Supply Chain Realities Challenge FMCG Sustainable Packaging Goals

Over the past two years, several consumer packaged goods companies have announced deadlines to reduce virgin plastic use in packaging and shift to more environmentally friendly options over the coming decades, includingKeurig Dr Pepper、PepsiCoandMondelez International. Recycled plastic and paper have proven to be two of the more popular alternatives. But as price and supply volatility continue to impact the packaging industry, one question keeps emerging: Is there a clear path to achieving these goals in the short term, or is it just wishful thinking?

A range of factors could complicate the timelines of consumer packaged goods companies, including the pandemic's disruption of consumer buying behavior and material supply chains, the existing recycling framework in the U.S., and recent developments such as the war in Ukraine. At the same time, the industry faces increasing pressure to take responsibility for the pollution caused by food and beverage packaging.

"There have been many commitments on recycled content and packaging, but the targets set are not really based on the fundamental means to achieve them," said Robin Waters, director of plastics planning and analysis at IHS Markit, in an interview with Food Dive late last year.

To understand why fulfilling these commitments may be difficult, it is necessary to examine the price and supply fluctuations of virgin and recycled plastic resins over the past two years.

The story begins with virgin plastic—resin newly made from petroleum or, in most cases in North America, natural gas. Food manufacturers face pressure to reduce the use of virgin plastic in packaging, and for good reason. A 2018 study cited by the Association of Plastic Recyclers found that producing recycled plastic resin uses 79% to 88% less energy than virgin resin, depending on the type.

At different points over the past two years, virgin plastic resin prices have been significantly higher or lower than recycled plastic, as pandemic forces strained their respective supply chains. With each shift in price trends, the timelines for achieving virgin plastic reduction targets have also changed.

"There have been many commitments on recycled content and packaging, but the targets set are not really based on the fundamental means to achieve them."

—Robin Waters, director of plastics planning and analysis at IHS Markit

When the pandemic intensified in early 2020, virgin plastics like polypropylene—a sturdy, recyclable plastic used in packaging such as yogurt cups—saw supply diverted to medical uses like masks and protective equipment. "So, the plants that make these chemicals, these polymers, shifted capacity from one type to another, also creating shortages, which pushed up prices," Richard Freundlich, senior analyst for plastic supply chains at RaboResearch, told Food Dive (he has since retired after the interview).

The Gulf Coast also experienced severe weather events, including Winter Storm Uri and Hurricanes Ida and Nicholas in 2021, causing power outages and disrupting the natural gas industry as well as chemical plants in Texas. The chaos had ripple effects on the downstream plastic packaging manufacturing sector.

"Suddenly there were shortages, and in packaging you can't easily substitute materials because of food law regulations," Freundlich said, referring to FDA rules that limit which substances can come into contact with food. Replacing a chemical additive in plastic packaging requires FDA certification—a process that takes about a year, he noted.

Infrastructure disruptions led to packaging plant shutdowns and plastic shortages. During the aftermath, virgin plastic resin prices saw historic increases.

Meanwhile, as virgin resin costs rose, food packaging costs naturally rose as well, Freundlich noted. To cope with these costs, consumer packaged goods companies began downsizing packaging. This had an impact on supply, requiring packaging manufacturers to readjust equipment.

Recycled plastic also faced its own supply pressures. During the pandemic, labor shortages at times shut down packaging plants and disrupted recycling operations in the supply market.

"When you see all this plastic being recycled, historically in the U.S. it's been done through mechanical sorting, which requires cheap labor," Freundlich said. "And those are the people who quit first (during the pandemic)." More importantly, this also affected the collection of recycled materials. The result was material shortages and, of course, price increases.

"You know all those companies you read about—'We're going to use 25% to 50% recycled plastic in our packaging,' right? That became a pipe dream," Freundlich said. "Not only because of procurement issues, but the price of making recycled plastic was significantly higher than the virgin material itself, sometimes twice as expensive. So the commitments made were never going to be fulfilled."

Although recycled plastic has recently become more price-competitive due to higher input costs for virgin plastic following the war in Ukraine, the supply-demand aftershocks of the pandemic will continue to manifest and complicate the transition of consumer packaged goods companies to more sustainable materials.

Demand shocks supply

Demand for rPET (recycled polyethylene terephthalate) has also exceeded supply, as recycling rates lag. According to the National Association for PET Container Resources, U.S. and Canadian rPET end-use consumption grew 10% in 2020, while U.S. collection fell about 2.3%, resulting in a recycling rate of 26.6%. Coca-Cola announced in February it would begin using 100% rPET in its bottles, and spokesperson Bailey Rogers told Food Dive the company has been working with local governments to develop recycling policies to ensure a supply of high-quality rPET.

Structural issues in the plastic recycling industry have also complicated the shift away from virgin plastic. Most plastic in the U.S. is recycled mechanically, involving processes such as shredding, washing, separating, drying, repellettizing, and compounding.

"The ability to supply enough mechanically recycled plastic to replace virgin plastic is limited by a variety of factors," said Waters of IHS Markit. He noted these factors include the limited types of plastic that can be easily mechanically recycled—the process works best on rigid plastics and thick films—as well as issues with ensuring traceability of different plastics after processing.

"So we've seen, as commitments are made, the premium for [post-consumer recycled plastic] has risen," Waters said. According to Plastics Recycling Update, from March to April, the national average price for post-consumer PET beverage bottles and containers rose 17% to 39.22 cents per pound. A year earlier, it was 12.03 cents.

