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Shape of things to come

Faced with elevated energy prices and escalating bale shortages, 2022 could be a critical year in the long-term development of Europe’s plastics recycling industry, reports Egor Dementev

 

 

In the second half of 2021, energy price surges led to disarray in many industries, including recycling. Indeed, fundamental energy supply and demand balance across Europe was expected to remain tight throughout 2022, even prior to the Russia/Ukraine conflict, with supply bottlenecks, cost pressures, and a lack of investment potential leading to shutdowns.

Plastics recycling in 2021
Recycled polymers prices started to increase long before the energy shock in the second half of 2021, mostly driven by brand owners’ ambitious sustainability targets. The sudden, and in some instances extraordinarily high, voluntary commitments outpaced the recycling sector’s ability to match with additional supply volumes.

Given the bottlenecks on the supply side, which cannot be addressed in the near term as they require structural solutions – for example, the introduction of Extended Producer Responsibility (EPR) and deposit return schemes (DRS), the building of enhanced collection and sorting infrastructure – demand has significantly outstripped supply for a prolonged period, especially for natural/clear recycled polymers and food-grade recycled polymers, which pushed prices to record highs throughout 2021.

The exceptionally high recycled content targets (for example, 100 per cent rPET bottles) have disrupted the market adding to structural market problems, namely limited overall access to high-quality feedstocks and decreased availability of virgin material (necessary to maintain tensile strength of recycled plastics, which degrade in quality after several processing cycles).

Fig.1: Recycled polymer prices (2021)

Given these ambitious targets, brand owners and retailers have predictably started to look for long-term supply contracts or even developing in-house recycling capabilities to build their own closed loops. An illustrative example is the recent expansion of the Schwarz group, owner of Lidl and Kaufman supermarket chains, which has been integrating into waste management (in addition to the DRS) and recycling.

However, despite the increased prices for recycled polymers, recyclers face a significant surge in costs and ultimately, reduced margins. The issues of stagnant or reduced collection volumes in the past two years (due to pandemic-related factors), decreasing qualities of bales, import freight issues as well as regulatory requirements for transboundary movement of waste have combined to create problems in sourcing feedstock for the plastics recycling sector.

Supply issues have resulted in high-quality bale shortages in the market, which have eventually transformed into lower yields and higher production costs. Moreover, prices for caustic soda (the key chemical for washing lines) had been growing throughout 2021, with early 2022 prices doubling year-on-year. Given the interplay of all these factors, increased costs through the recycled polymers supply chain were inevitable.

The combination of factors led to prices skyrocketing for recycled polymers and intensified price discussions. Recyclers started to experience pushback from buyers opposing further price increases, albeit unsuccessfully from late 2021 for rPET and from January 2022 for recycled polyolefins. This sentiment has persisted, and some companies, primarily rPET users, have even considered putting on hold projects that are part of their voluntary commitments, or at least not increasing the recycled content level at the same rate as in the past years, because of the high recycled material costs.

Perfect storm in energy markets
Energy analysts called the situation on the energy markets in 2021 a ‘perfect storm’ because a unique combination of several factors simultaneously started to exercise upward pressure on energy prices in August-September 2021, namely a global shortage of commodities and increased demand for energy, the renewables factor, and carbon prices.

In 2020, energy demand was low due to the pandemic effect with various Covid-related restrictions and the associated economic downturn. The recovery around the world in 2021 resulted in rapidly growing demand, in particular for gas. Asian markets also started to increase gas imports, partly pursuing the goal of tackling carbon emissions by switching to a cleaner fuel. These two factors created a deficit in Europe.

The situation in western Europe in 2021 was aggravated by the recent decreased investment into fossil fuels and short-term unfavourable weather conditions for renewables, so that European producers had to look for other energy sources, even temporarily increasing coal consumption.

As far as carbon prices are concerned, in July 2021 the European Commission proposed the so-called ‘Fit for 55’ package, which includes cutting carbon emissions by at least 55 per cent by 2030. Carbon analysts expect scarcity in the carbon markets to be driven forward by this increased ambition. Although not yet implemented, the legislative proposals including a tighter cap on carbon emission allowances and extension of the EU Emissions Trading System to new sectors, have led to an increase in carbon prices as these elements were priced into the market. Overall, this has exerted upward pressure on gas and power prices.

Fig.2: Disconnect between recycled and virgin polymer prices

Energy price impact on recycling
Plastics recycling is an energy intensive process, and the surge in power prices in 2021 has dramatically increased production costs. The recycling industry comprises mostly mid-size companies with limited cash reserves. Assuming gas markets stay tight throughout 2022, a large portion of those recycling companies could face financial difficulties amid squeezed margins due to increased energy, and overall production, costs.

The prolonged pressure on recyclers’ margins makes it challenging for many to be able to absorb any further costs, especially with a decreasing tolerance from buyers for price increases. There are concerns in the market that some smaller recyclers, especially those not integrated either into feedstock or end-product sectors, could go bankrupt, unable to pass through the costs during this challenging period or afford high bale prices to run the plant.

For instance, according to ICIS estimation, due to sharp increases in bale prices in January 2022, some PET recyclers are already facing negative spreads. ICIS reported in February 2022 that market players also confirm existing problems, with some being concerned about staying in business at all.

Key factors for 2022
The disconnect between virgin and recycled polymers (Fig.2) was evident in Europe during 2021, with recycled prices driven by direct market conditions rather than correlating to any virgin price movements. In the example of the PET market, the recycled material is anticipated to command a premium compared with virgin PET throughout 2022.

