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A REPORT FROM THE PLASTIC REDESIGN PROJECT

New Plastic Packaging Innovations

Will They Continue their Historic Tradition to Improve Recycling
or Will They Make Plastics too Expensive to Recycle?

By Peter Anderson and Donna Stusek*

Synopsis

The infrastructure to recycle plastics has advanced markedly since its beginnings a decade ago. However, with the bottle designs, handling structures and markets that currently exist, the prices paid to local recycling programs for the plastics bottles that they separate have been low relative to the costs that the programs incur to collect and process the containers. At present levels, that low price appears to be a contributing factor for the lower recovery rates exhibited by plastics compared to other recycled materials. In the future, any further erosion in that price, such as from new bottle components that are costly to remove, could threaten plastics recycling's long term viability, especially with regard to PET, the resin used to make most clear plastics bottles.

Plastics Become Recyclable

Prior to 1988, there were only a few dozen curbside recycling programs in the U.S. In response to the reawakening of environmental consciousness that sprang up that year in the wake of the Mobro Garbage Barge, however, the number of programs rapidly increased from 1,042 in 1989 to 9,349 in 1999.1

Chart - Plastic Bottles Recycled 1989-1998
Figure 1

Initially, programs collected newspaper, glass bottles and steel and aluminum cans, but very few collected plastics because recycling systems had not yet been created to process the material. As curbside recycling ramped up during that period, the plastics and recycling industries worked hard by nurturing a reclamation industry and markets for plastic to make it possible for the public to easily recycle their plastic bottles as part of the new and convenient programs.

Chart-Public Attitude to Plastics 1992 and 1999
Figure 2

High density polyethylene (HDPE) reclamation capacity grew by 110% from 480 million pounds in 1991 to over one billion pounds in 1998, and polyethylene terephthalate (PET) reclamation capacity grew by 204% from 424 million pounds in 1991 to 1.3 billion pounds in 1998, according to the American Plastics Council. The quantity of plastic bottles recycled swelled from 234 million pounds to 1.4 billion pounds between 1989 and 1998 (see FIGURE 1), and today over 8,000 curbside collection programs include plastics.2

These efforts were successful. Although when the decade began the public felt that plastics were not recyclable and were reluctant to accept new plastics packaging, by the end of the decade that unfortunate perception had completely turned around. A 52% favorable rating in 1992 had climbed to 66% by 1999 (see FIGURE 2).3 Packaging controversies seemed a thing of the past.

The Potential Problem

After a decade of developing an infrastructure for recovering plastic bottles and working with the upstream links to the system, the recycling community has come to understand the forces acting on the product manufacturers and become more sophisticated. Today, it appreciates the need for consumer product companies to periodically strengthen or rejuvenate their brands, a process which often involves changing the package for improved performance, convenience or shelf appeal.

Recyclers have also seen some of these innovations done by bottle designers concerned for recycling's future make recovery efforts easier. The elimination of the base cup in the 2-liter carbonated soft drink bottle, the development of an indented "gripper" to grasp large-size PET bottles that replaces handled PVC bottles, the substitution of EVOH for PVC liners in closures on carbonated beverages, the snap on LDPE shrink wrap label to overcome the need for difficult to remove rubber-based adhesives on milk jug labels, and the substitution of PET for PVC bottles are just a few examples.

However, if best efforts do not continue to be made to engineer around problems new designs might create at the back-end, other innovations hold the potential to either make it more expensive to sort and wash plastic bottles, or degrade the quality of the processed flake to the point where high paying markets can no longer use them.

One of the recent advances in packaging is the technology to improve the barrier performance of PET for oxygen sensitive products including beer and, when packaged in smaller bottles, fruit drinks and ready-to-drink beverages. Non-PET material with enhanced barrier properties is being introduced as thin interleaved layers or as inside or outside coatings to limit oxygen ingress to a greater extent than can be achieved by monolayer PET. Another new design element of potential concern is the increasing proliferation of colors other than green in PET bottles. Current variations include amber in beer and cobalt blue in sparkling waters, and more new colors are expected, often to create brand identity.

Some designs for these types of new bottles may require an additional sort or more costly wash bath if access to existing markets is to be maintained and, especially, if higher value added markets are pursued. Thus, if designed without consideration of their impact on recycling, these packaging changes have the potential to either increase the cost for recyclers to sort or upgrade the recovered resin stream, or to lower its value to end markets. Any combination of these changes will result in lower prices paid for the plastic bales sold by curbside programs, and they would be on top of the low prices these programs are already suffering. For, notwithstanding the best of efforts by many and the fault of no one, curbside plastics recycling has a hard row to hoe.

