INSIGHT: Recycling chain facing deeply challenging times but investment opportunities remain

Mark Victory


LONDON (ICIS)–On Friday 15 May, industry association Plastics Recyclers Europe (PRE) issued a statement urging the EU and member states to include recycling as one of the sectors supported by their recovery plans and to continue implementing measures under its Circular Economy umbrella because of the current pressure on the industry.

PRE warned that the plastics recycling industry is closing production as a result of the crisis, citing low demand on the back of convertor closures, and the low price of virgin plastics along with decreased global activity.

“If the situation is to persist and no actions are taken to remedy the sector, plastics recycling will cease to be profitable, hampering the attainment of the EU recycling targets and putting in jeopardy the transition towards circular plastics. In such a case, recyclable plastic waste will have no alternatives but to be sent to landfill or incineration,” PRE President and Director, Group Recycling at CeDo, Ton Emans said in the press release.

It is certainly true that the recycling industry is facing significant short-term disruption and strain as a result of the COVID-19 pandemic including financial pressure not seen since the global economic downturn in 2008.

Packaging demand in April fell by 20-30% across European recycled polymers because of substitution back to virgin, despite underlying packaging demand remaining strong due to homeworkers using more packaged goods.

Demand for non-packaging applications has ground to a virtual standstill due to widespread closures, particularly from key end-uses such as automotive and outdoor furniture, which have been most severely affected. In recycled polymer markets such as recycled polypropylene (R-PP), for example, where the majority of end-use is for non-packaging applications such as automotive, outdoor furniture, construction and flower pots – almost all European flower pots are now made from R-PP – demand in April fell by around 50% year-on-year.

As demand weakened, recyclers increasingly idled operations or switched to working purely from stock.

Cash reserves at recyclers are typically significantly lower than petrochemical firms, and many rely on short-term debt financing to fund investment. With strong consumer and regulatory pressure leading to a raft of Fast Moving Consumer Goods (FMCG) brand targets for 2025 across recycled polymer markets pre-coronavirus investment levels were high, increasing the debt-burden once coronavirus hit.

As a result, there have been widespread concerns over potential bankruptcies in parts of the chain depending on the approach banks take to debt refinancing.

Weak demand, the threat of bankruptcy in parts of the chain, and an unwillingness to launch new supply chains amid the current disruption have meant that underlying market growth in less well-established mechanical recycling industries such as recycled polyolefins – which had previously been strong – has ground to a halt.

For maturing recycling markets such as recycled polyolefins (R-PO) growth in 2020 had been expected to be strong because of increased use from the cosmetics and household goods packaging sectors.

With long testing cycles of around 18-months and multiple projects that had been delayed, consumption had been expected to increase sharply from the second quarter.

My colleagues Matt Tudball, Helen McGeough and I have written extensively in the past about the shortages of suitable material to meet FMCG targets – particularly for food-grade material.

Delays to investment now make it increasingly likely that there will not be enough material to hit 2025 brand and regulatory targets, resulting in increased competition for material and an increased disconnect between virgin and recycled material pricing.

Strong demand and lack of supply had already resulted in a disconnect between virgin and recycled polymer prices for grades most attractive to the packaging sector. A  two-tier market between packaging applications – where prices are now largely driven by demand and sustainability factors- and non-packaging applications – where prices remain driven by cost-saving against virgin, had arisen.

The charts here show the spread between virgin and recycled polymer grades – with zero on the graph representing price parity, above zero meaning recycling prices are more expensive than virgin and below zero meaning they are cheaper.

The first is the spread between R-PET colourless flakes and food-grade pellets and Virgin PET spot values

The second graph shows the R-HDPE pellet price spreads with virgin HDPE film spot prices

The final graph shows the spread between natural R-PP pellet prices (which are a mix of homopolymer and copolymer) and the various grades of virgin spot prices.

All three graphs show the increase in volatility since the spread of the pandemic in March. This volatility has increased uncertainty in the market, and multiple players have switched from contract to spot pricing as a result – particularly in France where pre-pandemic post-consumer waste prices were typically agreed on a quarterly basis but are now typically being concluded on a spot basis across all recycled polymers.

FMCG brands remain committed to their recycling targets, with no delay so far announced. Some regulations, such as the Italy plastics tax that was due to come in to effect in June, have been pushed back. There has been an absence of new legislation, but no regulation has been abandoned and there has been no sign of any shift in regulatory approach once the coronavirus crisis has been overcome. There has also been no signal of any change in consumer attitudes to recycling, with the pressure to avoid waste remaining high.

Indeed, the economic fallout from COVID-19 may make further legislation more likely in the mid-term since  plastic taxes, deposit return schemes and extended producer responsibility initiatives are simultaneously potentially revenue generating and unlikely to draw negative public reaction at a time when central governments are looking to recoup emergency expenditure. This could make them an attractive option for governments across the globe once the economic recovery is under way.

