Plastics producers are becoming famous for all the wrong reasons
The plastics or polymers industry was for many years a hidden industry. For most of its history, nobody knew much about the plastics business because it was sandwiched between oil and gas and a variety of finished goods.
But now, companies which produce the polymers that go into everything from plastic bottles and films to Tupperware containers are being recognised by legislators and the general public for all the wrong reasons. This is the result of the huge pushback against the scourge of plastic waste in our rivers and oceans.
Now, companies which produce the polymers that go into everything from plastic bottles and films to Tupperware containers are being recognised by legislators and the general public for all the wrong reasons.
Since the birth of the modern plastics industry in the 1950s, nobody has given much thought to the environmental impact of polymer companies like ExxonMobil, Chevron Phillips Chemicals, LyondellBasell Industries and Dow Chemical. These companies make a wide array of polymer pellets from raw materials derived from oil and gas.
These companies’ jobs traditionally more or less ended once they shipped polymer pellets to the plastic converters or fabricators, which are the companies that melt the polymer pellets down in order to reform them into plastic pipes, bottles, films and bags—items that have been at the very heart of our modern way of life.
“You do what has to be done to make money, and the way to make money as a polymers company was to look upstream, towards the cost of oil and gas raw materials,” said a strategic planner with a major oil, gas and polymers company.
“All that mattered was how cheap you could get your raw materials for, as nobody questioned how polymers were made from a sustainability perspective. Demand also wasn’t the problem as plastics found their way into more and more aspects of our modern lives. Consumption growth at this time was tremendous.”
However, this is no longer the case. Polymer producers are under tremendous public and legislative pressure to find technically and economically more efficient ways of recycling plastics—in other words, ways of making their products not from oil and gas but from used plastics.
Recycling falls into two categories: mechanical and chemical. Mechanical recycling involves collecting and sorting waste plastic, an expensive and logistically challenging task, and melting it down to turn it back into finished plastic products.
Chemical recycling involves breaking down plastics back into their chemical components. After this process, the results are transportation fuels and something called naphtha. Naphtha is traditionally made from oil refineries and is a raw material for producing polymers such as polyethylene and polypropylene.
There is a lot of scepticism within the industry about the economic and technical viability of chemical recycling.
There is a lot of scepticism within the industry about the economic and technical viability of chemical recycling. The current dilemma for the industry is how to achieve the levels of purity necessary to produce naphtha of the right quality to replace naphtha made from an oil refinery.
But some industry players are predicting major breakthroughs in chemical recycling over the next five years that will radically change the polymers business.
Instead of building new, multi-billion dollar conventional polymer production complexes—and there has been a huge wave of construction of these complexes over the last five years in the US—the production model could shift to one of numerous small chemical recycling plants.
The plants would take waste plastic from landfill sites at a negative raw material cost. The operators of the landfill sites would be happy to pay polymer companies to take plastic waste off their hands in order to save on fees for landfilling.
The question remains for manufacturers: Could all of these hundreds of small chemical recycling plants collectively make enough naphtha raw materials to meet global demand?
This is where the demand side of the equation comes into view. Through global initiatives such as the Ellen MacArthur Foundation, the brand owners—i.e., the sellers of bottles of shampoo, detergents and other disposables, such as Procter & Gamble, Unilever and Clorox—have made commitments to switch to recycled plastics and to reduce their plastic consumption.
Retailers, including major supermarkets, are even introducing bans on plastic packaging all together, replacing it with more recyclable packaging made from paper and aluminum. There have been numerous government initiatives, across both the developed and developing world, to ban certain applications of plastics entirely, such as the ubiquitous and much maligned supermarket shopping bag, which is made from polyethylene.
This shift in demand is forcing the polymer producers to look much more downstream for their economic success instead of mainly upstream. They will need to work with brand owners and retailers to redesign plastic packaging to (1) make it more recyclable and (2) reduce its plastic content in the first place.
“Less Is More”
The slogan “less is more” has become the zeitgeist amongst millennials, according to research by brand owners, replacing the “more and more” thinking of their parents.
Furthermore, social media is placing greater value on the importance of experiences over the accumulation of things and has supported the gradual rise in environmental consciousness. This is pushing millennials to consume fewer modern goods, including those wrapped in single-use plastics, which are the main cause of the global plastics waste crisis.
This shift towards a focus on gaining experiences over the accumulation of things is not just a phenomenon in the developed world. The ability to connect globally via smartphones has led to the same mind set amongst millennials in Indonesia as in the West, according to research by one major brand owner. In 2013, just 58 million people in Indonesia, or 24% of the population, owned smartphones. In 2019, ownership is forecasted to rise to 180 million, or 67% of the population.