Plastics' intrinsic characteristics are just more difficult for recyclers to handle than many other materials. Its low density- 30lbs./cu.yd. for plastic compared to 74 lbs./cu.yd. for aluminum cans, 500 lbs./cu.yd. for glass bottles and 150 lbs./cu.yd. for steel cans - means that there is a disproportionate cost to collect plastic bottles. This cost is due to the outsized space it consumes on the truck that is often not adequately offset by higher prices from end markets. Its low melt temperature - 210° to 480° F compared with 1,500°F for aluminum, 2,800°F for glass and 3,000°F for steel - means the contaminants such as caps, labels, adhesives, and dirt will not be volatized during remolding, and costly manual and mechanical upgrading is needed.

Ironically, it is the same features that make plastics attractive at the front end - plastics' light weight and facility to mold into different shapes - are the very same ones that create challenges for recyclers at the back end.

Chart- Recycling Rates in Materials 1995
Figure 3

Despite efforts by many in industry to overcome these hurdles, the underlying problems have contributed to the lackluster efforts to capture the material, with recycling rates for plastic bottles substantially less than that of the other materials, as shown in FIGURE 3.4

This TALKING PAPER asks whether local recycling programs can absorb increases in costs and declines in revenues caused by new bottles that are not adequately designed for back end handling. For, if the localities are not willing to increase the amount the public is willing to pay to cover new losses, and plastics is increasingly removed from local curbside programs in reaction to deteriorating economics, those joint efforts over the past 10 years to establish plastics as a recyclable container in the eyes of the consumer could be reversed.

Thus, this article isolates the question of what effect changes in bottle designs may have on collection efforts. It does not deal with the constellation of other factors influencing the economics of plastics recycling that may or may not change at the same time, such as collection efficiency, education efforts to increase supply, and recycled-content requirements to increase demand, nor on global issues such as the commodity price for virgin PET.

Minimum Viable Price

The specific question here is-

"If there is a protracted downturn in the price for recovered PET, due as an example to the costs that might be imposed by new bottle designs, could that adversely affect the willingness of cities to preserve plastics in their curbside recycling programs, referred to here as the Aminimum viable price."

The answer that developed out of this study is that PET markets appear to operate with a minimum viable price. If new bottles are designed without recycling in mind and push recycled PET's market value below that minimum price for extended periods of time, the PET collection infrastructure may erode at the same time as the need for increased supply is greater than ever. Improvements in those other factors impacting the economics of plastics recycling that are not dealt with in this analysis, were they to occur, may or may not offset that conclusion.

We undertook a survey of market participants to evaluate how long this seeming indifference of collectors to weak pricing might continue.5 Chief among the answers was the fact that there is a price below which local programs will probably reach a breaking point, after which time the losses from continuing to recycle plastic overwhelm those legislative constraints and dropping plastics from recycling programs squarely or by indirection will become a serious option.

Sophisticated market participants in the recycling industry generally pointed to there being a 5¢ to 6¢ per pound minimum for the price of mixed color bales of recycled PET (picked up at the shippers' door). If that minimum price is pierced for prolonged periods, then those who collect recyclables have been observed to begin to stop picking up or shipping plastics.

In response to the survey, Mr. Michael Schedler with the National Association of PET Container Resources, and previously with Bronx 2000, stated:

"The first $.06 bale cost/price was originally set by New York City in 1983 based on an evaluation they conducted at that time. In turn they said to the marketplace that no material would be sold at anything less. More recently in 1996 most major bale suppliers balked at selling when the price went below $.05 and either warehoused or got their price. Reclaimers that kept prices below that level during that period are still feeling some effect insofar as some suppliers still refuse to do business with them. Interestingly enough this was why in late 1998 and early 1999 when almost the same market conditions applied, no major reclaimer dropped the price below $.05 per pound."

Similarly, Mr. Steven Anderson, formerly marketing manager with RRS, one of the first MRF operators, stated:

"We were always looking for $.05/pound picked up pricing for PET bottle from non bottle bill states (based on the other available floor pricing scenarios). Sometimes we got it, sometime we didn't."

