The challenge of the circular economy

You don’t have to be a marine biologist to appreciate the extent of the problem; a walk along just about anywhere on Britain’s coastline at low-tide will usually suffice. Unlike, say, soil degradation or water contamination, the environmental costs associated with the use of non-biodegradable plastics stares us in the face every day. It’s obvious every time we do our weekly grocery shopping, or when we sort through the resultant detritus prior to the arrival of the bin men. Little wonder that people who don’t usually align themselves with environmental causes are taking up the cudgel.

A recent poll by Ipsos MORI found that 88 per cent of adults claim to be concerned about the issue, although opinions differed about the extent to which the government, consumers, retailers and goods producers should take responsibility for reducing the amount of unnecessary packaging. The answer to that question will obviously have material implications for the packaging and recycling industries, but changes to the way we bring consumables to the market could affect primary producers, the chemical industry, the supermarkets, and logistics providers – to name but a few.

Public concern translates into public policy

It’s clear that public concern is translating into public policy. The issue of packaging, specifically single-use packaging, now looms large in the political landscape, evidenced by a European Union commitment to make all plastic packaging across the Continent recyclable by 2030. (Plastic packaging accounts for about 60 per cent of all plastic waste generated annually in the EU with around 95 per cent of its value – c. €70bn-€105bn (£61bn-£91.5bn) – lost to the EU economy every year). 

Closer to home, chancellor Philip Hammond has formally called for evidence on how the government can use the tax system and other measures to restrict plastic waste volumes. And following successful measures to reduce the use of plastic bags at the checkout of the major grocers, the UK government has announced a Deposit Return Scheme in England, which is expected to cover single-use glass and plastic bottles, together with aluminium cans. Anyone who supplemented their pocket money in this regard prior to the 1980s will know this is hardly a novel concept. The practice of offering a deposit refund on glass bottles can be traced back to 1905 in the UK, but the various schemes were phased out 40 years ago, largely because of lobbying by trade associations.

Now a more imaginative approach is to the fore. Earlier this year, WRAP (Waste & Resources Action Programme), effectively an NGO, part-funded by Defra, launched a new initiative (in partnership with the Ellen MacArthur Foundation) to put the UK plastics system on a more sustainable footing, as part of the government’s 25 Year Environment Plan.

China's reassesses growth at all costs

If the increased strictures weren’t enough, last July, around the same time that it was starting to become apparent that packagers might need to reassess their product mix in the face of regulatory change, China, for years the world’s default destination for recyclable trash, announced a ban on imports of 24 categories of recyclables and solid waste (including plastic and paper). The ban came into force at the beginning of this year, while a complementary contamination limit of 0.5 per cent (per tonne) on all other waste imports was implemented at the beginning of March.

China’s ban on mixed paper imports, more stringent contamination standards, and a reduction in import licences for old corrugated containers (OCC), has resulted in significant disruption to the global recycling industry. What’s more, Chinese domestic OCC prices have been rising rapidly; a major input cost for Asia’s online retail groups, most notably Alibaba (US:BABA), which have been expanding on the back of China’s economic rebalancing in favour of domestic retail consumption. (Alibaba’s logistics arm, Cainiao, has already implemented more environmentally-friendly practices, including the use of tape-free boxes and biodegradable packaging materials.) Astonishingly, the number of parcels delivered to homes in China topped 602m a week during 2016 – a sixfold increase from four years earlier. Consequently, cardboard production in the People’s Republic now accounts for about one-third of global paper consumption, much of which was linked to western waste sources, so cardboard prices in China have taken off since the import bans started to bite, but further increases are likely to affect other markets.

The law of unintended consequences

It’s turning out to be a classic case of the law of unintended consequences. For instance, Maersk Line, the world’s leading shipper of containers, is already faced with a significant fall in waste cargo tonnage into China. Meanwhile, falling market prices for plastic and mixed paper bundles in the UK (as the waste backlog builds) means that the economic viability of local collections will come into question. Obviously, the business model for many waste management companies has altered drastically, so it’s far from clear whether they – or municipal government (ie, ratepayers) – will be forced to bear the market risk, and if so, for how long?

Investors with direct exposure to the packaging industry may also have been taken off guard by events, but packaging producers, already under mounting pressure to respond to client concerns about increased reputational risk, have already stepped up investments in biodegradable (or sustainable) products. (Companies such as Unilever and L’Oréal have been gradually incorporating biodegradable materials into their product ranges, while consumer giant Nestlé has just announced a target to make all of its packaging recyclable or reusable by 2025). 

So, even before news of the new statutory crackdown on waste, the European packaging industry was effectively responding to intensifying consumer pressure (an increasingly important dynamic as ‘millennial’ spending power waxes). The focus on technological innovation, together with ongoing consolidation, have been chief features of the packaging market in recent years, with the result that barriers to entry have increased; smaller operators have struggled as they’re unable to generate the same benefits-of-scale open to larger packagers, nor the requisite capital expenditure to fund the development of high-specification products for end-users. Packaging products have become far more complex due to the rise of e-commerce, together with marketing-led retail concepts such as point-of-sale packaging.