ESG Focus | Mar 25 2020
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Plastic recycling is preparing for a golden decade as the fourth industrial revolution, the shift to a circular economy, climate change and global regulation conspire to drastically increase demand.
ESG focus: Plastic Recycling – Lay Of The Land, Part 1
With the exception of this two-part Introduction, this four-part series of articles focuses mainly on fossil-fuel-based plastic recycling over bioplastics because the bulk of activity will occur in the petroleum-based polymer market in the near term given it is the best prepared and offers the most immediate solution to a pressing problem. Bioplastics will be examined in a separate article.
-Plastic recycling at the forefront of shift to circular economy
-Petrochemical polymers have the jump on bioplastics as big oil muscles in
-Government subsidies and regulations will guide the market
By Sarah Mills
Introduction
Plastic recycling represents the jump-off point for the world’s shift to a sustainable fourth industrial revolution – the circular economy.
It is being given priority as a matter of global urgency, given the impact of single-use plastic on ocean food chains and human health.
Authorities, not-for-profits, scientists, businesses and investors are diverting funds to the endeavour, heralding huge disruption for the recycling, waste management and plastic industries: and presenting huge opportunities and risks for investors.
As The Guardian points out, humanity’s impact on the Earth in the past century has been so overwhelming, and plastic and other pollutants so prevalent and permanent, that geologists recommend a new geological epoch be declared – the Anthropocene.
The plastic industry appears unstoppable
Estimates on the size of the global plastic market, the raw material for recycling, vary widely from as low as US$0.4trn to as high as US$1.5trn, and the industry contributes 3% to the world’s economy.
The World Bank estimated the global economy would tip US$89trn in 2019, which puts plastic’s contribution (it affects many industries) at roughly $2.7trn. High stakes.
The market is expected to grow 40% by 2030, according to The Guardian, and at a compound average growth rate of 3.5% out to 2026, according to Grand View Research.
In 2018, roughly one third of all plastics produced were used in single-use packaging, a planetary scourge.
The world’s governments are implementing bans on single-use packaging but are proceeding with caution given plastic is built into nearly every business in the world. Existing business models and disruptive technology need to adapt to integrate with the complex value and supply chains, from producers to businesses, to retailers, consumers and recyclers.
The besieged petrochemical, plastic packaging and consumer goods industries are presenting recycling as the solution, and governments appear to be favouring this tack.
The World Bank expects the quantity of plastic waste and costs related to its treatment are likely to double by 2025 – many would say this is a conservative estimate.
Recycling is estimated at between 9% and 12% of the world’s plastic production – roughly US$40bn taken on the conservative lower-end estimate of plastic production above.
According to Principles of Responsible Investment, the goal is to move that to 100% within 10 to 15 years – a $120bn opportunity according to the Ellen MacArthur Foundation – and growing, given a sharp acceleration in plastic production in recent years.
According to ResearchAndMarkets.com, the global recycled plastics market is expected to reach US$66.73bn by 2025, and post a compound average growth rate of 7.8% out to 2025.
Petrochemical and plastic packaging industries close ranks
The Plastic Waste Alliance, the international body representing the plastics and packaging companies and associated industries, have lobbied governments heavily to opt for recycling and a circular economy over taxes and plastic bans; and have committed US$1bn to reduce plastic production and improve recycling.
However, most have tens of billions of dollars riding on existing business models. As with all disruption, each step towards recycling represents a hit to the industry’s existing profit base, discouraging incumbents from innovating swiftly enough to meet the challenge laid down by governments.
Already, incumbents are pushing for an extended timeline to build the infrastructure for a circular model.
The petrochemical and fossil fuel industry meanwhile has embarked on an aggressive strategy to ensure the future of plastic, investing nearly US$200bn since 2010 into fracking-based plastics production.
Plastic appears to be a strategic choice for big oil as the climate-change battle intensifies. Shell’s $6bn ethylene-fracking plastic plant near Pittsburgh is just one of dozens planned for the US, India, China and the Middle East.
Plastic now uses nearly 14% of the world’s oil and gas. By 2050, estimates suggest plastic production could be driving half of all oil demand growth, according to The Guardian.
By flooding the world with plastic, the petrochemical industry also increases the pressure on the governments to favour recycling over regulation. While this strategy could backfire, it is unlikely.
A recent McKinsey report suggested plastic recycling could generate profit-pool growth of as much as US$60bn for the petrochemical and plastics sector.
