The US recycled PET market has begun to open up again, following significant disruptions at the height of the coronavirus pandemic that led to nine out of ten bottle bill states forgoing their recycling commitments.
At its height, recyclers in California were reporting as much as a 70% drop in Grade A post-consumer PET bottle bale supply and many material recovery facilities (MRFs) across the west coast and mid-west region were either shutting shop or reducing production significantly.
Exacerbating this situation was a bearish virgin PET market. Virgin prices plummeted to $857/mt (around 39 cents/lb) on April 29, the lowest level seen since S&P Global Platts started assessing the product in February 2006 and nearly 42% below year-ago levels. This led many PET consumers to turn their backs on the recycled market.
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With such low virgin PET prices and concerns over supply availability of recycled PET, many large food and beverage packaging manufacturers entered into six to 12-month contractual agreements with virgin resin producers.
Go deeper: Recycled plastics feel the heat from consumer demand
“Supply is only a small part of the equation – with the decline in oil prices, virgin prices have had an unprecedented cost advantage in this market,” said Darrel Collier, executive director of the National Association for PET Container Resources. “From time to time virgin prices do drop below R-PET prices, but now we’re talking a 20-cents/lb type of difference. I’ve never seen that kind of delta before.”
As supply constraints in the R-PET market began to ease, this only exacerbated the dire situation.
In late May and early June, both shelter-in-place orders and the retail enforcement suspensions began to lift and the recycling sector saw a huge flood of deposit bottles as residents returned their hoarded recyclables. Therefore, as supply returned to, and even outpaced, pre-pandemic levels, demand for feedstock bales had significantly decreased as cheap virgin resin displaced clean flake.
And by July, with recycled volumes returning to the market and local processors unable to absorb the influx, prices for deposit PET bottle bales had dropped to a record-low of 9 cents/lb, nearly 53% from highs seen in late April, Platts data showed. Consumers, still eyeing cost saving measures, continued to opt for virgin resin.
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Recyclers are fearful that continued deterioration of prices will render their trade completely uneconomical.
“This is an extremely bad situation as the cost of processing is far greater than the value,” said a source. “The current regulations do not allow CalRecycle [California’s Department of Resources Recycling and Recovery] to make up the difference. This means recyclers and processors are going negative on a CRV Grade (PET) that they are forced to buy back from the public.”
For many in the market, the answers lie in government investment and mandates.
Infrastructure investment needed
Without government mandates that require states, cities, or brand houses to incorporate a certain level of recycled content in consumer goods sold to the public, demand for recycled material is voluntary and dictated by companies with a “green” agenda. In 2019, there was a huge surge of public pledges from large beverage companies, such as Coca-Cola, Pepsi, and Nestle, to incorporate an ever-increasing minimum recycled content in their consumer goods, as well as a historic influx of recycling-focused legislation in Congress.
“Relative to meeting some of the 2025/2030 commitment of using minimum R-PET content, there has to be a lot more infrastructure investment in the recycling industry,” said Collier. “We’ve also got to start collecting more and push the plastics recycling rate above 30%.”
However, increasing the amount of material that is recycled and then actually processed is not an easy feat as the recycling sector faces a very cost-sensitive and volatile supply chain. When virgin prices hit a certain low point, the entire recycling value chain, all the way down to the bale market, feels the pressure.
The easiest way for the recycled plastics markets to retain profitability when compared to virgin is to lower raw material bale prices. When this happens, however, recyclers are no longer able to make a profit as costs of sorting and processing these bales are more rigid.
Because MRFs oftentimes have their own landfills on site, these sorting facilities have no choice but to landfill materials when the price of a bale gets too low, as landfilling fees are often cheaper than the cost of producing a bale.
“When I say we need investment, I’m talking MRF investment,” Collier added. “Not in what we call traditional reclaimers, the guys who buy bales and turn into pellet or flake, but MRF investment because [landfilling] has to stop.”
On the other hand, when the price of a bale gets too high, reclaimers, who are competing with extremely cheap virgin PET resin, then have a hard time selling downstream flake to end users – especially those in California who face even cheaper import resin prices.
Therefore, to end the vicious cycle, there needs to be a complete decoupling of the virgin and recycled plastics markets and demand has to stop being voluntary. For this to happen, more government action is needed, as well as more federal mandates requiring manufacturers to incorporate a certain amount of recycled content into their product offerings.
Legislative push resumes
COVID-19 slowed the momentum of sustainability bills in Congress, amid concerns over shrinking government revenues, and as many recycled-content mandates were vetoed and plastic bags bans were suspended in the first half of 2020. But recycling is re-entering the national spotlight, as the pandemic has brought to light just how “essential” waste management and material recovery really is to the packaging supply chain, as well as to the ethical consumer.
In mid-June, the Plastic Waste Reduction and Recycling Act was introduced, joining other legislative pieces such as the Break Free From Plastic Pollution act and the RECOVER Act introduced in late 2019/early 2020. These acts include such proposals as a virgin resin fee, tax incentives for recycling businesses, and infrastructure funding.
Additionally in June and July, many individual states have approved recycling market support bills and contamination laws, resumed the modification of solid waste laws, and lifted single-use plastic ban suspensions, proving that the year 2020 still has the potential to be the once-predicted groundbreaking year for the recycling industry.
“In the long run, it does not help anyone for there to be less of a competitive market and less strength of recycling infrastructure,” a West Coast buyer concluded.
Some hope for the industry
As the market nears the last few weeks of summer, when volume generation is typically at its highest and prices at their lowest, some recyclers are hopeful that the cooler weather will allow PET bale supplies to tighten, as people normally drink less in fall and winter months, lending much-needed support to prices.
In addition, because there is typically a two-to-three month lag between rising feedstock prices and those of their downstream products, recovery in upstream markets is expected to soon trickle down into the virgin PET market. According to Platts data, upstream paraxylene and purified terephthalic acid markets have risen in recent weeks on the back of higher crude prices, which have started to inch back up to pre-pandemic levels.
“Overall we expect contract polymer prices to peak in August or September,” said Rob Stier of S&P Global Platts Analytics. “Spot prices may peak this month. [We] already had big price moves from the lows set in April and May, so most petchems [are] in a two-plus month bullish price increase environment.”
Collier added that the expected increase in virgin PET prices will lead to improved demand for R-PET: “Let those who converted to virgin on a short-term basis come right back to R-PET.”
Most resin producers tend to base contracts on raw material prices. As a result, if this rise in virgin PET prices is realized, R-PET may once again become a competitive alternative.