Braskem’s green polyethylene is an interesting niche opportunity, but we question how big the market might be for a product where you need the buyer to agree to prices that cover your costs – i.e. how many buyers will potentially pay up. In a $100 per barrel crude oil environment, polyethylene from sugar cane likely looks quite attractive, but probably less so in a $50 crude environment. Sugar cane-based ethanol has a cost advantage over corn-based ethanol, and one of the key questions for Braskem is how do you grow the business outside Brazil, where the barriers to entry for others are not much different. We do not doubt the demand potential for green polyethylene and other ethylene derivatives, but our concerns would be how to profitably grow the business, especially if there is a lower crude oil price backdrop. Today it is easy to make a bull case for oil – we do so above – but note that oil forecasting is not our strength and nor is it anyone else’s – based on hindsight. Paying a 20% premium over fossil fuel-based polymers may make sense for some packagers with meaningful ESG goals, but a 100% premium is likely unstable.
Origin Materials reported earnings yesterday and the highlight was the further increase in possible customer demand for the products the company plans to make, as well as the recent announcement of a second US plant. In our ESG and Climate piece on Wednesday, we talked about how important it is going to be for these new technology companies to have bankable offtake agreements, as these will be needed to support funding, given the more cautious outlook that the market has towards project finance today and the concerns over rising rates. The products that Origin expects to make should have robust demand, and they should attract a whole bunch of interested customers, all of whom are struggling with their own ESG dialogue. The question around Origin is whether the technology can deliver the products at costs that make sense and in reliable volumes. The story looks good if the process does what is promised.
The chart below on recycling progress by the major FMCG companies is timely as it bumps into plenty of “national recycling day” headlines which include as many stories around recycling polymers into new applications as stories about like for like recycling. The more polymer that moves through collection and sorting and into roadbeds or composite particleboard replacement, etc., the less there is available for the FMCG companies to meet recycling goals. We see this as a major opportunity for the renewable polymer makers, but it is unlikely that there will be enough renewable-based polymers available to close the 2025 gap for most of the companies listed below. What is likely, in our view, is that the packagers will embrace chemical recycling as a way to increase their recycled content and will strike very specific deals with those able to show a chain of custody from collection through new polymer production.
The Avient chart around where brand owners sit with recycled content versus 2025 goals is quite scary. There are not enough initiatives collectively to address the needs, as the demand extends beyond the 13 brand owners listed. In our ESG and climate report yesterday we talked about the challenges with recycled PET and the complicating factor around recycled material heading into different applications, and consequently not being available to bottlers. We also have the issue of PET bottle pre-form capacity being overweight in Asia versus PET bottle demand and waste – setting up an imbalance between where the waste is and where the recycled material is needed. The gaps in the Avient chart and the slow and challenging recycling progress lead to a couple of conclusions. The first is that recycled material is likely going to rise in value versus virgin material – simply because of competition and the PR, IR, Social cost of not meeting targets for many brand owners. The second conclusion is that the renewably sourced polymer producers have a huge potential opportunity to step in and fill the gap. The challenge will be the ability to have enough capacity up and running to meet demand in 2025.
The article linked that discusses the “Talent War” for ESG spreads well beyond the investment community. Corporations are having to rethink strategy around new variables, and consequently, the experienced talent pool is limited and in some areas such as carbon abatement, recycling versus renewable polymers, and alternate sources of fuel, there is not much history to have created many “experts”.