The reasons for price volatility

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The financial viability of reprocessing firms arises out of the relationship between waste plastics and virgin resins. Where these are close substitute goods then the two markets need to be considered in parallel as demand in one market will depend on price in the other. Thus, forces determining the level of demand in one market will affect related markets.

For many uses, reprocessed materials are imperfect substitutes for plastics made from virgin resins. In other cases, they are - at least in functional terms - almost perfect substitutes. However, as noted above, issues of quality perception will lead to the reprocessed material selling at a lower price. The market for all material will determine an overall price level, and quality considerations will then determine the premium that is attached to virgin plastics. Equilibrium in this market is illustrated in Figure 3.5 below where total demand (derived as a function of the virgin price) equals qv + qr.

Figure 3.5. Interactions between the markets for virgin and secondary plastics

Figure 3.5. Interactions between the markets for virgin and secondary plastics

Qr Qv Q*

What is important for the reprocessed market is the residual demand, that is demand left unsatisfied after virgin supply at the equilibrium price. Virgin supply will be limited in the short-run by capacity in the industry, and when there are shortages in capacity then recycled material will take up all of the slack up to the new equilibrium quantity, which will result from a higher market price. This is typically the story for exports of recycled plastic material from the West Coast of the USA to Asia, China in particular.

"2001 saw the US markets for PET bottle bales dominated for the first three quarters by North American buyers and then by Chinese buyers during the fourth quarter. A strong economy allowed North American buyers to push prices to levels that forced Chinese buyers out of the market for a short period of time in May. Conversely, the Chinese took advantage of the dramatic US economic downturn in the fourth quarter to purchase large quantities of bales at the lowest prices in years. It must be noted that during this period, competing Chinese buyers often drove prices higher while North American buyers were absent from the market" (NAPCOR, 2001 Report on Post-Consumer PET Container Recycling Activity Final Report).

Similarly when there is excess capacity in the virgin resin industry, recycled material will only compete to the extent that it can be supplied in matching quality at the same or lower cost. As recycled material has collection, sorting, processing and transport costs this has led to the use of recycled material being low except in certain situations. This is made more severe by the general decline in virgin resin prices. The explanation that is given for these decreasing prices by trade journals is one of excess capacity. Together with the structure of the industry and the apparent nature of competition within it, virgin resin prices are pushed down - which is desirable for competition in the virgin sector, but disastrous for the recycling sector.

One particular episode of great volatility in prices has been investigated by Ackerman and Gallagher (2002). They seek to explain why prices for most recycled materials (including HDPE and PET) were suddenly extremely high in 1995 and then fell back to traditionally low levels. For example Cascadia Consulting group (1998) reported for PET and HDPE in NW USA that "a spike in prices occurred in 1994-1995 and, since then, prices have settled to levels generally higher than those in 1993". Ackerman and Gallagher's (2002) main concern is the incorrect signal that this sent to the recycling industry as recyclers expanded capacity on the assumption that high prices were a long run phenomenon. Six explanations for a possible price spike were considered:

  1. Inventory fluctuations.
  2. Macroeconomic trends.
  3. Capacity adj ustment lags.
  4. Government intervention.
  5. Export demand.
  6. Speculation.

On the basis of their econometric analysis they find that there is seen to be a small influence of 4 and 5 on prices, but the main explanation for the spike in prices of recyclables was speculative behaviour (6). However, it must be emphasised that the empirical evidence is not unambiguous and that the study only relates to one particular episode.

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