The consequences of price volatility

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Price fluctuations in the overall market will have important consequences for profitability and the long term survival of firms involved in recycling. Fluctuations in the quantities of different types of materials collected will interact with this, and firms will need to be able to cope with both types of uncertainty. Such fluctuations can arise from collection where the amount of particular materials included in the waste stream will change on an unexpected basis. This type of problem will be particularly serious in the collection and reprocessing of plastics where there is considerable variability in both the type of material collected and in its price.

Various possible sources of uncertainty exist for plastics reprocessing. In order to examine these issues, a series of simulations was undertaken, in which different sources of uncertainty are modelled as independent random variables. Four aspect of randomness are considered:

  • The balance between HDPE and PET material.
  • The balance between natural and coloured HDPE.
  • The balance between natural and coloured PET.
  • The price of collected unsorted waste.

This is then used to calculate the revenue for a reprocessing firm, for which the composition of waste input and sorting/sales is based on the business plan for an example of an American recycler in 1993 used by the Association of Small Business Development Centres. This example provides figures for costs as well as throughput. Cost data is generally impossible to obtain, but is crucial to understanding long term viability. The data is unlikely to be particularly accurate for present day Europe but provides a base illustration for problems involved. These costs are taken to be independent of the randomness in the sorting process and for the waste price fluctuations. The random term is used to multiply the basic figure, have a mean of 1 and a standard error of 0.05. Thus the variables fluctuate between +10% and -10% of the base figure.

For the price series two sources are used. The first is 19 months of price data provided by the German Market research firm EUWID, for various grades of plastics in Germany in the period 1996-1998. In the figures below, the months are indexed by the numbers 1 to 19. The top grade of sorted material is taken as the price that can be obtained for the material in each month. The price for the mixed grade is taken as the input price for material into the sorting firm. The profitability is therefore that of the re-sorting activity. For purposes of comparison, data from the USA is used, and this may be more appropriate as the cost data for the sorting facility is from the USA.

Figure 3.6. Simulation of profitability of reprocessing

Collected material price based on EUWID data for Germany

There are three main objectives for undertaking the simulations. The first is to see what the level and pattern of profitability for sorting is likely to be. The second is to see how this profitability may vary over time. The third is to see how much of variation in profitability is due to basic price fluctuations and how much to the accuracy of sorting and the composition of waste. The answers to the first two questions are provided in Figure 3.6 and 3.7.

Both simulations indicate periodic profitability. The main difference between profitability based on US prices and those based on German prices is that the former has a minimum profit of approximately zero, whilst the latter has more months of profitability and more of loss making. This may reflect the market structure and legislative differences between the two countries.

Figure 3.7. Simulation of profitability of reprocessing

Collected material price based on data for USA

6. Policy case studies

In this section the markets and policy frameworks in three OECD countries (United States, Germany and Sweden) are examined in order to cast further light on how public policy may have affected the markets for recyclable plastics.

6.1. United States

The most important sources of plastic waste in MSW in the United States are durable goods, followed by non-durable goods, plastic bags and containers. LDPE is the most important plastic type in US waste, followed by HDPE, PP, PS and PET in that order (see Table 3.9.) In the late 1980's there was almost no plastic recycling in the USA from MSW. Since then, the infrastructure for post-consumer plastics recycling has grown significantly to a mature industry with more than 2 000 companies. The plastics industry sees the uncertain supply of plastic bottles from municipal recycling programs as the industry's most significant barrier to higher recovery levels. Post-consumer plastics are in demand as cost-effective raw materials for making a range of products.

Table 3.9. Plastics in US waste 1996 (1 000 tons)

By type of good

Table 3.9. Plastics in US waste 1996 (1 000 tons)

By type of good

Durable goods

6 260

Non-durable goods

5 350

Bags

3 220

Soft drink, milk containers

1 350

Other containers

1 280

By type of plastic

PET

1 700

HDPE

4 120

LDPE

5 010

PP

2 580

PS

1 990

Other

3 130

Source: Subramian (2000).

Source: Subramian (2000).