On the other hand, the public sector tended to be less profit driven. Ms. Lori Robson, Recycling Coordinator, Pennsylvania Northern Tier Solid Waste Authority, stated:

"Our policy has been that any material that we are collecting and can get recycled is not discontinued unless the market place disappears. While we have been very lucky I might say in choosing the materials that we collect, again the prices gained are not always allowing our authority to break even in the recycling program. Unless there are no markets for our product (that might include the plastic beer bottle) we probably would not discontinue picking up all plastic bottles."

Even Northern Tier went on to observe, however, that lower prices might result in their advocating policy mandates to ban the specific confounding bottles as an alternative to dropping all plastics from their program:

"We probably (and already are) doing some additional sorting by hand to eliminate bottles that can not be accepted by our markets. This adds costs to a system that is already strained financially. I am very concerned about the development of new plastic bottles that are not [economically] recyclable and understand that this problem will only become worse as the industry moves on, unless we do something now. I am in favor of government mandates on plastic bottle design for recyclability."

It seems that, as the price drops for prolonged periods below a minimum price of between 5¢ and 6¢ per pound, the private sector which is more economically driven than communities, and those experiencing higher handling costs to recover recyclables, will consider phasing out plastics recycling. It did not, however, reflect any recovery from sales for the significant costs to collect, process or clean plastic bottles. Because the minimum price approximates the historic cost to sort and bale PET, this may have been the origin of this point of price resistance from local recycling programs to declines in the price received for their plastic bales. If this is the case, in the future, the minimum price could increase to 10¢/lb. because sorting costs increase as bottles are light-weighted and single serve bottles become a larger fraction of the bottle stream.6

On the other hand, many publicly operated programs and most programs in environmentally conscious locales such as Northern Tier, indicate that they will make every effort to keep collecting plastics no matter what the price decline. However, their commitment will be severely tested by macro-economic market forces to the point where their best intentions become impossible to sustain. For they are dependent on others in the private sector who can only continue in business if they can make a profit.

In order for plastics collected by even the most committed community to be recycled, the recovered bottles must first be upgraded by privately-owned, intermediate processors who first grind and wash the bottles to turn them into clean flake or pellets before the used bottles can be used by end markets. This makes curbside recycling of plastics dependent on the financial viability of those upgraders.

If the reclaimers' need to buy more equipment or hire more sorters to separate out new types of incompatible bottles, they will have to either raise the price they sell their product (clean flake or pellets) to end-markets, or drop the price that they pay their suppliers for feedstock (old plastic bottles) in order to maintain profit margins.7 As privately owned enterprises, they either make a profit or go out of business. Unfortunately, neither raising prices to end markets or dropping prices to supplying communities is possible.

On the topside, there are implacable constraints. Since recycled plastic has been previously heated to its melt point and has some residual contaminants, mechanically recycled resins can only move in the markets at a discount to virgin resin it seeks to displace, typically between the wide spec and virgin price. This upside collar is a double jeopardy for recyclers, because, in the face of global overcapacity, virgin commodity cycle downturns have already periodically forced the price that recyclers can charge below their current fixed handling costs. That places a painful upper bound on what upgraders can charge for their clean flake, with little room to absorb new designs that raise those handling costs, and squeeze margins, further.

On the downside, as noted, it appears that there is a minimum below which a drop in the price for RPET bales will result in a serious fall-off in supply. In view of the current status of the reclamation industry, that would probably be the beginning of a slow and irreversible decline. Reclaimers presently suffer from 45% crippling excess capacity.8 Any further overhang would be devastating to their competitive position compared to virgin manufacturers which operate on a 24/7 basis (24 hours a day, seven days a week). That is to say, competing virgin resin producers are amortizing (or spreading) their equipment costs over twice the throughput as recyclers are able to write off theirs.

The cold reality is that to maintain cash flow and make payroll in the short term, ill-conceived bottle designs will probably force reclaimers to drop prices below the minimum during low points of the virgin resin commodity cycle rather than attempting to raise their sale price. For, if to preserve margins, reclaimers hike their selling price, their market will evaporate overnight, while the impact of any the reaction by communities to lower buying prices will be more slow to gather steam and not be a problem till the next quarter. If those price drops become too recurring, that will likely be followed by a slow erosion in the willingness of some local recycling programs to collect plastic bottles.

