The Dow, LyondellBasell, Nova, Closed Loop Partners announcement yesterday is worth some thoughts. Closed Loop Partners is a PE company focused on funding recycling opportunities, but by its nature, it is relatively risk-averse as it has return goals to meet for its investors – to date its investments have been low-hanging fruit and niche in nature, but steps in the right direction nonetheless. The investment from the majors perhaps gives Closed Loop some wiggle room to look at projects that are less of a sure thing and maybe require a leap of faith on untested technologies or at least technologies untested at scale – primarily in sorting and identifying polymers and cleaning. We would still expect each project to be small, simply because access to the clean and easily sorted polyethylene and polypropylene in the US is limited by very poor standards of recycling and the vast proportion of unrecyclable polymer that ends up in a waste stream. If the group can find locations with significant supply, it might be wise to build pyrolysis at the same site to deal with everything that cannot be recycled. Our hope for this investment is that it is not simply an ESG PR opportunity for the polymer producers and that it does the following:
We talked a little about recycled polymer pricing in our ESG and Climate report yesterday. Recycled polymer pricing is rising relative to virgin polymer pricing (see chart below) and is likely to continue to rise unless hydrocarbon prices push virgin resins materially higher. Demand for recycled polymer is growing quickly and more quickly than supply, and we expect this to be reflected in an increased premium, barring more raw material inflation. Recycling is a fixed cost business – each step has a well-understood cost and companies are innovating to try and lower the cost of each step, but as so many different stakeholders are in the chain, it is a complex problem. One of the reasons why see the LyondellBasell/Suez venture works in The Netherlands is because Suez controls the waste in a region where recycling compliance at the household level is high. Despite this, it has taken a couple of years to get to the volumes needed to make the venture adequately profitable – mostly ensuring enough pure recycled polyethylene and polypropylene makes it to the facility. If polymer buyers are willing to cover the full cost of recycling in terms of the prices they are willing to pay, more material will become available – if LyondellBasell/Suez can demonstrate that they can make money when all the stars are aligned, it will likely encourage them to work with other municipalities in other parts of Europe (first) to see if they can replicate what they are doing now. In our view, all of the other advertised recycling programs are very small, very focused on niche applications, and don’t move the needle.