PET BOTTLE RECYCLING OUTLOOK IS NOT GOOD

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From my perspective on the plastics recycling sidelines, the short-term business outlook for PET bottle recycling in the United States appears rather bleak. This assessment was confirmed by George Dreckmann in his Page 10 Perspective of Feb. 17.

Dreckmann pinpointed the problem (resin producers) and proposed a solution (a consumer boycott). Unfortunately, his quick insight appears to be based more on raw emotions than rational thought or an understanding of PET business fundamentals.

PET is the first and only real success story in plastics recycling. Originally, it was driven by favorable market and economic incentives.

The prevailing PET supply/demand paradigm changed rapidly last year, led by a global change in industry structure and business dynamics. New producers have emerged, global expansion of production capacity is under way and U.S. PET resin prices have plunged to the mid-40 cent-per-pound range from previous highs of 60-80 cents per pound.

PET is now entering the growth phase of its product life cycle, which will be characterized by accelerating demand and declining prices. World-scale PET bottle resin plants are now at about 200 million pounds per year, about a fourfold increase from 10 years ago. At current raw material prices, break-even production (cash) costs for melt-phase PET are probably on the order of 42-45 cents per pound, close to current market prices.

As a rule of thumb, rapid industrywide expansion of production capacity usually leads quickly to oversupply, reduced average industry operating rates and discounted product pricing. But, like death and taxes, there is nothing more certain in the chemical industry than periods of oversupply. With modern capitalism still embracing a laissez-faire ideology, larger plant size is one of the keys to maintaining market share in a rapid-growth environment.

The rapid evolution of PET from a high-priced, near-specialty resin to a lower-priced, near-commodity resin will have an immediate and direct impact on PET recycling economics. The most apparent will be lower, more volatile virgin resin prices, less stable recycled resin price/cost relationships, lower spread margins and lower profitability, especially for small PET recyclers at the margin.

On the question of remedial action, I agree with Maurice Sadowsky (Mailbag, March 17) that the free market should decide the destiny of plastics recycling. The average consumer today is well up the learning curve on recycling issues and is able to separate facts from obfuscation. Therefore, I believe a broadly orches- trated boycott of PET packaging to be a highly unlikely event.

John Schumacher

Palo Alto, Calif.