In total, 53 companies reclaimed plastic bottles during 2000. Of these, 16 domestic reclaimers reported recycling PET bottles, and 37 companies reported recycling HDPE bottles. The domestic PET and HDPE bottle-reclaiming industries are each dominated by a relatively small number of companies; however, there are nearly three times as many HDPE bottle reclaimers as PET bottle reclaimers.

Five companies, that together recycle 77% (478 million pounds) of the recovered postconsumer PET bottle resin in the country, dominate the PET recycling industry. The remaining 11 companies recycle 139 million pounds, with five of the eleven companies recycling 87% of these pounds. Similarly, there are five companies that recycle 71% (454 million lbs.) of the postconsumer bottle HDPE resin. Beyond those dominant industry players, the HDPE recycling industry is somewhat more diverse. Thirty-two recyclers process the remaining 29% of the HDPE pounds recycled. PET and HDPE bottle reclamation capacity continues to exceed supply. Based on operations on a continuous basis (24 hour per day and 365 days per year), domestic reclamation capacity exceeds utilization by 38% for PET and by 46% for HDPE.

R. W. Beck (Beck, 2001) data on the recycling of non-bottle post-consumer plastics shows that in some cases, the amount recycled is quite significant. The 2000 recycling figures for noncontainer plastics only reflect data provided by survey respondents and do not extrapolate to a nationwide total; however, the figures do provide insight into the size and complexity of the postconsumer plastics recycling market. A total of 167 companies reported the recycling or export of non-bottle post-consumer plastics that totalled 1 175 million lbs.

Figure 3.8. Demand for recycled PET bottles in the USA (million lbs)

Fibre

Sheet and Film

Strapping Eng. Resins

— Food & bevg bottles -•— Non-food bottles _—Other_

199 199 199 199

200 200

As shown in Figure 3.8 below over half of all domestic recycled PET bottle end use in the United Sates is for fibre. Strapping is the next most important use, with only 13% of the total. Very little is re-used as containers.

Conversely, as shown in diagram below, over one-third of all HDPE plastic bottles recycled in the United States were remanufactured into HDPE bottles. Other major HDPE bottle end-markets include pipe and plastic lumber; film and sheet; lawn and garden (e.g. products such as edging and flower pots); and injection moulding (e.g. applications such as buckets, crates, and automobile parts).

Figure 3.9. End use of domestic recycled HDPE bottles in the United States

Lawn/garden 12% Lumber 9% Other 6%

A

^^^-^Injection Moulding 6%

Film/sheet 8% ^^^

' \

Bottles 39%

Pipe 20%

However, only 0.7 of the 19.3 million tons of plastic waste in MSW were recycled in the United States in 1993. This gives a rate of only 3.5% (GAO 1995). However, PET has much higher levels of recycling, albeit with present collection rates being much lower than their peak in 1995. (See Table 3.10.) HDPE bottles have comparable collection levels - 745.4 million lbs in 2000.

Table 3.10. US PET recycling rates (m. lbs)

Bottles collected

Bottles on shelves

Gross recycling rate %

1995

775

1 950

39.7

1996

697

2 198

31.7

1997

691

2 551

27.1

1998

745

3 006

24.8

1999

771

3 250

23.7

2000

769

3 445

22.3

2001

834

3 768

22.1

It was argued by Curlee and Das (1991) that efforts towards plastic bottle recycling should be directed particularly at PET and HDPE, as these were seen as the most appropriate. Their suggestion was the adoption of a flexible approach to recycling management. They did not, in 1991, anticipate significant barriers to the expansion of PET and HDPE as collection increased, particularly for post-industrial sources. However, in the case of post-consumption plastic waste they did stress the importance of ensuring that contamination is kept to a minimum.

Whilst recycling policy in the USA is organised at a state rather than federal level, many states have looked towards the EPA to provide leadership and guidance in waste planning and recycling, not least because inter-state issues are important. State officials often want national standards to require products to contain a proportion of recycled material. State efforts are necessarily limited because markets typically extend across state boundaries.

