Determinants of recovered plastics andrecovered paper prices

October 2008

2

Overview

Key relationships in the plastics and paper markets

Stylised models

Risk analysis - scenarios

3

Model schematic: plastics

Oil prices

Raw materials

prices

Virgin plastics variable

costs

Virgin plastics prices

Labour costs

Plastics intensity weighted

IP

Demand for

plastics

Supply of virgin

plastics

GDP

Industrial productio

n

International recovered

plastics prices

China industrial production

China production of plastic products

UK exports of plastic waste to

China

Total UK exports of

plastic waste

UK weather

UK regulation

UK recovered

plastic prices

Plastics – virgin / recovered prices

4

0

500

1000

1500

2000

2500

1990Q1 1994Q1 1998Q1 2002Q1 2006Q1

$ / MTUS PET prices

Virgin

Recovered

0

50

100

150

200

250

0

500

1000

1500

2000

2500

1990Q1 1994Q1 1998Q1 2002Q1 2006Q1

$ / barrel$ / MTUS PET prices, oil prices

Virgin

Oil price

Plastics - UK

5

100

120

140

160

180

200

220

240

700

800

900

1000

1100

1200

1300

1400

1500

1600

2004Q1 2005Q1 2006Q1 2007Q1 2008Q1

euro / MTeuro / MTUK HDPE prices

Virgin (lhs)

Recovered (rhs)

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

Demand and supply-side model –virgin plastics

7

Price of virgin plastic

Quantity (tonnage)Q*

P*Long-run supply curve

Short-run supply curve

Downwards-sloping demand curve -substitutes

Horizontal long run supply curve

Upwards sloping short-run supply curve

Demand curve

Demand and supply-side model –recovered plastics

8

Price of recovered plastics

Quantity (tonnage)Q*

P*

Long-run supply curve

Downwards-sloping demand curve -substitutes

Vertical long run supply curve – quantity fixed by collection rates

Demand curve shifts as price of virgin plastic changes – substitution into and out of recovered material

Quantity shifts as collection regimes and recycling facilities change

Demand curve

9

Model schematic: paper

Paper prices

10

0

200

400

600

800

1000

1200

0

50

100

150

200

250

300

350

400

$ / MT$ / MT

Pulp and OCC prices

OCC (lhs)

NBSK (rhs)

400

500

600

700

800

900

1000

50

75

100

125

$ / MT$ / MT

Pulp and conifer prices

Conifer (lhs)

NBSK (rhs)

Paper prices

11

50

60

70

80

90

100

110

120

750

800

850

900

950

1000

1050

1100

2000Q1 2002Q1 2004Q1 2006Q1 2008Q1

euro / MTeuro / MT

Office paper and OCC prices, UK

A4 (lhs)

OCC (rhs)

12

PaperPulp 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

Pulp: supply and demand

13

Price of pulp

Quantity (tonnage)Q*

P*Long-run supply curve

Pulp is a global commodity, price shifts with timber costs

Low price elasticity of demand

Long-run demand curve

ONP, OCC supply-side

14

Price of recycled paper

Quantity (tonnage)Q*

P*

Long-run supply curve

Short-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

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

Long-run demand curve

Paper and board supply-side

15

Price of paper and board

Quantity (tonnage)Q*

P* Long-run supply curve

Upwards sloping long-run supply curve

Increase in demand will result in higher prices and higher quantities

Implies paper and board is not a global commodity – firms have some market power

Demand fairly elastic wrt price

Long-run demand curve

Plastics – baseline input assumptions

16

Oil prices ease and stabilise around $80 per barrelExchange rates remain at their current levelsGlobal growth rates in Industrial Production and GDP recover and then remain close to trend across developed economies, while growth rates ease in developing economies.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0

20

40

60

80

100

120

140

1996Q1 1999Q1 2002Q1 2005Q1 2008Q1 2011Q1

annual % change

$ / barrel

Baseline assumptions

Brent crude (lhs)

EU‐15 GDP growth (rhs)

17

Scenarios - plasticsStrong 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 thebaseline 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.

Virgin PET / HDPE prices, Europe

18

1200

1250

1300

1350

1400

1450

1500

1550

1600

1650

1700

2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1

euro/MT Virgin PET prices, Europe

Baseline

Strong China

Global recession

Supply shock

Oil dollar

800

900

1000

1100

1200

1300

1400

1500

1600

2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1

euro/MT Virgin HDPE prices, Europe

Baseline

Strong China

Global recessionSupply shock

Oil dollar

UK recovered plastics prices

19

100

120

140

160

180

200

220

240

260

280

2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1

euro/MT Recovered HDPE prices, UK

Baseline

Strong China

Global recessionSupply shock

Oil dollar

China supply

100

120

140

160

180

200

220

240

260

280

2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1

euro/MT Recovered PET prices, UK

Baseline

Strong China

Global recessionSupply shock

Oil dollar

China supply

Paper – baseline input assumptionsThe world economy grows around trend for the whole of the forecast period. The same is true for global demand for paper and board.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.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

60

70

80

90

100

110

120

450

500

550

600

650

700

750

800

850

900

2000 2004 2008 2012

$/MT$/MT

US: price of pulp, conifer

Pulp (lhs)

Conifer (rhs)

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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.

Pulp and office paper prices

22

450

500

550

600

650

700

750

800

850

2000 2004 2008 2012

euro / MT

Europe:  price of pulp (NBSK)

China goes into reverse

UK NP defies critics

Death of NP

Baseline

Paperless Office

Paper Quality

800

850

900

950

1000

1050

2000 2004 2008 2012

euro / MT

Europe:  price of office paper

China goes into reverse

UK NP defies critics

Death of NP

Baseline

Paperless Office

Paper Quality

UK recovered paper prices

23

25

50

75

100

125

150

175

1995 1999 2003 2007 2011 2015

euro/MT

UK:  price of ONP

China goes into reverse

UK NP defies critics

Death of NP

Baseline

Paperless Office

Paper Quality 20

40

60

80

100

120

140

160

180

1995 1999 2003 2007 2011 2015

euro/MT

UK:  price of OCC

China goes into reverse

UK NP defies critics

Death of NP

Baseline

Paperless Office

Paper Quality

24

ConclusionsRecovered 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 pricesIn the short run: UK weather, Chinese demand, UK regulatory changes

Outlook: UK PET price in the range 150 to 220 euros / tonneUK 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 pulpPulp depends on timber prices – pulp is a commodityTimber 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 / tonneUK OCC price in the range 60 to 130 euros / tonne

Similarities: Recovered plastics are a substitute for virgin plastics, which are a commodityRecovered paper is a substitute for pulp, which is a commodity