Like most markets, packaging recovery note (PRN) prices largely fluctuate on two principles: supply and demand and swings in market sentiment.
What makes the PRN market unique is that supply and demand operate within a ‘closed’ compliance year. The demand figures are made available following the release of the obligation data in April, and then PRNs are generated during the course of the year to meet this relatively static demand.
Our window to the supply side comes in the form of recycling figures released at the end of every quarter. These much-anticipated trigger-points within the compliance year are fundamental to determining PRN prices, and are often the catalyst for flurries of trading activity and concentrated periods of price volatility.
In most basic terms, where these indicate a deficit of supply, PRN prices go up, and when they show surplus, prices go down.
The third quarter figures are especially sensitive because this is the final piece of supply data to be released before the January compliance deadline (fourth quarter results are released after the deadline). Not only do these set the tone for the final three months of trading, but they will also greatly influence opening PRN prices and forecasting for the following compliance year.
For PRN buyers, this year’s Q3 recycling figures released last month can be summed up as the good (plastic), the bad (steel) and the downright ugly in the case of glass.
Plastic’s nine-month bull run came to an abrupt end in October. The supply of plastic PRNs received a double boost in the month.
Backdated PRNs issued on newly authorised grades of washed PET flake saw Q1 and Q2 amended upwards by a combined 28,000 tonnes. It almost entirely wiped out the supply deficit from the first half of the year.
This caused an initial price correction down to £22. But it was the release of strong Q3 data, showing a 20,000-tonne oversupply for the quarter, that sparked a dramatic sell-off, with prices on t2e falling 64% to £8 per tonne in two weeks.
Volume buying support in the market at £8 has stabilised the price slide for now. But buyers should remain wary of a potential bounce in the price as we approach the December transitional period.
In the metals sector, aluminium also had a bumper Q3 and now looks well on course to meet its 2012 target. Prices fell accordingly on t2e, down 28% to £6.50.
But steel continues to underperform, missing its target for the second quarter in a row. Prices have yo-yoed either side of the Q3 release, twice breaking £50 per tonne before falling back to £35.
Current trends are showing an upwards swing again, with prices trading up to £37 per tonne. If supply remains tight, further volatility can be expected with many sellers holding out for higher prices.
While compliance in steel still looks achievable, hope for glass appears to be fading.
The Q3 glass figure confirmed buyers’ worst fears - despite PRN prices rising to record levels, glass remains woefully undersupplied. The market now needs to make up a 140,000-tonne deficit in the final quarter if the UK is to meet this year’s target.
Although some sellers are reporting that PRN generation has increased significantly in the past month as a direct consequence of the higher price, most experts feel that any improvement to supply now will be too little, too late.
The market reaction to the figures has been surprisingly muted. Despite an initial price jump to £80, the glass market has fallen back to trading freely at its pre-Q3 price of £75 per tonne. Some argue that the current undersupply is already priced into the PRN, others that the storm is still to come.
What we know is that glass prices are likely to become very unpredictable in the run-up to the compliance deadline. If non-compliance becomes a reality this year and buyers become resigned to this fact, the normal rules on supply and demand are unlikely to apply.
After a brief rally, paper fell back to 95p this month. It opened in the 2013 forward markets at £1.20. Recovery also traded in excellent volume in next year’s forward markets at 30p. Wood prices remain static at £1.25-£1.30.
Tom Rickerby Senior market operator, The Environment Exchange (t2e)