Plastic Recyclers Reeling-----How Global Commodity Deflation Ripples Up The Supply Chain

By GEORGI KANTCHEV and SERENA NG at The Wall Street Journal

BINBROOK, England—A former World War II bomber hangar houses a monument to the recent plunge in oil prices: hundreds of bags of shredded plastic.

The hangar is used by CK Group, a recycler of bottles, pipes and sundry bits of plastic. Plastic is often derived from oil, and there used to be money in recycled scrap. Not anymore. The fall in oil prices has dragged down the price of virgin plastic, erasing the recyclers’ advantage.

“Many in the recycling industry are hanging by the skin of their teeth,” says Chris Collier, CK’s commercial director, walking among the bales of unsold shreds. “Everybody is desperately chasing for money to stay alive.”

The ramifications are being felt far and wide. In the U.S., many cities and towns pick up detergent bottles, milk jugs and other bits of household plastic and sell them to recyclers who sort, process and resell the scrap. These municipalities typically earned cash—as much as $10 a ton in parts of New Jersey—for selling recyclable materials under contracts that tie the sales price to commodities prices, with a minimum.

In recent months, some expiring contracts have been replaced with new contracts that set no such floor. That raises the possibility for some municipalities that a moneymaker could turn into a loser.

“They are definitely concerned about the possibility that they may have to pay for the materials to be removed,” said Dominick D’Altilio, president of the Association of New Jersey Recyclers, a Bridgewater, N.J., group that includes recycling firms and municipalities.

At the start of this year, new polyethylene terephthalate, a type of plastic widely known as PET and used to make soft-drink and water bottles, cost 83 cents a pound, according to data compiled by industry publication Plastics News. That was 15% higher than the cost of recycled PET.

As of late March, the cost of new PET had fallen to 67 cents a pound, or 7% less than the recycled form, which costs 72 cents a pound.

In many parts of the northeastern U.S., scarce space for landfills makes garbage disposal much costlier than elsewhere, so local governments in New Jersey and New York could still find it economical to recycle even if they have to pay for their plastic to be hauled away. Where dumping trash in landfills costs less, some cities might decide to forgo recycling.

Prices are “very important to stimulate good recycling rates among our communities,” says Carey Hamilton, executive director of the Indiana Recycling Coalition.

Especially hurt are the middlemen of the recycling supply chain, who buy used bottles, cans, paper and other items and then use machinery to sort, bale and sell the recyclables. Prices middlemen get when reselling some types of plastic have plummeted by as much as half in just a few months, says Allan Zozzaro, a partner at Zozzaro Atlantic Coast Processing LLC in Passaic, N.J. “It’s putting a real strain on all recycling companies,” he says.

Prices of recycled plastic also slumped during the 2007-2009 recession. But the U.S. economy is growing now, and few saw the steep downturn in prices coming.

In Europe, two German recyclers have gone bankrupt since December. ECO Plastics Ltd., a British firm that touted in 2012 the opening of what it called “the world’s largest plastics processing facility,” went into administration, a form of bankruptcy. The company’s assets were bought by Germany’s Aurelius Group, which declines to comment.

Chris Dow, chief executive of Closed Loop Recycling Ltd., says the Essex, England, company could fail as a result of the low prices for recycled plastic. Closed Loop says it produces more than 75% of the recycled plastic used in the U.K.’s milk bottles.

“We are basically saying to our customers: ‘Help us come through this by paying a premium for recycled plastic,’ ” says Mr. Dow. “But few are.”

The shift in prices also jeopardizes environmental targets set by governments. For some types of plastic, recycled has become as much as £200 per ton (about $298) more expensive than virgin, recyclers say. The London Waste and Recycling Board says there were more than 1.1 million tons of plastic waste in London in 2010, the latest year for which figures are available.

Only one-third of the plastic waste was recycled. London hopes to recycle half its total waste by 2020.

“The fall in the oil price puts pressure on plastic recyclers and could threaten the ability of London to meet higher recycling targets,” says Wayne Hubbard, the board’s chief operating officer.

Plastic production starts with oil and natural gas, which are refined into familiar products like jet fuel or gasoline. But some products like ethane get “cracked” in high-temperature furnaces, breaking down organic molecules into simpler molecules such as ethylene and propylene.

Those are converted back to complex molecules, or polymers, which are then melted into small pellets. Bottle makers, pipe manufacturers and other firms buy the stuff and mold it into a finished plastic product. Only a tiny sliver of total plastic output comes from renewable organic sources like starch, corn or sugar.

The cost of producing new plastic closely tracks the ups and downs of global oil prices. Since June, the price of a barrel of oil has fallen more than 50%.

Many manufacturers prefer virgin plastic because its chemical composition can be precisely specified. That kind of plastic usually is more expensive than recycled plastic.

Now that new plastic is cheaper, Measom Freer & Co. is using more virgin material in the U.K. company’s bottles, says Anne Freer, director at Measom Freer. “People are just not willing to pay a higher price for the eco-friendly stuff,” she says. “We try to use as much recycled as possible, but it really comes down to price.”

Oil prices aren’t the only culprit. Government policies pushed companies to use more recycled materials, and recycling plants have mushroomed in the U.S. and Europe. That created overcapacity that has become painfully clear now that demand for recycled plastic has shrunk.

In the U.S., “people were surprised because the economy is doing fairly well, yet you have rapidly falling commodity prices,” says Scott Saunders, general manager of KW Plastics Recycling Division, a Troy, Ala., recycling company.

Back in the former bomber hangar in England, Mr. Collier feels squeezed.

The recycling process starts where most consumer goods usually end: in the trash. CK Group sorts the plastic and removes any unusable parts, evident in the coat-hanger hooks littering the factory floor. A half-dozen machines suck in plastic and spew it out as flakes.

The factory’s biggest piece of equipment is a three-story-tall color separating machine that the company recently bought for £350,000 ($520,000). The machine makes it possible for CK Group to offer bags of shredded plastic by color, which command a premium price over the variegated scrap known as “jazz.”

“Our scrap suppliers now want us to pay upfront, while our customers, those who still stand by recycled plastics, want to stretch payments as long as possible,” Mr. Collier shouts amid the roar of plastic grinders. “And we are in the middle of all this.”

Recycling Becomes a Tougher Sell as Oil Prices Drop - WSJ.

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