The sharp drop in the value of the pound after the UK voted to leave the European Union could offer short term gain but long term pain for producers and the UK plastic recycling industry.
The majority of plastic Packaging Recovery Notes in the UK are generated from exported plastic (PeRNs), rather than recycling that occurs in the UK. These PeRNs are created at the point waste is exported to be recycled in other countries. Of the 246,000 PRNs generated in Q1, 68% were through this export route.
As the plastic PRN market is so heavily dependent upon exports, currency fluctuations can have very quick and dramatic impacts on the value of plastic waste in the UK for foreign buyers. A weaker pound means foreign purchasers of UK plastic can buy more material for the same amount (in their own currency), driving up the demand for UK material.
Short term gain but long term pain?
The top three buyers of our plastic waste are China, Malaysia and India, illustrated in the chart below taken from WRAP’s Plastics Market Situation Report, Spring 2016 (figures in 1,000's of tonnes).
Since the UK voted to leave the European Union on the 23 June, the pound has lost approximately 10% against the dollar (USD), 10% against the Chinese Yuan Renminbi (CNY), 11% against the Indian Rupee (INR) and 11% against the Malaysian Ringgit (MYR). I include the USD/GBP exchange rate as it provides a standard bearer, with many international companies trading in dollars rather than their own currency.
The fall in the value of the pound heralds some short term gains for the market of plastic PRNs, as increased demand leads to a high likelihood of meeting the annual recycling target and falling prices. However, in the long run, this could cause problems for the UK plastic recycling industry.
With the pound at record low levels, the amount of PRNs generated via export, instead of UK recycling, is likely to increase further. This will pile more pressure onto an already embattled UK plastic recycling industry as UK recyclers compete with exporters for material.
Accredited UK recyclers have two primary streams of revenue - the value they can sell their raw material for and the plastic PRN revenue they can generate from their recycling activity. The low pound means more competition from accredited plastic exporters, whilst the low oil price is keeping the pressure on the value of their raw materials.
UK recyclers have been facing challenging conditions over the last year since the dramatic fall in the price of oil. In recent weeks and months, oil has started to rally. However, political uncertainty around the world will cause volatility in this commodity market.
Volatility in PRN markets
If difficult conditions continue, we could see more UK plastic recyclers falling into administration, reducing overall supply of PRNs and pushing prices to a higher and more volatile level in the long run.
In our experience, volatility in PRN markets causes the biggest headache for producers, as they work to hit their budgets throughout the compliance year. If UK recycling decreases, producers will be reliant on approved exporters to deliver the necessary PRNs into the system. Whilst exporters have benefited from current downward currency fluctuations, they would be negatively affected should the pound rebound. As the UK is a net importer of goods, it is conceivable that the Treasury and the Bank of England pursue policies in the long run to revalue the pound and control rising inflation, meaning that the UK might not be a viable market to foreign buyers for long.
If the UK based recycling industry is badly hit, leaving the UK with an export dependant PRN market, it leaves producers far more exposed to foreign economic conditions. This in turn could lead to greater PRN price volatility.
Robbie Staniforth, commercial manager, comments “We believe the PRN system and producers need to work together to ensure we help protect and nurture the UK plastic recycling industry. We would like to see less volatility, allowing UK plastic recycling to grow and producers to be able to set accurate budgets well in advance.”
"Should there be greater long term investment in the UK recycling industry through the PRN system, money could be spent on more jobs, recycling plants, collections and CSR projects for the UK."
If you would like discuss your packaging compliance obligations, please contact our team of specialists on 0845 094 2228 or email firstname.lastname@example.org.
Key account manager
As key account manager Richard helps our largest clients manage their legal obligations under Packaging, WEEE and Batteries legislation. His background in economics helps our members manage their budgets and strategically procure evidence.
The Environment Agency has published the first official packaging obligation data for the UK.Read More >>
Figures generated on the NPWD website show some interesting results, if they turn out to be correct once validated by the Environment Agency.Read More >>