This led to heavy substitution away from recycled material back to virgin, particularly by converters and brands not committed to recycled content targets. In some cases, recycled content in some applications such as food trays dropped from around 70% to below 20%, or even zero, according to recyclers in the European market at the time.
Six months later, colourless flake sellers have seen a flood of enquiries from those same customers who had substituted away from R-PET last year who are looking to make up the shortfalls in virgin PET with R-PET. The fact that virgin PET prices were 6% higher than R-PET colourless flake at the end of February 2021 also attracted virgin buyers back to R-PET.
However, these buyers are now left wanting because there is not enough material in Europe to meet their needs. Customers who continued to purchase R-PET throughout 2020 receive preferential treatment from flake sellers, while global beverage brands with ever-growing recycled content targets suck up even more food-grade pellet and colourless flake material to meet their needs.
Substitution is not the only factor behind the current strength of recycled polyolefins demand.
The spike in virgin prices has coincided with the restart of delayed recycled polyolefin projects from the packaging sector, which were pushed back at the height of the COVID pandemic.
Delays were due to workforce shortages, testing centre backlogs and a de-emphasis on sustainability goals amid wider economic concerns.
Amid sustained consumer and regulatory pressure against single-use plastics, demand for recycled polyolefins from packaging firms has been growing sharply in the past couple of years, and is expected to continue to grow in the mid-term.
Packaging consumption for recycled material has further been boosted in southern Europe ahead of the July implementation of a €450/tonne tax on non-recycled plastic packaging in Italy. Full details of the tax are expected to be announced in April, but recycled material will be exempt, and this has encouraged players to source increasing amounts of post-consumer content. Spain is also planning to introduce a €450/tonne tax on non-recycled plastic packaging, which is due to pass into law later in the year, although details of when and how it will be implemented are yet to emerge.
In addition, in January, an €800/tonne plastics packaging charge came into effect in the EU. This charge is not a tax, but is payable by nation states. The methods used to meet the cost of the charge will be up to individual countries and the EU Council has not proposed any regulatory stipulations around this. Individual countries are free to adopt different approaches and could seek to recoup the cost of meeting the charge from differing parts of the supply chain, leading to potential regulatory divergence.
Separately, under the EU’s Single Use Plastics Directive, all PET beverage bottles must contain 25% recycled content by 2025. Weaknesses in collection and sorting strategies across the region, together with many brands aiming to deliver higher recycled content targets before 2025 means supply of food-grade R-PET is increasingly limited in Europe.
Many large brands have the ability to pay for the higher-priced food-grade pellets while smaller brands may not, and between 80-95% of pellet volumes in Europe are now tied up in long-term contracts according to market estimates. This has led to a growth in extrusion technology being installed across Europe that allows preform producers and converters to take cheaper-priced R-PET flake and produce food-grade R-PET via the extrusion process.
Demand for colourless flake from the bottle to bottle sector is growing as a result, competing with the traditional sheet sector for the same material.
Results of the ICIS study of the R-PET industry in 2019 show the share of R-PET supply absorbed by the food contact bottle market rose to 32% compared with 25% in 2018. The PET sheet sector remained the single largest market using R-PET in 2019, with 38% share of the total supply, but was lower than the 40% share of 2018.
Demand from the bottle sector fuelled by legislation and higher recycled content targets mean demand for R-PET is likely to remain strong even after virgin availability improves.
In the recycled polyolefins markets, views are divided on the extent of substitution once virgin availability increases, with some R-PP players expecting demand to fall and other players expecting players that have increased recycled content not to substitute back to virgin.
Consumption for R-HDPE is seen as more fragile, and although it had been rising prior to virgin availability issues it had not risen to the same extent as R-PP, and fundamentals remain volatile. R-HDPE pellet demand is currently being predominantly driven by substitution from virgin. As a result, several R-HDPE players have spoken of a potential price and demand bubble once virgin availability improves.
Consumption from existing R-PP buyers was estimated at up to 20% higher in March year on year. There has also been a flurry of new buyers attempting to source recycled material in order to keep plants running. As a result, several players are sold out for March and buyers are understood to be attempting to secure material for several months ahead amid expected shortages.
Post-industrial PP bale supply remains tight due to the ongoing impact of the coronavirus pandemic. As well as disrupting some collection activities, the pandemic has meant that fewer consumers are replacing their cars. End-of-life automotive is typically the largest single source of post-industrial R-PP bales.
Post-consumer PP and HDPE bales supply is also tight. Although at the height of the pandemic some waste management companies had seen additional volumes entering the stream due to home working, other waste managers are seeing that the waste collection mix has shifted unfavourably against polyolefins.
R-LDPE natural post-consumer bale demand continues to outpace supply and continues to strengthen amid the spike in virgin values. Natural bales are predominantly sourced from France where eco-modulation subsidies - worth up to €400/tonne depending on position in the chain, according to sources - counterbalance the cost of separating and sorting. This has created a stream of material suitable for primary packaging applications that did not previously exist. Demand from packaging firms remains substantial because of sustainability targets that go significantly beyond current market availability
Conversely, R-LDPE mixed coloured and black pellet demand, as well as post-consumer mixed-coloured LDPE bale consumption, remains low because of COVID-19 related retail closures reducing demand from the key bin bag sector, and low price bin bags from China entering Europe. R-LDPE pellets have not seen the same level of substitution as R-HDPE and R-PP as a result.
Demand for recycled polyolefins is growing sharply from the packaging industry, and it is now the predominant end-user of some grade of recycled polyolefins, such as natural material. Packaging companies are increasingly prioritising sustainability commitments over cost-savings against virgin
Nevertheless, the majority of recycled polyolefins are currently consumed by non-packaging applications, which typically purchase based on cost-saving against virgin.
Underlying demand from the flower pot and construction sectors remains firm as players focus on home improvements while lockdown restrictions remain in force in Europe.
The only sector where demand is weaker is automotive. This is because of low consumer vehicle replacement rates during the ongoing movement restrictions across Europe. This is predominantly impacting demand for black R-PP pellets.
Low vehicle replacement rates have also limited post-industrial PP bale supply - a primary feedstock for the R-PP chain. In normal trading conditions, end-of-life automotive typically represent around 25% of post-industrial bale supply.
Additional reporting by Linda Naylor, spreads correct as of 9 March 2021