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New virgin polyethylene (PE) plants coming online in North America from 2016 to 2019 are expected to add 8.8 million tons, or 17.6 billion pounds, of annual production capacity—a 50 percent increase over 2015. With historically low virgin materials prices, that’s challenging news for recyclers who could find it difficult to grow beyond applications requiring recycled resin.

The new plants were announced in 2010-2011, the beginning of the North American “shale renaissance,” when advancements in horizontal drilling and fracking led to plentiful ethane gas. Resin companies began a massive wave of investment in North America, with more than 36.4 billion pounds of new capacity announced for PE alone.

Even though 16 percent of North American PE production was leaving North America in 2011 for export markets, plans were made to monetize ethane by converting it into PE pellets to ship all over the world and eventually double the amount of resin that would leave North America on a percentage basis by the end of this decade.

In all, over the next few years, 15 reactors are likely to come online, all much bigger than the last one that was built in North America—in 2006.

Existing producers expanding their PE capacities include ExxonMobil Corp., Chevron Phillips Chemical Co., Dow Chemical Co., LyondellBasell Industries, Nova Chemicals Corp., Formosa Plastics Corp. and Ineos. Among the newcomers entering or re-entering the North American PE market are Sasol of South Africa, Braskem Idesa in Mexico and Shell Chemicals. In late March, Borouge (a joint venture between the Abu Dhabi National Oil Co. and Borealis of Austria) entered the fray via a developing partnership with Total Petrochemicals and Refining USA Inc. and Nova Chemicals Corp.

The recycling connection

In 2011, as shale fracking took off, the PE recycling industry in North America was experiencing mixed results.

PE recycling had been experiencing significant headwinds, including losing market share to lower-cost polyethylene terephthalate (PET) bottles and to lightweighting in bottles and film. Industry trends, such as the use of concentrated detergents packaged in smaller containers, also negatively affected the amount of high-density PE (HDPE) available for collection.

Total North American collection of rigid and nonrigid PE bottles and film was at its highest point to date at approximately 2.2 billion pounds per year. However, that figure represented only 5.7 percent of 2011 virgin PE production.

Since 2011, the recycling industry has been growing steadily. Total estimates for PE collection in 2015 represent a 24 percent increase over 2011 levels; increases in film collection, rather than in bottle collection, account for the growth. IHS Markit estimates the PE recycling rate as of 2015 has increased as a percentage of total PE production to 6.6 percent.

The decline of oil prices at the end of 2014 and into 2015 had significant global effects on markets for virgin and recycled PE. Producers outside of North America have benefited from tight supply and demand, as the decline in crude-based feedstock costs was greater than the drop in virgin resin prices. An unforeseen benefit of lower oil prices has been stronger global demand resulting from stronger consumer spending and from recycled replacement by virgin resins. Even for North American resin producers, profitability has held up well.

However, for the recycling industry, the precipitous drop in oil prices has created challenges by lowering virgin plastic prices and making it difficult for buyers to justify using postconsumer recycled (PCR) resin. While global virgin PE resin prices have trended downward in light of lower feedstock prices, North American bale prices for natural and mixed-color PE are at nearly identical levels today versus December 2014, according to RecyclingMarkets.net.

Despite the downward trend in virgin resin prices, brand owners have committed to recycling and continue their sustainability initiatives, such as requiring certain percentages of PCR content in their products. Additionally, a big driver in allowing a market to develop for postconsumer natural HDPE has been California’s Rigid Plastic Packaging Container Program, which requires at least 25 percent PCR content in certain rigid containers.

In North America, natural PCR HDPE has had its challenges in recent years as the collection rate for HDPE bottles stagnated at around 31 percent. U.S. and Canadian demand for bottles made from virgin resin for liquid foods and household chemicals has flatlined. The collection rate for those items—the two largest categories in blow molding that contribute to recycling collection—has been stuck at 2.65 billion pounds per year, according to the American Chemistry Council Plastics Industry Producers’ Statistics Group and Vault Consulting LLC, Reston, Virginia.

Many factors have combined to cause this stagnation in HDPE collection. They include the continued lightweighting of packaging. Also, HDPE has lost market share to PET as well as to linear-low-density PE (LLDPE), which is used in stand-up pouches that have replaced some rigid containers. These trends reduce the number of HDPE bottles available for recycling.

Of all the new virgin PE plants coming online in 2016 and 2017, only two reactors, one by Braskem Idesa and one by Chevron Phillips Chemical, will make blow molding resins. Neither company is likely to dedicate all reactor time to producing blow molding resins, but the new supplies will be more than enough to satisfy near-term domestic demand growth.

One thing to watch out for is the North American expansion of bimodal virgin resin, which is made using two resin reactors and has superior physical properties at a higher density than traditional blow molding resins. In some applications, bimodal resin makes lightweighting of bottles possible without compromising performance. Both of these new HDPE reactors will be able to make bimodal resin. The degree of bimodal resin’s market penetration could affect the amount of HDPE available for recycling.

A significant challenge for PCR HDPE in recent years is that it consistently costs more than virgin blow molding material. This has made it challenging for natural PCR HDPE to grow beyond applications where it is required from an environmental or sustainability perspective.

Mixed-color PCR typically costs less than virgin resin, making it a viable option for meeting sustainability and cost-competitiveness goals.

Possible outcomes

We believe a couple of things are inevitable. First, in the near term, we expect that 17.6 billion pounds of new virgin capacity arriving within a relatively short time will put downward pressure on virgin resin prices in North America. 2018 will be a low point for North America compared with global prices. This should provide an opportunity for some manufacturers to bring finished goods production back to North America that had been lost to other regions over the last five to 10 years. More domestically produced finished products also should lead to more opportunities to incorporate recycled resin. This could reverse some trends, such as the increasing use of PET rather than HDPE in bottles over the last decade.

Secondly, sustainability is here to stay. No matter how much virgin resin comes online and what prices are in the near term, brand owners and consumers will not abandon recycling. In the short term, though, recyclers who have traditionally sold PCR resin only as a “cost saving solution” to virgin resin will find it challenging.

PE recyclers will find ways to be more efficient and will continue to innovate to find new, higher-value applications. The highest quality PCR likely will be best positioned to meet the stringent and increasing demands of the marketplace.

The author is senior director of polyolefins Americas for IHS Markit. He is based in Houston and can be contacted at joel.moralesjr@ihsmarkit.com.

For more information: IHS Markit, 832-619-8588, www.ihsmarkit.com