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ESG Focus: Plastic Recycling Disruption – Part 2

ESG Focus | Apr 29 2020

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: 
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ESG Focus: Plastic Recycling Disruption – Part 1 was published on 24th April 2020.

-New technologies to hit the market
New repositories for recycled plastic
-Lock it in, Eddy

By Sarah Mills

Disruption is about to descend on the plastic recycling market. At least one technology – that of hydrothermal upgrading – has already arrived. 

Combined with the fourth industrial revolution and the shift to a circular economy, plus the global determination to be rid of the bane of single-use plastics, this technology and its descendants and rivals promise a revolution of existing models.

Assuming the technology lives up to its promise, the fact that existing technologies will be insufficient to drive the demands of regulators should open the door to these new entrants

As Bridget Croke, vice president of external affairs of Closed Loop, tells Greenbiz: “If you look at the amount of recycled content in the plastic industry that companies are committing to, they are not going to be able to reach that with the mechanical technologies that exist today. They’re going to need new ways to be able to get that plastic back so that the quality of material is high enough to get into packaging again.”

The tip of the innovation iceberg

The most disruptive technologies will be those that enable the recycling of all polymers (including mixed films and bioplastics) into plastics or fuel (to create new virgin plastic), via a single waste stream, thereby solving much of the costly sorting problem that has dogged the recycled plastic industry for decades. 

Low-level sorting will still need to take place to ensure waste streams are not contaminated by non-plastic material; and aggregation of plastic waste at the kerbside and malls will play a key role.

In doing so, these technologies will further governments’ aims of achieving a fully circular economy and support the United Nations’ Sustainable Development Goals (SDGs) on several fronts.

These technologies should loosen the grip of fossil fuel companies on the plastics industry, giving bioplastics a foothold; an industry that is expected to receive strong support from impact investors, not-for-profits and energy poor sovereign nations (it provides an energy source for countries with no energy).

Hydrothermal upgrading

Hydrothermal liquefaction has been around for some time – since its conception in the 1920s. It was the subject of some experimentation during the 1970s oil shock and has more recently been revived to address the plastic problem.

It converts chemical polymers, biomass and bioplastics into fuel, which can then be used to create virgin plastic or provide energy for the process. Biomass fuels obtained from the process can also be mixed with petroleum fuels in the one facility. 

It differs from chemical pyrolysis (which also turns plastic into fuel) in that it uses supercritical water to break down the polymers – pressure cooking.

Hydrothermal upgrading takes a big step towards achieving the goal of processing all polymers through a single waste stream, in that, depending on the technology, it can process most plastics including many bioplastics in the same stream.

The shortcoming of hydrothermal upgrading compared with mechanical recycling in particular, is that it is less "plastic circular", in that half of the oil retrieved from the polymer breakdown would need to be used to fire the crackers to create virgin plastic and would end up as carbon emissions. A certain amount of fuel is also needed to run mechanical recycling plants, but less.

On the upside, it offers a solution for end-of-life plastics (plastics that have been recycled so many times they have lost their integrity) and creates a simple cost-effective process that improves the economics of recycling. It also emits less carbon dioxide than many competitors, such as incineration, because it operates at lower temperatures. 

While not exactly plastic-to-plastic, like mechanical recycling, it does re-use all of the plastic components, closing the circularity loop. 

Australian company building a global presence

Licella, an Australian company, claims to be the global leader in hydrothermal upgrading technology. Its CatHTR process allows the recycling of 85% of plastics into fuel – another big leap – that in turn can be used to produce new plastics.

While ideally, Licella would create separate plants for bioplastic and petroleum plastic recycling, it can accept both as small amounts in the mix in the other's stream. The mix levels generally reflect the balance of plastics rejected from material recovery facilities.

Licella’s technology substantially reduces sorting costs given it can recycle most plastic, including films such as cling wrap, multi-layered plastics and potato-starch-based bioplastics. 

The company says that after $75m and extensive testing, it has perfected the process and is ready for commercialisation.

Sorting still has to occur but far less of it, cutting labour costs. For example, you don’t have to separate out PET or polystyrene. A notable exception to this is PVC, which generally is not found in recycling bins anyway. 

The company is not listed and is only taking investments of a minimum of $1m. The plastic industry is keeping a close eye on this technology, which the company website positions simply as “a bridge to a lower carbon future”.