But, that slow erosion in supply among the less committed communities can be expected to eventually crash against the shores of the dedicated ones. For each downtick in supply that follows from incompatible designs increases reclamation overcapacity even more. That erodes margins further, leading to even lower bale prices and more communities dropping recycling. Eventually that can slip into a "death spiral." In a death spiral, a feedback loop is created in which each response to an initial small change in price further worsens the economics until, by the end, the price impact is magnified to the point where the system collapses and there is no longer an infrastructure for committed towns to sell into.

All of this strongly shows that the existing financial outlook for plastics recycling desperately needs improvement, not deterioration sliding toward the minimum price. What is needed is to correct the problem of designs in the existing bottle stream that negatively impact recycling - along with other strategies. If, instead, we add more ill-conceived bottle design changes, that will only exacerbate the existing situation to untenable proportions.

Impact of Lower Prices

Chart- Historic PET Prices 1997-1999
Figure 4

An examination of historic pricing for recycled PET in comparison to the 5-6¢/lb. minimum price provides a means of quantifying how possible price erosion will impact willingness to continue plastics recycling in many curbside programs.

Historically, as shown in FIGURE 4, prices paid to communities for their PET bales picked up have ranged from a low of 4¢/lb. to a high of 12¢/lb. (ignoring the aberrational year 1995-96 and the earlier years before today's infrastructure developed).9

TABLE 1 shows the trended price of 7.8¢/lb for each resin, along with the maximum and minimum price during that period from the graph. It also indicates PET prices already fall below the minimum 6% or 14% of the time during the ups and downs of one commodity cycle depending upon whether a 5¢ or 6¢/lb. minimum price is assumed.

Table- Historic PET Price Statistics 1997-1999
Table 1
Table- Sensitivity of PET Collection
Figure 5

The next FIGURE is the key one for bottle designers to understand how a difficult-to-recycle bottle might impact the future of PET recycling. FIGURE 5 shows the proportion of the time that the price for PET bales falls below the minimum price for each additional 1¢ drop in the bale price paid by the markets in response to the resulting increased processing costs. A one cent drop in bale prices would more than double the time that PET sinks the minimum to 14% or 33% of the time (depending upon a 5¢ vs. a 6¢ minimum price), and a two cent drop would triple the time in the cellar to 33% or 61%. Duration is important because it is the extended bouts of below-floor pricing that is expected to affect recovery rates.

This analysis suggests that even a 1¢/lb. increase in processing costs due to a bottle design that ignores recycling would be a problem, and almost certainly a 2-3¢/lb. penalty would lead more recycling programs to consider refusing to collect plastics that could begin a death spiral in the industry.

The next question is whether ill-considered designs may have price impacts of that magnitude.

Illustrative Impact on One New Design

One of the pending bottle design changes graphically illustrates how serious a threat some of these innovations might be to plastics recycling's economics. That is the incorporation of new color tinted bottles in the present clear and green PET stream.

Eighty percent of beer presently sold in glass is in amber bottles, and it is expected that most of the beer that is bottled in the future in plastic would also be in amber. Similarly, increasing amounts of sparkling water in plastic is bottled in a light blue. In minor quantities, that may escape detection, but, unfortunately, much of that shift has been into cobalt blue which does not dilute. Also, a rainbow spectrum of other new colors for packaging lies in the wings.

Presently, approximately 85-90% of all soft drink and custom PET bottles produced are clear and almost all of the rest are green. Most existing high and mid paying markets can only use single color streams, and for that reason it is necessary to incur the expense of separating the green bottles, which is presently absorbed into recyclers' handling costs and passed through in lower bale prices to curbside recycling programs.

When bottles with new color tints are first being launched, there will be too few of them to seriously dislocate recycling systems. Any that get separated and sent to MRFs may be pulled with the other contaminants and discarded or put into the mix and recycled. If ultimate market saturation reaches a critical mass, a special handling system to separate and market them will be necessary.10

Table- Incremental Cost to Sort New Color PET Bottles at Reclaimer
Table 2

The costs for sorting amber would be much lower at the reclaimer because MRFs operate at lower capacity factors and without any optical sorting capability. For that reason, we believe that almost all amber sorting will be done at the intermediate processor. We estimate that the reclaimers' incremental cost to manually separate another color from clear and green PET bottles will be approximately 6¢/lb., and, using autosort equipment, about 1.5¢/lb., for the new tinted bottles when they equal the proportion of green bottles in the inflow (see TABLE 2). Reclaimers generally indicate that they will wait a few years to decide whether to make the capital investment in that autosort equipment and, until then, will manually separate the amber bottles. Precisely how that cost would average out spread over the entire PET stream would depend upon how many new colors there are, the fraction of bottles with the new colors, the method used to sort them and how underutilized the system was prior to the new addition.

