Sustainability pressures are expected to change the dynamics of plastic consumption with regulation, innovation, consumer preferences, and corporate responsibility all playing pivotal roles.
Certainly, the prolific use of plastics and the negative consequences of disposal is a major sustainability problem that the world must solve. However, we would caution that the media hype around plastic’s imminent demise, and the subsequent impact to the industry, is grossly overstated. Our analysis of those industries/sectors most directly impacted support this view, and these insights, in turn, help guide our investment decisions.
Understanding the magnitude of the problem, both in terms of the environmental impact as well as concerns relating to human health, is central to defining plastic’s role in a sustainable world. Given plastic’s many positive attributes, we believe the sustainability debate should not ultimately be about “if” we use it, but “how” we use it and, crucially, how we dispose of it.
Ultimately, we believe the magnitude of plastic waste will drive change, and this will fundamentally reshape segments of the plastics industry. This paper analyzes the key areas where this reshaping is likely to play out. That said, the changing use of plastic will be gradual and punctuated by regulation and the emergence of technology solutions along the way.
The Positive and Negative Impact of Plastics
Since their introduction in the early 1900s, plastics and plastic packaging have become integral to modern life.
Global demand for plastics has increased twentyfold over the past 50 years, and the International Energy Agency predicts that demand will grow by an additional 45% by 2040, with nearly two‑thirds of that growth coming from Asia.
The obsession with plastic is easy to understand—cheap, lightweight, and durable, the material is beneficial to society in a multitude of ways, including:
- Reducing food waste—by extending the freshness period
- Lowering vehicle emissions—by making cars lighter
- Increasing energy efficiency—through improved building insulation
Despite the many benefits, the vast consumption of plastic is a major sustainability problem that the world must solve. Meanwhile, most plastics have a very short life span (less than one year), yet they can take up to an estimated 450 years to break down, creating a major environmental impact if not disposed of properly.
Accordingly, we believe that the sustainability debate should center on how, not if, we use plastic and, most importantly, how we dispose of it.
Scoping the Problem
The environmental impacts of plastic are numerous, with implications for human and animal health.
- Ocean leakage—Estimates suggest that there are more than 150 million tons of plastic in the ocean, with a further 8–10 million tons leaking into oceans annually. It has been suggested that, by 2050, there could be more plastic in the oceans than fish. Plastic waste harms marine life in many ways:
- Sea animals ingest plastic, leading to injury or death
- Natural ecosystems vital to ocean health are polluted
- Microplastics consumed by marine life make their way into human food chains
- Land leakage—An estimated 25%–30% of plastic waste is left on land as it escapes waste collection systems or is never collected. As this plastic waste breaks down, chemical byproducts seep into soil, groundwater, and waterways.
- Landfill and incineration—Landfills account for 40%–45% of plastic waste disposal. In many countries, poor disposal practices lead to chemical seepage into soil and waterways. With proper disposal, the environmental impact can be contained. Incineration has negative consequences as it releases carbon back into the atmosphere. However, better practices such as high‑temperature incineration can greatly reduce the emissions impact, while the energy generated can be sold as a byproduct.
- Bisphenol A (BPA)—BPA is used in harder plastics for use in food containers and drink bottles. While the science is not conclusive, there are concerns about the potential health risk for humans and animals. As such, several countries have restricted BPA usage, and the U.S. has listed it as an endocrine disruptor.
(Fig. 1) Global Plastics—Where Does It All End Up?
Global plastics end usage by industry, and how it is ultimately disposed of
As of January 2018
Source: The New Plastics Economy, Ellen MacArthur Foundation (2018).
Source: IEA, The Future of Petrochemicals (2018) (adapted from “Production, use and fate of all plastics ever made”, Geyer, R., J.R. Jambeck, and K.L. Law (2017).
(Fig. 2) Top 20 Country Contributors for Land‑to‑Ocean Plastic Waste Leakage
Plastic waste leakage into the world’s oceans shows little sign of abating
As of February 28, 2015
Data are based on 2010 estimates. ppd = per person per day, mmt = million metric tons.
Source: Science Magazine, February 2015, “Plastic Waste Inputs From Land Into The Ocean,” JR Jambeck, et al.