State- and municipal-level experience

Some states and municipalities have had active recycling programmes related to plastics for a number of years. For instance, in the case of New Jersey a programme was instituted to encourage recycling of paper, metal, glass, plastic containers and food waste. However, as noted above plastics can be costly to collect and recycle, and as such most municipalities concentrated on the other waste streams in order to meet the overall objectives of the program. The relatively more positive experience in two other states will be discussed.

California

The California Integrated Waste Management Board (CIWMB) has recently investigated how its recycling policies have applied to the recycling of plastics, with the premise that current recycling policies have failed (NewPoint Group 2003). As such, it makes a useful candidate for a case study.

Figure 3.10. PET recycling rate in California

Figure 3.10. PET recycling rate in California

Pet Recycling Diagramm
Source: California Dept. of Conservation (2002).

Plastics recycling has increased substantially in recent years. For instance, 26.4 m plastic containers were recycled in 1988, but this increased to 1 600 m in 2001. However, this has not kept pace with the volume of plastics so that recycling rates for PET have declined from a peak of 71% in 1994 to 36% in 2001. The range of plastics has increased also so that some plastics which are not being recycled much can have considerable environmental problems associated with inappropriate disposal (e.g. PS). Currently recycling consists mainly of PET and HDPE, although these comprise 13.8% of plastic waste by weight. (Figure 3.10 gives time-series of PET recycled in California in recent years.)

California has a substantial recycling infrastructure. There are 241 recycled plastics processors and 8 reclaimers (the US as a whole has 60). Current recycling policy started with the Integrated Waste Management Act of 1989. This followed the EPA hierarchy of re-use first then recycling and finally disposal. Targets were set at 25% reduction by 1995 from the 1990 base and 50% by 2000. For plastics, this converted into a market capacity goal of 0.4 m ton per year, whereas the overall actual figure for 2000 was of the order of

0.05.m tons (NewPoint Group, 2003).

CIWMB (1996) sets out the market development programme that was expected to be necessary to meet the 2000 target. The first market development plan was set out in 1993, the 1996 market development plan was based on the changes that the initial plan had caused. Three areas were seen as requiring attention:

  1. Collection and processing of materials.
  2. Manufacturer use of recycled feedstock.
  3. Product marketing and consumer use.

Plastics were seen in 1996 as requiring special attention as the CIWMB had two specific minimum recycled content programmes, mandated by state law. One was for garbage bags, the other for rigid plastic packaging containers. Market development for plastics was also seen as being necessary as local authorities had invested in plastic collection programmes and the state wished to ensure that demand would be present to absorb this material. The 1996 plan was to ensure compliance with the minimum content legislation, to promote discussions between plastic durable goods manufacturers and plastics reprocessors, and to provide loans for the establishment of reprocessors and recycled content manufacturers. The CIWMB also provided a quarterly market report on recycled plastics monitoring developments in both virgin and recycled resins. The 1995 market report envisaged that high costs of collection, sorting, and cleaning would act as barriers to post-consumer plastic recycling (CIWMB, 1996).

Together, these costs have led to recycled resins having prices close to or above that of virgin resin as determined by capacity considerations. Whereas a 20% advantage of recycled resin over virgin is thought to be necessary to stimulate sufficient demand by plastics fabricators. Prices for recycled resins closely follow those for virgin resins and so are variable. Long term contracts which smoothed out fluctuations would help reprocessors who may be more dependent on price stability than are virgin resin producers.

Contamination of post-consumer plastics has been seen to be a particular problem in California. This comprises two separate types of problem:

  • Use of recycled plastics. The US FDA has guidelines for the use of recycled plastic in food containers and packaging. The guidelines relate to chemical contamination in mechanically recovered plastics. The responsibility for ensuring compliance with FDA guidelines falls on packaging manufacturers. They retain liability for safety of packaging even if approval has been given for the recycling process used.
  • Incompatible resin types. This can arise from uncertainty about what is recyclable. Where contamination from incompatibility arises it can reinforce the perception of recycled content products as being inferior.

