Determinants of recovered plastics and recovered paper prices. October 2008

Transcription

1 Determinants of recovered plastics and recovered paper prices October 2008

2 Overview Key relationships in the plastics and paper markets Stylised models Risk analysis - scenarios 2

3 Model schematic: plastics Oil prices GDP Raw materials prices Virgin plastics variable costs Labour costs Industrial productio n Plastics intensity weighted IP China industrial production China production of plastic products UK exports of plastic waste to China Total UK exports of plastic waste Supply of virgin plastics Demand for plastics UK weather Virgin plastics prices International recovered plastics prices UK recovered plastic prices UK regulation 3

4 Plastics virgin / recovered prices $ / MT US PET prices $ / MT US PET prices, oil prices $ / barrel Virgin Virgin 1000 Recovered Oil price Q1 1994Q1 1998Q1 2002Q1 2006Q Q1 1994Q1 1998Q1 2002Q1 2006Q1 0 4

5 Plastics - UK euro / MT 1600 UK HDPE prices euro / MT Q1 2005Q1 2006Q1 2007Q1 2008Q Virgin (lhs) Recovered (rhs) 5

6 Plastics Virgin plastic prices determined by costs (crude oil derivatives) in the long run Price shifted around by demand in the short run Recovered plastic prices determined by virgin plastic prices in the long run Price shifted around by production costs, demand, country specific regulations in the short run 6

7 Demand and supply-side model virgin plastics Price of virgin plastic Demand curve Short-run supply curve Downwards-sloping demand curve - substitutes Horizontal long run supply curve P* Long-run supply curve Upwards sloping shortrun supply curve Q* Quantity (tonnage) 7

8 Demand and supply-side model recovered plastics Price of recovered plastics Long-run supply curve Downwards-sloping demand curve - substitutes Demand curve Vertical long run supply curve quantity fixed by collection rates P* Demand curve shifts as price of virgin plastic changes substitution into and out of recovered material Q* Quantity (tonnage) Quantity shifts as collection regimes and recycling facilities change 8

9 Model schematic: paper 9

10 Paper prices Pulp and OCC prices Pulp and conifer prices $ / MT $ / MT $ / MT $ / MT OCC (lhs) Conifer (lhs) NBSK (rhs) NBSK (rhs)

11 Paper prices euro / MT Office paper and OCC prices, UK euro / MT A4 (lhs) OCC (rhs) Q1 2002Q1 2004Q1 2006Q1 2008Q

12 Paper Pulp prices determined by timber prices in the long run: it s a commodity Quantity shifts around in response to demand Recovered paper prices determined by pulp prices in the long run: it s a substitute for pulp Quantity shifts around in the short run in response to demand, but in the long run prices do the work, restoring an equilibrium relationship with pulp prices Consumer paper prices determined by both demand and supply in the long run: relatively few global manufacturers with pricing power 12

13 Pulp: supply and demand Price of pulp Long-run demand curve Pulp is a global commodity, price shifts with timber costs Low price elasticity of demand P* Long-run supply curve Q* Quantity (tonnage) 13

14 ONP, OCC supply-side Price of recycled paper Long-run supply curve An increase in demand will cause quantity to increase in the short run But in the long run it will only cause an increase in the price, crowding out the extra demand P* Long-run demand curve Short-run supply curve Long-run supply is fixed wrt price, and is driven by consumption of paper and board (sensitive to the price of paper and board) and by collection rates (insensitive to price) Demand relatively inelastic wrt price Q* Quantity (tonnage) 14

15 Paper and board supply-side Price of paper and board Upwards sloping longrun supply curve Increase in demand will result in higher prices and higher quantities P* Long-run demand curve Long-run supply curve Implies paper and board is not a global commodity firms have some market power Demand fairly elastic wrt price Q* Quantity (tonnage) 15

16 Plastics baseline input assumptions Oil prices ease and stabilise around $80 per barrel Exchange rates remain at their current levels Global growth rates in Industrial Production and GDP recover and then remain close to trend across developed economies, while growth rates ease in developing economies. $ / barrel Baseline assumptions annual % change 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Brent crude (lhs) EU 15 GDP growth (rhs) 0 0.0% 1996Q1 1999Q1 2002Q1 2005Q1 2008Q1 2011Q1 16

