INSIGHT: Global recycling markets can rally despite pandemic-related challenges – Part I, Europe

Author: Mark Victory

2020/07/15

LONDON (ICIS)--2020 was supposed to be the year of growth in the recycling markets, with the likes of recycled high density polyethylene (R-HDPE), recycled polypropylene (R-PP) and recycled polyethylene terephthalate (R-PET) expecting a sharp increase in demand from the packaging and preform sectors. But no one could have predicted the dramatic and sustained impact the coronavirus pandemic, the subsequent crash in crude oil prices, and demand drop-off would have on the world’s recycled markets.

The aftereffects of coronavirus lockdowns have resulted in substitution back to virgin, weak demand, delayed investments, a lack of underlying growth, and financial strain across the recycling industry.

The economic impact of the coronavirus is likely to remain the dominant driver of the recycling market in the second half of 2020, and markets are expected to remain opaque and volatile.

In the longer-term, the pandemic is expected to deepen the pre-existing fault lines in the market – in particular, structural shortages of high-grade material suitable for the packaging industry, and regulatory pressure on the market.

Players across recycled polymers have shifted back to virgin since the coronavirus became widespread at the start of the second quarter. Low virgin polymer prices have been a major driver of this, particularly for non-packaging applications.

Subsequently, Q2 packaging demand was 20-30% lower year on year, despite wider strong underlying demand for the sector.

For non-packaging demand, lockdown restrictions severely limited consumption for key end-use recycling markets such as construction, automotive and fibres. Demand from these industries had already been weakening prior to the coronavirus pandemic because of negative macroeconomic conditions.

Although the easing of lockdown restrictions in much of Europe has seen some consumption return to the recycling sectors, it remains at a low level, and sectors such as automotive are not expected to see a significant rebound in demand for the remainder of the year.

Despite weak demand and falls in prices since the second quarter, higher grades of recycled material suitable for use in packaging remain above virgin values in Europe.

As of 9 July, R-PET food-grade pellet (FGP) continues to see the highest differential with virgin, at 83-93% above virgin PET bottle grade values.

R-HDPE blow moulding natural pellets were at 50-65% above virgin HDPE values, colourless flake R-PET Europe prices were 15-25% above virgin values, and R-HDPE natural injection moulding pellets were 1-4% above virgin HDPE values.

Although the consumer and regulatory push for recycled content has been muted by the coronavirus, and although some FMCGs have limited recycled content in the short-term because of more immediate concerns, packaging brands appear committed to achieving the 2025 targets set out by the EU.

In Europe, structural shortages of European Food Safety Authority (EFSA) approved food-grade material and material suitable for cosmetics and pharmaceutical primary packaging applications have continued to support margins for R-PET FGP, and both grades of R-HDPE natural pellets.

For other grades of European recycled polymers, though, margins will remain heavily impacted by low virgin prices and non-packaging demand weakness for the rest of the year.

Months of limited consumption has led to maxed-out storage space at several waste management firms across Europe. This has resulted in destocking at distressed prices to free up storage space as summer holidays approach.

In the UK, the need to destock coupled with falls in Packaging Recovery Note (PRN) and Packaging Export Recovery Note (PERN) values and weak demand, resulted in post-consumer bale (PCB) price falls of 59-67% in July.

PRN and PERN values - which are typically priced into the cost of bales - have fallen by 69% across the second quarter.

Despite distressed selling, weak demand and sharp falls in virgin values across the first half of 2020 have meant that waste costs remain too high to effectively compete with virgin without selling at a loss.

There has been talk of recyclers being forced to close down since April and, thankfully, to date, that has not been the case, but many recyclers are reducing output and extending maintenance and holiday shutdowns to avoid selling at a loss. This is not expected to change much during the traditional seasonal summer slowdown and could well remain in place into the third and fourth quarters.

The precarious financial position of some recyclers is leaving opportunity for mergers and acquisitions to develop and it is expected there will be announcements before the end of the year of larger players acquiring plants to grow business.  Unfortunately, not all companies will have this option.

As long as virgin polymer prices stay low, R-PET flake producers and recycled polyolefin producers outside of natural R-HDPE grades will be looking to the PCB suppliers to lower prices to allow them to recover some margin.

However, decreases in PCB prices in recent months across all three widely traded grades of recycled polymer were not significant enough to help with margins.

Margins of R-PET flake producers and recycled polyolefin producers outside of natural R-HDPE grades are often squeezed and for prolonged periods when there is a decline in virgin resin pricing.  Clearly this restricts the viability of the business overall but also restricts the ability to invest, expand, build new or update existing lines and technology to increase both volume and quality of supply.

For Europe R-PET colourless flake prices, ICIS analysis shows, with €100/tonne lower bale costs the margin would be substantially improved. This is the minimum amount the recycling sector is looking for, but not expecting to achieve.

Given the fragility of the European recycling sector, on a financial basis, due to inflated bale prices, it lends to further support for improved bale supply (both volume and quality) so a greater supply of recycled polymers is made available to end markets.

Whether or not PET bale suppliers will drop prices further remains to be seen, especially if coronavirus leads to a substantial drop in consumption of PET beverage bottles over the summer. This will mean less PET bottles enter the recycling stream and may give PCB suppliers a reason to limit any future reductions if supply becomes constrained. Of course, if PET bottle demand is down, it is likely R-PET demand will be lower too.

Insight by Mark Victory, Matt Tudball and Helen McGeough