It is understood the plastics and packaging industry is under pressure to opt for plastic-to-fuel options over mechanical recycling options, which would enhance the technology’s prospects.

One assumes its successors may be less expensive, smaller and less capital intensive. But innovation will need to occur swiftly to compete with low oil prices.

The rise of mini plastic-recycling plants

As technology advances, it is conceivable that within the decade, factories, and consumer goods and packaging companies will have their own such plants installed in-house to cut transport costs – a key cost input for plastic producers and recyclers.

Already do-it-yourself mechanical recycling machines, produced by a company called Precious Plastic, allow people to recycle plastic in their homes. 

Such technologies are nascent but taken to their logical conclusion would allow manufacturers to recycle their plastic in-house, particularly if incentivised by governments to achieve circularity and reduce emissions.  It is more energy efficient than pyrolysis and monomer recycling, and inhousing would cut transport costs.

It may also explain the pressure on packaging companies to favour plastic-to-fuel options as these will be more capital intensive in the near term.

It also suits big plastic’s agenda, because by converting half the oil in plastic to emissions, it potentially opens the market for more virgin plastic (and oil), in which the petrochemical industry has invested heavily in the past decade.

However, MSCI expects the trend towards smaller less-capital intensive technology across all recycling modes increases the likelihood of stranded assets in the plastic industry and possibly even the plastic recycling industry. 

Companies like Licella will need to paddle hard to remain on the crest of the wave.

Big plastic is observing the company’s progress and Prime Minister Scott Morrison has endorsed the company domestically and internationally. 

The Saudi-Russian oil war and the resulting low oil price may have a negative impact on the rollout of hydrothermal upgrading technology, particularly to energy poor countries that can now access oil at a quarter of the price it was just two years ago. Plastic as a source of energy is now less attractive.

ESG investment

From an ESG perspective, the traditional players are collaborating to preserve their interests and to position themselves as recipients of government subsidies and ESG dollars.

A fourth group of investors is likely to gravitate to the new plastic-recycling entrants and technologies. Its members would likely comprise governments, not-for-profits, bioplastics producers, energy poor sovereign nations, and ESG impact investors.

These investors will need to beware of greenwashing and of companies, and groups of associated companies, hopping aboard the sustainability gravy train in order to garner government grants; subsidies for untried technology; and ESG impact investment dollars.

Plastic patents – the evolving material

Another key area of innovation is in plastic patents, particularly those with recycling themes, and keeping in mind our previous articles on plastic substitution and re-use, and the difficulty of recycling certain plastics such as polystyrene, coloured plastics and plastic film.

Non-recyclable plastics are likely to be eliminated and replaced by either new plastics or natural substitutes to decrease the collection and sorting challenges that have plagued the industry.

As noted above, Licella is able to process its partner BiologicQ’s starch-based bioplastic NuPlasticQ. Any bioplastic patent that can either be catalysed, monomerised, or included in existing mechanical recycling streams would be of ESG interest.

The CSIRO’s report The Recycled Plastics Market: Global Analysis and Trends notes a growing intensity patent filing for polymer recycling patents over the past decade. In the five years to 2016, 50% of all relevant existing patents were lodged. About 70% of these were lodged by Asian countries. 

The global recycled plastic market is dominated by four main resin types: PET, HDPE, PP and LDPE. Given the majority of abovementioned patents were for novel PET, PP, PS and PVC technologies, CSIRO conjectures that this may signify market direction in the near term.

Chemical companies are also experimenting with bioplastics, reflecting the growing acknowledgement that new non-fully recyclable and degradation-free fossil fuel-based plastic may be phased out within two decades if not earlier.

On the general plastic front, the CSIRO Manufacturing Report noted an 8.2% rise in plastic patents for storage and waste-management systems in 2017; 7.7% for containers and packaging; 6% for films, coating and packaging; and 5.3% for bottle recycling. Most patent lodgements are by large multinational chemical, automotive, packaging and technology companies.

New technologies include developments such as making plastic more resistant to solar radiation, hypersalinity and extreme radiation, all of which increase the markets for plastic as well as recycled plastic. Super-strong nano-lattices are being developed for flying vehicles. 

The food industry will be a huge area for product design as companies attempt to extend shelf life to cut transport emissions. Companies such as Ineos Styrolotion, for example, are introducing new products using recycled polystyrene resin (polystyrene is listed as a difficult to recycle plastic). The list goes on.