This begs the question that if FMCGs remain committed to their brand targets, why is substitution back to virgin occurring in the short-term in the packaging sector?

The answer may in part lie in the disconnect between FMCG brands and packaging manufacturers. Many packaging manufacturers are owned by private equity firms creating a heavier focus on short-term profits and a greater emphasis on the spread between virgin and recycled prices, and margins between waste costs and recycled material prices.

In this context, PRE is correct to highlight the pressure from falling virgin values, although as we’ve seen above there was already a disconnect between virgin and recycled values in many polymer markets that pre-dates the crisis.

Virgin polymer prices have fallen sharply in response to COVID-19, particularly following the crash in crude oil values. This has placed significant pressure on non-packaging recycling grades in April and May, and a growing disconnect between virgin and recycled values has also added pressure on packaging grades so that recycled values do not price too high above virgin.

The exception to this is R-PET food-grade pellets, which have been largely disconnected from virgin values since 2011, where supply chains are well established, volume commitments are typically longer term, and where the brunt of current 2025 legislative targets are focussed. R-PET food-grade pellet values are currently almost double virgin PET values.

Nevertheless, even outside of R-PET, substitution back to virgin is not the sole result of low virgin values. It is also being driven by security of supply concerns, ease of use, and limited workforces.

This reduction in demand may well prove to be a short-term consequence of COVID-19 logistics disruption, with consumption returning alongside workforces once lockdown restrictions ease.

Nevertheless, the longer-term consequences of potential supply-chain bankruptcies and lack of investment will be felt for far longer if they result in further availability restrictions in the mid-term.

Because of this, PRE’s call for governments to support the industry is likely necessary to shore up struggling businesses and to prevent longer-term threat to the achievability of sustainability targets.

“It is evident that legislation drives demand, as seen by the SUP Directive and impact on the food grade R-PET market.  The disconnect to virgin prices in this market emerged prior to COVID-19 but has held firm throughout the pandemic when other commitment from other markets has fallen by the wayside.  However, it should not be the case that plastic users and packaging producers should opt for recycled feedstocks simply based on costs, or solely in response to legislation. The climate crisis and plastic pollution remain critical issues for the plastics industry to address and the ambition for a circular economy has not diminished. Therefore, supply chains across all sectors needs to assess priorities in line with this purpose and how short-term decisions will impact long term business prospects” Helen McGeough, Senior Analyst, Plastics Recycling at ICIS said.

Any bankruptcy or lost investment in any recycling chain resulting from COVID-19 is a tragedy for sustainability. Nevertheless, in all crises there is a level of opportunity.

The specific potential opportunities in the present crisis lie with brand owners and petrochemical firms.

The sustainability agenda is unlikely to subside in the mid-to-long term.  Without investment, shortages are likely, and some firms can be expected to miss their targets.

Brand owners and petrochemical firms can no longer ignore sustainability without facing significant consumer backlash, regulatory consequences and potential lost business.

Many of these firms, though, do not have established supply chains in the recycling industry and in some cases lack internal expertise.

The crisis creates the opportunity for smart firms with deeper pockets and higher cash reserves than is typical in the recycling chain to invest and act as a bulwark for the industry.

At the same time, it would in the longer-term ensure these firms achieved their targets and embed them more deeply in supply chains at a time when investment is likely to come at a discount. It would also signal a deep-seated commitment to the sustainability agenda.

Some firms are already doing this, and although investment announcements have slowed, they have not disappeared.

Perhaps the most noteworthy of recent investment announcements is L’Oreal’s €150m social and environmental fund, launched to directly help tackle the impact of the economic fallout from COVID-19.

€50m of the fund will be used to promote the circular economy with the aim of developing new solutions and business models to boost the recycling and management of plastic waste.

While the sustainability agenda may be on hold for some companies because of the current crisis, for those that are able, acting now will ensure they are not caught-short in the future.

ICIS has launched a new Europe recycled polypropylene (R-PP) price report covering post-consumer and post-industrial bales, flakes and pellets. To subscribe to the new report, or for further information, please contact

Click here to see regulatory targets and a list of chemical and mechanical recyclers on the ICIS Circular Economy topic page.


ICIS Premium news service

The subscription platform provides access to our full range of breaking news and analysis

Contact us now to find out more

Speak with ICIS

Now, more than ever, dynamic insights are key to navigating complex, volatile commodity markets. Access to expert insights on the latest industry developments and tracking market changes are vital in making sustainable business decisions.

Want to learn about how we can work together to bring you actionable insight and support your business decisions?

Need Help?

Need Help?