A circular economy and the fourth industrial revolution (4IR)
The world is shifting to a circular economy and there is a concerted drive from authorities to ensure 4IR is built upon a sustainable model. This is what the world’s petrochemical industries are banking on.
Zero waste, recycling, smart design, product interchangeability, multi-tasking of equipment, and additive manufacturing will form the foundations of this model.
According to Reiter, the shift to a sustainable circular economy will generate US$2trn in revenue alone and US$4.5trn in productivity gains.
Plastic and recycled plastic are expected to play a critical role in 4IR, as a component of new technologies. The demand for plastic in electronic vehicles alone will be huge, given lighter cars mean lower emissions.
Ironically, climate-change mitigation favours plastic; and as climate change appears to trump plastic pollution as an ESG investment and global governmental priority, plastic recycling’s future is assured.
Heavyweights dominate but contenders are rallying
There will be a two-pronged battle.
In one corner are the petroleum-based plastic recyclers and packaging companies, supported by the powerful consumer goods companies (for now), petrochemical and fossil-fuel industries.
They are the incumbents and hold downstream markets, and are already dominating the collections arena. They are aiming for the ESG best-in-class investment dollar and will be the main recipients of this in the near term.
In the other corner stand a plucky band of bioplastic recyclers, who should attract the ESG impact investment dollar in the near term; as well as not-for-profit support and government grants.
As the market develops, it should also attract a best-in-class dollar and traditional consumer goods and waste-management companies that successfully incorporate bioplastic recycling into their businesses should also attract a best-in-class weighting.
Both sides hope to be recipients of government subsidies.
Reasons why petrochemical polymer recycling will dominate near term
Apart from the drive to a circular economy, there are several reasons why petrochemical recyclers will dominate over bioplastic recyclers in the short term.
Large petrochemical companies have positioned themselves as providers of waste-processing solutions and a supplier of raw materials to the plastic recycling industry. They have been developing strategies in this area for some years now and have the weight and momentum to carry the day.
The best performers in the space are even hopeful of attracting a best-in-class ESG dollar. The plastic industry is quick to point out that plastic significantly enhances shelf life of food, which in turn reduces wastage and carbon emissions associated with transport. Again, climate change mitigation appears to favour plastic.
In the past decade, the price of Brent oil has fallen from above US$110 to roughly US$30. Thanks to the ascendancy of coal seam gas and a price war between the United States and Saudi Arabia, the US coal seam gas market slumped and the industry diverted the shale-gas ethylene into virgin plastic production, creating a deluge of cheap plastic.
This in turn increases the demand for recycling of polymer plastic to resolve the glut, weighing the tables further in favour of polymer recycling over bioplastic recycling. This situation has been exacerbated by the recent oil price war between Saudi Arabia and Russia.
It also creates another problem. Virgin plastics out-compete recycled plastics on price, and recent price wars have left many recyclers reeling and in need of support. This has upped the ante on governments to subsidise the polymer recycling industry, further favouring chemical polymers over bioplastics in the near term.
Bioplastic is the disruptor but it’s slow out of the barrier
The definition of bioplastic for this article is plastic made from totally renewable sources. It does not include so-called “biodegradable” petrochemical plastics or bio-composite plastics.
Bioplastic recycling is lagging petrochemical plastic recycling for several historical, technological, technical and political reasons, but given recent technological advances, the industry could gain fast and serious market share should investors, not-for-profits and regulators (hence consumer goods companies) favour it.
The bioplastics industry has not developed the levels of standardisation needed for recycling streams and has, until recently, been unable to be recycled in the same streams as polymer plastics, serving as a contaminant and obstacle to achieving circularity through recycling.
While they boast compostability, this is only under high-temperature industrial composting and as a result, the industry has been tarred with accusations of greenwashing.
Once the bioplastic industry develops the standardisation and certification needed for bioplastic recycling streams, and once new pyrolysis technology enters the market (see game changers below), bioplastic recyclers and end-users of its product should be a candidate for the ESG best-in-class investment dollar in the medium term to long term – providing the industry can develop viable collections models and downstream markets.
It is conceivable that regulation will increasingly favour it in this regard as the decade progresses.
Recycling and bioplastic figures and forecasts
Less than 1% of the world’s plastic is at present sourced from biomass.
A KPMG Insights report predicts recycled plastics and bioplastics will account for 45% of global plastic production by 2030.
It expects petroleum derived plastic will fall from 85.1% of the packaging mix in 2019 to 54.7% of the total mix by 2030.
