By John Richardson, Senior Consultant Asia, ICIS
THE PLASTICS or polymers industry was for many years a hidden industry. For most of its history, nobody has known much about the plastics business because it is sandwiched between oil and gas and a huge variety of finished goods. The meat cannot be seen because of the high visibility of the bread around the sandwich.
But now, for all the wrong reasons, companies that produce the polymers that go into everything from plastic bottles and films to Tupperware containers, disposable coffee cups, and plastic bags are being recognized by the legislators and the general public. This is the result of the huge pushback against the scourge of plastic rubbish in our rivers and oceans.
For the longest time, from the birth of the modern plastics industry in the 1950s, nobody has given much thought to the environmental impact of what the polymer companies do.
Just to explain what is meant by polymer producers it is the companies, such as ExxonMobil, Chevron Phillips Chemicals, LyondellBasell Industries, and Dow Chemical, which make a wide array of different types of polymer pellets from raw materials derived from oil and gas.
Their job traditionally more or less ended once they had shipped polymer pellets to the plastic converters or fabricators. These are the group of companies that melt the polymer pellets down in order to reform them into plastic pipes, bottles, films, and bags, etc. – 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 your 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 from 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-day lives. Consumption growth was tremendous.”
No longer. The polymer producers are under tremendous public and legislative pressure to find technically and economically more efficient ways of recycling plastics – in other words, making their products not from oil and gas but from used plastics.
Recycling falls into two categories – mechanical and chemical. Mechanical involves collecting and sorting waste plastic, an expensive and logistically challenging task, and melting it down to turn it back into finished plastic products.
Chemicals recycling involves breaking down plastics back into their chemicals components. What you are left with 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 (PE) and polypropylene.
There is a lot of skepticism within the industry about the economic and technical viability of chemicals recycling. The problem is achieving 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 chemicals recycling over the next five years that 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, especially in the US – the production model could shift to one of numerous small chemicals 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 rubbish off their hands in order to save on fees for landfilling.
Would all of these hundreds of small chemicals recycling plants, however, collectively make enough naphtha raw materials to make the plastics to meet global demand?
This is where the demand side of the equation comes under the picture. Through global initiatives such as the Ellen MacArthur Foundation, the brand owners – i.e. the sellers of bottles of shampoo and detergents and a wide range of other consumer disposables, such as Procter and Gamble and Unilever – have made commitments to switch to recycled plastics and to reduce their plastic consumption.
The retailers, including the major supermarkets, are even introducing bans on plastic packaging altogether, 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 PE.
This is forcing the polymer producers to look much more downstream for their economic success instead of mainly upstream. They will need to work with the brand owners and the retailers to redesign plastic packaging to a.) Make it more recyclable and b.) Reduce its plastic content in the first place.
“Less is more” has become the new Zeitgeist amongst the Millennials, according to research by the brand owners, replacing the “more and more” thinking of their parents.
Social media is placing greater value over experiences rather than things and has raised environmental consciousness. This is pushing the Millennials to consume less modern-stay stuff, including goods wrapped in single-use plastics. It is single-use plastics which are the main cause of the global plastics rubbish crisis.
This is not just a rich-world phenomenon. The ability to connect globally via smartphones has led to the same mindset amongst Millennials in Indonesia as in the West, according to research by one major brand owner. In 2013, just 58m of the population of Indonesia – 24% – owned smartphones. But this year, ownership is forecast to rise to 180m – 67%.
Three scenarios for polyethylene
Polymer companies recognize that their future success won’t just depend on working with the brand owners and retailers on redesigning packaging, which will require them to invest in new technical/commercial teams. They will also have to take responsibility for 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 penalizes or benefits companies, depending on the extent to which they sustainably dispose of plastic rubbish.
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 rubbish 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 rubbish collection and recycling scheme in the city of Muncar in East, Java, Indonesia. The aim is to prevent 10,000 tonnes of plastic rubbish 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.
PE is the polymer or plastic most exposed to the plastic rubbish crisis as more than half of its end-use applications are single-use. It is heavily used 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 11m tonnes, but by 2018 it had reached 102m tonnes. Annual average percentage demand growth was at 5.7%.
The ICIS base case forecast is that from 2019 until 2030 global demand will jump further from 107m tonnes to 156m tonnes at an annual average growth rate of 3.6%. This “business usual” base case assumes major effect from the public and political backlash against plastic rubbish.
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, invests substantially in mechanical and chemicals recycling and 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 rubbish problem. These new services help replace the revenue lost by 2019-2030 cumulative demand growth being 60m tonnes less than in our base.
But, if the polymer industry were to largely ignore the problem 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 entirely wherever possible, in favour of other materials. Here we see PE demand growth falling to just 2% per year.
The effect on the polymer industry would be quite devastating under this third scenario. In each of the years between 2019 and 2030, on a cumulative basis again, demand would be 181m tonnes less than our base case.
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 broad implications.
The good news is that ICIS sees this third scenario as highly unlikely as the polymer companies are showing every indication of taking the plastic rubbish problem very, very seriously.
John Richardson, Senior Consultant Asia, ICIS