Circular economy will mean complete shift in feedstocks for petchems – PwC

BARCELONA (ICIS)–Although 2050 seems a long way off, in terms of the chemical industry’s investment cycle – where large capital investment produces assets that endure for decades – it should be on the horizon.

By then, according to the EU’s 2050 vision, the region will have an “innovative, circular economy where nothing is wasted and where natural resources are managed sustainably.”

This long-term objective is driving current and future legislation including the objective, unveiled in January, of making all plastic packaging recyclable by 2030.

However, the implications of developing a truly circular economy go way beyond this to challenge the fundamentals underlying the petrochemical industry, namely its use of fossil fuel-derived feedstocks, according to consultants at PwC.

One of the concept’s fundamental principles is to move from a “linear” economy relying on consumption of finite resources to one based on renewable resources.

For an industry that currently relies in 90% of cases on oil or gas-derived feedstocks there will be huge challenges ahead if customers, regulators and shareholders push this agenda hard.

A circular economy runs on renewable energy, biomass and smart usage of finite resources, but at present most of the chemicals industry is taking only modest steps in this direction, rather than re-examining core growth strategies with this in mind.

According to Jan-Willem van den Beukel (pictured), PwC’s global circular economy lead for sustainability, the circular economy is an unstoppable force that will force the chemical sector to retool its production assets.

“This will require huge investments in different processes. It is a dot on the horizon – replacing fossil fuels – but in the long run it is inevitable for this to occur. Considering the investment cycle for chemicals it’s already casting a shadow,” said Van den Beukel.

The consultant is optimistic the industry can achieve this transformation because there are many forces driving it from linear to circular.

The first force would not be regulation, he said, but changing consumer behaviour, both in business to business (B2B) and business to consumer (B2C), and highlighted the example of major goods producer Unilever, which in 2017 introduced a target of 100% recyclable plastic packaging by 2025.

The company did this not because of regulation but because it was the right thing to do and is expected by customers.

At the 2018 World Economic Forum (WEF) taking place this week in Davos, Switzerland, 11 global companies pledged to work towards 100% recyclable or compostable packaging by 2025.

SHIFT TO BIO-BASED
“There may be a small place for finite resources but as a principle the circular economy mimics the natural system. This implies you rely on regenerative resources and fossil fuels are not regenerative,” said Van den Beukel.

Companies must prepare for the shift to bio-based feedstocks and it would be impossible for them to ignore the EU’s Emissions Trading System (ETS), which has a ceiling on carbon dioxide (CO2) emissions that may gradually increase energy costs.

“As carbon prices increase, it will become less attractive to use fossil-based feedstocks. Stakeholder pressure, investor pressure and regulatory pressure means that sooner or later it’s the route you have to take,” said Van den Beukel.

“You can fight it for five to 10 years, but that could be a waste of time you could have been spending on finding ways to make this shift.”

The consultant added that it is a fact that the circular economy is coming as we move away from the linear version which went back to the first industrial revolution.

“You have to decide if you want to have a strategy which prepares for that,” he said, adding that in 2050 the chemical industry will inevitably be mainly based on bio-based feedstocks.

However, that is only 32 years away – relatively soon in terms of chemical industry investment cycles.

Another driver is technology as developments in biochemistry and biotechnology make renewable-based chemical production more viable.

The bio-chemicals and polymers market is tiny and underfunded compared with the mainstream, although they are advancing quickly.

INDUSTRY RESPONSE MUTED
Trade group PlasticsEurope has implemented a plastics recycling target but not one on use of alternative feedstocks, though it aims to conduct a study on this by 2019.

In its 2017 Sustainability Report, EU chemicals trade association Cefic acknowledged the growth of alternative feedstocks and circular economy, citing the need for “large-scale investment” in research and development (R&D) and “conversion of assets”.

Van den Beukel welcomes the positive response of PlasticsEurope to the circular economy concept.

“That’s good news – the move to a circular economy is inevitable so industry is right to embrace this. It’s also a huge opportunity as there is no need to continue producing the same way we have been for the last 20 years.”

The consultant insisted the technology is now available for the traditional chemical companies plus new entrants such as biochemical producers, recycling companies and new providers of biomass feedstock.

WINNERS AND LOSERS
Chemical companies that can react quickly, adjust business strategies and cooperate with partners up and down supply chains will emerge as the winners.

Creating a level playing field is also important, and governments can help by making sure all producers face the same challenges.

On the global scale, regulators in China and many other countries – with the exception of the US – are moving in the same direction as the EU.

“The energy transition is already happening. If you understand and react to the trends fast enough you can cope. I’m optimistic that a flat global playing field will allow the chemical industry to adapt without harming its competitiveness,” says Van den Beukel.

All the big chemical companies are investigating the circular economy and many are making supply chain or technology acquisitions.

The leading players are all aware of the shift to bio-based and are taking this seriously, but there there is a need to speed up, however.

Belgium-headquartered producer Solvay, for example, is a global partner of the Ellen MacArthur Foundation that publishes influential reports on the circular economy, including one on plastics in December 2017.

There is currently a lot of confusion about the difference between bio-based, biodegradable and recyclable packaging.

What determines recyclability is not the feedstock but the packaging design, so chemical companies will need to work with packaging groups to develop products which are more recyclable.

Crisp packets are a good example. They are currently a plastic-coated, aluminium-mix and have to be thrown into residual waste.

The first movers to produce a high quality crisp bag which is recyclable will be a winner, says Van den Beukel.

PARTNERSHIPS ARE KEY
According to Tom Beagant, director at PWC’s climate change and sustainability team, vertical integration along value chains is an option but more important are partnerships.

“Many of these global challenges can’t be solved by one actor in a value chain alone. Chemical companies need to start investing in R&D now and develop partnerships.”

He added that the EU’s circular economy strategy is already sending signals to industry, and fast-moving consumer goods producers will be looking to drive that change too.

Even without regulation, this change is coming.