More innovative than disruptive (with the exception of all-stream-recyclable bioplastics), these are all active areas of investment at the moment as inventors pitch primarily to packaging companies, vehicle manufacturers and consumer goods companies that are seeking solutions for circularity, to appease regulators, attract ESG dollars and out-position their peers.

New repositories for plastics

Government procurement is being touted as a key market for recycled plastics, particularly given that it is, at present, uncompetitive with virgin plastic. Recycled plastic can generally be used in anything that plastic can be used in from guttering to sewerage pipes. 

But the government procurement market is likely to be focused on funding new repositories for recycled plastic that will simultaneously result in a reduction of emissions or compliance with one of the United Nations Sustainable Development Goals, while progressing the recycling revolution.

Plastic roads, for example, are a keen area of experimentation. Asphalt concrete is responsible for 1.5m tonnes of carbon dioxide emissions a year, which is equivalent to 2% of global road-transport emissions. 

According to The Economist, bitumen cost GBP400 a tonne vs GBP300-350 a tonne. It also solves perennial problems of bitumen such as potholes caused by water infiltration, sharply reducing maintenance costs. 

There are two types of plastic roads: those produced in factories that consist of modular, hollow and prefabricated road elements (for drainage and conduits for services such as gas and electricity), made from consumer waste plastics; and those that consist of asphalt mixed with plastic waste – plastiphalt (which countries like India have been doing in an ad-hoc high-polluting way to fill potholes given its relative cheapness for some years).

In 2019, the UK embarked on a GBP1.6bn plastic asphalt trial, and in Australia, Victorian municipalities have already trialled three small suburban roads made from plastic asphalt. It is cheaper than bitumen and is being trialled for durability.

On the prefabricated front, a 30-metre bicycle track in the Netherlands, made from 70% recycled plastic and 30% polypropylene, is three times as durable as bitumen. 

It is being used to test a product called PlasticRoad, being developed by two Dutch firms: engineers KWS and pipe-makers Wavin, in partnership with French oil and gas giant Total. Rotterdam is the first city mooted to adopt the technology.

The sections are easily recyclable and replaceable, making the construction, labour and emissions costs at first glance appear to out-compete plastiphalt roads. They are light and hollow, making them easy to transport and faster to install than a bitumen road, particularly given the capacity to easily accommodate cables and utility pipes. 

Plastic roads take days, instead of months, to construct, which, if adopted, presages disruption for the construction industry. It is four times lighter than bitumen, reducing transport emissions again.

Car parks and railway platforms could be next on the list as plastic, and recycled plastic, find a growing number of repositories. Other similar uses for recycled plastic include plastic pins in motorways.

Already recycled plastic is being used in government procurement contracts replacing concrete rail sleepers.

Given MSCI predicts that stranded plastic assets could prove a reality as technology advances, big government-funded infrastructure projects are likely to be one of the few more enduring markets for big plastic and big recycled plastic.

Funding the procurement driven revolution

In response to Prime Minister Scott Morrison’s address to the Australian Plastics Summit in March, Rob Spence, from the Municipal Association of Victoria told the ABC: “It’s going to require a significant capital injection to make this stuff happen … it’s all about landfill reviews and landfill prices.”

In other words, the waste-management industry and plastic disposers are likely to have to pay more to dispose plastics, affecting industry margins.

While the Australian government has managed to avoid regulating the industry while setting non-regulated waste-management targets, that is not the case overseas, where recyclers are banking on the fact that large consumer goods companies will be forced to pay a premium to meet their recycling commitments and comply with regulators.

Mr Morrison may have balked at levies and taxes, but it is likely that at some stage they will need to be adopted in Australia given the recent plunge in the oil price. Otherwise, governments will be paying a huge premium for the privilege of procuring recycled plastic products, which would be a financial nonsense.

Levies would seriously disrupt the viability of the waste management business model. Investors will need to keep a keen eye on policy in this area, and gain a clear sense of company strategy. 

The Fourth Industrial Revolution

The innovation of plastic roads alone will impact the construction industry, the waste management industry and the plastics industry – and it is just one of the areas in which plastic innovation will disrupt traditional paradigms (we will cover this in a separate article on virgin plastic).

The advent of the fourth industrial revolution over the next decade will trigger massive changes in the uses of plastic and recycled plastic – many of which are difficult to envisage from our present position.

