Shrinking Plastics – Implications Of Tighter Regulations

By Peter Rawle, Jean-Marc Champagne, Sam Hilton 18 November, 2019

WWF HK's Rawle, Champagne & Hilton offer a detailed guide for investors to master the shifting plastics landscape

Regulations on single-use plastics are rising, bringing higher costs for using plastic, more extended producer responsibility schemes plus increased requirements & subsidies for recycling/collection
World 'virgin' plastic production is likely to decelerate to a CAGR of 1.1-2.5% by 2030; with only 2% recycled & 32% leaked currently, improved recycling, disposal & recycling will slow demand growth
Co's which adapt to new regulatory regimes & master new tech for plastics recycling will be “winners” in the plastics industry; those sticking with existing biz models will be the “losers”

This article is based on the report “Shrinking Plastics: implications of Tighter Regulations on the World Industry”, published by WWF-Hong Kong in 2019 and downloadable here.


It’s not hard to get people to agree that plastic pollution in the sea is a bad thing. It is more difficult to get people to agree what to do about it, other than accepting that the “3 Rs” of Reduce, Re-use and Recycle outline the way ahead.

Increased regulation is coming to the plastics industry

Public awareness of and concern about marine plastic pollution are increasing quickly. In response to that public concern, the number of new laws and regulations intended to restrict the use of single-use plastics has been steadily rising every year since the middle of the decade. The chart below shows the trend for regulations affecting plastic packaging.

The number of new laws & regulations intended to restrict the use of single-use plastics has been steadily rising every year

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We at WWF don’t know exactly which measures the world will use in order to reduce plastic pollution – but we do expect the number of new measures to be large. Those measures are likely to concentrate on encouraging the “3 Rs”. We expect them to have a major impact on the plastics manufacturing industry in the next few decades.

We think that the following types of measures are likely;

  • Higher costs for using plastic in various applications (e.g. “shopping bag” charges).
  • More extended producer responsibility (EPR) schemes for plastic.
  • Increased requirements for plastic recycling and the collection of waste plastics.
  • Increased subsidies for plastic recycling and the collection of waste plastics.

These measures should reduce demand for plastics overall, increase the cost of making and using plastics and encourage the replacement of “virgin” (i.e. non-recycled) plastics with recycled plastics.

The growth rate of world plastics production is likely to decline significantly

World “virgin” plastic production has been growing at an average annual rate of 3.5-4.0% for the past decade (Chart below). Many observers think it will continue to grow at close to this rate: 3.0-3.5% annually.

We think that this CAGR is likely to decelerate significantly below 3.0-3.5% over the decade to 2030 & will be 1.1-2.5%

We think that this CAGR is likely to decelerate significantly below that range over the decade to 2030 and will be 1.1-2.5%, depending primarily on the extent of the new measures affecting the production, use and disposal of plastics. Because this deceleration in demand growth is greater than is generally expected, it is bad news for the plastics industry and investors in it.

Note that this deceleration in demand still means that annual plastic production – and so probably annual plastic pollution in the seas – will increase further. WWF is calling for a real decline (i.e. a negative CAGR) in world plastic production over the coming decade which, if achieved, would result in an even worse situation for the plastics makers.

Problems and opportunities in recycling

The world does a bad job of recycling waste plastic. The chart below shows one estimate of how the world treats plastic packaging, after it has been used. It shows that only 2% of used plastic packaging material is recycled into new plastic packaging material (“closed loop recycling”).

Only 2% of used plastic packaging material is recycled…

 

…while 32% of the used materials enters the natural environment as a result of accident, careless disposal or deliberate actions

Meanwhile, 32% of the used material “leaks”. This means that it is not securely disposed of, through recycling, incineration or landfill but instead enters the natural environment as a result of accident, careless disposal or deliberate actions. Some of that 32% ends up in the seas, creating marine plastic pollution.

The environment would benefit in various ways if the plastics industry became much more “circular” – i.e. if it raised the 2% figure sharply while cutting the weights of the other destinations for packaging waste, especially the “leakage”.

Improved collection, more secure disposal & increased recycling will be the major cause of  slower growth in virgin plastic demand

The absence or weak presence of regulations that require recycling as well as the technical difficulties of recycling most plastic waste and the unprofitability of doing so are all reasons for the low 2% figure. Yet all three of these causes for low recycling are likely to lessen in the coming years. We expect improved collection and more secure disposal of plastic waste, together with increased recycling, to be major causes for the slower growth in virgin plastic demand which we predict.

Bad news for plastics manufacturers, especially if they ignore the coming changes and are focused on low value-added products

Companies which are “ahead of the curve” in adapting to the new regulatory regimes and which, in particular, can master new technologies for plastics recycling will be among the “winners” in the plastics industry over the next few decades. Those companies which continue with existing business models that do little to lessen marine plastic pollution will be the “losers”.

