Europe recycling chain faces uncertain future

Uncertainty typically leads to nervousness, which in turn leads to volatility, as markets react to each fluctuation in underlying conditions to a degree they wouldn’t normally.

This uncertainty has come at a time when the chain would traditionally be looking to its next year volumes. Many players across the recycled polymers chain have said that forward planning at the moment is simply impossible.

On the one hand, macroeconomic conditions are weak and there is a growing threat of recession across Europe. Demand from non-packaging grades has fallen sharply in September across all recycled polymers—particularly demand from the key construction sector.

Comparatively, low virgin values are also encouraging a shift away from recycled materials in non-packaging grades – which typically work on a cost saving basis – while high energy costs have limited recyclers’ ability to reduce flake and pellet prices without risking negative margins.

Geopolitical shifts remain unpredictable given the ongoing conflict in Ukraine. Energy prices—and government measures to tackle energy prices—also remain difficult to forecast.

On the other hand, sustainability commitments from the packaging sector remain high, and there has been no real slowdown in consumption of packaging – for the time being.

The gap between fast moving consumer goods (FMCG) sustainability commitments – many of which are due to mature in 2025 – and available supply has seen recycled polymer markets decouple from virgin price movements and macroeconomic conditions in all packaging-dominated grades over the past few years.

Structural shortages are likely to become even more endemic if negative macroeconomic conditions persist – which appears likely – because this is likely to lead to greater hesitancy in investment.

Nevertheless, there has been increasing talk that some FMCG producers are beginning to reassess their sustainability commitments in light of the growing spread with virgin and amid recessionary fears.

One FMCG major confirmed this week that it was already having internal discussions with its finance department on whether it should stick to its sustainability commitments. At the moment, concerns over mid-term availability if it were to step out of the market, and the favourability of deals when it were to step back in, have meant remaining with recycled material. Discussions are expected to intensify should the macroeconomic situation significantly worsen.

High energy costs also bring the risk of potential bankruptcies in the chain, which would make sustainability targets increasingly harder to achieve, as industry association Packaging Recyclers Europe (PRE) warned on September 22.

The recycling industry typically operates on narrow margins and with smaller cash reserves, placing them at greater risk of bankruptcy in any sustained downturn. Currently, the market is faced with the spectre of rising costs and falling demand.

According to a PRE survey referred to in the statement, average energy costs for recyclers have increased from a typical level of around 15-20% of production costs—minus labour and maintenance—to a current average level of 70%.

The most energy-intensive part of the recycling chain is typically the conversion of bales to flakes and pellets. Nevertheless, waste managers and sorters have also seen rising costs due to escalating electricity prices.

Energy costs remain a significant challenge for flake and pellet producers, and many have already switched to short-time working.

Energy costs vary depending on individual countries’ energy mixes and individual producers’ contract terms. This is creating a significant disparity between players in the recycling chain and is leading to increased regionalisation of prices and widening ranges based on individual seller storage and cash flow positions, along with individual energy costs.

In short, players who have to free up storage space or need to generate cash flow are currently more likely to sell at low values, while those with more storage space and with more comfortable looking balance sheets are preferring to sacrifice volume over price. This is particularly true since many sellers do not believe that lower prices in the current conditions will stimulate volumes.

While waste managers have not seen energy costs rise to the same extent as those seen in flake and pellet production, costs in that sector have also increased, as have logistical costs.

Storage space, though, is perhaps a sharper challenge for waste managers than further down the chain. This is because while flake and pellet producers have the option to turn down operating rates of waste or store material long-term – providing they can absorb the cost of storage – waste will continue to enter the system.

This means that at some point, and many believe that point is fast approaching, waste managers will either need to offload material, or send it for incineration or landfill.

In the short-term, market signals point to volatility and regionalisation. For many, without support, the remainder of 2022 may see extreme financial hardship. Any rationalisation in the chain, or a drop in badly needed investment, risks further threatening circularity goals.

Buyers looking to contract volumes for next year face a tough calculation, a deep and protracted recession risks being stuck with high inventories; a less severe downturn or market recovery risks a repeat of the kind of shortages seen in the first half of 2022. Those that step back completely risk re-entering the market on unfavourable terms, or lack of access at all.