Another commodities crash

28th April 2017 Posted by

The news that oil prices are again on the way down after signs of a rally earlier in the year suggests that the challenges faced by the secondary materials market are not yet fully resolved.

Not only has the price of Brent oil dipped below $50 a barrel, but industrial metal prices have also fallen, affecting materials such as iron, steel, copper and zinc. In April 2017 commodity price indices, capturing a basket of traded commodities, were reportedly back at 2016 levels. Demand for iron ore and other materials has fallen by over 30% principally as a result of a softening of China’s economy, with stockpiles growing as infrastructure projects slow.

The market for recycled plastics was particularly badly hit during the previous slump in oil prices, and there is a danger of history repeating itself this time round. With softening demand the spotlight of end-users inevitably falls on quality as opposed to quantity. China’s year-long National Sword 2017 campaign aims to do just that, continuing the work of Operation Green Fence in monitoring imports of resource products including industrial waste, electronic scrap and plastics.

None of these ominous demand-related signals appears to have phased the European Parliament’s committees, nor dampened their enthusiasm for raising statutory recycling rates to – as many at the sharp end of the secondary raw materials (SRM) market would regard – recklessly high levels.

Structural failures in the SRM market continue to exacerbate the mismatch between the dynamics of supply and the dynamics of demand. For example:

  1. Externalities associated with the extraction and processing of virgin raw materials are not fully costed into their price. One estimate suggests that the price of copper and of beryllium would increase by 12% and 327% respectively, were the cost of greenhouse gas emissions properly factored in.
  2. Virgin raw material price trends typically mirror energy – and for plastics, specifically its starting material, oil – price trends. SRM prices tend not to be determined by production costs, but are pegged to the price of virgin raw materials in the long run. A general global economic contraction will reduce demand for raw materials generally, but because virgin raw material flows are far larger, price reductions during periods of excess stock can undercut SRM prices. The scrap steel market has been affected in this way.
  3. The cost structure and price setting mechanisms for the SRM industry are entirely different to that for virgin raw materials. SRM costs (and consequently market prices) are based on the costs of waste collection and processing, which are primarily driven by regulation (recycling targets, landfill diversion targets, etc). Virgin raw material extraction is driven by economic demand, and unlike waste collection and regulatory-mandated recycling, can be suspended when demand falls. Conventional risk management measures such as long-term stockpiling cannot be applied because of the need for cashflow.

For these reasons, the market for SRM has been inherently unstable and in the long run likely to turn unsustainable in the face of ever-more ambitious legislation to increase recycling, as proposed in amendments to the European Commission’s Circular Economy Package.

Our sector has consistently argued that high recycling rates should be balanced by appropriate demand-side measures if the post-crash problems experienced by secondary material suppliers are not to be repeated. The Environment Council’s and Trilogue discussions on the Package provides an opportunity to inject a note of pragmatism into the Package, and to reverse the more egregious amendments proposed by the European Parliament.

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