thirds of all low density and linear low density PE is used in flexible packaging – a total of 33 million tonnes worldwide
    • Nearly a quarter of high density PE is used in packaging film and sheets, and a fifth is used in injection moulding applications such as cups and crates – a total of 18 million tonnes worldwide

Virtually all of this production is potentially recyclable. Producers and consumers who want to embrace a more service-based business model therefore have a great opportunity to take a lead in creating the necessary infrastructure, in conjunction with regulators and the brand owners who actually sell the product to the end-consumer.

Please click here to read the full analysis in ICIS Chemical Business.

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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

Midway Atoll becomes “plastic island” due to our throwaway society

Midway plastics Dec16Plastics have made an enormous contribution to improving our quality of life over the past 75 years.  Polyethylene (discovered in 1933), polypropylene, PVC, polystyrene, PET and many others have made our lives safer, and easier:

  Plastic pipes have removed the risk of lead poisoning from our water, and helped to reduce water lost in transit
  Plastic packaging has made food safer, and reduced waste by increasing its shelf-life
  Plastic components have reduced the weight of cars and many other products
  Plastic cables have enabled the benefits of electricity and the internet to be delivered to billions of people

But, as the World Economic Forum (WEF) highlighted earlier this year in a major new Report – The New Plastics Economy – we need to rethink the way we use plastics.  We simply cannot afford, from either a financial or environmental perspective, to continue with a situation where:

  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

A new 15 minute report by CNN, Plastic Island, highlights the urgency of the need to reverse these trends, showing:

“How our throwaway culture is turning paradise into a graveyard

Its focus is on Midway Atoll in the North Pacific Ocean, an island where nobody lives.  And yet as the film shows, plastic debris is scattered all over its beaches.  It has floated there across the ocean for thousands of miles.  Even worse, Midway’s breeding birds often mistake pieces of plastic for food, and feed them to their chicks – causing them to die a painful death.  As the report highlights:

When you tear open the fragile ribcages of the birds who did not survive — as US Fish and Wildlife Service Superintendent Matthew Brown did in front of us — the sheer volume of plastic waste now in our world becomes apparent.  Inside the slight skeleton of one albatross, we found bottle tops and a cigarette lighter amongst seemingly endless tiny shards of plastic. It’s as if plastic actually was the bird’s diet.

“These brightly colored plastic fragments were picked out of the sea by the bird’s parents, who mistook them for food, then fed them to their offspring. The birds can’t digest the plastic pieces but they still feel full, which causes malnutrition and death, according to researchers….

So much of the damage is on the edge of the invisible. If you kneel down on Midway and stick your hand into the hot sand, you can pull up a troubling multicolored array of particles.  These are what activists call the “new sand” — plastic that has broken down into smaller and smaller pieces, and then become part of the shoreline.

These smaller particles are what end up in the food chain. The smallest ones, called nano-plastics, sink deep into the ocean and can end up in plankton. Larger pieces, known as micro-plastics, float in a soup, suspended in water, and are eaten by fish. The fish then get eaten by “apex predators” higher up the food chain — including humans.”

Of course, it is wrong to blame the companies producing plastics for this problem.  It is us, the users of the plastics, who cause the problem by throwing away the coffee cup we don’t need any more, and the umbrella bought in a hurry to keep us dry in a sudden storm.

But as with other environmental issues of the past 50 years – leaded petrol, the ozone layer and now sustainability – growing consumer pressure means it is very dangerous for the producers to simply ignore the problems that are developing.  Once the public loses its trust in an industry, it is very difficult to regain it.  And if trust goes, then one’s licence to operate is threatened.

The issue is simply that we have reached a parting of the ways.  Plastic production has surged in the past 50 years from 15 million tonnes in 1964 to 311 million tonnes in 2014. Current forecasts quoted by CNN suggest that on present trends, this volume could double by 2036 to over 600 million tonnes.

