In the past two years, several CPGs have announced deadlines to slash their use of virgin plastic in packaging and shift toward more sustainable options over the next few decades, including Keurig Dr Pepper, PepsiCo and Mondelēz. Recycled plastic and paper have proven to be two of the more popular alternatives. But as price and supply volatility continue to impact the packaging industry, one question keeps emerging: Is there a clear pathway in the short term to hitting these goals, or are they just pipe dreams?
A mix of factors threaten to complicate CPGs' timelines, including the pandemic’s scrambling of consumer buying behavior and material supply chains, the existing recycling framework in the U.S., as well as recent developments such as the war in Ukraine. This is even as pressure continues to mount for the industry to take accountability over the pollution caused by food and beverage packaging.
“There have been a lot of commitments in terms of using recycled content and packaging, and the goals that were established were set without really a fundamental base of the means to do that,” said Robin Waters, director of plastics planning and analysis, IHS Markit, in an interview late last year.
To understand why meeting these commitments may prove difficult, it helps to examine the price and supply swings that have rippled across virgin and reclaimed plastic resin over the past two years.
The story begins with virgin plastic, resins that are newly created from oil or, as is mostly the case in North America, natural gas. Food manufacturers are under pressure to reduce their use of virgin plastic in packaging, and for good reason. A 2018 study cited by the Association of Plastic Recyclers found recycled plastic resin uses anywhere from 79% to 88% less energy to produce as virgin resin, depending on the type.
At different points over the past two years, virgin plastic resin has been considerably more or less expensive than reclaimed plastic as pandemic forces stressed their respective supply chains. And with each shift in the price trend, the timeline to hit goals for cutting virgin plastic also changes.
“There have been a lot of commitments in terms of using recycled content and packaging, and the goals that were established were set without really a fundamental base of the means to do that."
Director of plastics planning and analysis, IHS Markit
As the pandemic swelled in early 2020, supplies of virgin plastics such as polypropylene — a stiff, recyclable plastic used in packaging such as yogurt containers — shifted to medical purposes like face masks and protective gear. “And so, the factories that were producing these chemicals, polymers, shifted capacity from one type to another, also creating shortages, which also increased the prices,” said Richard Freundlich, a senior analyst of plastics supply chains with RaboResearch, who has retired since the interview.
The Gulf Coast also saw brutal weather events, including Winter Storm Uri and Hurricanes Ida and Nicholas in 2021, that knocked out power and throttled the natural gas industry as well as chemical plants in Texas. The chaos had ripple effects further downstream into plastic packaging manufacturing.
“Suddenly we have shortages, and you just can't substitute material so easily in the packaging field because of the food law regulation,” Freundlich said, referring to FDA regulations that restrict which substances can come into contact with food. Swapping out one chemical additive in plastic packaging requires a qualification from the FDA — a process that takes about a year, he noted.
The infrastructure outages led to packaging plant shutdowns and plastic shortages. Virgin plastic resins saw a historic price increase during the fallout.
Meanwhile, as the cost of virgin resins rose, so naturally did the cost of food packaging, Freundlich noted. To get ahead of these costs, CPG companies began reducing package sizes. This had a supply impact, requiring packaging manufacturers to retool.
Reclaimed plastic has faced its own supply stressors. For a time, labor shortages during the pandemic led to packaging plant shutdowns and disrupted recycling operations that fed the market.
“When you look at all these plastics when they are reclaimed, they are done historically in the United States by mechanical sorting, and that takes cheap labor,” Freundlich said. “And those are the first guys that quit their jobs [during the pandemic].” More importantly, it also affected the collection of materials for recycling. The result was material shortages and, of course, price increases.
“Know all these companies that you read about — 'We're going to use 25%, up to 50% of reclaimed plastic in our packages,' right? That became a pipe dream,” said Freundlich. “Not only because of the sourcing problems, but the price of making reclaimed plastic was significantly higher than the virgin material itself, sometimes twice as expensive. So the promises that were made, will never be met.”
While recycled plastics have since become more price competitive recently as virgin plastic faces higher input costs in the wake of the Ukraine war, the lingering supply and demand effects of the pandemic will continue to play out and complicate CPGs' transition to more sustainable materials.
Demand hits supply
Demand for rPET has also outpaced supply as recycling rates lag. According to the National Association for PET Container Resources, end-use consumption of rPET rose 10% in the U.S. and Canada in 2020, while collection fell about 2.3% in the United States, resulting in a recycling rate of 26.6%. Coca-Cola, which announced in February it would begin using 100% rPET for its bottles, has been working with local governments on setting recycling policy to ensure a supply of quality rPET, said spokesperson Bailey Rogers.
Structural issues in the plastics recycling industry also are complicating the shift away from virgin plastics. Most plastic in the U.S. is recycled mechanically, through processes that include grinding, washing, separating, drying, re-granulating and compounding.
“The ability to supply enough mechanically recycled plastics that can be used to displace virgin plastics is limited for a number of reasons,” said Waters with IHS Markit. He said these include limitations on the types of plastics that can easily be mechanically recycled — the process works best on rigid plastics and thick films — and issues with ensuring the traceability of different plastics once they've been processed.
“And so we've seen that the premium for [post-consumer recycled plastics] go up as the commitments have been made,” Waters said. According to Plastics Recycling Update, the national average price of post-consumer PET beverage bottles and jars rose 17% from March to April, for a per-pound price of 39.22 cents. This compares to 12.03 cents one year ago.
