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Recycled plastics recover from pandemic but economics remain challenging

As 2021 gets underway, Europe's new plastics tax is creating a demand boost for recycled plastics in the region, while in Asia, recyclers are expected to struggle with bearish virgin markets and soaring freight costs at least in the first half of the year. By Benjamin Brooks, Sarah Schneider, Miranda Zhang and Hui Heng

After a tumultuous 2020 for the global recycled plastics markets that saw production margins pressured and bearish virgin prices causing buyers to shun recycled plastics, the first half of 2021 may see a step change, at least in Europe and the US, in reaction to newly signed legislation that may provide an impetus to increased demand.

In the Asian markets, a combination of uneconomic export opportunities and expected low virgin prices well into H1 2021 will likely mean recycled plastics markets will continue to struggle, though upcoming high-specification recycling plants, delayed from 2020, may provide a lifeline and a new impetus to high-specification recycled plastics in the region.

Rush for materials in Europe

European recycled plastics markets are set to be dominated by the EU's Plastics Tax, which took effect on Jan. 1, having only been announced in July 2020.

The lack of time afforded the market for planning, in addition to a lack of standard reporting principles across EU member states and unfavorable economics that will carry over from 2020, will cause a period of uncertainty early this year, market sources have said.

Go deeper: More S&P Global Platts recycled plastics coverage and pricing

In Q4 2020 buyers rushed to the recycled HDPE market as they looked to ensure they can access the supply they need. Recyclers towards the end of 2020 reported high production rates, nearing 100% in some cases, in comparison to around 50-60% over the summer, in order to meet this extra demand.

Pricing wise, R-HDPE premiums over virgin HDPE blow molding grades jumped to as high as Eur150/mt in November, from Eur50/mt at the beginning of the fourth quarter. A supply crunch in the virgin HDPE market in January has seen virgin HDPE blow molding prices climb. This has given added impetus to R-HDPE demand and afforded sellers the ability to try to push prices higher—R-HDPE light pellets have gained Eur10/mt in January, normally a quiet month in the markets.

R-PET demand is expected to rebound in the first half of 2021. This will be led by companies that have voluntary commitments, as well as buyers wary of impending legislation in 2025. Some buyers had already discovered the difficulties of entering the R-PET food-grade pellet market late as some sellers reported a lack of available supply in 2021 already for newcomers to the market.

Recycled plastics economics are not expected to improve significantly, according to market sources. S&P Global Platts Analytics expects higher grades of recycled PET to average a premium of around $150/mt over virgin equivalents in the medium term, at least.

With these economics set to continue, buyers in the market may well be forced to forgo the cost savings afforded by the virgin markets if they are to avoid levies—set at Eur800/mt of unrecycled plastic—that will be imposed from January.

Uncertainties may stifle R-PET uptake in Asia

Asian recycled plastics markets, however, are likely to remain under pressure in the first half of 2021 amid coronavirus uncertainty, a lack of container availability and competitive virgin plastics.

The overall PET market is unlikely to see a rapid recovery due to a lack of tourism and large events in the first half of 2021, sources said. Hence, consumption of bottled drinks will remain low, leading to limited feedstocks for PET recycling. Such domestic supply shortages could delay the stricter measures that some countries in Southeast Asia plan to implement on waste plastics imports, according to sources.

Meanwhile, limited container availability and rising freight costs have restrained recycled PET exports. This tightness could last until February, if not longer. If freight rates come down, Asian recycled plastics exports to Europe and the Americas may recover, adding much needed impetus to higher-grade R-PET in Southeast Asia.

US could see R-PET demand boost

Despite various setbacks the US recycling sector has faced this year related to the economy and the coronavirus pandemic, market participants are cautiously optimistic that strong export demand and minimum-content mandates will support higher recycled PET prices heading into 2021.

As recycling and waste management services have been deemed essential, sources say they expect any upcoming supply tightness, especially in bottle-bill states like California, will be on the back of increased demand rather than a decrease in volumes moving through the system.

Export demand is also expected to remain robust due to record low bales prices in the second half of 2020, amid low crude prices and weak domestic demand.

Sources said they expect export demand to remain strong heading into the new year, particularly in Mexico which has an overcapacity of PET film and fiber processing infrastructure.

It is the domestic market that could see the biggest change in 2021. Recycled-content mandates passed in California in September will require plastic beverage containers to contain a minimum of 15% R-PET by 2022. It is likely, sources have said, that demand for R-PET, at least in California, will rise some months prior to the implementation date.

Overall, market players expect continued growth in R-PET prices and demand over next year as more packaging companies attempt to meet PCR commitments and legislation.