INSIGHT: Different views on pricing, supply and demand split Europe R-PET market

Author: Matt Tudball

2020/05/08

LONDON (ICIS)--The European recycled polyethylene terephthalate (R-PET) market is facing a tough time due to the double threat of plunging oil and virgin PET prices and impacts on demand and availability because of the coronavirus pandemic.

As a result, views among R-PET market participants on prices and supply and demand are diverging, putting buyers and sellers firmly in one of two camps.

On the one side are the players who see the current situation around coronavirus creating stronger demand for R-PET, driven by increased consumption of food packaging, water bottles and hygiene products packed in PET, most of which also have some level of R-PET content.

On the other side, there are the players who are getting pummelled by the on-going drops in the virgin PET prices.

Describing the eastern European market, one source said “flake producers see their margins melting like snow in the sun” as post-consumer bottle (PCB) prices stay high.

However, flake buyers are increasingly asking for reductions to make R-PET competitive with PET or, worse, stop buying R-PET altogether.

So what does this two-tier market mean for prices, supply and demand?

THE IMPACT OF VIRGIN
It is probably easier to start with the impact of virgin PET, as this has some very real and immediate consequences for the R-PET market.

As of 1 May, the spread between virgin PET bottle grade and free delivered (FD) northwest Europe (NWE) colourless flakes was around €230/tonne, compared to May 2019, when flake prices were €8/tonne below virgin.


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The crash in crude oil prices has pulled PET down with it, while unchanged PCB prices and limited supply have kept R-PET flake prices in a much more limited range.

The issue now is that these low virgin prices are causing a lot of converters to substitute R-PET for virgin, which is of better quality and, according to some, easier to source.

This is not happening across the board, but where converters have the technical capacity to reintroduce virgin into their lines, or where their customers are not strictly specifying the amount of recycled content in preforms and the like, recycled content levels have dropped from around 70-80% down to as low as 20% in some cases, market participants have confirmed in recent weeks.

Flake producers are under increasing pressure to lower their prices because of cheap virgin, and are now facing the tough decisions of either selling at a loss, or not selling at all.

“Some sources told me that they prefer not to sell than to decrease prices [further], and we closed at zero volume [with those sellers] for May. This is a clear sign that they are selling with losses,” a flake buyer said this week.

“There's going to be closures, maybe mothballing,” a seller of flakes said.

Some businesses were already cutting working hours and furloughing workers, sources said.

And these flake sellers who are now under immense pressure to compete with virgin are putting pressure on the PCB sellers to lower their prices in order to help support the flake producers’ margins and give them a fighting chance of still being in business when the pandemic starts easing its grip on Europe.

“We have never experienced such a period like this since 2008,” a PCB seller said in reference to the sudden and significant change in buying demand seen in the last couple of weeks.

“Until February or March, or a little into April, we had the impression coronavirus would not affect us, but in the last 14 days it's affecting us big time,” the PCB seller said.

Across the market there were players quoting price drops in all three R-PET sectors as a result of the pressure from virgin, describing a drop in demand from flake buyers who were shutting up shop to ride out the storm as long as they can.

However, while some were feeling a very negative impact due to the drop in virgin prices, there were others who were seeing more support for their markets either as a direct or indirect result of coronavirus.

PANDEMIC AND SUSTAINABILITY TARGETS
This second group of players quoted prices in a more stable range, especially on the PCB side.

“I would say PET is in better shape than other polyolefins, the food grade is really protecting [us]. If we do a comparison with the [2008] crisis, prices of the bales completely dropped then," a PCB supplier said.

"At the moment, the bales are stable only because of the food grade demand; otherwise it would drop completely, at least for the clear PET [PCB],” it added.

Demand for packaged goods was relatively strong in March due to the pantry stocking as a result of looming coronavirus lockdowns, as well as the typical increase in sales ahead of the warmer months.

The high level of requirements for PET resin, however, was an anomaly against many other polymers.

“You're going to prioritise food. Those who package food are so much better off than those packaging toys or razor blades,” a trader of R-PET said.

Another aspect was supporting arguments for stability in the R-PET market during the pandemic was a lack of availability on the PCB side.

Already in March, there were issues at collection and sorting facilities in Europe that had the potential to limit PCB demand, but by all accounts these issues are now mostly resolved.

However, there were those in the PCB market this week who said availability is still limited.

“[There is] no pressure on bales [pricing], this is not a right fact! In Germany, recyclers search for material,” one source in the German market said.

Underscoring the availability issues was the fact that sustainability targets are still playing a relatively important part in the purchasing strategy of some buyers, but not all.

As a result, food-grade pellet (FGP) demand remains relatively healthy, as brands in particular need to make sure they support their pellet suppliers to ensure they have sufficient supply down the road when attention turns back to the EU’s target of 25% recycled content in PET beverage bottles by 2025.

“[Brands] recognise the distance from virgin is too big but [it is] not a reason to stop [buying FGP], because they have the fear to lose their sources,” a recycler said, adding that some brands are instructing buyers to “pay the price, but please just deliver.”

These brand commitments are also helping support those flake buyers who are installing pelletisation technology, an increasing trend in Europe.

These flake buyers are able to purchase flake at a higher level because they can convert it to pellets and sell direct into the FGP market, where prices still almost double that of virgin PET.

As a result of all these different market dynamics, prices for PCB and colourless flake, as well as FGP, fell at the beginning of May, with the colourless flake price dropping at both ends, in an FD (free delivered) northwest Europe (NWE) basis.

Meanwhile, colourless PCB and FGP price ranges widened, representing the mixed views between stability and downwards pressure.

“Combined, all these challenges suggest a rocky road for the recycling sector without greater commitment from some sectors of industry," said Helen McGeough, ICIS Senior Analyst, Plastic Recycling.

"This is, of course, very short sighted of end users, who will want to return to recycled feedstocks to fulfil pledges and meet customer expectations regarding sustainability.

"In a market already with supply constraints, any lost capacity would tighten the supply further and increase competition for that supply,” she concluded.

MORE UNCERTAINTY
It is fair to say the R-PET market is in a very strange and difficult place right now, with many factors pulling in different directions.

So much has changed since the end of March and throughout April that players have no real clue what May will bring, and are watching developments on a weekly basis.

Even in the upstream PET market there appears to be no real sign of recovery, with beverage bottles – the feedstock for the R-PET market – facing tough times in the coming months.

Beverage sales were significantly down in April and expected to be so for May as a result of the complete halt in tourism and the social restrictions set across Europe, both limiting the out-of-home sales.

European beverages major Nestle posted a decline in sales of 6.2% already in the first quarter, year on year, while US major Coca-Cola posted a 1% decrease, forecasting a worse second quarter.

Coca-Cola's sales volumes in April stood around 25% lower than in the same month of 2019, while Europe's Danone’s sales at its division for PET-intensive bottled water posted a fall of 6.8%, year on year.

Considering lockdowns may still remain in place for most of May and potentially June, we can expect a worse outcome for beverages in Q2 and practically-muted demand for PET in the summer.

However, sustainability may be the saving grace of the R-PET market, as there appears to be no plan to change the 2025 targets, and some brands are still mandating recycled content in their product.

With so many different views from market players, and with regulatory targets to meet still in place, it will be fascinating to see what the R-PET landscape looks like in Europe once it starts getting back to normality post-pandemic.

Insight by Matt Tudball

Additional reporting by Caroline Murray