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A steep increase in petrochemical production in China and the US has led to a global oversupply of industrial chemicals used in plastics, sending the price of new material so low that its recycled alternative has become uneconomical to use.
China was responsible for 60 per cent of petrochemical capacity increases in 2023, according to new figures from S&P Global. Production has also surged in the US on the back of the shale gas boom, leading to a level of oversupply of materials such as polyethylene not seen since the 1980s.
The glut of virgin plastic presents a challenge to companies trying to reduce their reliance on single-use plastics in the face of stricter regulation and government pledges to reduce plastic waste pollution.
“Petrochemical overcapacity and the resulting lower prices for virgin material make life harder for producers of recycled plastics,” said Ciarán Healy, analyst at the International Energy Agency.
Ethylene capacity rose nearly 42mn tonnes last year compared with 2019, while global demand grew by only about 14mn tonnes. Ethylene is produced from hydrocarbons derived from oil and natural gas and is a feedstock for the most widely used plastic, polyethylene.
The oversupply has left the sector operating well below full capacity, with global utilisation rates dropping from about 90 per cent in 2019 to below 82 per cent last year as prices tumbled.
In the US, spot prices for virgin high-density polyethylene (HDPE), a common plastic used in products such as shampoo bottles, toys and plastic bags, dropped from $1,674 a tonne in 2021 to $943 in 2023, according to S&P.
The petrochemical glut has piled pressure on recycled plastic manufacturers, which are struggling to compete with far cheaper virgin materials. According to S&P, the price of recycled HDPE prices has fallen dramatically from highs of $2,954 a tonne earlier this year but, at $1,631 a tonne, remains considerably more costly than its virgin counterpart.
Before 2019, recycled plastic used to be cheaper than virgin products. But demand for the material rocketed as consumer goods companies set targets to cut their reliance on virgin plastics in an attempt to reduce their carbon footprints and plastic waste.
Walt Hart, a lead chemicals researcher at S&P, said ethylene use rates, the amount converted to new materials such as plastic, had fallen to their lowest level in four decades because of “a gross overbuild” of production capacity and slower economic growth during and after the coronavirus pandemic.
Hart said “permanent closures of uncompetitive assets and cancellation of some unneeded projects are necessary” to raise ethylene prices.
The excess capacity has also piled pressure on European and Asian producers facing higher production costs than competitors in North America and the Middle East, which benefit from their access to low-cost ethane feedstock, according to the IEA.
The decline in Europe’s petrochemical industry has been exacerbated by surging prices after Russian export cuts pushed up input costs. In 2022 Europe manufactured 14 per cent of global plastics, falling from a 20 per cent share in 2012, according to trade group Plastics Europe. China’s share of 32 per cent has grown from 23 per cent share over the same period.
China’s new capacity has also piled pressure on its former suppliers, as the country used to be a major importer of polymers and synthetic fibres. The IEA said shipments of petrochemical products to China from the Middle East and other parts of Asia had fallen 30 per cent in the first nine months of 2023.
But leading oil producers including Saudi Arabia are betting that petrochemical demand will continue to rise even if demand for petrol-driven vehicles falters, and it is investing in Chinese petrochemical capacity to secure export sources of its crude.
James Wilson, senior analyst at market intelligence provider ICIS, said the recycled plastics market would continue to underperform for the foreseeable future. “With this unprecedented supply of cheaper materials, how does recycling compete in that environment? It is a much tougher environment than we have seen previously.”
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