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H2 Outlook: Unfavorable economics will test appetite for sustainability

Houston — Increased media coverage on the environmental impacts of single-use plastics has fueled huge demand growth in recycled plastics, particularly of polyethylene terephthalate (PET) -- used to make plastic beverage bottles -- and also more recently high density polyethylene ( HDPE), used for a plethora of other consumer goods packaging. Demand for recycled plastics over the longer term is expected to grow due in part to European Union policy initiatives. The second half of the year, however, will test the markets true commitment to using recycled plastics when it looks as though the economics will not be favorable.

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There has been much talk about a growing disconnect between the recycled food-grade PET flakes market and the virgin PET market. Once flake prices tracked the more expensive virgin market, making using flakes economical as well as being a win-win for marketing. The end of H1 2019 saw virgin resin prices sink, at first to parity with flake prices, and then below. Virgin PET spot prices have never before fallen as low as spot flake prices since at least February 2008, when S&P Global Platts first assessed flake prices. In December of that year, virgin spot prices fell to their lowest premium over flakes -- Eur10/mt -- but that is as close as they have come to parity. Since February 2008, spot virgin PET has, on average, been Eur214/mt higher than flake prices. But, a combination of high stocks, bearish feedstock prices and a delayed start to the summer season this year saw demand for virgin resin fall. Recycled flakes, on the other hand, have proved more resilient.

On the surface, this looks positive for food-grade R-PET demand growth but it may have a less positive impact in the second half of the year.

Converters have been eyeing the possibility of switching much of their flake buying capacity into cheaper virgin resin. However, this is easier said than done.


The continued strength in the European R-PET market, led by a structural supply and demand imbalance, could test consumers' real appetite for supporting sustainability drives.

"It comes down to whether the consumer is really willing to pay substantially more for a 100% recycled bottle or not," a source said, adding that there comes a price point at which it is not economically sustainable.

However, the market is skeptical about the ease with which companies can quickly switch their buying activities away from R-PET to virgin resin. In part, this is down to the difficulty in running different formulas of virgin resin and R-PET blends for individual packaging through existing machinery. More importantly, it may prove difficult to reverse big brands' decisions of increased recycled content, set to last over many decades, just because of poor economics over a relatively short time frame, such as are expected for the rest of the year.


Far from looking to switch to cheap virgin, further recycling pledges are expected to drive some growth in the market in H2 2019.

Coca-cola is to launch 100% recycled R-PET bottles for its Glaceau bottled water brand and is switching its Sprite branded bottles from light green to clear, in order to boost recyclability and make it easier to incorporate 50% R-PET in their manufacture.

Evian launched 100% recycled plastic bottles at this year's Wimbledon tennis tournament.

This level of demand is what has kept R-PET food-grade pellet pricing high while virgin pricing has fallen. And, perhaps more importantly for recyclers, has kept margins over their feedstock - post-consumer bottle bales - at high levels. The gross margin, around Eur425-Eur450/mt from bales to recycled flakes since June 5, is far higher than source estimates of break even costs at around Eur150/mt.

It is not just the bottle industry making gains in their use of recycled plastics. Footwear brand Converse are set to launch shoes made partly from recycled PET bottles, while sustainability and recycled polyester has come to the fore in other fashion brands.

Certainly, it seems impetus is still growing in the recycled market, but it points to an issue the market has been toying with for a while: to meet this demand, there needs to be an increase in supply and an increase in recycling capacity.


In late March 2018, the UK government proposed the introduction of a deposit return scheme as a means of increasing collection rates within the UK. According to the government's Commons Select Committee environmental audit, a deposit return scheme in the UK could significantly increase recycling rates to between 80%-90%, as in countries with successful deposit return schemes. An open consultation closed on May 12 and so far, it is unclear what form, if any, a deposit return scheme in the UK will take.

In continental Europe, many countries remain ahead of the curve on deposit return schemes and there are plans to further increase their scope, particularly in Germany.

While increasing collection rates is an important factor and, perhaps more crucially, the quality of the waste that is being collected, it is only half the battle. To process increased recycled material, more recycling infrastructure will be needed, particularly considering the growing refusal by many Asian countries to take Europe's waste.

Away from the bottle-to-bottle market, developments in both mechanical and chemical recycling infrastructure, are gaining momentum. New polymer recycling facilities are due to come online in H2 2019 and could help to relieve strains on supply.

But there is still the real possibility that demand will continue to outstrip supply in H2 2019, particularly in the recycled PET food-grade market. New plants planned for the coming years, while significant, are not yet of comparable capacity to virgin plastic production. As a result, recyclers recognize that big brands have few other options for securing good quality supply, and remain in a strong position to keep pricing high.

To conclude, recycled plastics markets will continue to gain momentum in the second half of the year, despite unfavorable economics for bottle makers. Investments in new capacity, including by household consumer goods names - such as Ikea Group's investment in the Morssinkhof Rymoplast new polyolefin recycling site - as well as brands' commitments to exceed European Union targets on recycled content will continue to be the main drivers.

-- Benjamin Brooks,

-- Luke Milner,

-- Edited by Richard Rubin,