Table- Clear/Green Price Difference for PET Flake
Figure 6

Then, in addition to the sort costs, there will be further losses in the form of lower market prices for PET that is tinted for two reasons. First, tinted or pigmented plastic bottles in general, as with glass, are discounted from the price for clear or natural resins because they have more limited markets. FIGURE 6 shows the average 18.9% spread between clear and green PET that has been paid by end markets for clean PET flake or regrind between 1997-1999.11 Second, there are currently no significant markets at all for amber or cobalt blue tinted or any other non-green PET bottles, and new ones proportionate to the quantity of non-green tinted bottles that arise will need to be developed. Consequently, for the foreseeable future, one would expect that the discount for non-green tinted bottles will be greater than the 18.9% green discount.

Together these two factors indicate that the overall price which local recycling programs receive for the mixed PET bales will be reduced as the proportion of all color tinted bottles increases and to the extent that the discount for non-green tinted bottles is greater than for green.

Table- Sensitivity Analysis of the Impact of More Colored Bottles on Market Price
Table 3

There is no data from which any specific increase in the color fraction or discount from clear for the future can be established. For that reason, we have constructed a sensitivity table to show how various increments in change would impact the price paid by the end markets.12 TABLE 3 shows that sensitivity analysis of how the overall market price for PET bales will decline as these two consequences ensue from new tinted bottles.

The grey shaded box shows the current situation in which approximately 20% of the bottles are green and the discount from clear is approximately 20%. As an illustration of possible impacts under different assumptions, the brown shaded box shows how the MRFs overall PET price will be affected if the current 20% color discount for green increases to 50% for other colors and the color fraction increases to 30% due to a 10 percentage point fraction of amber. The overall market price drops by 1.1¢/lb., or 12%, when the impact is spread over all PET sales, but, it ought to be noted, were the price drop for that larger color discount properly apportioned to the new colored bottles, on the other hand, the per pound price would increase to 3.3¢/lb., or 49.2%.

Combining the additional sorting costs for significant quantities of non-green tinted PET bottles of 1.5¢ - 6.0¢/lb. with the lost market value of perhaps 1.1¢/lb. in the illustrative cases cited, suggests losses from the roll out of a new color could total 2.6¢ - 7.1¢/lb. These consequences could be exceedingly serious if not worse for recycling's long term future.

Conclusion

Along with other secondary materials, plastics recycling has grown significantly in the past decade. This has occurred despite several factors that make the economics of plastics recycling particularly challenging. While recycling programs have shown a surprising degree of resiliency in their ability to survive deep swings in prices, we suggest in this article that it is reasonable to assume there exists a "minimum price" which, if sustained long enough, will result in a significant reduction in collections. Even public collection programs, insulated to a degree from market price impacts by the demands of local citizens for their services, may also begin to reduce collections at some level of price reductions.

Our analysis suggests this minimum price may lie between 5-6¢/lb. for most private collectors (although there is more ambiguity in public programs). As sorting costs rise, for example, due to smaller weight bottles and the need to begin new sorting processes, the minimum price may rise as well to recover their greater sorting costs. Almost certainly, if prices were to permanently fall (or net collection costs rise) below the minimum price, collections would slowly begin to drop and then compound themselves, with serious implications for plastics recycling businesses throughout the country.

Among the many factors influencing plastics recycling costs and prices is the wave of innovation sweeping bottle designs. New designs have the potential to increase costs by requiring sorting or other processing steps, or to reduce value in end-markets. If new designs are developed in cooperation with the recycling industry, they may also have the potential to enhance plastic recycling by expanding the supply and even markets.

The plastics processing industry, through its trade association the Association of Post-Consumer Plastics Recyclers, has established programs to work with manufacturers. Additionally, the Plastic Redesign Project, a coalition representing the interests of local and state government recycling agencies, is dedicated to working with the packaging and plastics recycling industries to find win/win solutions that meet their needs for innovation, cost and market penetration, while also optimizing prospects for profitable plastics recycling. The threat posed to plastics recycling if new designs push prices below the minimum, as documented in this article, is a compelling case for the need for such cooperation.


