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
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
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.
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