April 17, 2019
Versatile, durable, hygienic and cheap to produce — plastic is a miracle material that makes modern life possible. But with more than 90% of all plastic waste yet to ever be recycled1 , plastic pollution is clogging oceans and waterways and poses a threat to the safety of marine and wildlife. In this report, J.P. Morgan Research explores how the packaging industry is responding to the fight against plastic pollution as consumers, retailers and regulators push for change.
While sustainability has been both a topic of public debate and an increasingly important consideration for investors for some time, there has been a significant increase in the public discourse around the need to cut down plastic pollution in the last 18 months or so. Factors such as the BBC TV series "Blue Planet II," which aired towards the end of 2017, helped raise awareness, particularly in Europe, after the report estimated as much as 12 million tons of plastic ends in the sea each year, with more than 80% of marine litter coming from plastic. The documentary brought greater attention to what many see as the excessive use of plastic as a packaging material and the need to improve how this material is managed, post-consumer use. Since then, governments around the world have responded with new legislation and guidelines to encourage recycling and address litter. The EU is set to ban 10 single-use plastic products such as cutlery, straws, plates and cotton buds by 2021. Major global corporations including Unilever, Procter & Gamble, Nestle and PepsiCo have all proposed major waste reduction initiatives. Many retailers around the world such as Ikea have pledged to phase out single-use plastics completely and supermarkets in the U.K. and the Netherlands have started introducing 'plastic free' aisles. Consumer preferences have also shifted dramatically, with increasing demand for reusable plastic products and more sustainable packaging solutions.
"Consumer sentiment has undergone what appears to be a permanent shift in its attitude towards the use and disposal of packaging. The particular focus on plastic, especially single-use plastic that is thrown away shortly after purchase, will see some of these products become almost unviable," said J.P. Morgan Head of European Business Services and U.K. Small & Midcaps Research, Alexander Mees.
"In general it is likely that consumer goods companies will seek to reduce plastic as much as they can, provided they can continue to ensure proper shelf life and protection of the product in transit," Mees added.
Public aversion to single-use plastics and excessive plastic packaging appears to be changing the behavior of Fast-Moving Consumer Goods (FMCG) companies and supermarkets. Many have committed to the greater use of recycled and recyclable plastics or, in some cases, to the replacement of plastic with other forms of packaging material such as compostable alternatives. Some of the largest plastic and chemical producers in the world, including Dow Chemical, have also signed up to organizations committed to developing large-scale solutions to tackle plastic waste.
Increased demand for corrugated cardboard packaging in the U.S.
This shift in public sentiment towards plastic waste has not gone unnoticed by investors. Some investors have been expecting and have priced in a reduction in demand for plastic packaging or increased costs of delivery, according to J.P. Morgan Research.
"This has yet to be seen in the numbers, but many packaging companies have taken pre-emptive measures to demonstrate how they can address the new reality. This includes increased investment in recycling capabilities and the use of biodegradable plastics," said Mees.
Meanwhile, non-plastic packaging companies have stepped up to demonstrate the opportunity the change in public sentiment might create. One particular material, corrugated cardboard, is set to see considerable growth as a result of the departure from single-use plastic packaging. Corrugated businesses are developing new products to act as alternatives to plastic packaging, with examples including fruit packaging and paper straws. London-based packaging company DS Smith has estimated the shift away from plastic packaging will create an extra $700 million in demand for corrugated cardboard in Europe and the U.S. between 2018 and 2022, equal to 0.4% per annum of incremental growth.
"The overall message from non-plastic packaging companies is that the tide is turning and while it may take some time, it is likely that the use of plastic will decline and other packaging materials will step into the gap it leaves. Plastic packaging companies have generally given the message that they expect to use more recycled and recyclable plastic in their products, but that the benefits of plastic (flexibility, weight, ability to hold liquids) will continue to underpin robust demand," said Mees.
Beyond the sustainability debate, demand for cardboard-based packaging has trended steadily over the past few years, largely fueled by e-commerce. Almost everything sold online comes in a box and so the rise of e-commerce is an important structural change underpinning the recent turn in demand for corrugated packaging. Highly customizable and versatile, corrugated is an ideal material for online retailers big and small.
"The use of corrugated cardboard as a packaging material is likely to grow faster than other materials regardless of the sustainability debate as it is best suited for e-commerce, which is the fastest growing retail sub-sector. However, corrugated is easier to recycle than plastic so this will also likely help drive volumes," said Mees.
E-commerce vs. global packaging market share
Government legislation is forcing the packaging industry to change and adapt too. Last year, China announced it would no longer buy the world's discarded plastics. Up until relatively recently, China was importing 45% of the world's plastic waste imports2 so the move created major disruption for the recycling industry. Plastic packaging companies in Europe and the U.S. in particular have a huge opportunity to increase and improve both their recycling facilities and the volume of recycled materials in their own products. In Europe, the U.K. government has indicated higher taxes will apply to plastic packaging that does not use at least 30% recycled material. The European Commission has suggested it may even look to introduce "producer pays" regulations that require the companies that use plastic packaging to help pay for the cost of cleaning up beaches and building out recycling capacity. Taking action now is expected to avoid environmental damages costing the equivalent of €22 billion ($24.8 billion) by 2030 and save consumers a projected €6.5 billion3.
"These measures are just the start and there may even be greater incentivization for the recycling industry — this is a long-term dynamic. We are at the start of a long journey towards better environmental stewardship," added Mees.
JPMorgan Chase has a long-standing commitment to promoting sustainable business practices and advancing sustainable solutions for clients all over the world. Here are some of our firmwide sustainability initiatives.
2National Geographic, 2018
3European Commission, 2018
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