Viewpoint: No pretty picture for EU rPE, rPP recyclers

The outlook is tough for the European rPE (recycled polyethylene) and rPP (recycled polypropylene) markets. Recyclers are struggling with low demand, energy costs have risen steeply, and buyers can take their pick from recycled and virgin material at cheap prices.

Inflation and the cost of living crisis have hit demand in many of the recyclers' main markets.

Confidence in the construction sector is weak and sales of durable goods have been hit by consumers tightening their budgets in preparation for a winter of high costs for energy and other essentials. Even in more recession-proof industries such as food and homecare, customers' preference for value brands, rather than "premium" labels that are more likely to incorporate recycled content in their packaging, is likely to affect recyclate sales.

Market participants are all looking for the turnaround. But prospects for economic recovery depend on geopolitical and outside factors - such as the conflict in Ukraine and China's reopening after Covid - as well as European policymakers striking the right balance between tightening policy to reduce inflation without damaging growth and employment. There are no guarantees for 2023.

Destocking probably exacerbated weak demand in the second half of 2022. Using construction as an example, the production of plastic building materials declined for several months before overall construction output, Eurostat data show, suggesting inventories were reduced. This might suggest that stocks need to be rebuilt in the new year, but manufacturers are unlikely to be in any rush considering uncertainty over demand. Materials cost inflation and labour shortages have already slowed investment in construction and new project starts in 2022, and further deceleration is expected in 2023.

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Recyclers are also contending with lower virgin PE and PP prices. Both remain oversupplied, despite Argus estimating that European production is operating at just 60-70pc. This has driven prices down, causing issues for recyclers that find it very difficult to sell into many industries unless they can offer a discount to the virgin price.

There is little to suggest that virgin prices will rebound in the short term. Imports from other regions are setting the low end of the market and global virgin polyolefin capacity growth - particularly PP - is likely to significantly outpace demand in 2023. Furthermore, improving container shipping availability makes it easier for imports to reach the European market.

In the long term, the European Commission's packaging and packaging waste regulations proposal could go some way to decoupling recyclate and virgin prices by forcing more packaging producers to include recyclates regardless of cost. But the requirements, which still need to be ratified by the European parliament and member states, are unlikely to significantly impact the market in 2023. Some recyclers may also argue that they do not go far enough, with only packaging included.

Weak demand and lower virgin prices will combine with high energy costs to squash recycling margins next year.

The first quarter - when the energy price squeeze will be most intense - will be particularly challenging. Falling bale prices helped to offset higher electricity costs in the second half of 2022, but how much further they can decline is questionable, with PP bales already scraping €200/t ($212/t) delivered, HDPE not much higher and transparent film bale prices supported by demand in export markets.

Some demand growth is likely from the second quarter, as downstream manufacturers rebuild their stocks. But a wider economic recovery is unlikely until the second half of the year at the earliest, and may be delayed into 2024. Until then, uncertain demand and oversupply in the virgin PE and PP markets are likely to weigh on polyolefin recyclate prices, and recycling margins.

By Will Collins

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