Solving the recycled plastics puzzle
Today’s consumable products — from food and beverage to health and beauty — rely on linear supply chains that extract natural resources at the front end and result in waste into landfills and the environment at the other end.
If we’re going to move from this linear model to a circular one, more capital must be invested into recycling infrastructure solutions and innovations and business models need to compete with virgin raw materials.
At Closed Loop Partners, we envision a world in which virgin and post-consumer recycled plastic feedstocks are used seamlessly by supply chain partners and manufacturers.
Some materials' supply chains and regions are already on paths to circularity. For paper, using recycled material has become the norm and most producers don't even talk about it because investments in infrastructure made collection and recycling of paper at scale possible.
For plastics, however, efficient circular supply chains remain elusive. Plastics are actually hundreds of thousands of variants, making recycling technically difficult and markets geographically distributed depending on your region.
As an investor in circular supply chain solutions, we are seeing a new wave of innovations emerge that disrupt current models with the promise of a new level of scale.
How do you compete on price when playing a different game?
Expecting post-consumer recycled supply chains to compete with virgin supply chains is like saying the New England Patriots are better than the Boston Red Sox because they scored more points last week.
Virgin resin suppliers enjoy a strong position in the supply chain compared to their recycled-content counterparts because of the sheer scale of existing infrastructure for virgin materials and access to feedstock supplies. In contrast, current recycling systems to collect, sort, market and transport recycled plastics are distributed, complete and sub-scale. The cost models and scale — tens of billions of pounds for virgin versus hundreds of millions for recycled — are fundamentally different yet they compete in the same market.
Let's look at the case of PET (think: beverage bottles). PET is a widely accepted material for recycling, and generally profitable to collect and sort nationwide, yet in 2015, just 30 percent of the 5.6 billion pounds generated was recovered, and 13 percent became feedstock for more containers and packaging. A significant amount still ended up going to disposal at a cost of millions of dollars to cities and companies.
Why isn't more PET recovered and recycled?
Effective mechanical sorting and processing of recycled PET (rPET) is hard to do and often involves multiple entities across the supply chain to create a usable pellet. The current cost structure and lack of consistent supply makes it very difficult to get to price parity with virgin resin.
Chemical solutions are enticing because they offer the promise of turning polymers back to a virgin-like monomer state. While technologies exist, scaling chemical processing is difficult without two things: a business model that competes with the price of virgin resin; and the scale to drive efficiency for billions of pounds of material to be re-introduced into existing supply chains. With many failures over the past decade, chemical recycling requires further R&D, greater supply and integration with upstream suppliers.
Investing to improve supply chains
At Closed Loop Fund, the project finance vehicle of Closed Loop Partners, we actively are investing in opportunities to address these cost drivers. Mechanical processes are widely in use and are the lifeblood of the recycled plastics markets.
With investment in mechanical infrastructure, we would expect to see an increase in the percentage of post-consumer recycled content used in packaging — a water bottle could go from 10 percent recycled-content to 50 percent recycled-content — and nationally we could expect to increase the recovery rate of PET by 5 to 7 percent (more than 350 million pounds per year). For both return and impact, proven near-term solutions in rPET supply chains present investable opportunities.
In the past three years, more than $1.5 billion — at least 30 deals and nine acquisitions — has been deployed in North America into processing technologies, facilities or operations for any plastics. The vast majority of this available capital has been deployed into mechanical solutions.
Investing to create tomorrow's supply chain
As my high school chemistry (or Latin) teacher might remind us, plastic polymer resins are made by combining monomers. Today, all monomers are generated by refining virgin, extracted resources.
What if, in addition to scaling the infrastructure for mechanical processing, the plastic supply chain could be optimized so that virgin plastics companies were also major purchasers of recycling-derived monomers for use in the resins they sell? Would that give supply chains seamless access to post-consumer material at comparable scale, making the virgin and recycled products indistinguishable?
Think of the "physical loop" as bottle-to-bottle recycling and think of the "chemical loop" as building block-to-building block recycling. A fully circular supply chain means we have to advance both circularity of the physical loop and the chemical loop; it means ultimately that today's plastics can be the feedstock for tomorrow's plastics.
In all likelihood, billions of dollars of investment are needed to build a bridge to that long-term vision, including:
1. Debt financing for collection and sorting infrastructure to ensure more material is captured and recovered;
2. Debt and equity financing that increases processing efficiency and end-market manufacturing for mechanically processed recycled plastics to maintain demand; and
3. Research and development funding, seed and venture financing to accelerate solutions that efficiently de-polymerize a range of plastics.
In such a future, all existing assets — including municipal recycling programs and MRFs — eventually would need to expand to manage the billions of pounds of plastics not currently recycled or recovered. With that investment, we also would see incredible impact on many other materials, and cities would be closer to achieving their solid waste goals as well.
What will it take to get to 2030?
We need solutions that address the challenges preventing price parity. Improvements and innovations in mechanical recycling are keeping more plastic in play each day, but we need to keep the chemical building blocks in play too, if we are to end extraction and close the loop by 2030.
It is time to engage all of the players in the linear supply chain — from monomer producers and technology owners to municipalities and recyclers — to explore circular supply chains enabled by polymer recovery and conversion. The scale of virgin supply chains is far beyond anything we see today with post-consumer recycled materials. The system needs polymer manufacturers with the expertise and assets to deeply evaluate, engineer, cost and scale the solutions. This is one way to build an enticing and profitable roadmap for investors around the world.