In our ESG and Climate Piece tomorrow we will look at the impact on plastic waste initiatives of falling virgin polymer prices. If recycling initiatives stall – especially the more expensive mechanical piece – it will likely add to concerns that packagers already have around whether they can get enough material to meet their public goals on recycled content. If it then also looks likely that new materials – renewable based on biodegradable - may be either late to market or more expensive than anticipated the door opens wider for the chemical recycling advocates and also for alternative materials. The chemical recyclers also need collection and sorting to improve, but the more complex/forgiving the facility, the less rigorous the sorting needs to be. Also, this route is somewhat agnostic to the price of virgin polymers as the output is competing with fuels and chemical feedstock values. For chemical recycling to be economic, the price of crude oil must remain high. For chemical recycling to get the lion’s share of recovered plastic waste the price of oil needs to be high and the price of virgin polymers low – discouraging mechanical recycling. While this may spur more chemical recycling, the net effect of low virgin polymer prices would overwhelm the benefit of better recycling economics for the majors – many of whom make up the bulk of the existing and planned chemical recycling capacity today. That said, the more plastic waste that ends up in chemical recycling, the less of an impact there will be on virgin plastic demand
Life in 2022 is likely to be tougher for the new companies in materials and fuels, as all of them need capital to support projects that now look riskier from a cost inflation perspective and the market has moved to reflect that risk – Exhibit below. For every company below, the 2022 story was supposed to be capital spending to create commercial-scale production. The poor stock performance for many has tracked rising raw material prices – especially steel – as well as concerns around supply chain-driven delays and labor shortages. Few have the financial capacity to absorb significant cost overruns and/or construction delays. Danimer Scientific has done a recent capital raise and its impact created roughly half of the downside shown below – Danimer still likely needs more capital, but with more cash on the balance sheet may be able to get the rest through loans. Gevo, which in our view has the more impressive portfolio of potential offtake partners at this point likely plans to borrow at the facility level, and the stock weakness is likely a combination of inflation fears, the declining LCFS value, and the wait for the company to announce that it has a completed FEED study for the first plant and has reached FID. We would struggle to invest in any of these names today given the step-change in company development that each needs to make in 2022, and we would need more offtake agreements and process/construction guarantees than any company can likely get today, and if they could, they might not want to make some agreements public. See more in today's ESG and Climate report
The bioplastics chart below (from today's daily report) is interesting from a couple of perspectives, the first being whether the projections are reasonable and the second being the significance of the investments. We believe that the volume targets are optimistic, given the capital requirements and that many of the companies pursuing bioplastics are relatively new and need to borrow most or all of the capital needs. The volumes would be easier to believe if the participants were large companies with strong balance sheets. The second point is just how small the volumes are in the grand scheme of plastics. Global demand for plastics exceeds 300 million tons and consequently, the 2026 projection would account for only 2.5% of global polymer demand. Note that in the article (linked here) around the uptake of biodegradable plastics – in this case in the UEA – one of the constraints to growth listed is availability. The other constraint, which likely faces producers in all markets is consumer education. Introducing a new polymer – or range of polymers – into an already confusing mix will require consumer education around what is biodegradable and what to do with the material. This topic follows on from the recycling theme in last week's ESG and Climate Report.
Companies are being encouraged/forced to produce climate plans by ever more focused shareholders many of whom only have a passing understanding of how some of the companies operate and how they might best set a course to lower emissions and otherwise be better stewards of the environment. The pretty graphic by Covestro below likely looks much better than the data and ambition behind it really are. This is not necessarily meant as a criticism of Covestro, but the company like many others is being challenged to explain a very complex, process, and engineering-heavy set of options to an audience not really qualified to understand them – pictures with circles are easier.