The first half of the 2017 compliance year was dominated by discussions on the potential impact of China’s National Sword initiative on the generation of export plastic packaging recovery notes (PRNs). Since the start of the campaign to reduce illegal imports of waste plastics in mid-February, PRN values have been on a steady march northwards over fears of a short supply.
National Sword has drawn parallels with China’s 2013 Green Fence initiative: both were launched almost without warning at a similar point in the compliance year, both targeted restrictions on import of lower grade recovered plastics and both have driven PRN prices above £60 per tonne.
On the face of it there are many similarities between to two policies, although analysis of the latest supply data shows a far more resilient market to that of four years ago, leading many to question the justification behind current high values.
In 2013, escalating prices were fuelled by a genuine shortfall in PRN generation, as export volumes declined due to Chinese import restrictions. By the half-year point, in-year PRN generation was 7% (24,000 tonnes) short of target.
Exports fell noticeably during this period: Q1 dropped 14% on the previous quarter and, in Q1 and Q2, export PRN generation was down 7% and 9 %, respectively, on the 2012 average. By July 2013, the Green Fence policy had become a genuine threat to UK compliance, driving the PRN price to a five-year high of £75 per tonne. Prices would remain in the mid-£60s until the end of October.
In contrast, and contrary to the doom and gloom predictions from many sellers, the 2017 PRN market remains on course to hit target at the mid-year point.
Plastic exports in Q1 were only 200 tonnes off record levels, growing 8% on the previous quarter and 6% on the 2016 average. The result was all the more remarkable by the fact that this period was set against a backdrop of both the early implementation of National Sword and a paralysing hike in shipping costs.
But the strength of the Q1 data was largely ignored in a market dominated by the overwhelming bullish consensus among sellers, who predicted that escalating restrictions in China would eventually reflect in a severe tightening of the PRN market. Between 22 February to 21 June, plastic PRN prices increased 160% from £26 per tonne to a year high of £67.50 per tonne on the t2e spot market.
The release of interim Q2 data in July has shown more telling signs of a slowdown in the plastic export market, with PERN generation down 15% on Q1 and 10% on the 2016 average. But the impact of the decline in exports in Q2 has been softened by a significant rise in domestic reprocessing, up 18% on Q1 and 14% on the 2016 average. The net result is a quarter that has again exceeded expectations and is less than 1% shy of the quarterly target for plastic.
Despite all the turmoil in the export markets, the data paints a much healthier picture. In-year PRN supply is broadly in balance with demand and, with the addition of a substantial 65,000-tonne carry-in from 2016, the plastic market should swing in favour of buyers. Spot prices have dropped 9% to £61.25 since the release of the Q2 data.
There remains a huge amount of uncertainty and nervousness around the China situation. This is unlike 2013, when Green Fence import restrictions were relaxed towards the end of Q3 and allowed lower grade material to move freely again, ultimately leading to the collapse in the PRN price – hitting £7.50 in late December.
The timing of the Chinese ban will frustrate buyers and is likely to override any positive market spin from the Q2 data. Expect market sentiment to continue to play a large part in shaping PRN prices in the months to come.
PRN MARKET ROUND-UP
Aluminium: Record PRN generation in Q2, which is likely to push prices further into single figures. Prices fell 24% to £9.50 per tonne during the quarter.
Steel: A 25% surplus in steel continues to place downward pressure on the PRN price. Spot prices fell 40% to £4.25 per tonne during Q2.
Wood: Continues to hold a premium to paper, trading consistently between £1.75 and £2 per tonne in the spot. Forward markets for 2018 opened at between £4.50 and £5.30 per tonne, reflecting next year’s increased target.
Glass remelt: Prices remained stable during Q2 trading at £11.90-£13 per tonne.
Glass other: Prices continued to track below the remelt price, trading at £11.20-£11.75 per tonne.
Paper: Concerns remain over possible Chinese ban on mixed paper. Prices have held up well at 90-95p per tonne. Excellent volume traded in 2018 forward markets at 90p-£1.20 per tonne.
Recovery: Prices remain suppressed at 40-50p per tonne due to large market surpluses.
Tom Rickerby is head of business development at The Environment Exchange (t2e)