The Global Recycling Shakeup: Why Tech Is Replacing Cheap Labor in the Plastic Recycling Industry

Converting plastic scrap to clean plastic resin pellets is a complex process.

“The foundations of the global recycling system were cheap labor, cheap shipping, and high demand for lower-grade post-consumer resin. Without those elements, this intercontinental trade wouldn’t have made economic sense,” says Contant. The Chinese recycling industry, however, also had severe environmental consequences that prompted the government to intervene. Plastic that had no commercial value was either burned on site—further damaging China’s notoriously poor air quality and making local communities ill—or buried in dumps where it often polluted farmland and rivers. At the same time, rising domestic consumption meant local recycling efforts were increasingly able to meet Chinese manufacturers’ demand for new plastic resin.

China analyst Wenting Shen, CFA, highlights an additional factor: “China no longer wanted to be seen as the world’s dumping ground, especially as it’s trying to play a more prominent role in world affairs.” So in July 2017, the Chinese government announced that, by the end of the year, it would only permit the import of plastic scrap with less than 0.5% contamination, a standard few waste management companies in the West could meet. When National Sword came into effect in 2018, Western recyclers’ access to China’s cheap labor pool was effectively blocked, and the flow of plastic scrap from the West to China reduced to a trickle.

Sorting Winners from Losers

With the demise of the Chinese export market, global demand for plastic scrap dropped dramatically, leading to chronic oversupply and falling prices. Between May 2018 and May 2019, the average price per pound of scrap high-density polyethylene (HDPE) in the US, for example, fell by nearly half, from 39 cents to just 21 cents. As a result, bales of plastic have piled up in warehouses in the West, leading some waste management companies to incinerate or send to landfills the plastic waste they previously exported profitably.

“China’s import ban made an already-difficult line of business even more difficult,” says Shali Zhu, CFA, who analyzes the energy and industrials sectors. However, she points out that, while recycling isn’t particularly profitable, it typically represents just a small part of the larger waste management companies’ overall business. Republic Services, the second-largest waste management company in the US, derives over 90% of its revenues from its trash disposal operations. Under 10% is derived from its recycling operations, of which less than a quarter comes from plastics. “Unless the price of plastic scrap recovers, lower plastic recycling revenues will likely remain a drag in most cases, though not a major one, on the overall margins of waste management companies,” says Zhu.

“When access to cheap labor evaporates in any industry, the incentive to invest in automation increases.”

Despite the challenging environment, some waste managers are investing in their recycling operations. Their focus is on increasing yields (the proportion of recyclable material recovered from the waste stream) and building capacity to perform more of the advanced sorting, cleaning, shredding, and extrusion processes themselves via automation. “Many waste management companies are making large technology investments to move up the plastic recycling value chain in an attempt to take advantage of the relatively better prices for more-processed plastic waste,” says Contant. “Since China’s ban came into effect and the demand for minimally sorted plastic dropped, just doing a basic sort is now an increasingly bad spot to be, margin-wise.”

It’s no surprise, then, that makers of advanced waste-sorting equipment are benefiting from the global shakeup. TOMRA, a Norway-based manufacturer, has reported sharply increasing sales of its high-tech sorting and processing machines since China’s National Sword policy came into effect. Alongside its competitors in the recycling equipment industry, TOMRA, with a 60% share of the global market, uses technologies such as infrared scanning and computerized air jets to automate all parts of the plastic recycling process, from sorting by polymer type and color, to washing, chopping, and finally pelletization. “When access to cheap labor evaporates in any industry, the incentive to invest in automation increases, which is essentially what we’re seeing,” says Contant.

Will Recycling Work Again?

A glimmer of pricing relief may lie ahead for waste management companies. Rising consumer and political interest in plastic recycling has led to calls for “minimum recycled-content” regulations that would force consumer goods companies such as Nestlé and Coca-Cola to use a minimum proportion of post-consumer plastic in their packaging. Under a pioneering directive adopted by the European Parliament last year, plastic bottles sold in the EU will be required to contain at least 25% recycled content by 2025, and 30% by 2030. In a parallel development, an industry-led coalition in North America is urging the US and Canadian governments to impose a minimum of 20% post-consumer recycled content in some types of plastic bags by 2025. These measures would increase demand and pricing for post-consumer plastic resin and, by extension, lift plastic scrap commodity prices.

Innovation that can enhance the purity of post-consumer plastic resin may also lead to increased demand—and higher scrap prices—by making it more attractive for Western manufacturers to substitute post-consumer plastic resin for the virgin variety, particularly when the oil price (that to a large extent governs virgin resin prices) is high.

Scrapping the scrap

China’s National Sword Policy Forces the West to Recycle Its Own Plastic

New technologies could also reduce plastic recycling costs and boost waste managers’ margins. IBM, for example, has developed an enzymatic process to selectively “digest” polyethylene terephthalate (PET) plastic from dirty plastic bottles, producing a pure PET powder in one step. AMUT, an Italian recycling-equipment maker, has invented a dry “delabeling” machine that can remove labels from plastic bottles without the use of water, which is costly to heat and treat in an industrial setting. Though these and other emerging technologies are promising, it is not yet known whether they can be deployed economically and at commercial scale.

Unlike trash collection, which is essential, recycling can be considered a discretionary service, says Contant. “Western countries had sort of been getting a free ride for the last few decades, but that’s more or less over,” he says. “So if we want plastic recycling to continue, someone else has to foot the bill.” If minimum recycled-content regulations spread, a greater portion of the bill will be footed by consumer goods companies and their customers, and opportunities will abound for companies that can figure out cost-effective ways of processing plastic waste—without shipping it offshore. “If we want our plastic waste to eventually be reused rather than trashed, all the companies in the recycling value chain need to be able to turn a profit,” he says.