The Role of Plastic in a Sustainable World
Given the magnitude of the disposal problem, we believe the plastics industry will be fundamentally reshaped in four key areas: (1) reduced usage, (2) increased recycling, (3) increased incineration (waste to energy), and (4) replacement by plastic alternatives and/or new biodegradable plastics.
Today, the primary focus in terms of reducing plastic waste is on single‑use plastics. This is a shift from past decades where the focus was on reducing material usage through making plastic packaging lighter weight. Consumer goods companies are now turning their focus to packaging alternatives and/or redesigning packaging to make it recyclable.
On a global basis, only 14% of plastic packaging is collected for recycling, and only 10% is ultimately recycled. Certain plastic packaging materials are recycled at higher rates—such as polyethylene terephthalate (PET) bottles, high‑density polyethylene (HDPE) bottles, and post‑commercial films. Some geographies achieve much higher recycling rates, with the difference usually being dependent on recycling economics for the format and region.
PET used in beverage bottles has a higher recycling rate than any other type of plastic, but recycling rates for PET vary by region. On a global basis, it is estimated that only half of PET bottles are even collected for recycling, and then only 7% is recycled, bottle‑to‑bottle.
In Focus—Plastic and the Packaging Sector
In 2015, plastics made up 25% of global packaging volumes (up from 17% in 2000). Demand for plastic packaging has been driven by increasing applications including food and beverages, personal and household care, consumer electronics, and construction. Most estimates for future growth sit around 4% compound annual growth rate, with food and beverage applications growing at a slightly faster rate than other categories.
While gross domestic product growth will be a key driver of growth in plastic packaging, it is also true that regulators, companies, and consumers are all showing interest in addressing the end‑of‑life problems that come with plastic packaging. This is especially the case for food and beverage applications, so we believe key drivers of success among packaging companies will be: (1) product innovation and (2) the ability to develop a circular business model.
Highlighted below (Appendix 1) are just some of the regulatory measures that have been introduced, or that are planned, specifically aimed at reducing plastic packaging. Similarly, Appendix 2 details the corporate commitments being undertaken by many of the industry’s key customers. (Note: The lists are illustrative and not exhaustive.)
(Fig. 3) Industrial Impact of Reshaping Plastics Usage
Source: T. Rowe Price research.
(Fig. 4) Recycling Rates Vary Notably Between Regions and Materials
Plastic recycling lags other materials significantly
As of December 31, 2015
Sources: MSCI ESG Research, U.S. EPA, Recycling Today, Ball Corp., International Paper.
In Focus—Plastic and the Energy/Chemical Sectors:
Petrochemicals account for 14% of oil consumption (13m barrels per day) and 8% of natural gas consumption (300bn cubic meters). Petrochemicals play an important role in the broader chemicals sectors as they account for roughly 90% of chemicals feedstock (raw material that fuels an industrial process) today, but it is light olefins (ethylene and propylene) and aromatics (benzene, toluene, and BTX) that are the precursors to plastics, synthetic fibers, and rubber.
Light olefins and aromatics are collectively known as high‑value chemicals or HVCs. These HVCs can technically be made from materials other than oil and gas, such as biomass, water, CO2, and other carbon sources, but today oil and gas are the cheapest and most prevalent feedstocks. Coal‑to‑chemicals chains have proven economically competitive in Asia and will see some growth in the coming decade, but they remain small in a global context. (Coal has accounted for 1% of all plastics feedstocks since 1970, while oil has accounted for 74% and natural gas for 25%.)
The entire plastic packaging sector accounts for approximately 36% of petrochemical production.1 While some companies will have material exposure to production of HVCs for the purpose of plastic packaging production, we don’t think this exposure automatically correlates with an extreme sustainability risk. Many of the companies involved will likely end up as solutions providers as packaging products are adapted to solve for their end‑of‑life problem.
However, we caution that there will be winners and losers in this category, and with government regulation becoming more focused on this issue, demand patterns could change quickly (i.e., in the next five years versus the next 10–20 years). Another important point to note is that the most at‑risk companies tend not to be that closely tied to their end market. They simply sell a commodity product into a global market. As such, it is possible that company managements may not be best positioned to see the change coming.