Although large brand owners using PET are unlikely to roll back their sustainability pledges, the price dynamics could lead some end-users, such as the thermoforming sector, to switch to a higher proportion of virgin material. This could in turn ease demand and result in stronger price negotiations from buyers. This would challenge recycled polymer suppliers in passing on cost increases downstream.

Bale availability is expected to tighten across European PET, PE and PP markets. Lack of growth in collection and sorting capacities has been an industry issue for a prolonged period and became most evident in recent years when demand growth for recycled materials, driven by regulation and industry sustainability commitments, escalated to current levels.

The situation is aggravated by a downside risk of weak plastics consumption in Europe this year, firstly because of record high inflation in Europe impacting consumer sentiment and lowering disposable income, and secondly, because of various Covid restrictions limiting mobility and on-the-go consumption.

Facing tight feedstocks, for instance, rPE and rPP mechanical recyclers started to source mixed-polyolefin bales, which in turn has moved chemical recyclers to test other input waste types.

Legislation
EPR, recyclability requirements, mandatory recycled content targets in the EU (25 per cent for PET bottles by 2025 and 30 per cent for all plastics bottles by 2030), expected plastics taxes – in the UK this year, and in Spain and Italy from 2023 – will continue to drive recycled material demand. Moreover, it will influence material (plastics, paper and aluminium) and polymer substitution.

For example, rPET initially seems better positioned in some applications with new DRS systems in Europe scheduled for 2022-2023 (for example, in Hungary, Ireland, Latvia, Malta, Portugal, Romania, Scotland, Slovakia, and Turkey) suggesting improvements on the collection side. Coupled with the expected release of positive opinions from the European Food Safety Authority on multiple outstanding applications, these developments should provide additional supply of food-grade material and help achieve the stated recycling goals, including brand owners’ and retailers’ voluntary pledges, which for rPET go far beyond the mandated levels.

Sustainability commitments
Although brand owners are increasingly challenged in sourcing sufficient volumes and qualities of recycled material, higher cost recycled feedstocks (although less palatable) are unlikely to make them step back from their ambitious pledges. Then again, those without high-level recycled content targets or with less exposure to consumer scrutiny are more likely to consider switching back to virgin or even alternative materials if there are potential cost savings or greater security of supply.

Chemical recycling
There was an expectation in the market that in 2021 the European Commission would take a decision on whether chemical recycling would contribute to recycling targets, as an officially recognised process. Although it didn’t happen, there were some notable developments with regard to the legal status of chemical recycling. Following the UK case effective in 2022, Spain drafted legislation that stipulates that chemically recycled material will be exempt from a plastics packaging tax planned for introduction in 2023.

Potential EU-wide approval will be a significant boost for the scaling process of chemical technologies. In anticipation of legislative movements, many large players are investing in chemical recycling, stating it as the solution to tackle hard-to-recycle plastics and leapfrog recycling rates.

Fig.3: Feedstock prices

Long-term consequences
It’s likely to prove a critical year for the recycling industry, the outcomes of which could potentially shape the sector’s long-term structure. As discussed, the challenges for recyclers and a potential prolonged period of low (or negative) margins could have several consequences.

Some smaller recycling plants could close temporarily or even go bankrupt, being able to source only expensive or low-quality feedstock (which means higher wastage rates and operating costs) while facing pushback from buyers unwilling to accept further price increases.

A prolonged period of squeezed margins with low availability of feedstock will hinder investment in much-needed additional recycling capacities. It could put at considerable risk the EU’s stated recycling targets for all plastics.

Amid the current low availability of feedstock, market players are expected to seek either direct integration into upstream (waste management) or build long-term partnerships along the value chain to secure access to feedstock and achieve more favourable pricing.

Larger companies could target strategic acquisitions of those recyclers in financial difficulty and increase their market share. From the strategic point of view, under current market conditions, their higher capacity would allow them to benefit in the future from stronger purchasing power in feedstock markets, long-term supply agreements and enhanced recycling economics.

Even though producers face increasing regulatory requirements for waste shipments (both intra- and extra-EU), with proposed new legislation in the EU, tight supply of domestic feedstocks will drive them to seek alternative sources of bales and flakes, outside of the region. Import supplies could potentially start from the second half of 2022 when logistics are forecast to improve. Despite resistance from some in the chain, this is one of a limited number of options on improving feedstock supply and many will consider it, if they are not already active in this area.

Shaping the sector
Last year was a challenging one for the plastics recycling industry because of significantly increased production costs (based on surges in energy, caustic soda and logistics). Coupled with the tight feedstock problem deriving from structural bottlenecks on the waste collection side, those factors led to recycled polymer prices hitting record highs with tense price negotiations between buyers and sellers taking place.

The feedstock situation is expected to worsen through this year. Legislative developments must address stagnating collection rates for plastics waste and limitations in sorting capacities and also define the legal status of chemical recycling in Europe to support and shape a less volatile future for the industry. Although elevated recycled polymers prices could motivate some buyers to switch to greater use of virgin material, consumer and regulatory pressure leaves many large brand owners no choice as they remain committed to their sustainability targets.

The interplay of all the above-mentioned factors will shape the plastics recycling industry in the long-term. Shortages of high-quality bales will make recyclers look for alternative feedstock sources (including via import) with a high risk of financial difficulties for smaller recyclers. Those shortages most significantly, have the potential to hinder investment in new recycling capacities. It is highly likely that increased mergers, acquisitions and partnerships will develop in the European market during 2022 under the current environment.

(Article originally published in May 2022 issue of Plastics in Packaging)

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