Glass PRNs: what happens next?

The prospect of some compliance schemes or producers not meeting their glass recycling targets under the packaging regulations is a sobering thought for the festive season, so why are people talking about this, whats happened, and what does it mean for the UK?

The gap between glass recycling levels and the regulatory targets is approximately 565,000 tonnes (equivalent to almost 150% of the quarterly production at the start of the year). This is a big gap to close.

Glass PRN prices are now almost 10 times higher than the start of the year (market prices are currently at 75 from 8 at the beginning of 2012) due to this shortage in supply to meet demand.

Even with such high prices, the question over whether there is enough recycling taking place to hit the requirement remains to be seen. Indeed, we are aware of many different discussions taking place within schemes that may be struggling to comply.

These include conversations around whether alternative forms of recycling or compliance evidence can be used in addition to the PRN system, whether audit trails demonstrating a lack of tonnage availability will be a sufficient defence of non-compliance, whether members can be ejected under the scheme terms and conditions to reduce the scheme obligation and whether there is any movement in the definition of what can be counted for PRN production. Despite this, there appears to be a significant tonnage of PRNs available at this time and trading through reprocessors and brokers alike. So is the difficulty just about cost or does the PRN system not work in these circumstances?

System

We believe the PRN system works well to finance the recycling sector for packaging waste and that the issue is not with the system, but rather is with those schemes that had not make robust enough plans to spread risk and act early when the warning signs first appeared. For example, early indications of market difficulty started to become known in Q2 and Q3; and quicker action by schemes to purchase earlier would have led to an increase in localised demand for recycling and therefore a higher price being paid. This in turn would have helped reprocessors secure more tonnage for recycling that may have otherwise been uneconomical to collect.

So why didnt this happen? Maybe its been down to price pressure from producers that have been looking to reduce and secure their budgets due to the hard economic climate. Certainly at the start of the 2012 compliance year, we received a number of tender requests from producers seeking to lock their prices down through fixed price deals.

At this point, it was easy to look back at the previous couple of years, where the reported recycling levels have been higher (in part due to the fraudulent tonnage being included in the figures as publicised recently) and a lower purchase price was achievable. We speculate that under these conditions, schemes may have been tempted to offer the fixed price deals for producers based on the recent climate, without back-to-back supply contracts being in place with reprocessors.

Reaction

If this is true, this may explain the delayed reaction for advancing the purchasing focus when the early warning signs appeared, in the hope that lower prices would return the other side of the peak. This could become a difficult situation to handle schemes needing to make decisions on trying to renegotiate their supply agreements with reprocessors or make a loss or issue a Q5 invoice or fail to comply?

Ultimately, the PRN system responds well to market shortages by allowing the price to increase in times of undersupply, which in turn promotes more recycling through increased investment becoming available. Surely then, the responsibility for schemes meeting their compliance obligations depends upon their ability to generate and action robust supply agreements with recyclers and to put in place appropriate back-to-back contracts that meet and balance their exposure.

The core principles of this supply and demand balance combined with each materials unique characteristics and elasticity of supply provide, at times, a volatile price market.