ESG Focus | Apr 24 2020
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ESG Focus: Plastic Recycling Disruption – Part 1
-Disruption is so unpredictable
-Disruptees take the capital high road
-Disruptors to lower barriers to entry
By Sarah Mills
“Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow.” William Pollard, English Clergyman
Disruption is so unpredictable. The best ideas may not see the light of day. Or might be superseded by even better idea overnight.
I recall attending an Australian telecommunications convention more than a quarter of a century ago. My fellow attendee pointed to a booth manned by an unassuming middle-aged Australian man.
“See that man,” my friend said. “He invented viable video teleconferencing technology.”
There was a sense of ‘what man’s magic is that’. The Internet was barely finding its legs outside of libraries; and videoconferencing was the stuff of sci-fi movies. It was pre-widespread-web, so the idea was that a corporation would install several machines all over the world and the magic would flow.
“Kerry Packer offered to back him, for a 51% stake,” my friend continued. “But the guy knocked it back because he wanted to retain control.”
“Now, a tsunami of technology is about to crash down, which could make his technology redundant.”
Within a few years, P2P web-based technology like Skype flooded the world – and even more revolutionary: the business model was based on free distribution and useage.
As the Accenture Ad says, “It’s not how many ideas you have. It’s how many you make happen.”
Then came another agonising two decades working in the media and observing the complete inadequacy of boards, steeped in the past, to deal with disruption: The lack of board and management vision, the appointment of managers and MBAs over visionaries, and the exodus of the company’s frustrated and overlooked visionaries to try their capital-poor hands at new technologies.
The hubris of power dictated the demise of some of the world’s most powerful media companies.
I precis this story about plastic recycling disruption with these anecdotes to emphasise to readers that it is early days for the plastic recycling industry. No matter how wonderful a technology might appear now, the chance that there is even something more amazing just around the corner is high.
For example, Licella, which appears to have the most advanced plastic-to-fuel hydrothermal upgrading recycling technology in the world (providing a solution for end-of-life plastics to be converted back into plastic), describes its process only as “a bridging technology to a lower carbon future”, according to The Fifth Estate.
This pair of articles examines the state of play now, scans the most disruptive technologies and trends to hit the market in the past few years, and takes a gentle stab at imagining the future.
Plastic recycling stands on the precipice
The interesting thing about disruption in the plastic recycling sector is that it is being driven by regulation, which is in turn being driven by the growing urgency to rid the world of the scourge of single-use plastic pollution.
Without this, the industry is, on average, uneconomic when the oil price falls below US$50-US$70 a barrel depending on the recycling mode. So until recently, recycling has proved a very slow-moving feast and appeared an unlikely saviour.
Of course, the second these economics shift (one shift was the recent oil price plunge) in favour of recycling, it's a new ball game.
The European Union has stipulated that 100% of all plastics and 55% of all waste must be recycled by 2025. France has legislated that 30% of all plastics in consumer goods must comprise recycled plastic and Britain has introduced a tax on plastic containing less than 30% recycled material. Australia is aiming for 30% average recycled content across all goods and infrastructure procurement by 2030.
These and similar moves have disconnected the interests of plastic producers and the world’s biggest users of single-use plastics, the consumer goods companies, and opened the door to innovators and new entrants.
Add to that a capital dump from governments, not-for-profits and ESG impact investors, and the incentive to innovate in the industry is strong.
According to McKinsey, plastic re-use and recycling could equal as much as 50% of plastic production by 2030, assuming a US$75 a barrel oil price (the recent fall in oil price will certainly affect these forecasts) and an effective regulatory framework reinforced by support from other industry stakeholders and consumers.
This would require capital investment of about US$15bn to US$20bn a year – almost double the global petrochemicals and plastics industry annual investment over the past decade.
Disruptive technology’s end goal – to recycle all polymers in one, tiny, low-cost stream
Until recently, the plastic recycling industry has been subject to a fairly predictable array of obstacles: fluctuations in the oil price, laborious and expensive collection and sorting; ranging purity of waste streams (not all plastics can be recycled, nor in the one stream), and the task of developing downstream markets for products. These were challenging but stable conditions.
Plastic recycling also required modest to high levels of capital investment depending on the mode.
But all that is about to change as a tsunami of new technologies descends on the market.
Technological innovations will be varied and many but the main ones will be those that allow the recycling of all polymer families in a single stream (particularly those that can incorporate both bioplastics and chemical polymers), or at least all petrochemical plastics; those that allow small economic in-house processing (either for fuel pyrolysis or monomer and mechanical recycling); and those that solve problems of polymers with advanced functionality, such as those plastics that encase electronics, and multi-film and coloured plastics.
Technology is already available that alters this playing field (which we briefly discuss below), allowing the breakdown of plastic into its components and enabling the recycling of bioplastics in the same waste stream.
The technology to recycle all polymers in one stream will reduce many of the barriers to entry caused by the challenges of sorting and collection.
This combined with technologies to create smaller, localised, even factory-based recycling operations in support of a circular economy for the fourth industrial revolution, suggests that the level of capital intensity required to recycle will fall, as will barriers to entry.
Those with capital still stand to benefit from the scale of operations, particularly in the near term and for residential markets, but it means competition will intensify and existing recycling models may be upended.
There is likely to be a debate as to whether governments should be signing long-term agreements with large players that may stymie competition and elevate government costs over the long term.
