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Downstream slumbers as plastics backlash grows

Recycling will increasingly alter supply fundamentals, while legislation targeting single-use plastics will erode demand

The oil industry continues to expect that rising petrochemicals use will be central to demand growth over the next two decades. But campaigns against single-use plastics (SUP), which make up about a third of plastics demand, look set to curb that growth while creating new technological and structural challenges for the industry.

Petrochemicals feedstock accounts for approximately 13mn bl/d, or about 13pc, of world oil demand, according to the IEA. BP, in its Energy Outlook 2019, that a worldwide SUP ban scenario could curb oil demand in 2040 by as much as 6mn bl/d. SUP products include shopping bags, food wrappings and plastic bottles, which are all under scrutiny by legislators and regulators worldwide.

New technologies under development and deployment by the oil refining and chemicals industries promise to increase the use of new feedstocks, or recycle SUPs and other products, are now moving to commercial-scale production.  Finland’s Neste in July announced that it is collaborating with LyondellBasell Chemicals, at the latter’s Wesseling site in Germany, to produce bio-based polypropylene and low-density polyethylene (LLDPE) products. Austria’s OMV is ramping up capacity of its ReOil technology, which converts SUPs to synthetic crude oil, and hopes to integrate it with its Borealis chemicals affiliate’s operations. Borealis and Neste in October announced they are collaborating in the production of renewable polypropylene.

Integration between the refining, chemicals and waste industries lags legislative agendas

The growth of recycling will require broad structural adjustments to industry operations. Consultancy Wood Mackenzie points out that recycling will require “progress on waste disposal practices, consumer education, and recycling infrastructure and technologies”. While legislation restricting SUP use has proliferated over the past year, integration between the oil refining, chemicals and waste management industries seems to lag legislative agendas.

Asian momentum

Since China began to reject imports of waste from other countries in 2018, effectively putting responsibility to recycle back onto the countries of origin, Southeast Asian countries, where much waste was redirected, have also done so. India has postponed a national ban on SUP use, which had been scheduled to come into effect in October, but is actively discouraging their use. The EU’s Strategy for Plastics in a Circular Economy, which was agreed in 2018, is forcing companies operating within its borders to make half of all plastic packaging to be either reusable or cost-effectively recycled by 2025, and all plastic packaging be so by 2030.  

As with many environmental initiatives, the US is the key laggard in moving to ban SUPs or ensure their recycling. Four states—trend-setting California and New York as well as smaller Maine and Vermont—and a number of cities have enacted legislation banning SUPs, and members of the American Chemistry Council’s (ACC) plastics division have agreed to a voluntary target of 100pc of plastic packaging being recyclable or recoverable by 2030. However, there is no sign of Federal Government actions and US recycling of PET (polyethylene terephthalate) bottles is estimated to be only about 30pc, compared with a global average of about 56pc.

The aluminium loop

Powerful brands such as PepsiCo and Coca-Cola in the US and the UK’s Unilever are aligning their operations to minimise SUP packaging. As with the International Maritime Organization’s (IMO) 2020 reduction of sulphur content in marine fuels, major corporations responsible to shareholders and mindful of image concerns likely will be key drivers of SUP restrictions. Wood Mackenzie principal analyst Pieterjan Van Uytvanck suggests that some drinks brands will move to aluminium cans as containers. “Aluminium recycling is a true closed loop,” which saves more than 90pc of the energy required to produce new metal, Van Uytvanck says.

6mn bl/d Impact on oil demand by 2040

While demand issues preoccupy many in the industry, feedstock supply is also shifting industry perspectives. US ethane production is constrained by a lack of midstream capacity but should be freed from that limitation over the next couple of years, leading to a new wave of US ethane-based ethylene plants. That capacity will compete with new Asian and Middle East plants.

Virgin feedstocks

Paul Hodges, chairman of International EChem, a chemicals industry consultancy, writes that European producers will be placed at a disadvantage by low-cost US ethylene feedstock and should accelerate moves to use recycled feedstock in their systems. Consultancy McKinsey & Co has predicted that by 2030 up to a third of world plastics demand “could be covered by production based on previously used plastics rather than from ‘virgin’ oil and gas feedstocks”.

Wood Mackenzie noted in a recent industry update that nearly 80pc of new ethylene capacity investments, totalling over 14.2mn t/yr, are expected to come onto the market in the next five years, with over 80pc of that increase targeted for 2022-24. That increased capacity could “push the ethylene industry into bottom-of-the-cycle conditions by the mid-2020s”, the consultancy says. Producers integrated into feedstock supply chains may be able to preserve margins by pressuring their upstream system, but non-integrated plants will see a severe margin squeeze, Hodges predicts.

The industry risks being caught between potential demand destruction brought on by recycling, the moves to limit a significant section of its product slate, and by rising capacity incentivised by cheap feedstock. 

Bill Barnes is director of Pisgah Partners

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