Bret Biggers, senior economist with the Institute of Scrap Recycling Industries, said the recycling industry is responding to growing demand by investing in new plants, equipment and automation, specifically at materials recovery facilities (MRF) that process the commodities after collection and supply them to packaging manufacturers. Private equity is providing a financial boost to some players, allowing them to expand and upgrade, a trend he expects to continue in the year ahead.
Labor shortages affecting all of manufacturing are expected to ease in the second half of 2022, Biggers noted. However, many of the issues that affected supply last year will persist in the months ahead. “Supply chain disruptions are going to continue. There's forecasts it won't be until the second and third quarter before they start easing," he said. "… Within America, the transportation costs are going up and wages. ... That means that recyclers have to contend with a lot of rising costs.”
The alternatives to plastic have also seen their own share of price volatility. Different types of paper, which has proven a popular option for CPGs ranging from Bumble Bee with its paperboard tuna can wrappers to Diageo and its paper whisky bottles, has also faced price increases, although at a more modest degree compared to other materials.
"Paper packaging prices have gone up about 26% to 44% in the past two years, depending on what kind of grades you're looking at,” said Xinnan Li, an analyst for food and agribusiness with RaboResearch. “But that's really driven by a higher consumer demand. Whether it's on the retail side, consumers just buying more products on the market shelf, or on the e-commerce side, a lot more products have to be packaged in corrugated boxes.”
The North American paper market is also fairly consolidated around a handful of major manufacturers, who have a lot of pricing power, Li said. Finally, paper packaging has been wrestling with the same labor issues as other industries, and so both virgin and reclaimed paper manufacturers have passed along the higher associated costs.
At the beginning of the pandemic, some MRFs closed or collection volumes were affected, sending demand and prices skyward for old corrugated container pulp. A jump in demand from online purchases early in the pandemic also was a major factor. Li said the OCC price has jumped from about $30 a ton to now $120.
“So that's a huge increase that … the industry is going to digest somehow,” she said. Prices for wood pulp, the basis of virgin corrugated board, has seen about a 50% price increase, “purely driven by demand for wood for pulp.”
An inflationary year
Although some of the packaging material price rallies had begun to settle toward the end of 2021, the Ukraine conflict has introduced a new element of uncertainty.
While Ukraine is not a major provider of chemicals — with about 3% to 5% of the market, Freundlich said — it does rattle the balance of supply feeding the plastics industry. Meanwhile, with some European countries boycotting Russian natural gas, the U.S. has stepped in to supply liquefied natural gas. That diverted supply will come at the expense of industries such as plastic manufacturing.
“When you add all this together, it's inflation. It will be continued inflation. And even before the Ukraine situation, we would see moderate price increases in packaging resins for the next five to 10 years because of natural gas,” Freundlich said.
Freundlich said the quickly shifting ground makes providing a forecast on virgin plastics pricing difficult.
“Plants have been canceled. Pipelines have been canceled,” he said. “We don't know what the effect is and how the import-export relationships will be altered. This all could have major effects on price. So 'hold on tight' is what I'm saying. Yes, it's not going down. It's going to be an inflationary year.”
Perhaps the biggest factor in materials costs will be energy. The Ukraine conflict pushed the price of global benchmark Brent crude oil to $134 per barrel this past March — its highest point since 2008 — and U.S. natural gas prices to their highest level in 13 years. Brent crude prices have since settled to around $110 per barrel, although demand is expected to remain elevated.
"When you add all this together, it's inflation. It will be continued inflation. And even before the Ukraine situation, we would see moderate price increases in packaging resins for the next five to 10 years because of natural gas."
Retired senior analyst, plastics supply chains, RaboResearch
For recycled plastics, this provides an opening. At the Plastics Recycling Conference this past March, analysts with IHS Markit noted the run up in oil prices could pressure virgin resin prices and make recycled resins more competitive, Waste Dive reported.
Beyond being a key material in plastics, oil and natural gas also power most of global manufacturing. This has implications for the economics of different packaging types.
“Energy costs — if you look at glass — whoa. Aluminum — yikes. I mean, these are all very, very energy-intensive,” Freundlich said of other virgin packaging alternatives to plastic. “It's a scary situation. But the good news is there's lots of new capacity coming online and that can counteract some of the costs.”
Paper prices are also being pressured by the war.
"Before we were forecasting double-digit growth even before the Russia-Ukraine [conflict],” Li said. Because paper processing is energy-intensive, the war will only pressure prices in the short term.
Longer term, Li said the outlook for paper prices is much better, with several new corrugated container board plants due to come online and capacity expansions that should add to supply. This — combined with the more modest price swings for paper — could give the material an advantage as more manufacturers shift their packaging.
“With where the traditional plastic prices are, that could be even more incentive for companies to look into the alternative — more sustainable materials. Because traditionally, sustainable materials are more expensive,” Li said.
Meanwhile, another buzzword is bubbling up that will affect both the food and packaging industries in the years to come.
“Over the last three, four years, everybody, including every packaging person, was stuck up on the word ‘sustainability,’” Freundlich said. “This year and the following couple years, that word will be changed to ‘decarbonization.'"
To build on the Paris climate accord, the United Nations is challenging every country, city, company and financial institution to strive for carbon neutrality by 2050. Food companies including Nestlé, Mars and Unilever have already set targets for net zero emissions by 2050 or earlier. Packaging is one path to meeting those goals.
“There's not one company that doesn't have a team very significantly considering what they can do,” Freundlich said. “It's going to have a great impact on inflation and unfortunately cost as well.”