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OPINION

A slow turn to the circular economy

A slow turn to the circular economy
August 2, 2018
A slow turn to the circular economy

I’ll be warned off covering the packaging sector at this rate, but the good people at IHS Markit have just provided some market commentary, which chimes with research we’ve been conducting into what is purportedly the world’s oldest limited liability company –- Finland’s Stora Enso OYG (CPH: STERV) – but more on that in a moment.

By now, we’re all familiar with the unfolding narrative: existing and prospective legislation designed to limit the environmental damage caused by plastic packaging, particularly single-use plastic items, is already having a profound impact, not only on consumer behaviour, but also on capital allocations within the wider packaging industry.

The problem of disposing of polymer-based materials has been with us for decades, but it’s only come to a head recently, possibly because it finally became impossible to ignore the physical evidence around us, with demand for polyethylene, the world’s most used plastic, almost doubling since the turn of the millennium. That rate of growth partially reflects the growth of emerging market economies, but the process of globalisation – primarily via e-commerce – has given rise to demand for innovative and, increasingly, environmentally-friendly forms of packaging.

The report from IHS Markit, though largely focused on an industry sub-sector, is instructive nonetheless. The report suggests that the current market value of biodegradable plastics exceeds $1.1bn, but is likely to hit $1.7bn by 2023. That’s a decent rate of growth by most measures, and something worth considering in terms of long-term capital allocations.That growth extends to other areas of the market, ranging from fibre-based board materials and corrugated packaging products to biomaterial pulp grades to meet the demands of paper, board, tissue, textile and hygiene product producers. Conventional packaging companies are certainly looking to exploit the trend, and although for now it’s a relatively narrow field, the involvement of participants such as Cargill and BASF suggest that large-scale corporations are buying into the growth narrative.

The report goes on to say that the use of biodegradable plastics would be intertwined with the expansion of dedicated composting infrastructure and the increased diversion of organic waste materials (including discarded food) from conventional landfill sites. These types of polymers, either bio- or fossil fuel-based, are broken down into carbon dioxide and water through microbial processes in industrial or municipal compost facilities. However, many biodegradable polymers are compostable only in specialised composting facilities, which operate at higher temperatures than conventional compost piles, that underlines why state and municipal regulation is needed to drive the industry forward.

Global demand for these polymers stands at 360,000 metric tons, but total consumption of biodegradable polymers is expected to increase to almost 550,000 metric tons by 2023, representing a CAGR of 9 per cent, though that rate could accelerate on the back of mandatory composting programmes. We think the waste management industry, though effectively in thrall to government regulation, has been slow on the uptake where composting is concerned – you would have thought that China’s ban on a range of imported waste materials would have concentrated minds.

But no genuine consensus exists on the best way forward with eco-friendly packaging, as evidenced by the debate now raging over the environmental pros and cons of oxo-degradable plastic (OBP) packaging. Once seen as a viable option in tackling the proliferation of microplastics in the oceans, their use – at least within the European Union – is likely to be curtailed after the European Commission said it will take steps to “restrict the use” of OBP across member states following concerns that the material could even exacerbate the problem.