There are a number of laws which provide incentives for recycling for plastics. These include:

  • B 939 Recycling and Landfill Legislation (1989) established the hierarchy of waste provision, goals for waste diversion (25% reduction by 1995 from the 1990 base and 50% by 2000) with requirements that all local authorities meet these. It is a weight-based law, and so favours heavier materials such as paper to plastics.
  • SB 235 Rigid Plastic Packaging Container Legislation (1991) which is directed at plastics and was designed to "spur markets for plastic materials collected for recycling by requiring manufacturers to utilize increasing amounts of post consumer recycled material in their rigid plastic packaging containers and to achieve high recycling rates for these plastic packaging containers." In 1996 food and cosmetic packaging was made exempt
  • SB 951 Plastics Trash Bag Law (1993) which initially required that all trash bags of 0.75 mm. and greater thickness have 10% recycled plastic post consumer material, eventually increasing to 30% content. This law was replaced by SB 698 in 1998 which eliminated the 30% requirement, and introduced two compliance options, of either 10% recycled content, or at least 30% recycled content of all the manufacturers plastic products intended for sale in California.
  • AB 2020 Beverage Container Recycling and Litter Reduction Act (1986) which is a redemption programme for carbonated mineral and soda water beverage containers. Payments are made by beverage distributors on each container sold in the state. A payment is made to consumers who return empty containers to certified recycling facilities. In 2000 this was extended by SB 332 to cover a wider class of non-carbonated drinks, and to cover all resin types, rather than just PET and HDPE which had previously been included. In 2002, it was extended further by SB 1906, to cover an even wider range of drinks containers. The scheme now covers all food liquids except milk, wine and spirits.
  • SB 235, which specifies details on recycled content of rigid containers, has been difficult and expensive to monitor, and appears to have been largely ignored by small rigid container producers in the past. This may have been because of a lack of awareness of the requirement. Larger producers tended to be in compliance throughout, so that the law was not affecting those intended. CIWMB found that between 1996 and 1999 there was only 10% compliance with the act. Throughout the late 1990's there seems to have been little impact on the amount of recycling for rigid containers, and the recycling rate declined from 24.6% in 1996 to 17.9% in 1999. Only in 2000 was there an upturn in the amount and recycling rate. The law also creates incentives to switch to other forms of packaging, or to change the size in order to avoid it.
  • SB 951, the trash bag minimum requirement, was intended to reduce the amount of PE, from which trash bags are made, that was going to landfill. It also could be seen as part of a closed loop recycling system as the PE typically comes from waste plastic bags. It has been made obsolete by two separate means of avoidance. Firstly there are alternative uses to which recycled PE can be put. Plastic lumber is one and this has had high demand in recent years. Plastic lumber has no quality or other requirements. It is also able to take more PE from the waste stream. However, it corresponds to an open loop rather than closed loop solution. Although, as the plastic will be locked up for a much longer time as plastic lumber than as short-life trash bags this may not be a particularly serious problem. Consequently, trash bag manufacturers found it difficult to access enough waste PE to meet the 10% minimum requirement. The second problem was that the law applies only to one-quarter of the trash bags produced for use in California. Two-thirds of the trash bags produced in California are sold to out-of state users.
  • AB 939 has several problems in providing an adequate solution to recycling problems. The first is one common to recycling policies in several countries in that it "wills the end without willing the means to ensure that end". The second problem for plastics recycling is that it sets overall targets by weight. As light products this is biased against plastics. The third problem is that there is no incentive for alternatives to landfill for plastics that cannot - or are expensive to -be recycled, such as waste-to-energy. Overall, the aim of AB 939 in leading to 50% diversion has not been met, in part because waste generation has grown much faster than recycling activity, in part because it does nothing to solve the problem of high collection and sorting costs.
  • AB 2020 is crucial to supporting recycling activities in California, even though it is only concerned with 3% of total waste. Although recycling has not kept pace with the growth in plastic beverage containers, PET containers recycled through it increased threefold between 1998 and 2001. So whilst the recycling of beverage container goals in AB 2020 are only met for aluminium, this should be seen perhaps a reflection of the inefficiency of the level of the target set rather than the programme itself. For PET, recyclers receive $1 140 per ton, of this $200 comes from the value of the plastic scrap collected, with $940 form AB 2020 payments. For HDPE, recyclers get $445 per ton in total with the scrap value being $185.
  • AB 2020 is limited in application though. For example, HDPE containers used for milk are not included in it. It also does not currently provide any incentive for the use of plastics that have existing recycled markets. Thus there is the possibility of proliferation of plastic types, which will be returned by consumers to recycling facilities, but end up being disposed as waste.