Plastic will play a critical role in the transformation, from components to lattices in building materials and medicines, to carbon fibre frames for electronic vehicles and flying cars.

Assuming continuing regulation, demand for quality recycled plastic should rise massively over the next two decades.

In the meantime, the IPO and M&A market is vibrant, particularly for plastic-to-fuel and plastic-to-fuel-to-plastic solutions (value adding), which are being backed by big oil. 

Take the example of a small company called Agilyx, which modified its fuel-producing pyrolysis plant to break down 10 metric tons of polystyrene waste (traditionally an extremely difficult to recycle plastic) into its base material styrene – because styrene earns more than fuel.

Big petrochemical companies rushed to woo the company, which has formed a joint venture with polystyrene maker Americas Styrenics. The pair are building Agilyx plants around the globe.

The company is also working on depolymerising polyethylene terephthalate (PET) and acrylics. 

Another company, Plastic Energy that uses pyrolysis to transform plastics into diesel and naptha (which can be used by petrochemical plants to recreate polyethylene and polypropylene), is also expanding globally.

This is just the tip of the iceberg and demonstrates that global plastic recycling is gearing up at a very fast rate. 

They are also evidence that the plastic industry is placing massive bets on the more capital-intensive chemical recycling and pyrolysis that requires big, expensive plants and the aggregation of vast quantities of plastic waste.

Plastic pyrolysis, emissions dynamics, and big oil

A Brightmark Energy project, for example, is building a US$260m plant in Indiana that will transform 100,000 tons per year of plastic waste into 68m litres of diesel and naphtha, which it has already agreed to sell to BP and 22m litres of industrial waste. Dow has similar plans in the Netherlands.

This also positions large petrochemical companies as recipients of best-in-class ESG dollars given they are reducing their emissions.

According to the Argonne National Laboratory, producing low-sulphur diesel fuel via pyrolysis of waste plastic is up to -14% less greenhouse-gas intensive than making the same fuel from crude oil. Licella’s CatHTR technology is more efficient again.

The Dutch consultancy CE Delft, found widespread adoption of chemical recycling in the Netherlands would save 1.5tonnes of carbon dioxide per metric ton of recycled plastic. Mechanical recycling saves 2.3tonnes.

At-scale pyrolysis (above 55,000 tonnes) substantially cuts the costs of oil production from recycled plastic by up to -30% – with implications for the geopolitical landscape.

These plants are being vertically integrated to cut transport costs – another big emissions and dollar saving. 

Given the scale of investments, this really starts to put the Saudi’s oil war into perspective.

Targeting value-added products

However, fuel, as a commodity is a lower value-add product. This is why many chemical pyrolysis companies are shifting to higher-value products through chemical monomer recycling such as polystyrene, and diverting the fuel into recycled plastic products, some of which may only be commercially viable through government subsidies or regulation.

The rush to lock in supply

One thing nearly all players are certain about is the need to aggregate and gain secure long-term access to raw materials (plastic waste).

Partnership and long-term signings are critical to ensuring financial futures during the disruptive phase. 

Chemical recyclers of single monomers, for example, need partners that buy predictable volumes of a single product.

It even raises the prospect of a recycled plastic futures markets to allow recyclers to hedge their positions. A previous article notes that Plastic Bank has established a bitcoin exchange for recycled plastic.

Tying up partners will be critical, as will be controlling plastic collection to fend off competitors. 

For example, in Australia, Cleanaway Waste Management ((CWY)) signed a Memorandum of Understanding with Pact Group Holdings ((PGH)) and Asahi Beverages in February to jointly develop a local plastic pelletising facility to process the roughly 900 million plastic bottles into flake and food grade pellets which will be used as raw material for production of packaging for food and beverages. 

Coca-Cola Amatil ((CCL)) is considering establishing a large recycled processing plant in Australia with French recycling and waste-management company Veolia.

Such contracts not only secure income but corral plastic resources from new entrants.

That most announcements that have been made recently are not legally binding suggests players are standing on the sidelines as long as possible before committing. 

It is also a red flag to those, including governments, who are considering investing on the basis of MOUs. At this stage, the game is very much one of “show me the money”.

If a solution to extracting ocean plastic is found, it will provide a separate source of raw material to innovative new entrants.

Similarly, bioplastics producers will need to sign long-term agreements with bio-plastic recyclers or hydrothermal upgraders.

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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