It depends on whether those in power wish the industry to remain in Captain Plod mode, or shoot ahead to support the sustainable fourth industrial revolution and reap those benefits.
Listing the disruptees
The first incumbent to face disruption is the petrochemical industry. It recognises the need to get involved in recycling, and use it as a feedstock to demonstrate its commitment to a circular economy, and to attract ESG dollars.
The second incumbent will be the waste-management industry, given circularity will upset its cheap waste to landfill business model.
Both will be investing in start-ups, collaborating with research institutions and consumer goods companies, signing long-term agreements with municipalities, waste-management companies, landfill sites and any organisation with access to large quantities of plastic waste.
The third and fourth incumbents will be packaging and consumer goods companies, who will be seeking innovations that best allow them to meet regulatory requirements, improve circularity and gain greater autonomy. They will also be partnering with waste-management firms, plastic recyclers and new technology providers. They will readily adopt any new technology that improves their regulatory and ESG position and profitability.
The construction industry and building materials industries may also face disruption arising from the substitution of traditional materials with recycled plastic – particularly if it is regulated. Think plastic as a substitute for metal reinforcing in concrete, or the labour and equipment shifts that will be dictated by the adoption of just plastic roads, for example.
There should also be a degree of backward integration as core incumbent players move to establish waste collection operations and recycling branches. Vertical integration is a key ESG investment play.
The ability to access and handle plastics waste would be a key to success in the future and it is conceivable that major players will be moving to lock in access to this waste for both assurance of supply and a barrier to entry.
Investors will need to monitor the strategies of listed companies in this space in relation to backward integration, vertical integration, mergers and acquisitions, collaborations with consumer goods companies, government policy, municipal signings, and technology adoption.
Disruptees take the capital-high road
The most immediate changes to hit the market will be the industrial scale launch of two relative new technologies – monomer recycling and hydrothermal upgrading – and the massive expansion of mechanical recycling volumes, according to McKinsey, keeping in mind one of the major challenges to recycling in the past has been the inability to recycle all forms of polymers.
Traditional pyrolysis technology requires billions of dollars in steam crackers and aromatic plants and is often used to create cracker feedstocks (fuel). It is profitable when the oil price is above US$50 a barrel. Given it is not circular, i.e. plastic to plastic, it is being considered a back-up for the destruction of plastics that reach end of life. It cannot recycle many plastics.
Hydrothermal upgrading is the relatively new competitor to pyrolysis. It can recycle nearly all plastics, including many bioplastics and is about 50% circular (in that it takes roughly half the amount of recycled fuel to provide energy feedstock for the plastic, creating emissions not plastic).
Mechanical recycling requires less investment than pyrolysis, setting it at an advantage. It is fully circular for a series of recycles, but the quality degrades with each recycle meaning the plastic must eventually be disposed. Not all plastics can be recycled in the one stream. Innovations are changing this to some degree and some speculate the market could develop to a point where it can recycle more polymers.
McKinsey’s projections estimate that mechanical recycling could rise from 12% for total plastics volumes to 15%- 20% by 2030, at US$75-plus a barrel (which looks optimistic at this point). But a fall to below US$65 a barrel and it is, at this point, uneconomic, so innovation, regulation and subsidies will be critical.
McKinsey says monomer recycling has the potential to generate some of the highest plastics recycling profitability levels because it is less capital intensive than big pyrolysis (at this point in time), although more intensive than mechanical recycling.
It involves condensing polymers so that it can undergo reverse polymerisation, allowing recycled plastic to be used for the same function or to be remade into the same material. One of its major drawbacks is that it cannot recycle all polymers in a single stream. It also has a poor emissions profile and requires large capital intensive plants, both of which makes it attractive to big plastic and big oil.
It is likely that in the long-term, capital-intensive producers will target large-scale infrastructure projects such as plastic pins for motorways, and plastic roads.
Disruptors taking their marks
As mentioned above, disruption in plastic recycling is interesting, not only because of government regulation, but because of the near religious zeal of many to combat plastic pollution – from ESG impact investors to not-for-profits to consumers.
It is this zeal that perhaps defines more powerfully a revolution, or even a war, as opposed to technological transformations, such as that experienced by the media in the early 2000s. Think the Reformation (which toppled the seemingly all-powerful universal Catholic Church). It’s not just about the money. We are entering the arena of human will and agency.
Disruptees may be looking to batten down the hatches and lock out disruptors by controlling plastic collections and building strong capital bases; but disruptors are forming collaborations with like-minded not-for-profits, ESG impact investors and energy-poor sovereign nations to forward their vision.
Their mission: to produce technologies that reduce capital intensity and improve the economics of plastic recycling.
Given the nexus between plastic and fossil fuels, this could have far-reaching, even revolutionary, implications.
Already, Saudi Arabia has killed the oil price in a war designed to squeeze out competitors. It certainly affects the economics of recycling.
But on the flip side, so does government regulation, and the Saudi move increases the argument in favour of regulating recycled content.
The lower the oil price falls, the more intense will become the pressure to either ban single-use plastic or regulate the amount of recycled content used in plastic production.
The coming recession may slow, but not halt this regulatory resolve, buying time for the fossil fuel industry to entrench itself in the recycling market (for a short while).
Part 2 of this article looks at some of the disruptive technologies and trends driving innovation.
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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