Figure 5 indicates that only 2% of global plastic packing demand is currently “displaced” through closed‑loop recycled feedstock. If closed‑loop recycling methods gain traction around the world, this would be a small, but persistent, drag on volumes for the petrochemicals sectors. Each ton of polyethylene recycled replaces 1.5 tons (or 11 barrels) of oil.
The petrochemicals chain also faces a sustainability issue in its synthetic fibers segment, which accounts for approximately 15% of petrochemicals production. Studies conducted by the Circular Fibers Initiative and Ellen MacArthur Foundation indicate that 63% of feedstocks into clothing is plastic (Figure 6). Furthermore, only 13% of the total material input in the apparel industry is recycled, with the majority going into lower‑value products such as insulation and furniture filling.2
The CO2 Impact of Plastic
A unique aspect of petrochemical production is that hydrocarbons are used as a feedstock, with about half of the sector’s energy consumption used as a raw material and not combusted. Two of the main hydrocarbon feedstocks are naphtha and ethane. Naphtha is primarily derived from crude oil, while ethane is more prevalent in natural gas and natural gas liquids. The majority of ethylene is produced using a process called “steam cracking”, a thermal process where hydrocarbons are broken down, or “cracked” into smaller molecules that are then used to manufacture more useful (and valuable) chemicals.
Looking more carefully at the emissions released in the manufacturing process, ethane crackers are far more efficient, releasing 1–1.2 tons of CO2 per ton of ethylene produced, compared with naphtha crackers releasing 1.8–2.0 tons of CO2 per ton of ethylene produced.
While the economics for plant‑based plastics remain challenging, we do see a lot of research and development and pilot projects going into bioplastics today. The benefits of bioplastics are that no fossil fuels are required to make the product and they break down more quickly than traditional plastics. However, even if the economics were right, there are some notable drawbacks to the implementation of bioplastics. First, they must be separated from traditional plastics in the recycling process. Second, they are not as strong as fossil fuel‑based plastics. And third, the amount of plant‑based materials required is significant. To replace 3% of the global plastics market, 5% of global corn crops would be required.3
(Fig. 5) Global Flows of Plastic Packaging Materials
As of January 31, 2018
Source: The New Plastics Economy: Rethinking the Future of Plastics, Ellen MacArthur Foundation (2018). Analysis based on 2013 data.
(Fig. 6) Global Flows of Clothing Materials
As of January 31, 2017
Source: A New Textiles Economy: Redesigning Fashion’s Future, Ellen MacArthur Foundation (2017). Analysis based on 2013 data.
(Fig. 7) Plastics Factors Incorporated Into T. Rowe Price Research
Proprietary RIIM analysis rates companies on their plastics sustainability
Factoring Plastics Sustainability Into T. Rowe Price’s Responsible Investing Indicator Model (RIIM)
Our proprietary RIIM incorporates a broad range of plastics‑related factors, varied across subindustries, against which we then measure and score companies on their plastics sustainability. An example model output is illustrated in (Figure 7, above). Note that this is not an exhaustive list of factors.
The prolific use of plastic and negative consequences of its disposal are major sustainability problems that the world needs to solve. However, we would caution that the negative media hype around plastic and its imminent demise, and the subsequent impact to the industry, is grossly overstated.
Indeed, as we consider the various business impacts that could come from moving to a more sustainable world, plastic does not reside in the highest‑risk category. This is because cost‑effective substitutes are not readily available, and many of the companies targeted will likely be solutions providers as packaging products are adapted to solve their end‑of‑life problem.
1The Future of Petrochemicals, OECD/IEA December 31, 2018.
2A New Textiles Economy: Redesigning Fashion’s Future, Ellen MacArthur Foundation (January 31, 2017).
3Plastic Pollution FAQs, HSBC Research (November 15, 2018).
(Appendix 1) Government Regulation Affecting Plastic Packaging
As of December 31, 2018
Source: T. Rowe Price research.
(Appendix 2) Corporate Commitments Concerning Plastic Packaging
As of December 31, 2018
Source: T. Rowe Price research.
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