Recycled PET market hit by downturn

Rough ride

17 June 2009 00:00  [Source: ICB]

Although its long-term future looks bright, the recycled PET market is under intense pressure, as prices have plummeted in the downturn

WHEN REGGAE musician Peter Tosh sang "You're just a brand new second hand," in 1976, he was talking about a woman.

But he could just as easily have been referring to recycled polyethylene terephthalate (R-PET), from used bottles and fibers. Of all the plastics, polyethylene terephthalate (PET) is the easiest to recycle, and the most common.

And now, global companies are clambering to realize the marketing potential of a pro-green message.

By 2010, the US-based Coca-Cola, for example, wants its European bottles to be made with 25% R-PET: recycling has become big business.

"R-PET will grow in the future because it's cheaper than PET [and] because the consumer will [accept its use for] beverages," says Alfred Peuker, head of technical management at the German trade group PET Cycle.

Food-grade R-PET material, which is used to create food and beverage packaging, is seen by the market as having the biggest potential for growth. Plastic beverage bottles, in particular, are seen by the majority in the market as having the biggest growth potential.

Plastic bottles hold particular advantages over their glass counterparts. "The [plastic] bottles have less weight, they are clear and transparent and they don't break as easily. Consumers want convenient products right now," says Peuker.

Technological improvements with European R-PET processing have meant that recycled material can now compete with its virgin counterpart in terms of quality.

"The technology has been improving for three to four years, and has reached a satisfactory level now," says one manufacturer.

The only potential issue remains convincing premium beverage producers, for applications such as beer and wine, to switch to plastic bottles. "Consumers don't like beer in PET," says Peuker.

Growth for R-PET products could also be stimulated by outside events. If oil prices continue to rise, use of R-PET will become more economically viable.

"If the oil crisis comes, which it will - it's just a question of when - then recycled material is going to be more in demand," says one R-PET producer.

As with all business, though, the "inconvenient truth" for recyclers is that whatever marketing potential recycling might bring, price remains the ultimate arbiter of demand. And the global recession has severely affected R-PET producers.

"The challenge for this year is the low price of virgin PET material. It's a very big concern if it's too low. If you produce food-grade R-PET, in particular, the risk is that your cost will be higher than the virgin material price," says a buyer.

The majority of players in the R-PET market assert that prices rise and fall in conjunction with virgin PET prices.

"Our prices are calculated by the virgin prices," says one food-grade R-PET producer. "I don't think there will ever be a move away from that. The value always depends on the virgin. You always have that fixed cost."

However, an analysis by ICIS of comparable pricing data shows that while R-PET has a strong correlation between the different grades, the relationship between R-PET and PET prices is casual at best; except for downwards trends.

Since 2007, the majority of falls in virgin PET prices have been followed by falls in R-PET prices, at a delay of about two months. According to market participants, the reason for this is simple economics; the majority of consumers use R-PET as a cheaper alternative to virgin PET material, and if the margin between the two is not wide enough, buyers will favor new material.

As for those that choose recycled as part of a company's green commitment, during sustained economic hardship social conscience has a habit of being quietly pushed to one side in favor of survival.

Since their peak in January 2008, virgin PET prices have fallen by one-third. R-PET prices have fallen in tandem, and this has lead many producers to bemoan their ever-shrinking margins.

"I would advise nobody to invest in a new PET recycling line, unless the purchasing and sales are already guaranteed," says Ton Emans, supply chain manager at flake producer CeDo, a subsidiary of Germany-based DELTON.

"The future of PET recycling is jeopardized because the present market doesn't leave room for any margins," he adds.

Emans is not the only market player predicting hard times ahead. At the endof March, Expladan, a Denmark-based producer of R-PET flakes, filed for insolvency, and there have been fears in the market that further bankruptcies in the sector are imminent.

"Restricted demand and reduced market prices puts collectors and reprocessors under huge cost pressures. The strongest will survive. The biggest worry is that the recently built, high-investment reprocessing plants will run into financial difficulties," says Colin Starke, who is the operations manager at global packaging manufacturer Signode.

While in Europe, there is strong health and safety legislation for R-PET material, this same legislation does not exist in Asia, exacerbating the problem.

This allows producers in the region to lower their fixed costs and then to offer cheaper material prices, placing further downward price pressure on the already beleaguered market.

the threat from china
A buyer of R-PET bottles says: "China doesn't have the same regulations as in Europe, and it makes it cheaper for Chinese companies to produce material.

"At the moment they are producing to a lower quality and technical level. But in one or two years, their technology will catch up and then they will be a real threat."

Emans adds: "There is still a lot of material, virgin, R-PET and finished products, out of [the Asian Pacific region], which will be sold at cash costs. Processing costs are still lower than in Europe."

To reduce the Asian threat, some are calling for protectionist legislation to be imposed by the European Commission. "There should be some sort of political protection," one bottle buyer says.

Calls for legislative changes are not restricted to countering threats from Asia. Some are calling on governments to introduce a minimum required percentage of recycled material in PET bottles, such as are being strategically implemented by companies such as Coca-Cola.

"To restore and guarantee PET recycling in Europe for the future, government regulation is needed which prescribes processors to use 10-15% recycled material in PET bottles," says Emans.

Countries such as Switzerland and Germany began instituting a recycling framework much earlier than other European countries, and consequently are better equipped to handle the current abysmal trading conditions. There are also quality variations between countries, which has led to calls for the industry's standardization.

"Central Europe [countries] are developed in their collection sites, which are government-led, but Eastern Europe and the UK are not at the same level as other countries," says Peuker.

Without separation, bottles can become contaminated with other plastics, such as polyvinyl chloride (PVC) and this can cause quality problems.

The issue is an ongoing one, and is caused at the initial collection point, where bottles of different types of plastic are often mixed together. The problem is caused by the public's lack of knowledge.

One recycler points out that it would be difficult to imagine most consumers distinguishing between different types of plastic. Despite the current issues, though, most remain confident about the long-term outlook. "From a polyester strapping manufacturer's viewpoint, there is no way back from recycled raw materials. R-PET has become the only cost-viable raw material for the majority of strapping products," says Starke.

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By: Mark Victory
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