What will be the future of the plastics industry by Olivia Watson

A circular transition for plastic. The point of Olivia Watson, Senior Thematic Investment Analyst, Responsible Investments at Columbia Threadneedle Investments

Plastic is a growing environmental problem and is increasingly a point of reference for policies at national and international level. In recent months, the UN has agreed to draft a global plastics treaty that could include cuts in virgin plastic production, as well as growing collection and recycling infrastructure. At the national level, in April the UK introduced a plastic tax that provides for the levy of GBP 200 per tonne of plastic packaging that contains less than 30% recycled plastic. The interdependence between plastic pollution and other environmental issues is also increasingly recognised. For example, the draft of the next UN COP (Conference of the Parties) on Biodiversity envisages the goal of "eliminating the dispersion of plastic waste" as part of the 2030 Global Biodiversity Framework. In the context of the net-zero targets, NGOs and stakeholders also continue to draw attention to the contribution of the production, use and recycling of plastics, as well as related waste, to global greenhouse gas emissions. We expect that these factors will continue to create momentum in favour of a transition to a more circular plastic, which will include: reducing the use of virgin plastic; increased use of recycled plastics and alternative materials; creation of different product delivery models, as well as enhancement of plastic collection infrastructure and recycling technologies. Following our previous research on consumer goods and packagers, we have extended our focus to plastics producers and waste companies through a panel discussion with key analysts from the equity and credit sector to discuss the risks and opportunities of these developments. Plastic manufacturers Most of the plastic is produced by a handful of global petrochemical companies. The development of the industry has provided benefits to society by improving food preservation and introducing lightweight products, among other things, but in doing so it has also introduced a reliance on low-cost virgin plastic into the daily lives of people around the world through clothing, automobiles, electronics and food packaging, with much of these materials destined to become waste. Plastic manufacturers are now in the early stages of a structural change that will increase demand for recycled plastic (especially for single-use packaging, but also for more durable products) as companies such as Renault, LG, Vestas, Inditex, Adidas and many others set targets for the use of recycled plastic. These targets are in addition to regulatory requirements and commitments already made by consumer goods and packaging companies to increase the consumption of recycled plastics by 2025. Overall, our analysis of business goals across all industries suggests that recycled plastics could account for up to 8% of demand for this material by 2025 and up to 15% of global demand by 2030. In this scenario, the growth in demand for virgin plastics could shift from growth rates above those of GDP previously seen to less than 1.7%. Currently, however, the production of recycled plastic is not enough to meet this demand, and it is unlikely that chemical recycling technologies, which could increase material volumes, will succeed before the second half of this decade, based on capacity announcements made so far. In this context, a change on such a scale will require major changes for plastic manufacturers. The companies that will prove most resilient to these changes are likely to be those that can rely on well-developed circular strategies and other benefits, including: lower revenue dependency on non-recyclable plastics; strategy and significant objectives related to recycled production compared to the company's production volumes; evidence of multiple partnerships and efforts to launch and enhance new technologies such as chemical recycling, which can enable the company to adapt and respond easily to technical or other challenges; ability to maintain and expand customer relationships through transition, working with customers to develop new and potentially higher value products and forms of packaging; access to low-cost virgin plastic raw materials, which will remain economically competitive in a scenario of slowing growth in demand for virgin plastics. Our analysis of different plastic manufacturers against these criteria shows a mixed picture, with business plans to increase recycled production by between 1% and 22% of estimated production by 2030. The range and depth of business partnerships related to new technologies such as chemical recycling also vary greatly. Waste and recycling The transition to recycled plastics will also entail major changes for the waste and recycling sector. The landscape of risks and opportunities in different countries is variable, given the varying degree of recycling infrastructure, public education and collection rates. However, given the rapid increase in regulatory changes and demand for recycled plastics, well-positioned waste companies can benefit from investing in new technologies, such as advanced sorting technologies that can increase automation in facilities and material recovery rates, capturing the greatest value from waste plastics. Some waste companies can also benefit from opportunities for vertical integration, increasing the degree of recycling and treatment of collected plastics. To cope with the increase in demand, however, the amount of investment needed will be considerable, and will include improving collection and processing infrastructure, not only in developed markets with low recovery rates (e.g. the United States), but also in emerging markets with less developed infrastructure. As in the case of plastics producers, the review of companies' investment spending plans and their future targets to increase material recovery provides an indication of their respective programs and positioning in view of this transition. Our analysis, therefore, ended with the recognition of the need for continuous monitoring in the light of the rapid developments related to this issue. Ongoing research, collaboration and engagement between the fundamental investment and responsible thematic investment teams will help us identify possible winners and losers and encourage companies to continue developing their circularity strategies. • 24 July 2022