INSIGHT: Shortage fuelled switch from virgin to recycled polyolefins could prove permanent for some grades

LONDON (ICIS)–Severe shortages of virgin polyolefins are driving substitution to recycled polyolefin alternatives. With ongoing regulatory and consumer pressure against single use plastics, for some grades there may not be a swich back.

Europe recycled polyolefin pellet values are once again at their most competitive levels against virgin on record across all grades, as virgin price rises continue to outpace those in the recycled polyolefins chain.

This is despite recycled polypropylene (R-PP) currently being at record high levels, and prices for recycled polyolefin pellets having risen by up to 55% since the start of 2021. ICIS records date back to November 2019 for R-PP, and to May 2019 for recycled polyethylene (R-PE).

The relative competitiveness of recycled polyolefins values is fuelling substitution away from virgin. With sustainability targets mounting and a continued backlash against single-use plastics from regulators and consumers, there has been talk that for some material grades the switch could be permanent.

Demand for recycled polyolefins is growing sharply from the packaging industry, and it is now the predominant end-user of some grade of recycled polyolefins, such as natural material. Packaging companies are increasingly prioritising sustainability commitments over cost-savings against virgin.

Nevertheless, the majority of recycled polyolefins are currently consumed by non-packaging applications, which typically purchase based on cost-saving against virgin.

On average, corresponding grades of virgin spot prices are 282% above recycled low density polyethylene (R-LDPE) mixed-coloured pellets, almost triple black R-LDPE pellets more than double non-packaging natural R-LDPE (R-LDPE) pellets and general purpose black and mixed-coloured recycled HDPE (R-HDPE) pellets, double recycled R-PP black pellets, and just below double R-HDPE pipe-grade black pellets.

R-HDPE blow-moulding natural pellets, meanwhile, are trading below virgin values for the first time since ICIS began tracking prices for that grade of material in May 2020.

Demand for R-PP was already strengthening prior to the recent spike in virgin prices. This was the result of projects that had been delayed in 2020 due to coronavirus starting to come onstream, as well as strong demand from the key construction, outdoor furniture and flower pot end-use sectors. Construction, outdoor furniture, and flower pot demand are strong because while COVID-19 related travel restrictions remain in effect, players are concentrating on home improvements.

There has also been talk that the tightening regulatory environment in the EU on single-use plastics is also fuelling substitution.

In January, an €800/tonne plastics packaging charge came into effect in the EU. This charge is not a tax, but is payable by nation states. The methods used to meet the cost of the charge will be up to individual countries and the EU Council has not proposed any regulatory stipulations around this. Individual countries are free to adopt different approaches and could seek to recoup the cost of meeting the charge from differing parts of the supply chain, leading to potential regulatory divergence.

Consumption from existing R-PP buyers was estimated at up to 20% higher in March year on year. There has also been a flurry of new buyers attempting to source recycled material in order to keep plants running. As a result, several players are sold out for March and buyers are understood to be attempting to secure material for several months ahead amid expected shortages.

Post-industrial PP bale supply remains tight due to the ongoing impact of the coronavirus pandemic. As well as disrupting some collection activities, the pandemic has meant that fewer consumers are replacing their cars. End-of-life automotive is typically the largest single source of post-industrial R-PP bales.

Post-consumer PP and HDPE bales supply is also tight. Although at the height of the pandemic some waste management companies had seen additional volumes entering the stream due to home working, other waste managers are seeing that the waste collection mix has shifted unfavourably against polyolefins.

Indicating just how tight post-consumer bale supply has become, Corepla’s March post-consumer HDPE bale tender was understood to have been awarded at €600/tonne ex-works – a dramatic increase from October when values were at €150/tonne ex works. Corepla is the Italian national consortium for the collection and recycling of plastic packaging and issues a monthly tender for Italian post-consumer waste collected through kerbside recycling programmes. Italy is the dominant bale supplier in southern Europe.

Bale values in northwest Europe are considerably lower, at €200-300/tonne ex-works, resulting in additional cost burden for southern European producers.. As a result, pellet prices in southern Europe are typically being offered at a higher level than in NWE.

R-LDPE natural post-consumer bale demand continues to outpace supply and continues to strengthen amid the spike in virgin values. Natural bales are predominantly sourced from France where eco-modulation subsidies – worth up to  to €400/tonne depending on position in the chain, according to sources – counterbalance the cost of separating and sorting.

This has created a stream of material suitable for primary packaging applications that did not previously exist. Demand from packaging firms remains substantial because of sustainability targets that go significantly beyond current market availability.

Views are divided on the extent of substitution once virgin availability increases, with some R-PP players expecting demand to fall and other players expecting players that have increased recycled content not to substitute back to virgin.

Consumption for R-HDPE is seen as more fragile, and although it had been rising prior to virgin availability issues is had not risen to the same extent as R-PP, and fundamentals remain volatile.

R-HDPE pellet demand is currently being predominantly driven by substitution from virgin. As a result several R-HDPE players have spoken of a potential price and demand bubble once virgin availability improves.

Conversely, R-LDPE mixed coloured and black pellet demand, as well as post-consumer mixed-coloured LDPE bale consumption, remains low because of COVID-19 related retail closures reducing demand from the key bin bag sector, and low price bin bags from China entering Europe. R-LDPE pellets have not seen the same level of substitution as R-HDPE and R-PP as a result.

Growing underlying demand for recycled material has seen virgin polyolefin and recycled polyolefin values largely decouple. There remains an insufficient volume of recycled polyolefins to meet brand targets.

Additional demand for recycled polyolefins is likely to embed this decoupling further. Five years ago players could look to virgin prices for an indicator of where recycled polyolefin values were likely to be. The volatility in the recycling/virgin price spreads since 2019 show that this is no longer possible.

Insight by Mark Victory