Continued bearish macroeconomics and substitution to comparatively low-priced virgin and off-spec material has led the majority of players across recycled polyolefin markets to conclude that a recovery in 2023 is unlikely.
2023 has been a largely unprecedented year. Following on from tight supply in H1 2022, many recycled polyolefin players built stocks through the winter of 2022, including in sectors such as horticulture that had never previously pre-built inventories in large quantities, to avoid a repeat in H1 2023.
As macroeconomic conditions weakened - leading to an estimated 50% fall in demand across Q2 year-on-year for non-packaging grades of recycled polyolefins, and 20-30% for packaging grades - and virgin values fell (adding substitution pressure) these pre-existing stocks combined with limited consumption exacerbated oversupply in the market.
This led to sharp falls in non-packaging flake and pellet prices in H1 2023 which have not been fully replicated in bale price movements, particularly for post-industrial recycled polypropylene grades. At the same time, costs remain elevated.
Weak demand has been the result of the cost of living crisis reducing consumers’ discretionary spends and bearish macroeconomic conditions reducing infrastructure projects. Coupled with this, low priced off spec and virgin values have driven demand away from recycled material, and some sellers have been forced to sell at distressed values to free up warehouse space and raise cashflow. Margins have narrowed, amid an ongoing high-cost environment. Some players described current margins as unsustainably low, and players continue to see high risk of consolidation in 2023.
The market is now entering the summer months which typically sees convertors shut down for several weeks of planned maintenance - limiting demand further. This year, several players have entered shutdowns early due to unfavourable economics, and shutdowns are expected to be extended.
This has led to some distressed prices in the market as players look to free-up warehouse space and raise cashflow before the summer maintenance period begins in earnest.
For grades such as recycled high density polyethylene (R-HDPE) pipe-grade black, June would typically see a peak for pricing in an average year as the high season for construction demand collides with players looking to build stock to take them through the summer months. This can be seen from the seasonality index below.
The seasonality chart shows an index of the weeks during the year when prices for that grade of material are typically highest and lowest. Numbers above 1.00 on the X axis show prices are typically higher than average in that week of the year, and numbers below one show that prices are typically lower than average in that week of the year.
The seasonally adjusted price for the current year divides the price against the seasonal index value for that week - with the seasonally adjusted price shown on the secondary X axis. This serves the purpose of aggregating the seasonal impact on pricing and gives a truer picture of the underlying movement of prices.
The seasonally adjusted price shows just how sharp the fall in prices has been in 2023, which has led to pipe-grade black pellets to fall below general purpose black for the first time on record.
Nevertheless, there remain underlying structural shortages - particularly of packaging suitable material - and sustainability pressure from regulators and consumers shows little sign of abating.
Most market players agree that, as a result, the pendulum is likely to swing back from its current extreme in the mid-term. The timing of any rebound in demand, though, remains uncertain and looks increasingly unlikely in 2023. With non-packaging grades making up the bulk of flake and pellet producers’ volumes, even for those players also selling packaging suitable grades, the survivability of players until demand returns remains an open question.
Mark Victory is a Senior Editor, Recycling at ICIS