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Plastics sustainability: Risks and strategy implications
Plastics are an indispensable part of modern society. Compared with alternative materials, plastics reduce the overall carbon footprint - both for the durable and no-durable goods we consume and the packaging used to protect and distribute those goods. Plastics demand growth has been driven by its value-in-use, as it represents the best material choice for a wide array of applications due to its many cost-effective properties. However, the impact of uncontrolled management of plastics waste after initial use, which contributes to land, river, and oceanpollution as well as biological food chain effects, is damaging the public image of chemicals. It is also fostering an increasing number of regulatory mandates and policies from consumer product companies seeking to curb plastics usage. The proposed solutions often do not consider the viability of other materials solutions and lack a fundamental understanding of the associated infrastructure capabilities or needs.
From a waste management standpoint, the chemical industry has historically focused its attention on technical achievements that reduce the initial consumption of plastic used to produce and package products. However, the lack of a more robust and circular approach by value chain stakeholders has led to a crisis of plastics pollution, which has become a disruptor for the chemical industry.
The global scale of the problem is daunting, and the industry's challenges continue to escalate with global demand growth, which is fueled by consumer convenience trends and the robust performance properties of plastics. If overall plastics consumption continues with the same usage patterns (see Figure 1) plastics waste in landfills and the environment will grow to over 10.5 billion metric tons by 2030.
This "plastics paradox" of high value-in-use versus unmanaged waste has placed plastics and the chemicals industry under intense public scrutiny. Accumulated plastics waste in oceans from the uncontrolled release of debris via rivers, particularly in Southeast Asia, provides a striking visual reminder of damaging environmental effects. Plastics sustainability is now one of the top priorities for the chemical industry as it threatens to disrupt demand and, at the public level, be viewed as an existential threat that will challenge the industry's social license to operate. The findings from a recent IHS Markit multi-client study, Plastics Pathway to Sustainability, exposes four key findings associated with plastics sustainability and reviews numerous strategic implications for the plastics value chain.
The potential impact on virgin resin demand is significant
Near 50% of the virgin demand growth (from 2018 to 2030) for polyethylene (PE) and polypropylene (PP) is viable for recycle or displacement for the major demand centers. This represents over 20 million (MM) tons of PE and 20 MM tons of PP). Nearly 20% of polyvinyl chloride (PVC) virgin demand growth (from 2018 to 2030) is also viable for recycle or displacement for the major demand centers. This is occurring at a time when chemicals are increasingly viewed as a strategic portfolio hedge to plateauing oil demand. While global demand for fuels is growing at 1% annually and expected to plateau in about two decades, the demand for chemicals is growing at a multiple of GDP -3% to 4.5% annually. While chemicals represent nearly 7% of the refined barrel, by 2030 chemicals may comprise over 14% of the refined barrel. With chemicals outpacing refining on demand growth and returns on capital expenditures over the last decade, chemicals represent an opportunity to balance the diversified product portfolios of oil and chemical companies and help them manage risk. The additional uncertainty of future demand growth for plastics adds further complexity to capacity planning and increases the competitive hurdles for attracting capital.
Strategic implications of demand risk include the possibility that diversification from oil to petchems may be less impactful than currently anticipated. In addition, slower market growth creates the potential for extended down cycles, and marginal supply curves flatten with potential lower long-term margins. Moreover, the demand contribution from developing markets may evolve much differently than anticipated. Furthermore, sustainability performance potentially affects entity valuations as well as available financing.
Policy decision-making occurs at a faster pace but without validated data
Today, over 60 countries have introduced bans and levies on the use of plastics. Both the public and private sectors are increasing efforts to curb consumption and improve management of single-use plastics. These actions are often driven by limited understanding of the consequences and available alternatives or the ability of infrastructure to deliver. The EU directive requires new plastic products to contain at least 50% recycled materials by 2025 and 75% by 2035. On May 9, 2018, the American Chemistry Council's (ACC's) Plastics Division announced goals that commit US plastics resin producers to recycle or recover all plastic packaging in the US by 2040. The issue represents a mismatch in scale: The problem is at large scale (e.g., 20 MM tons each for PE or PP), while the scale of current commercial solutions is orders of magnitude smaller. Also, the geographic dispersion of the problem is orders of magnitude larger than chemical industry standards. The EU policy will require significant investment in physical infrastructure, with initial estimates in the range of €1.5B per year. ACC's policy requires development of technology, massive infrastructure, and social systems.
Technology is not ready for required recycle volumes
Current mechanical recycling processes have scale and economics limitations while processes such as chemical recycling are in their technology development infancy. Waste collection streams and systems are dispersed with relatively low-input volumes compared with the requirements needed to achieve economic scale. From a strategic standpoint, forced regulated solutions have limited ability to deal with massive plastics volumes without scaled technology. To be competitive with natural feedstocks, recycle economics also require logistics efficiency to convert plastics waste into highquality, prime-equiva-lent, fit-for-use materials.
The infrastructure is inadequate to address sustainability policies
Critical infrastructure elements - including collection, sorting, processing, and end-use application facilities and their harmonization - remain in early development. In the U.S. in 2016, 50% of PE material purchased for recycle was of unsuitable quality for further processing. Gaps in supply and end-use demand for recycle material remain. Current plastics processing technology is labor-intensive, high-cost mechanical recycling, compared with thermal and chemical process technology under development. Today, many collection systems are under economic pressure and are overwhelmed with waste volumes of all materials. Stakeholders such as chemical producers, converters, brand owners, retailers, and waste management companies are confused about their sustainability responsibilities. System design, mechanisms for consumer social behavior, and viable value chain economics for recycling continue to trail demand. The underlying strategic challenge for participants and stakeholders is how to align waste management priorities with other societal needs, which differ significantly among regions. Additionally, while the impact of mechanical recycled plastics replacing virgin resin is potentially significant, those volumes fall well short of addressing the disposition of plastics waste beyond landfill. New application areas must be developed for mechanically recycled plastics, and the chemical and thermal recycling infrastructure will play a critical role.
Participants in the plastics value chain are just beginning to understand the complex solution options and the related strategic implications. As a result, we are now seeing the emergence of more sophisticated and collaborative cross-value chain efforts, compared with previous ad-hoc, sometimes desperate responses from businesses and governments. The value chain is moving away from "who is responsible?" to "what role do I play in collaborations along the value chain?" Recent good examples of this step-change in approach by industry participants include the Alliance to End Plastics Waste and the TerraCycle Loop™ Shopping System.
Much work remains to develop sustainable business and behavioral models that address this systemic issue, and the call to action needs to be dramatically expanded. Ad-hoc actions by governments and corporations to ban plastics could prove costly if policy makers do not consider whether there are viable, economical alternatives. They must also carefully balance the prioritization of plastics waste versus other social needs.
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