Three Scenarios for Polyethylene
Polymer companies recognise that their future success won’t just depend on working with brand owners and retailers on redesigning packaging. They will also have to take responsibility of the final disposal of plastic products.
Some companies believe that legislators will introduce plastics taxes, or even a plastics credit trading system similar to the carbon credits system in the EU, which penalises or rewards companies, depending on the extent to which they sustainably dispose of plastic waste.
The core of the disposal problem centers on ten rivers in the developing world: eight in Asia and two in Africa. A 2018 study by the Helmholtz Centre for Environmental Research estimates that 90% of the plastic waste in the world’s oceans comes from these ten rivers.
One polymer company leading the way is the Vienna-headquartered Borealis. It is partnering with the Norwegian government and other companies in establishing a plastic waste collection and recycling scheme in the city of Muncar in East Java in Indonesia. The aim is to prevent 10,000 tonnes of plastic waste from leaking into the ocean over the next five years.
“I think it’s only a question of time before we see some sort of global legislation aimed at plastic rubbish. As legislation develops, this could change the terms under which we operate,” added the strategic planner with the oil, gas and polymers company.
Polyethylene (PE) is the polymer or plastic most exposed to the plastic waste crisis as more than half of its end-use applications are single use. PE is heavily used it to make plastic films, food containers and bottles.
The growth of PE demand since its invention in the 1930s, when it was first used to insulate radar cables, has been quite staggering. The ICIS Supply & Demand data on PE goes back as far as 1978. In that year, global consumption was just 11 million tonnes, but by 2018, it had reached 102 million tonnes, with the annual average percentage of demand growth at 5.7%.
The ICIS “business as usual” base case forecast is that from 2019 until 2030 global demand will jump further from 107 million tonnes to 156 million tonnes at an annual average growth rate of 3.6%. This base case assumes major effects from the public and political backlash against plastic waste.
The two other ICIS scenarios present very different outcomes for PE demand and thus the financial fortunes of the polymer producers.
Scenario 2 assumes moderately lower growth of 3% per annum as the industry successfully works with brand owners and retailers to redesign packaging and invests substantially in mechanical and chemical recycling, as well as in reducing river and ocean pollution.
Instead of being focused mainly on getting hold of cheap oil and gas raw materials to make more and more PE, the focus of the producers switches to being service or solution providers for the plastic waste problem. These new services would also help to replace the revenue lost from 2019 to 2030 through cumulative demand growth being 60 million tonnes less than in the base.
Unless plastics producers carry out major redesigning of packaging, brand owners will, wherever possible, turn to packaging materials other than plastics, such as paper and aluminum. The problem is that recycling rates in aluminum and paper are already very high globally at around 50%, whereas in plastics recycling rates are much lower—for some polymers the rate is below 10%.
Currently, the difficulty is the way that plastics packaging is produced. Flexible packaging applications, like the stuff used in potato chip packets, milk cartons and single-serve sachets, involve multiple layers of different types of plastic, paper and cardboard. It is only possible to mechanically recycle one type of plastic at a time, and when you manufacture multi-layer products, it is impossible to re-separate the layers.
The other problem is collecting plastic waste. Flexible packaging and plastic films are so low in weight, and so widely dispersed, that waste collectors lack the economic incentive to collect the waste. So, even assuming that packaging can be re-designed to make it more recyclable, this challenge would also have to be addressed.
The onus is thus on the plastics companies to work with the Fast-Moving Consumer Goods (FMCGs) to redesign packaging, using polymer science to ensure that performance doesn’t suffer. The FMCGs don’t care what their packaging is made from, as long as it works, and, increasingly, as long as it satisfies the rising environmental concerns of their customers.
But, if the polymer industry were to largely ignore these problems, then PE would be increasingly replaced by other more recyclable packaging materials such as aluminium and paper. Brand owners and retailers would stop using PE wherever possible in favour of other materials. PE demand growth in this third scenario would fall to just 2% per year.
The effect on the polymer industry would be quite devastating. In each of the years between 2019 and 2030, on a cumulative basis again, demand would be 181 million tonnes less than our base case.
This worst-case outcome would therefore have broader implications.
In the great scheme of things, Scenario 3 might appear to have few consequences beyond the effect on the companies themselves. But many of the major polymer producers are also oil and gas producers and some of the household names that are important for stock markets and pension funds. This worst-case outcome would therefore have broader implications.
The good news is that this third scenario seems highly unlikely as the polymer companies are showing every indication of taking the plastic waste problem very, very seriously.
By John Richardson, Senior Consultant Asia, ICIS