Recycling is expected to rise from 12.2% of tonnage to 30.6%, and bioplastics are expected to rise from 2.6% to 14.7% in tonnes.
Allied Market Research predicted the global bioplastics market would reach $68.5bn by 2024, and register a compound average growth rate of 18.8% from 2018 to 2024.
The forecast shift to bioplastics will need to be driven by regulators.
Potential game changers
Technology has arrived that can process both chemical and bioplastics in one stream (an Australian innovation), threatening to up-end the plastics, consumer goods, waste-management and recycling industries all in one.
If supported by regulators, not-for-profits and investors, it has the potential to loosen the petrochemical market’s grip on the plastic industry.
The company in question is Licella, and we will be using it as case example for a separate article on plastic recycling disruption (a separate article in this series).
Licella is just one example of disruptive innovation and, given not-for-profit and government support, more game-changing innovations could gush forth as the pressure to deal with single-use plastics and shift to renewable raw materials intensifies.
Threat of regulation divides and hopes to conquer
Regulation has decoupled the long-standing shared interests between consumer goods companies and plastic producers, allowing the entrance of disruptors.
For now, the former are siding strongly with traditional players for quality and assurance of supply, but they will be keeping an eye peeled for options that might reduce regulatory threats and consumer boycotts, disrupt their business, enhance ESG investment in their companies, or sharply cut costs.
Globally, consumer-goods companies are also attempting to protect themselves against the unfolding chaos in the plastics industry by pledging to reduce difficult to recycle plastics in their product designs (the present design model is for waste to be discarded) and move towards a closed-loop model, in which they recycle their own packaging.
This will at least ensure that in the near term they remain beneficiaries of the best-in-class ESG dollar, and provide greater control over packaging quality and supply during a period of disruption.
European countries lead in the regulation department and are experimenting with a mix of single-use plastic bans, regulations on recycling content, taxes and subsidies to encourage recycling. Also in Europe, many countries have zero waste to landfill policies. Some countries incinerate plastic for energy and bioplastics can be incorporated in this waste stream. Many Asian and African countries have also implemented bans.
Australia has opted so far for government subsidies and incentives only, and a range of State-led single-use plastic bans. The government has shown no propensity to tinker with waste-to-landfill settings, although many say this will be essential to progress the situation.
The United States has no national policy but individual states are dealing with the issue separately.
The moral (and financial) hazard of subsidies
Meanwhile, the plastic and associated industries are appealing to governments for incentives to cushion the blow of recycling legislation.
The industry is a big employer and, if the phase out of coal plants in Germany is any indication, European governments have indicated a willingness to subsidise big businesses. The Plastic Waste Alliance also wishes to avoid regulation and taxes on single-use plastic and virgin resin.
Critics decry this path, claiming it would have a distorting effect and stifle innovation, as incumbents attempt to shore up their positions and control the transition – a transition that, depending on technology – may be uncontrollable, wasting taxpayer funds.
They also say subsidies breed an environment of corruption and encourage businesses to take short cuts to pocket as much of the subsidies as possible, slowing innovation. It also encourages industry sectors with similar interests to collaborate in a detrimental rather than constructive fashion.
All these factors pose pitfalls for ESG investors seeking long-term investments. Disruption is on the move and companies that are using subsidies inefficiently are unlikely to survive.
Another group suggests the best path forward is to adopt a combination of subsidies and regulation to avoid such moral hazards, while reducing the impact of disruption on the broader value and supply chains – a push-me pull-you approach, gently ratcheting up the pressure to innovate and leaving room for innovators and new entrants.
Australian developments
The Australian government has, at this stage, plumped squarely into the moral hazard camp, Prime Minister Scott Morrison declaring at the Australian Plastics Summit that no regulation or taxes will be enacted.
“Different countries have tried this in different ways but, true to our principles, my government will not take a top-down, tax and punish approach – we want to encourage and incentivise the best.”
Instead, Morrison said the government would support the recycling industry through government procurement. While the specifics were scant, his speech suggested it would not be a free-for-all handout, expressing clear favour for certain projects to alleviate the moral hazard issue.
More details are expected from Council of Australian Governments meetings soon, and the numbers will be revealed in the May budget. We will discuss these initiatives and the Australian situation in a separate article in this series.
Part 2 of this article will examine the nuts and bolts of plastic recycling – problems and options, the ESG landscape, the institutional-public-offering and merger-and-acquisition landscape for the sector.
FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/
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