King County, Washington State

King County is the area surrounding Seattle. Plastics form only a small part of waste disposed there, and, as with California, recycling is confined mainly to PET and HDPE bottles. In 1998, the County commissioned Cascadia Consulting Group to investigate recycling markets and the possibility of public sector aid in their development. Plastic film was seen as a medium priority material for recycling as it makes up a significant proportion of commercial waste. Whilst there is some demand for the material, this is at some distance and has stringent specifications. The other area of plastics they considered was to extend the collection of PET and HDPE from beverage containers to rigid plastic containers. However, there was limited scope for this. Only one processor was willing to accept mixed rigid containers, and then charged a fee for accepting them. Cascadia focused on four types of plastic, PET bottles, HDPE bottles, rigid containers, and films.

23% of plastic containers were being recycled. This compares to a national figure of 24.5% As in other areas, virgin plastic supply is growing quite rapidly, and whilst recycling is also growing, this is at a lower rate. Overall recycling rates are therefore at best static, and usually decreasing. Supply of PET bottles was growing fastest. However, various new developments appeared imminent such as the use of composite materials such as PET with an impermeable core, PEN (Polyethylene naphthalate) and HDPE bottles with PVC sleeves (acting as a labelling device). The separation of these materials, to avoid the recycled material being regarded as contaminated, will be important if use of recycled material is to be maintained.

Baled HDPE was shipped to reclaimers in British Columbia, California or Texas. These then produce recycled resin, which is sold to processors. Most PET was exported, mainly to China. King County is well placed for this through the port of Seattle. 25% of the PET is shipped to the south east of the USA. Plastic film collected is shipped to the south west USA for plastic lumber and similar applications. Whilst there is very little local demand for post consumer recycled material, several local plastics processors used post-industrial scrap. Some products in King County advertise to consumers their recycled plastic content. For this reason they are often prepared to pay a higher price for the recycled material.

Recycled material from King County enters into the following consumer products: HDPE as 25% of the content in detergent bottles; plastic lumber; PET as fibre; HDPE and PVC in plastic pipes; plastic bags in California. In all of these there is strong competition in terms of both price (e.g. in pipes where the competing virgin resin has a low price), and in quality.

Markets for recycled plastics from King County are international in scope, and the price depends on that of the competing virgin resin. This was seen by Cascadia (1998) as being driven by oil prices, economic activity in Asia, and virgin production capacity and production in the USA. In 1998, depressed economic activity in Asia, and the growth of virgin production capacity in China, leading to the initiation of exports into the USA, was seen as depressing prices for recycled plastics. Barriers to market development were seen by Cascadia as being:

  1. Lack of local critical mass in plastic processing and manufacturing - recycled plastics are typically shipped elsewhere - and this adds to costs.
  2. Increases in virgin capacity in Alberta, Canada.
  3. Preference for virgin plastics by manufacturers due to better performance characteristics.
  4. Increases in supply of imported resins and consequent lower prices.
  5. Lack of infrastructure for sorting plastics other than PET and HDPE and applications for these materials.

Of these 2, 3, 4 are concerned with supply in the competing virgin industry and so are not barriers that can be changed by policy without affecting competition overall. 1 is concerned with the local geography of the area, and 5 is mainly concerned with the nature of the material. Nevertheless it was seen that there was opportunity for public sector action for market development. These were:

  1. Monitor developments in new packaging materials so that recycling programmes were not undermined.
  2. Expand supply of PET and HDPE bottles and film, by improving recovery rates from consumers.
  3. Improve efficiency of recycling so as to both lower recycled material price and increase its quality.
  4. Expand procurement policies for recycled plastic products, mainly by the private sector.
  5. Expand collection of and markets for plastics currently not being recycled.

Of these 4 and 5 would necessitate that recycling of waste plastics into new products should take place, and that incentives be provided to ensure that consumer demand meets this supply.

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