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Recycled plastics market becoming more liquid and globalized as demand soars

On January 1, 2021 the EU introduced a plastics tax of Eur800/mt on plastic packaging that is not recycled. The levy is just one example of policies being enacted by governments across the world to tackle the issue of plastic pollution.

A raft of new legislation, along with voluntary commitments by major users and producers of plastic, aims to rid the world of plastic waste and is pushing demand for recycled plastics ever higher.

S&P Global Platts Analytics forecasts that mechanically recycled plastics will displace over 1.7 million mt of virgin polymer feedstocks by 2030, compared with 688,000 mt in 2020.

recycled plastics replacement of virgin polymer feedstock

For the ambitious waste reduction plans to succeed requires the evolution of recycled plastics into efficient, global commodity markets. There are signs that this is already happening.

Towards commoditization

Recycled plastics have gone from localized marketplaces, where demand is based purely on cost effectiveness against virgin equivalents, to a global market where demand is focused on the highest value material.

The value of recycled plastics—and it is substantial—is beginning to be unlocked. It is this value that is driving the commoditization of plastic waste markets and may, ultimately, help tackle plastic waste pollution. Simply put, there will be no sense in discarding a material into the natural environment when it has such a high value and can be exchanged in an efficient market.

recycled vs virgin pet price relationship changing

Feedstock costs for recycled pet exceeding those for virgin pet

A number of different factors are helping to drive commoditization in the recycled plastics markets. Some, such as an increase in the number of participants active in the market, have stemmed from legislation.

Various governments, beginning with Europe but more recently in the US and across Asia, are mandating that participants in certain industries, predominantly those that work with plastic packaging, decrease their reliance on virgin plastic and increase their use of recycled material. In some cases, this is being backed up by taxes.

The UK's version would charge GBP200/mt on plastic packaging that does not contain 30% recycled content by April 2022. S&P Global Platts analysis shows the tax would be more costly for market participants than adhering to minimum recycled plastic content, despite the heftier price tag compared with virgin plastics.

The effect of these policies has been to boost the number of market participants, predominantly buyers—or "users" of plastic packaging—increasing competition and necessitating greater supply and, therefore, a larger marketplace. Already, there are signs that supply in local markets is insufficient to serve local demand, as recycling rates can never be 100%. This causes companies to look further afield.

In Europe, demand is exceeding the potential of both the local and regional markets, leading participants to look to Southeast Asia, in particular, for additional supply, bringing the region into a growing global marketplace.

Plastics to fit the mold

Larger marketplaces and more market participants require a degree of product standardization.

In virgin plastics markets, this is not a concern. A virgin polymer buyer can be certain that plastic bought from one supplier will be the same as, or at the very least, compatible with, that from another supplier. There is a consistency of technical properties, volume and color.

On a global scale, this allows arbitrage economics to aid in balancing global supply and demand. That is why prices for polymers in different regions tend to trend in a similar fashion. It is also why a global view of these markets is essential.

Product standardization in recycled plastics is trickier. They are, after all, derived from waste. Standing in the way of arbitrages are differing product specifications and levels of contamination, as well as concerns over traceability across different regions, and even within the same region. Waste collection systems can vary hugely, even within the same country, yielding different compositions of waste to be recycled and different qualities of recycled material. You get out what you put in.

Buyers want to be sure of product quality but they also want to be sure that their material, particularly that collected in developing countries, is being sourced legally, is what it says it is, and that workers across the value chain are being treated fairly. The "S" in ESG—environmental, social and governance—is as important as the "E" when it comes to recycled plastics.

Large-scale investments in standardization are now being made by some of the biggest companies across the waste management industry all the way through to the fast moving consumer goods industry.

In Europe, where the most established recycled plastics markets are found, levels of key contaminants in R-PET clear flakes, such as PVC, acetaldehyde and benzene, which all affect how a beverage bottle looks and performs, as well as having health implications, are moving lower and in some cases are now negligible. Production is also becoming more consistent, meaning buyers can be sure that each separate batch will perform in the same way.

In Southeast Asia, Suez, Veolia, Coca-Cola and Indorama, among others, have made investments in new plants to produce R-PET clear flakes with low levels of PVC content.

S&P Global Platts pricing data clearly shows that a reduction in PVC contaminant levels correlates to an increase in market value of R-PET clear flakes. In some cases, this premium for material with a PVC content of less than 30 parts per million (ppm) can be $50/mt-100/mt compared with material with up to 100ppm PVC content.

US recycled PET is also becoming more uniform and showing reductions in contaminant levels. This push is being driven by California, where a minimum recycled plastic content in PET bottles will apply from 2022, starting with 15%.

Those affected by this legislation—chiefly beverage bottle producers—will demand high-quality material so that the consumer cannot tell a recycled bottle from a virgin bottle.

The California R-PET clear flake market is largely dominated by material with a PVC contaminant level of up to 100ppm, reflecting that the US R-PET sector is geared towards lower-grade end markets, such as the fibre and textiles markets. However, more and more material is entering the market with levels no higher than 10ppm PVC, bringing it much closer to the standard seen across Northwest Europe and feeding growing demand for high-quality material.

Going global

These developments in both Southeast Asia and the US are making material produced in different regions more alike, meaning more options for market participants—whether buyers or sellers, and regardless of their location.

Regional recycled plastics markets are exerting increasing influence over the global marketplace, S&P Global Platts pricing data shows. And if any further evidence were needed, it was provided in early 2021 by a tight container market.

Europe and the US recycled PET markets saw price increases at the beginning of the year, in part due to a lack of supply amid a shortage of containers to import material from Asia. These gains outstripped those seen in Southeast Asia as participants there struggled to send material to Europe and the US West Coast.

southeast Asia recycled PET vs Europe and US

Increased global trade in recycled plastics has also driven an increase in liquidity and new contracting dynamics.

Where participants were once satisfied with linking supply or purchasing contracts to the relevant virgin price, or fixing prices for an entire year, these practices now mean that contracts quickly cease to reflect the true value of material.

Participants are moving away from long-term fixed price contracts and are choosing to take much shorter time periods as reference points. This became particularly apparent in spring 2020, when spot market bids and offers were reported to S&P Global Platts with the proviso that they were valid for only 24 hours. Again, this points to the need for more data, on a more granular level, providing more transparency.

Plastic pollution is a global issue that requires a global response, and the development of a large and liquid market for recycled plastics can play an important role in this effort. Unlocking the value of plastic waste will mean less slips through the net. And understanding that value is key to driving the plastics industry forward.