Q3 PRN figures impacted by wider macroeconomic trends

Against a background of rising prices for plastic PRNs and PERNs, compliance scheme Valpak, with input from Valpak Consulting, takes a broader look at issues around the PRN and reasons that rising prices should be treated with caution.

The latest figures for plastic PRNs have prompted a number of responses in the industry to the increasing prices and below-target quantities that the market has produced this year to date.

There are a number of macroeconomic factors influencing this current trend through their effect on the demand for recycled plastic polymers. Chinese manufacturing, a major end market for recycled plastics, continues to be weak, with the last published results showing a further contraction in factory activity. The Chinese government target of 7% growth has now been cast into doubt. Meanwhile, continued struggles in Europe to escape the credit crisis continue to weaken demand for British recycled plastic, with GDP growth up just 0.4% in the Euro Area in the second quarter of 2015.

Consideration of the plastics PRN needs an all-round view, suggests Valpak

The UK construction industry has suffered an unexpected downturn this year, with the ONS in its latest report announcing that “In August 2015, output in the construction industry was estimated to have decreased by 4.3% compared with July 2015 and decreased by 1.3% compared with August 2014. This was the first year-on-year fall since May 2013.” This is estimated to consume 22% of Britain’s plastic demand, and therefore is further weakening the demand for recycled plastic. Some of this effect is being mitigated by the growth of the packaging sector’s use of recycled plastic.

What is the effect of this weakened recycled plastic demand?

With less buyers of recycled plastic, the price of the majority of plastic polymers has fallen. This has increased pressure on reprocessor’s margins, and is likely to mean a fall in volume being produced, shown by the below target number of PRNs up to Q3. This has important implications for the PRN market.

Reprocessors are likely to be having lower production levels, whilst demand for PRNs remains relatively high due to rising government targets as the amount of obligated plastic packaging on the market remains constant, is resulting in more competition for PRNs, leading to the price increases. However, for those with packaging obligations, the current low price of plastic polymers appears to be outweighing the increased cost of PRNs, leading to a boost in the bottom line for many organisations.

Extra income

These PRN price increases are helping to stabilise the recycled plastic industries, by offering extra income in proportion to cope with the lower available output prices. Although some recyclers have got into difficulties, looking at other commodities industries in Britain shows that the effects without PRN income could have been more catastrophic. The current issue raised by reprocessors is the volatility of PRN prices, weakening the ability for the industry to plan into the future and help make long term investments. With the recent increases in PRN price, this volatility has become an increasing issue.

Plastics recycling process generic 1 — PRN prices could continue to rise but at the other side of the chain, purchasing material for packaging could be cheaper

The outlook for the rest of 2015 for recycled plastic polymers looks uncertain. Whilst there is little chance of Europe’s demand increasing, economists at ANZ expect Chinese manufacturing to pick up by the end of the year as government spending and stimulus measures gradually take effect. Similarly, positivity about the British economy and demand for new houses is expected to encourage the construction industry in Britain. If these predictions become true, this could increase demand and raise the price of recycled plastic polymers in the medium term, allowing downward pressure on the price of PRN as production and export both increase to meet rising demand.

Targets

Over the next few years, government targets are planned to continue to rise steeply. This will increase demand for PRNs, and will create upward pressure on the PRN price, exacerbating this issue in future years.

With the impending deadline in December for PRN obligations to be met, it is expected by many that there will be further short term PRN price increases as compliance schemes and companies scramble to meet their demands. However, it seems likely that operators are sitting on excess stock due to the recent low polymer price, and that this increase in supply will exert further downward pressure on the short term PRN price before the end of the year. This extra supply effect, combined with the potential change in macroeconomic trends outlined earlier, means that comments about soaring PRN prices should be treated with caution.

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