Bret Biggers, senior economist at the Institute of Scrap Recycling Industries, told Food Dive that the recycling industry is responding to growing demand by investing in new plants, equipment, and automation, particularly at the material recovery facility (MRF) level, which processes commodities after collection and supplies packaging manufacturers. Private equity has provided a financial boost to some players, enabling them to expand and upgrade, and he expects this trend to continue over the next year.

Biggers noted that labor shortages affecting all manufacturing are expected to ease in the second half of 2022. However, many of the issues that affected supply last year will persist in the coming months. "Supply chain disruptions will continue. There are forecasts that they won't start to ease until the second and third quarters," he said. "...Domestically, transportation costs and wages are rising... This means recyclers have to deal with many rising costs."

Alternatives to plastic have also experienced their own price fluctuations. Different types of paper—which have proven to be a popular choice for consumer packaged goods companies, from Bumble Bee's cardboard tuna can packaging to Diageo's paper whisky bottles—have also faced price increases, though more moderate compared to other materials.

"Paper packaging prices have risen about 26% to 44% over the past two years, depending on the grade you look at," Xinnan Li, food and agribusiness analyst at RaboResearch, told Food Dive. "But this is really driven by higher consumer demand. Whether it's at the retail end, where consumers are buying more products on shelves, or at the e-commerce end, where more products have to be packed in corrugated boxes."

Li said the North American paper market is also fairly concentrated, dominated by a few major manufacturers with significant pricing power. Finally, paper packaging has also struggled with the same labor issues as other industries, so both virgin and recycled paper manufacturers have passed on higher related costs.

Early in the pandemic, some MRFs closed, causing demand and prices for old corrugated containers (OCC) to surge. The spike in online purchases in the early pandemic period was also a major factor. Li said OCC prices have jumped from about $30 per ton to $120 now.

"So it's a huge increase... The industry has to absorb it in some way," she said. Wood pulp prices—the basis for virgin corrugated board—have risen about 50%, "purely driven by demand for wood pulping."

A year of inflation

Although price increases for some packaging materials began to stabilize at the end of 2021, the conflict in Ukraine has introduced new uncertainties.

While Ukraine is not a major supplier of chemicals—Freundlich said it accounts for about 3% to 5% of the market—it has indeed shaken the balance of the plastic supply industry. Meanwhile, as some European countries boycott Russian gas, the U.S. has stepped in to supply liquefied natural gas. This diverted supply will come at the expense of industries like plastic manufacturing.

"When you add all the factors together, it's inflation. This will be persistent inflation. Even before the Ukraine situation, due to natural gas, there would have been moderate increases in packaging resin prices over the next 5 to 10 years," Freundlich said.

Freundlich said the rapidly changing situation makes it difficult to make predictions about virgin plastic pricing.

"Plants are being canceled. Pipelines are being canceled," he said. "We don't know what the impact will be, how import-export relationships will change. These could all have significant effects on prices. So 'hold on tight' is what I'd say. Yes, prices won't come down. This will be a year of inflation."

Perhaps the biggest factor in material costs will be energy. The conflict in Ukraine pushed global benchmark Brent crude oil prices to $134 per barrel in March of this year—the highest since 2008—and U.S. natural gas prices also reached 13-year highs. Brent prices have since fallen back to around $110 per barrel, though demand is expected to remain high.

"When you add all the factors together, it's inflation. This will be persistent inflation. Even before the Ukraine situation, due to natural gas, there would have been moderate increases in packaging resin prices over the next 5 to 10 years."

—Richard Freundlich, retired senior analyst at RaboResearch (plastic supply chains)

For recycled plastic, this presents an opportunity. At the Plastics Recycling Conference in March of this year, IHS Markit analysts noted that rising oil prices could put pressure on virgin resin prices and make recycled resin more competitive, as reported by Waste Dive.

Beyond being a key material for plastic, oil and natural gas also power much of global manufacturing. This has implications for the economics of different packaging types.

"Energy costs—if you look at glass—wow. Aluminum—ouch. I mean, these are all very, very energy-intensive," Freundlich said of alternatives to other plastics. "It's a scary situation. But the good news is that a lot of new capacity is coming online, which can offset some of these costs."

Paper prices have also been pressured by the war.

"Even before the Russia-Ukraine [conflict], we predicted double-digit growth," Li said. Since paper processing is energy-intensive, the war will only put pressure on prices in the short term.

In the long term, Li said the outlook for paper prices is much better, with several new corrugated board plants coming online, and capacity expansion will increase supply. This—combined with more moderate paper price fluctuations—could give the material an advantage as more manufacturers transition their packaging.

"Given the prices of traditional plastics, this could become a greater incentive for companies to look for more sustainable alternatives. Because traditionally, sustainable materials are more expensive," Li said.

Meanwhile, another buzzword is emerging that will impact the food and packaging industries in the coming years.

"Over the past three or four years, everyone, including every packaging professional, has been obsessed with the word 'sustainability,'" Freundlich said. "This year and in the coming years, that word will become 'decarbonization.'"

To advance the Paris Climate Agreement, the United Nations is challenging every country, city, company, and financial institution to achieve carbon neutrality by 2050. Food companies like Nestlé, Mars, and Unilever have already set targets to achieve net-zero emissions by 2050 or earlier. Packaging is one pathway to achieving these goals.

"There's no company that doesn't have a team very seriously considering what they can do," Freundlich said. "This will have a huge impact on inflation and, unfortunately, on costs."