INSIGHT: Europe R-PET stays buoyant amid rising green interest

28 June 2010 15:37  [Source: ICIS news]

By Mark Victory

LONDON (ICIS news)--Whether something second hand is just old junk or a useful, albeit used, commodity is all a matter of perception.

For many years recycled polyethylene terephthalate (R-PET) was the unloved younger sibling of its upstream virgin polyethylene terephthalate (PET) rival, viewed as technically inferior, niche, and purchased purely on cost-point.

But in a climate change-obsessed world, the R-PET market is changing. As more companies invest in corporate social responsibility, demand is increasing, supply tightening and prices soaring.

The evidence for increased interest in sustainability is everywhere, from the introduction of ‘smart metering’ by electricity companies, to the third phase of the EU’s Emissions Trading Scheme (EU ETS), which consultancy firm Ecofys recently said could increase chemical production costs by 5-10%.

In the R-PET market, this can be seen in the investment in reprocessing units, which sources estimate has led to a 10-20% increase in the number of washing facilities in Europe. This has been fuelled by buying interest.

“People who buy food-grade [R-PET] material want green long as people have to push their green credentials and there’s tight supply, it will continue,” a flake and pellet buyer said.

Across all grades of European R-PET, prices are at record high levels. For the first time, there are reports from the market that food-grade R-PET pellets are trading above virgin PET prices.

“Prices are really at levels never seen before, even flakes are now more or less the price of virgin,” an R-PET flake buyer for pellet manufacture said.

Spot virgin PET is being offered for as low as €1,120/tonne ($1,383/tonne) FD (free delivered) Europe, according to sources in that market.

R-PET food grade pellets were being offered as high as €1,180/tonne FD NWE (northwest Europe) last week, buyers and sellers said, with some sources now seeing prices as high as €1,200/tonne.

In the past, this would not have been possible as buyers were purchasing food-grade pellets purely on price-point rather than environmental goals.

Nevertheless, the increasing importance of sustainability targets amongst corporate consumers means that demand is no longer led by the price of virgin PET, but by environmental concerns.

In essence, R-PET is becoming an independent market. Because of this, many R-PET players are predicting that prices will stay at their current levels for the foreseeable future.

“You can reduce the percentage [of R-PET] in a project if you don’t like the cost, but are you going to remove it completely? I doubt it, not when they’re promising their customers that they’re using recycled material,” said a major producer.

Nevertheless, there remain buyers within the market that are cost driven. As such, some R-PET food-grade pellet producers have confirmed that they will continue to sell material at a minimum of 5% below virgin prices.

“In R-PET you have higher wastage [compared to virgin PET], due to pollution and contamination. But prices are higher than virgin, this doesn’t make sense. In my opinion the high prices cannot last. But we said that in May, and in June prices are still going up,” said an R-PET pellet buyer.

Keeping prices below virgin, though, is becoming increasingly harder if producers want to avoid selling at a loss. This is because prices in the upstream R-PET colourless flake market are unlikely to decrease in the near future because of tightness in the market, squeezing the margins of food-grade pellet producers, which use this as a feedstock.

“It’s [high R-PET prices] all to do with demand, and demand comes from corporations wanting to prove their green credentials,” said a flake and pellet buyer.

A major food-grade R-PET producer said that the average extrusion cost between colourless flakes and food-grade material was €150-200/tonne. With colourless flakes trading last week at a minimum of €900/tonne FD NWE, this would mean that the cost of food-grade production is at least €1,050-1,100/tonne.

“We have squeezed our margins. The margins of sellers [upstream in the R-PET chain] are 25%. We are down to 10%. We’ve squeezed our margins, they have to squeeze their margins, too,” said an R-PET food-grade pellet producer.

As a result of tight margins, some sources said they expect food-grade pellet producers to increase colourless-flake production at the expense of food-grade pellets, because flakes were currently more profitable and demand was strong from the sheeting, automotive and strapping industries.

The supply chain - starting with R-PET bottles, down through the R-PET flake market, and finally food-grade pellets - is starved of material. Availability has been low since the end of the fourth quarter 2009, because of low collection rates at post-consumer recycling facilities.

This has been attributed to several factors, including: the colder-than-expected winter, which led to fewer purchases of beverages in plastic bottles, the major source of post-consumer collection material; the economic downturn in 2009 and environmental concerns, which led to lower consumption of water bottles; and a light-weighting of PET content of around 25% in virgin bottles during 2009, which meant that more needed to be collected per kilogramme of R-PET produced.

R-PET supply is expected by some to remain an issue in the market throughout 2010, and demand will not go away, meaning upward price pressure will continue.

Whether R-PET food-grade prices can remain above virgin PET in the long-term is as yet untested in the market, but the green initiatives being discussed in headquarters up and down the country certainly suggest it’s possible.

This leaves R-PET food-grade pellet producers with another dilemma - do they sacrifice buyers purchasing on cost-point in favour of those purchasing for ecological reasons, or do they honour long-standing relationships, reduce prices and operate at a loss until prices further up the chain fall and margin pressure is relieved?

($1 = €0.81)

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By: Mark Victory
+44 208 652 3214

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