Food giants' sustainable packaging goals face supply-demand reality check

Over the past two years, multiple consumer packaged goods (CPG) companies, including Keurig Dr Pepper, PepsiCo, and Mondelēz International, have announced targets to reduce virgin plastic use in packaging and shift to more sustainable solutions over the coming decades. 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, a question keeps emerging: Is there a clear path to achieving these goals in the short term, or are they just aspirational?

A range of factors could complicate CPG timelines, including pandemic disruptions to consumer purchasing 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, industry pressure continues to mount to take responsibility for pollution caused by food and beverage packaging.

"There have been a lot of commitments on recycled content and packaging, but those targets were not really set based on the fundamental means to achieve them," said Robin Waters, director of plastic planning and analysis at IHS Markit, in an interview late last year.

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

Virgin plastic supply shocks and price spikes

The story begins with virgin plastic—resin newly made from petroleum or, predominantly in North America, natural gas. Food manufacturers face pressure to reduce virgin plastic use 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 various 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.

When the pandemic intensified in early 2020, supply of virgin plastics such as polypropylene—a rigid, recyclable plastic used in packaging like yogurt cups—shifted to medical uses such as masks and protective equipment. "So the plants that make these chemicals, these polymers, shifted capacity from one type to another, also creating shortages and driving up prices," said Richard Freundlich, senior analyst for plastics supply chain at RaboResearch, who 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, which caused power outages and curtailed operations in Texas' natural gas industry and chemical plants. The disruption had ripple effects on downstream plastic packaging manufacturing.

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

Infrastructure disruptions led to packaging plant shutdowns and plastic shortages. Virgin plastic resin experienced historic price increases in the aftermath.

As virgin resin costs rose, food packaging costs naturally rose too, Freundlich noted. To stay ahead of these costs, CPG companies began downsizing packaging. This had supply implications, requiring packaging manufacturers to readjust equipment.

Supply pressures and structural limitations of recycled plastic

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

"When you see all this plastic being recycled, historically in the U.S. it's done through mechanical sorting, which requires cheap labor. And those people were among the first to leave during the pandemic," Freundlich said. More importantly, this also affected the collection of recyclable materials. The result was material shortages and, of course, higher prices.

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

Although recycled plastic has recently become more price-competitive as virgin plastic faces higher input costs following the war in Ukraine, lingering pandemic supply and demand impacts will continue to surface and complicate CPG's transition to more sustainable materials.

Demand exceeds supply

Demand for rPET has also exceeded supply, while recycling rates lag. According to the National Association for PET Container Resources, end-use consumption of rPET in the U.S. and Canada 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 company spokesperson Bailey Rogers said they have 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 grinding, washing, separating, drying, repellettizing, and blending.

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

"So we've seen, as commitments are made, the premium for [post-consumer recycled plastic] rise," 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, compared to 12.03 cents a year earlier.

The recycling industry is responding to growing demand by investing in new plants, equipment, and automation, particularly at material recovery facilities (MRFs), which process commodities after collection and supply them to packaging manufacturers, said Bret Biggers, senior economist at the Institute of Scrap Recycling Industries. Private equity has provided financial support for some players 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 easing 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."

Price volatility of paper alternatives

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

"Over the past two years, paper packaging prices have risen about 26% to 44%, depending on the grade you look at," said Xinnan Li, food and agribusiness analyst at RaboResearch. "But that's really driven by higher consumer demand. Whether it's on the retail side, where consumers are buying more products in the market, or on the e-commerce side, where more products have to be packed in corrugated boxes."

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

Early in the pandemic, some MRFs closed or saw collection volumes affected, causing demand and prices for old corrugated containers (OCC) pulp to surge. The surge in online purchases early in the pandemic was also a major factor. OCC prices have jumped from about $30 per ton to $120 now, Li said. "That's a huge increase... The industry has to absorb it in some way," she said. Wood pulp prices—the basis for virgin corrugated board—rose about 50%, "purely driven by demand for wood used in pulp."

A year of inflation: Energy and geopolitical shocks

Although price increases for some packaging materials had begun to level off by late 2021, the conflict in Ukraine 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 did shake 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 that up, it's inflation. It's going to be sustained inflation. Even before the Ukraine situation, due to natural gas, packaging resin prices would have risen moderately over the next 5 to 10 years," Freundlich said.

The rapidly changing situation makes forecasting virgin plastic pricing difficult, Freundlich said. "Plants are being canceled. Pipelines are being canceled. We don't know what the impact will be, how import-export relationships will change. These could all have significant impacts on prices. So 'hold on tight' is what I'd say. Yes, it's not going to come down. It's going to be a year of inflation."

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

For recycled plastic, this presents an opportunity. At the Plastics Recycling Conference in March, IHS Markit analysts noted that rising oil prices could pressure virgin resin prices and make recycled resin more competitive, according to Waste Dive.

Beyond being key materials for plastic, oil and 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 very, very energy-intensive. It's a scary situation. But the good news is there's a lot of new capacity coming online that could offset some of those costs," Freundlich said of other virgin alternatives to plastic.

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 pressure prices in the short term.

In the long term, Li said the outlook for paper prices is much better, with several new corrugated board mills coming online and capacity expansions expected to increase supply. Combined with more moderate price volatility for paper, this could give the material an advantage as more manufacturers turn to it for packaging.

"As traditional plastic prices rise, this could even incentivize companies to look for more sustainable alternative materials. Because traditionally, sustainable materials are more expensive," Li said.

Meanwhile, another buzzword is emerging that will impact the food and packaging industry in the coming years. "For the past three or four years, everyone, including every packaging professional, has been stuck on the word 'sustainability.' This year and in the years to come, that word will become 'decarbonization,'" Freundlich said.

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

"There's not a company that doesn't have a team seriously thinking about what they can do. This will have a huge impact on inflation and, unfortunately, on costs as well," Freundlich said.