Plastics-manufacturing co’s with large exposures to commodity-type plastic products are more vulnerable to the risks

Plastics-manufacturing companies with large exposures to commodity-type plastic products are more vulnerable to the risks caused by the decelerating demand growth and tougher regulatory environment for plastics. We have calculated “monomer ratios” – rough indices of this vulnerability – for major plastics makers with publicly-traded (“listed”) shares and show them below.

How institutional investors should respond to these threats and opportunities

For all investee companies, encourage them to:

  • Reduce the amount of plastic they use,
  • Reuse that plastic, and
  • Recycle waste plastic and support improved collection and disposal of waste plastic.

For investee companies in the plastics manufacturing industry:

  • Encourage them to develop and use new plastic recycling technologies.
  • Ask them to disclose their plans to cope with the likely deceleration of growth in virgin plastic resin sales caused by technological change and tighter regulations against plastic pollution.
  • Revise investment strategies to reflect the risk of decelerating demand on plastics manufacturers whose policies to cope with that risk are inadequate.
  • Revise investment strategies to reflect the risk of additional taxes or other financial penalties being imposed on the plastics industry because of increased public concern over waste plastic pollution.

For investee companies which use plastic packaging (e.g. beverage bottlers, retailers):

  • Encourage them to take responsibility for dealing with their waste and to introduce extended producer responsibility schemes. This could include simplifying packaging designs and reducing the overall amount of plastic packaging used in order to facilitate recycling and reduce plastic consumption.

Further Reading

  • HK Submerged? Is This Map For Real? – Rising sea level is a catastrophe waiting to happen but we have to avoid alarmism & choose the right map to visualise the risks. Getting the right scenarios also matter. Find out more in our review
  • Why Hong Kong Needs A Meat Tax – Want to help stop Amazon deforestation? How about better health? With Asia’s climate action looking bleak, Greenqueen’s Ho sees a meat tax as HK’s chance to become a regional leader
  • Nepal Clean Irrigation Initiative – Up in the mountains, communities still rely on fossil fuels but Solerico is out to change that in Nepal with solar-powered pumps. Their co-founder & CEO Spencer expand on the challenge, financials & impact
  • Race For Water – Fighting Plastic Pollution In Our Oceans – What does the world’s largest solar-powered catamaran have to do with ocean plastic pollution? The Race for Water Foundations’ Lee explores this sustainable solution for ocean conservation with us
  • Climate Action 100+ First Progress Report – Having brought 370+ global investors together, what has Climate Action 100+ achieved? From setting emissions reduction targets to disclosing climate scenario analyses, check out key results from their director Wright
  • Plastic Waste: The Vector For Change – USD13billion is the annual cost of impact of plastic pollution to our oceans. Doug Woodring, founder of Ocean Recovery Alliance, shares challenges ahead and strategies for a plastics-free ocean
  • Plastic, China & The Circular Economy – Can we avoid more plastics than fish by 2050? Only around 10% of plastics gets recycled, but this is where opportunities lie. Woodring, founder of Plasticity Forum, shares key points from the 5th annual forum on the circular future of plastic
  • Eight Million: China & The Global Plastic Challenge – Sustainable Asia’s Marcy Trent Long & Sam Bekemans share their new podcast series “Eight Million”, which looks into the plastic waste pollution issue globally & in China and what is being done. China Water Risk is featured in episode 2
  • Can Loop’s 21st Century Milkman Fix Plastic Plague – Called the 21st Century milkman, is Loop’s circular shipping platform the answer to our planets massive plastic problem? Corporate Knight’s Adria Vasil explores
  • Modern Water Dispensers: Shifting Consumers Off Plastic – With Hong Kong throwing away 5.5 million plastic bottles every day, Urban Spring’s Jennie Wong explains how their network of water refill stations could be the way forward

Peter Rawle
Author: Peter Rawle
Peter Rawle is a consultant for WWF-Hong Kong's Environmental Finance team and has worked in Asian equity markets since 1983. He has variously filled the roles of equity analyst, investment strategist and head of research for investment banks, including UBS and Schroders. He has also worked in equity investment for several asset managers. He has run his own company, which trains securities analysts. Before moving into finance, he worked in the engineering industry in the UK.
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Jean-Marc Champagne
Author: Jean-Marc Champagne
Jean-Marc worked for 17 years in the investment banking industry for Merrill Lynch in New York City in equities, Bank SinoPac, BNP Paribas and Jefferies in Hong Kong in equities and equity derivatives. Jean-Marc was most recently at Jefferies and left in mid-2015 as a Senior Vice President, Equity Derivative Sales to join WWF to make a proper contribution to society and the world. Jean-Marc is the Climate Finance Advisor for WWF-Hong Kong and advises institutional investors on the financial risks related to climate change.
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Sam Hilton
Author: Sam Hilton
Sam Hilton is a Senior Research Analyst for Environmental Finance at WWF-Hong Kong. He was previously an equity research analyst at Keefe Bruyette & Woods and FoxPitt, Kelton (acquired by Macquarie) in Hong Kong, where he covered banks, brokers, and exchanges across the Asia-Pacific region.
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