OUTLOOK ’20: Europe PET to be tested by sustainability amid economic turmoil and oversupply

LONDON (ICIS)–Choosing what is most likely to test the virgin polyethylene terephthalate (PET) industry in Europe may lead to a resounding “War on Plastic!”, but the challenges are many and overcoming them will not be easy.

DEMAND
If we start with sustainability and the global quest to achieve a circular economy, the writing is already on the wall. At least if PET’s poor image when bundled together with other plastics is anything to go by.

The misinformation surrounding the recyclability of PET, and in many countries – poor collection rates – are tough areas to combat.

Alternative materials to plastics are often heavier, and the potential consequences of replacing PET with say glass, could be environmentally disastrous.

Trade groups are opposed to the Italian government’s proposed €1,000/tonne tax on plastic packaging. Italy is the EU’s second biggest producer of plastics products after Germany. The lobbyists and sources in the PET market claim that such a tax would have a hugely negative impact on the country’s economy.

Amid the green backlash, customers and producers alike are exploring ways of operating in a more environmentally friendly way.

Where European producers are concerned, mechanical recycling has been a focus. They may even benefit from customers choosing to buy virgin PET locally in order to reduce their carbon footprint.

While it is all well and good to talk about mechanical and even chemical recycling in order to tackle the sustainability issue, they are investments that cannot be achieved unless margins improve.

“We have reached the end of the cycle with the polyester chain at zero margins from oil to MEG (monoethylene glycol) and PET. Margins are below variable costs and it is not sustainable,” a source said.

Something has to give.

In 2020, the expected growth in demand in Europe is 2%, according to ICIS.

In theory, however, demand for virgin PET will drop in the next five years, as it becomes law for PET bottles to contain 25% recycled material by 2025, and 30% in all plastic bottles by 2030.

Moving towards 2025, we expect to see the vast majority of soft drink producers meeting or exceeding the 25% recycled PET (R-PET) target, which will take that demand away from virgin and effect the growth rate.

While some brand owners have said they would go beyond these targets, the R-PET supply for this to happen is not in place.

The lack of R-PET availability was a sticking point in 2019, and those not so exposed to public scrutiny, perhaps, managed to switch back to virgin PET in order to save on costs.

The following graph shows the recent substitution trends of PET and R-PET in Europe.

The reduction in demand for domestic virgin PET in 2019 became a concern along the chain, and caused sellers to reduce output. European producers battled against poor weather in the peak summer season and the arrival of a vast amount of imports. Some estimate that imports will total 1m tonnes over the course of 2019.

In the second half of the year, suppliers fought back by closing the price gap between European and Asian offers, and recaptured market share.

The 2019 arbitrage window for China versus South Korea PET to Europe can be seen in the graph below.

The seemingly relentless descent of domestic prices resulted in customers buying bits here and there – just because values seemed so attractive – which in turn resulted in a continuation of relatively high stocks down the value chain.

Prices also helped to activate a series of hedging, prebuying and fixed price deals that took place at the end of quarter three and the beginning of quarter four. This may see domestic supply more heavily relied upon going into 2020 than it was during the same period in 2019.

How this pans out through the course of 2020 is unclear, but the pressure will be on given PET capacity increases coming on stream and further up the chain in Asia.

AVAILABILITY
In 2017 and 2018, a series of PET-related financial disasters and production mishaps across the globe created times of shortage that affected how customers reacted going into 2019. This resulted in the influx of PET imports early in the year.

As it turned out, few buyers benefitted due to the subsequent price decreases that occurred.

Nevertheless, this gave customers more than the buffer they needed and created a wave of feedstock purified terephthalic acid (PTA) leaving Europe for other destinations.

The age of some PTA and PET plants and the finances required to keep operations running smoothly could present a threat to output going forward.  Indeed, in 2019, producers demonstrated their willingness to cut production when prices were consistently unattractive to them.

Despite the negativity of 2019, Alpek agreed to acquire Lotte Chemical UK’s, PET plant. How this will unfold is not clear, but there are plenty of theories being bandied about the market.

Some industry participants do not see this as a standalone purchase, rather the beginnings of a wider hold on production in Europe.  Business is not exactly booming, so perhaps other opportunities could arise, they say.

“Business has turned sour again though. Almost all producers in Europe are a question mark. In such an oversupplied market, having so many plants is the worst nightmare,” a second source said.

Today’s economic situation in Europe does not necessarily promote an era of high investments, though.

Predictions are made all the more difficult in current macroeconomic and geopolitical circumstances. A conversation without the mention of Brexit or the US-China trade war is rare these days, because nobody really has an answer to the dilemmas the industry faces.

A resolution to these issues would offer an opportunity to garner a clearer perspective on what crude is likely to do, and the impact it may have on raw materials and in turn on PET, or how demand in general is likely to react. Anything is better than the unpredictability on display for much of 2019.

Meanwhile, OPEC+ has agreed to continue with its existing cuts agreement but take further measures to ensure compliance from the countries that are not sticking to the rules (Iraq and Nigeria).

On the demand side, rhetoric from the US and Chinese trade delegations has been positive over recent weeks, with a ‘phase 1’ agreement expected by the end of the year.

This will be positive for the global economy and will therefore support crude demand. The IMO 2020 regulations coming into force on 1 January will continue to drive demand for lighter, sweeter crude through Q1 2020.

The new International Maritime Organisation (IMO) rules on low sulphur fuels comes into force in January 2020, and will continue to drive demand for lighter, sweeter crude through Q1 2020. It will also create another feature to negotiations concerning PET, a product that for a couple of months in 2019, saw imports surpassing the 100,000 tonne/month mark.

In the longer Europe market, freight price increases of 6-8% are being discussed, while on busier deep-sea routes such as the Europe-US or Europe-Asia trajectories, shipping companies are hoping to boost contracts by as much as 15-20%.

Quarter four is when annual PTA and PET contract negotiations are at their most intense – no more so than for 2020. What spot-contract ratio will be decided, where the fee in the raw material-plus formula will land and how much will be based on monthly freely negotiated prices are the focus of discussions.

Their outcome will help determine what path PET takes in 2020.

Forecasts are made with extreme caution nowadays. The industry not only appears to be morphing, but the world itself has changed and the changes are of such a magnitude that nobody really feels safe with their predictions.

The twists and turns the PET market takes are legendary, and with the challenges already in place and more lying in wait, nobody is expecting an easy ride.

So 2020, bring it on.

PET resins can be broadly classified into bottle, fibre or film grade, named according to the downstream applications. Bottle grade resin is the most commonly traded form of PET resin and it is used in bottle and container packaging through blow moulding and thermoforming.

Fibre grade resin goes into making polyester fibre, while film grade resin is used in electrical and flexible packaging applications. PET can be compounded with glass fibre for the production of engineering plastics.

Additional reporting by Susan Mair and Ajay Parmar

Thumbnail picture credit:  Karol Serewis/SOPA Images/Shutterstock