Peter Anderson is president of Madison, WI-based RecycleWorlds Consulting and project director for the Plastic Redesign Project. Donna Stusek is administrator of the Ohio DNR Division of Recycling and Litter Prevention and a member of the Executive Committee of the Plastic Redesign Project. Research for this report was funded by the California Intergrated Waste Management Board.

1 BioCycle "State of Recycling," April issues 1989-1999.

2 American Plastics Council, 1998 National Post-Consumer Plastics Recycling Report (1999), at pp. 1 and 7, Figures 1, 5, 6 and 7.

3 American Plastics Council, Internal Polling Data, 1992-1999.

4 U.S. Environmental Protection Agency, MSW Fact Book, 2000. These reported figures actually overstate plastics recycling because approximately half of the reported PET recovery is from bottle bill or redemption law states where recovery can exceed 80% only because of the nickel or dime mandated deposit or redemption value when the bottle is returned, not the market value for RPET. Alternatively, the poor performance of plastics is explained with reference to the growing "single serve" segment of the PET stream, much of which is consumed away-from-home. However, 100% of aluminum cans, which has a 52.0% recovery rate, is in 12-ounce, single-serve containers, while only 35.4% of the carbonated soft drink segment of PET bottles is bottled in 24-ounces or less. "How CSDs pack," Beverage World (June 1999).. If away-from-home consumption was a full explanation of the problem with plastics, then aluminum would be expected to have a worse recovery performance than plastics, most of which is consumed at-home, instead of 2 1/2 times better. Presumably, it is the fact that aluminum cans command five or more times the market value as plastic bottles, Waste News' MARKETS PAGE, and requires none of the costly manual separation by resin and color, which explains the dramatically different recycling rates.

5 In an idealized world, a statistical study using monthly price and consumption time series data would be undertaken to determine whether a minimum viability price exists. However, in the absence of something like the existence of a government guaranteed floor, the simple use of statistical techniques involving dummy variables to separate out price effects above the minimum price from those at that level would not work, and the analytical task would depend upon an in-depth knowledge of individual reclaimers' pricing practices when the market price fell below the point where they experience declines in supply. This led us to consider less rigorous anecdotal reports by market participants. In an email survey which the Plastic Redesign Project conducted of local recycling program managers and buyers through various listserves, the responses varied about the effect of price erosion. This is to be expected because surrounding conditions are different from one locale to another - legislative requirements, socio-economic factors, the efficiency of the type of collection and processing system employed, the availability of regional markets for recycled plastic and the cost of landfilling - will determine each community's ability to sustain plastics recycling as part of its curbside program if average prices decline. In addition, the private sector operates under different imperatives from the public sector. Nonetheless, general trends did emerge as described in the text.

6 MRFs' sorting costs per pound for plastic bottles are increasing as the weight of the average plastic bottles has decreased with the recent increase in use of single-serve containers and, to a lesser extent, as bottles were light weighted. For the sorting cost is a function of the number of container units that a sorter can pull off a conveyor in a day, not the number of pounds of plastic passing by. The rate at which a sorter can pull containers off the MRF line will range from 2,000 to 3,000 units per average hour over an entire day. The average fully loaded wage rate is approximately $10.00/hour and the average hourly amortization expense for a sorting station is approximately $6/hour. Originally, there were approximately 6 plastic bottles per pound, now, with the explosion of small single serve containers, there are approximately 12 bottles per pound. Thus, initially, the sort cost ranged from 3.2 to 4.8¢/lb., depending upon a facility's sort rate, with an additional 2 to 3¢/lb. for baling, or 5.2 to 7.8¢/lb. together. However, now that sort cost has increased to 6.4 to 9.6¢/lb., or about 10¢/lb. combined when counting bale costs, due to the greater number of small size plastic bottles. See American Plastics Council, How to Develop a Viable Post-Consumer Plastics Handling Business (1993), at p. 70. Whether minimum price will slowly increase to the 10¢/lb. level as awareness of the new cost structure increases among MRF operators and recycling managers is not known.

7 In the wings, some suggest that the improved operating efficiencies is another option to extricate themselves from this set of pinchers. A closer examination of how this might develop, however, leads to serious doubts that it is a practical option.

