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Has COVID-19 changed the economics of plastics recycling?

Co-authored by Michael Bermish, Principal Analyst, Alexandra Tennant, Senior Analyst PET and RPET, and Chloe Kinner, RPET Global Lead, of Wood Mackenzie. For more COVID-19-related resources, visit the Wood Mackenzie Coronavirus Research Hub.

The global pandemic sent a shockwave through the plastic recycling industry. The impact of lockdown, industry closures, and sudden shifts in product demand can be felt in every part of the recycling chain. What will the picture look like as the clouds begin to lift?

In a recent webinar, we explored how coronavirus has affected the recycling industry in three core markets: the United States, South America, and Europe. With a detailed look at each stage of the process – collection, reclamation, and reprocessing – we assessed the effect on margins and profitability, and what it means for the short- and long-term outlook.

Falling prices mean virgin plastic is back

For manufacturers, replacing virgin plastic or VPET with recycled material (RPET) is key to their sustainability goals. But the price of VPET has seen a sharp fall in 2020. Raw-material costs were already declining, but the collapse of crude oil prices has steepened the drop.

As a result, in some areas – such as sheet or thermoform production – manufacturers are switching back to VPET, instead of using recycled product.

01 Us Virgin Pet Prices

We’re now forecasting growth in VPET consumption in the United States for 2020, despite the sharp economic recession. Travel restrictions and the absence of sports and entertainment events have seen the single-serve beverage market take a hit, but lockdowns have increased demand in other areas. Panic-buying and filled pantries have resulted in greater consumption of case bottle water and large-size juices, for example, as well as pandemic-specific items such as hand sanitiser and cleaning products.

The U.S. fibers market has been hit hard – which will cut demand for recycled plastic

Food packaging and recycled bottles are the fastest-growing markets for recycled plastic. But the largest end-use is fibers, with a wide range of uses including fiberfill (pillow stuffing), home furnishings, and carpets.

Lockdowns have had a massive impact on fiber demand. At the height of the pandemic, apparel stores and industries such as auto manufacturers and housebuilders all shut down temporarily. The one bright spot has been in personal protective equipment (PPE), with increased demand for face masks and visors.

Overall, for 2020, we expect fiber production to decline. There are signs of improvement as lockdowns ease, but any recovery in the second half of this year could be derailed by further waves of the virus.

02 Us Polyester Fibre Textile Mill Consumption

Lockdown has skewed collection rates and industry supply

The recycling industry depends on a steady supply of reclaimed plastic for its feedstock. Slower consumption growth means the RPET industry is even more reliant on raising collection rates to increase volumes. Not surprisingly, this has been severely affected by countries going into lockdown.

South America’s collection rates tend to eclipse the United States, due to economic incentives to return recyclable material. People collect bottles from the street or landfill to make money.

03 Pet Bottle Collection Rate For Brazil Mexico Us

In Mexico, collections continued during lockdown, but bottles for recycling were in shorter supply. While this was temporary, there is concern that the PET bottles that went uncollected have forever been lost to the circular economy.

By contrast, on the U.S. west coast, particularly in California, there was evidence of people holding onto recyclable material while facilities were closed in lockdown. As a result, there was a substantial increase in supply when centers reopened in June.

A (temporary) silver lining for margins

Coronavirus has actually resulted in an improvement in the economics for producers of some types of recyclable material.

In the United States, there is still a premium for the clear flakes and pellets, which are then processed into some new RPET products. Despite the fall in prices for baled bottles (the stage after sorting, where plastics are washed, grinded, and pelletized), prices for RPET clear flakes and pellets have held up.

Why has this happened? In some segments, companies have returned to using VPET, but in others, brands remain committed to sustainability pledges. They are continuing to demand RPET, keeping the price higher.

04 Us Rpet Pellet Margin January And July 2020

This is positive, but it’s not yet clear how long these premiums can last. And it’s also not the case across the board. For example, in Europe flake prices have started to decline, meaning reclaimer margins have eroded substantially. Some producers are reporting they may need to reduce RPET production.

Regulation is the main driver in Europe

Big brands’ commitment to recycling has played a huge part in the global sustainability surge. In Europe though, it’s arguably regulation that’s really driving change – particularly for non-consumer-facing companies, such as the sheet and strapping producers, who don’t face the reputational risk of switching from RPET to lower-cost VPET.

The implementation of the EU’s single-use plastic directive is still intact, although at a country level Italy has delayed its new plastic tax until 2021 and the UK has extended the consultation period for its packaging tax. There is a risk that without further investment into the infrastructure of the industry we’ll see companies and countries striving to meet a target, falling short, and letting the pandemic – and the significant disruption it caused – take the blame.

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