17 Scenarios - plastics Strong China: Chinese demand for plastics increases by 10% relative to the (already strong) growth in the baseline scenario. At the same time, consistent with a wider Chinese boom, global oil prices increase by 20% relative to the baseline scenario and stay higher throughout the forecast period. Because of that, US and European industrial production and GDP growth slow relative to the baseline case. Global recession: US and EU growth slow sharply (with industrial production down by 2% relative to the baseline scenario). Because of that slowdown, global oil prices fall by 10%, while Chinese GDP growth also slows thanks to weaker demand for Chinese exports. Oil price fall: oil prices fall rapidly back to around $70pb, as the speculative bubble bursts. At the same time, the dollar strengthens against the euro, recovering to around $1.20. GDP growth benefits in all economies, but particularly in oil-intensive economies like China. Strong demand combined with falling costs pushes demand for plastics up. But quantities increase while prices fall on the virgin side: bad news for the recovered plastics industry. Global plastics supply shock: global production of plastics increases by 5% relative to the baseline forecast and that increase is also reflected in the production of recovered plastics in the UK. China plastic supply shock: demand for UK recovered plastics from China fall, either because China as a whole slows or, more likely, because China shifts to sourcing more of its recovered plastic domestically. The impact of this shock is felt only by the UK recovered plastics industry: in the charts below, we do not separately identify this scenario except in the case of UK recovered plastics prices. 17

18 Virgin PET / HDPE prices, Europe euro/mt 1700 Virgin PET prices, Europe euro/mt 1600 Virgin HDPE prices, Europe Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 Baseline Strong China Global recession Supply shock Oil dollar Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 Baseline Strong China Global recession Supply shock Oil dollar 18

19 UK recovered plastics prices euro/mt Recovered PET prices, UK euro/mt Recovered HDPE prices, UK Baseline Strong China Global recession Supply shock Oil dollar China supply Baseline Strong China Global recession Supply shock Oil dollar China supply Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 19

20 Paper baseline input assumptions The world economy grows around trend for the whole of the forecast period. The same is true for global demand for paper and board. $/MT US: price of pulp, conifer $/MT Within that overall picture, growth in China and other emerging markets is much faster than for the world as a whole, as those economies continue to catch up with developed economies in terms of GDP per head. China in particular continues its outperformance of recent years, both across the economy as a whole and in the consumption and production of paper and board Pulp (lhs) Conifer (rhs) Oil prices ease lower and stabilise around $80 per barrel. Gas prices follow suit. Wages and general prices continue their trends of the last decade. The dollar appreciates gradually to reach 1.20 to the euro and 1.80 to the pound. 20

21 Scenarios - paper Death of the newspaper in the developed world, in which newsprint declines sharply across developed economies, driving down both the supply and demand for ONP. UK newsprint defies its critics, in which demand for newsprint in the UK increases, thanks in part to the proliferation of free newspapers. China growth goes into reverse, in which the Chinese economy slows sharply after the Olympic Games, and its demand for paper and board follows suit. Paperless office almost a reality, in which office demand for paper and board declines sharply over the next twenty years across developed and developing economies Quality of recovered fibre declines, in which an increased recovery rate driven by higher demand for recovered fibre leads to a decline in the average quality and therefore price of that recovered fibre. 21

22 Pulp and office paper prices Europe: price of pulp (NBSK) Europe: price of office paper euro / MT euro / MT China goes into reverse UK NP defies critics Death of NP Baseline China goes into reverse UK NP defies critics Death of NP Baseline Paperless Office Paper Quality 850 Paperless Office Paper Quality

23 UK recovered paper prices UK: price of ONP euro/mt China goes into reverse UK NP defies critics Death of NP Baseline Paperless Office euro/mt Paper Quality 20 UK: price of OCC China goes into reverse UK NP defies critics Death of NP Baseline Paperless Office Paper Quality 23

24 Conclusions Recovered plastics prices in the UK depend on: In the long run: oil prices and labour costs, and their impact on variable costs in virgin prices, and their impact on international recovered prices In the short run: UK weather, Chinese demand, UK regulatory changes Outlook: UK PET price in the range 150 to 220 euros / tonne UK HDPE price in the range 140 to 200 euros / tonne Key risks to UK market: slower Chinese growth, lower (higher) oil prices. If oil prices were to fall to $70 per barrel or below, prices would go to the bottom of the range. Recovered paper prices depend on: Pulp prices in the long run substitute for pulp Pulp depends on timber prices pulp is a commodity Timber prices reflect demand for paper and board, as well as other sources of demand for timber Quantity of recovered paper depends on collection rates, not (yet) a function of the price Outlook: UK ONP price in the range 65 to 120 euros / tonne UK OCC price in the range 60 to 130 euros / tonne Similarities: Recovered plastics are a substitute for virgin plastics, which are a commodity Recovered paper is a substitute for pulp, which is a commodity 24