For the primary way for that to occur is to increase plant throughputs in order to reach levels where greater scale economies exist. This can happen when those volumes are able to amortize substantially greater investments for such things as longer infeeding singulation lines and additional and more sophisticated optical sortation systems. Initially, to attract new funding, then, these mega-facilities would have to increase the price they pay for bales to pull the requisite volumes needed for paying down their greater investments.

But, even if these new operators able to do so, they might not get the supply they need. The amount of the improved pricing, which their efficiencies theoretically might permit them to reflect in higher bale prices, may be offset by the shipping costs many cities would incur to reach more centralized facilities. Moreover, it is unclear that they will be able or willing to raise bale prices. For one thing, it will be only be possible to attract financing for major new investment in the reclamation industry by offering higher returns than currently provided by the industry which has problems justifying reinvestment at existing levels of capital intensivity. Returning the benefit of the greater efficiencies from those new investments to the customer instead of the investor would negate the business plan. For another, when the number of buyers (reclaimers) are significantly reduced and the survivors are few in number, they may acquire market power that enables them, until they kill the golden goose, to hold down bale prices to communities.

Presumably, the underlying assumption of those considering this strategy is that the proliferation of new bottle designs cannot be handled by the existing generation of processors which will therefore become obsolete, constructively leaving the market to a new generation of these mega-facilities which will then be able to attract the needed volumes and capture the efficiencies as higher returns for their investors. They may also hope to lock down mega-contracts with end-markets such as Coca-Cola to supply bottle grade RPET.

What such a strategy misses is the fact, as described in the text, the resultant lower bale prices could pierce the minimum and lead to slow declines in collection. This could be fatal because, although these new plants are a powerful, efficient engine when operating at full capacity, their greater capital intensivity makes them fightingly vulnerable when supply wanes and capacity factors fall.

The only other factor in this regard that ought to be considered is the possibility of entirely new and innovative technologies -- as contrasted with simply larger scale technologies -- that could dramatically reduce the costs of producing high quality recycled resin. While this is certainly always a possibility, it is also true that new technologies do not always materialize. Different observers will accord different probabilities to its occurrence. Those who are more cautious will probably ask that packagers delay rolling out new confounding bottle designs until those innovations have been commercially demonstrated.

8 American Plastics Council, 1998 National Post-Consumer Plastics Recycling Report (1999), at p. 7, FIGURE 5.

9 Waste News, Historic Commodity Pricing 1996-1999 (mixed color PET bales FOB Chicago market).

10 Three reclaimers which have defined pricing schedules for amber beer bottles whom we interviewed indicate that during the testing period for the new bottle if the proportion of new distinct color tinted bottles remains below a low threshold such as 3%, the sort costs could be nominal. For it may be possible to simply have the same contaminant sorter at the head of the line who pulls rejects simply discard the new colored bottles at the same time and not incur any incremental cost.

11 Historic Resin Pricing, Plastics News (1997-1999). Note that the prices shown in the FIGURE are for recycled PET which has been processed into clean flake by an intermediate reclaimer. This is substantially more than a MRF receives for its PET bales FOB shown in FIGURE 6 because the reclaimer must pay for shipping (2¢/lb.), debaling (2¢/lb.), singulating (1¢/lb.), sorting clear from green (2¢/lb.), removing PVC (2 1/2¢/lb.), grinding, asperating, washing and drying (12¢/lb.) the baled material (costs are illustrative approximations-only from the American Plastics Council, How to Develop a Viable Post-Consumer Plastics Handling Business (1993), at p. 70). Subtract the 21 1/2¢ in total processing costs incurred after the MRF bales its PET from the average 30¢/lb. flake price paid by the end markets and the result, 8 1/2¢/lb., approximates the reported bale price.

12 The outputs shown in the sensitivity table are calculated from the following data. The Plastic News time series data for the period 1997-1999 shows an average price for clear flake of 30.5/lb. and for green flake, 24.8/lb., or a 5.8/lb. and 18.9% difference. Approximately, 75% of carbonated soft drink (CSD) bottles are clear and CSD bottles are 60% of all recovered PET bottles. Thus, the composite clear fraction is approximately 85%, and the color weighted flake price would be 29.7/lb., which is 74% greater than the 7.8/lb. mixed color bale price reported by Waste News for the same period. This suggests that the imputed clear bale price would be 8.0/lb. and, green, 6.5/lb.

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