But with 8 million tonnes of plastic waste already entering our oceans each year (one garbage truck a minute), will the public allow this volume to be produced?  It seems unlikely.

Instead, it is far more likely that we will have made major moves towards developing a more circular economy, where plastic is designed to be reused, not thrown away.

Encouragingly, many companies already recognise that change is inevitable, as the list of those participating in the production of the WEF Report confirms – not only does it include major consumer companies such as IKEA, Nestle and Unilever, but also many of the major plastic producers such as Dow, DSM, DuPont and Indorama.

The winners in this New Normal world will be those who recognise the new direction.  They will develop more service-based business models that will enable them to grow revenue and profit for the future.  The unfortunate losers will be those who stick their heads in the sand, and assume that nothing will ever change.

Sustainability replaces globalisation as key driver for economy

WEF plastics2 weeks ago, India ratified the COP 21 Agreement.  This means the Agreement enters into force on 4 November.  81 countries, responsible for more than 55% of greenhouse gas emissions, have now agreed to reduce emissions in line with the decisions made in Paris last December.  And last week saw another landmark Agreement, with 150 countries agreeing to phase out HFCs, in an addition to the already successful Montreal Agreement on CFCs.

This rapid ratification process highlights the paradigm shift taking place in the global economy.

World trade agreements were the motor of the global economy during the SuperCycle.  Thus the World Trade Organisation (WTO) was established in 1995 to build on the success of the Uruguay Round of trade liberalisation between 1986-1994. But its flagship initiative, the Doha Round launched in 2001, has proved a failure and was effectively abandoned at the December 2015 Nairobi ministerial meeting .

One week before Nairobi, however, the Paris conference had succeeded in reaching agreement between 195 countries. They will attempt to cut greenhouse gas emissions to a level that will limit the rise in global average temperature to “well below” 2deg C (3.6deg F) compared to pre-industrial levels. This is the point when it is believed that climate change could threaten life on earth.

Essentially, therefore, the world is moving in a new direction.

As we have seen in the US Presidential campaign, both the main candidates have moved away from pro-free trade policies.  Donald Trump, the Republican candidate, has said he would probably pull out of NAFTA (the North American Free Trade Area) within 6 months of taking office.  Hillary Clinton, the Democratic candidate, has said she is now against the Trans-Pacific Partnership deal agreed between the major Pacific Rim countries (excluding China).

Clinton’s position highlights the change underway.  Her husband, Bill Clinton, had signed the NAFTA agreement when president.  And she had earlier said that the TPP was the “gold standard” for trade agreements, when Secretary of State.  But today, free trade is increasingly seen as a vote-loser, rather than a vote-winner.

Sustainability and the climate change issue are the opposite.  they are vote-winners.  And, of course, they map on to the shift that has taken place in underlying demand patterns due to changing demographics:

  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

The concept of sustainability is therefore an excellent fit with these changing demand patterns.  It is, of course, obvious that it makes far more sense to reuse and recycle products, than to simply throw them away.  But it also fits with today’s economic reality, given that both young and old have less spare cash than in the past:

  Older people are moving into retirement, and so their incomes are reducing along with their needs
  Younger people often have large tuition fee debts, and have to pay very high prices if they want to buy a home

The impact of this shift will be very significant over the next few decades, just as globalisation changed our world-view over the past 30 years.  As the chart above from the World Economic Forum highlights, we are appallingly wasteful in our use of plastics.  The Report adds that:

  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.

Of course, this paradigm shift also has the potential to reduce overall demand growth, and maybe even overall demand, for current products.  Demand patterns are already transitioning away from products and consumables, and becoming more service-led.  In turn, it means that GDP will become less relevant as guide to future growth potential.

Companies and investors need to factor this new paradigm into the Budgets for the 2017 – 2019 period.  As the COP21 ratification process confirms – sustainability is no longer an issue for “tomorrow”.  It is a key driver for short and medium term growth in revenue and profit.