Mexico joins plastic sustainability battleground in US West Coast

This is the first of a two-part series focusing on the recycling landscape in the US and Mexico, the current dynamics between the two markets, as well as expectations on the potential impact of legislations and policies on the sector. Read part 2: As high inflation dents consumer demand, sustainability and plastics recycling initiatives take a hit.

Plastics recycling's profile has grown in Mexico in recent years on the back of industry initiatives and increasing consumer awareness. As demand rises for sustainable packaging across the country, so does the importance of Mexico as a trading partner in the Americas, with challenges and opportunities presenting themselves in both emerging and established markets.

Current market dynamics present a challenge for the US West Coast, where competition for recycled polyethylene terephthalate, or PET, feedstock such as post-consumer soda and water bottles creates a challenging environment for domestic recyclers to achieve profitability. Meanwhile, a mismatch between current market dynamics and expectations of higher demand in Mexico make competing with participants across the border an economic no-brainer for many recyclers. Add the presence of competitively priced Southeast Asian imports to the US West Coast into the mix, and the past few months have presented a battleground for market share in a space where short-term demand has taken a hit from economic headwinds, such as high inflation and low consumer confidence. Long-term demand expectations remain robust.

Virgin resin cost-competitiveness

The cost-competitiveness of virgin resin is expected to remain a key trend for recycled polymers, resulting in downward pressure on domestic material and significant pressure on recycler's profit margins.

The US is a net importer of virgin PET, having received more than 1.4 million mt overall in 2023. Taiwan was by far the top source, followed by Mexico and South Korea, according to US International Trade Commission data. However, expectations for higher domestic production levels rose as a major PET complex under construction in Corpus Christi, Texas, was set to reduce that import need. But the project was paused in the latter half of 2023 due to high inflation, construction and labor costs that exceeded original expectations. As a result, the US still relies on imports for feedstock -- paraxylene and purified terephthalic acid -- as well as for PET resin.

Prices for imported resin, primarily sourced from Asia, have seen an impact throughout 2024 as a result of rebel-Houthi vessel attacks, operations and capacity constraints, congestion, equipment issues and rate increases. However, virgin resin prices remain at a discount compared to recycled resin prices, prompting buyers to opt for the most cost-effective option, and exerting downward pressure on domestic pricing not only in the US but also in countries from Central and South America.

According to Platts data, the average spread between virgin PET bottle grade DDP West Coast and recycled PET pellets FOB Los Angeles on 2023 was $205.8/mt, while the average spread from January-June 2024 was $198.8/mt.

Recycled resin markets continue to experience a growing disconnect from their virgin counterparts due to volatile supply-demand dynamics, increasing production costs and buyer considerations for quality.

As the recycled markets navigate through 2024, the recycled PET markets continue to face significant challenges and opportunities across different regions.

Unfavorable economics test market's genuine appetite for sustainability

On the West Coast, recyclers' margins are taking a hit amid limited post-consumer PET collection levels and strong export demand.

According to the National Association for PET Container Resources, or NAPCOR, the US PET collection rate has remained steady at around 30% over the past decade.

To achieve the expected demand due to legislation, industry initiatives and consumer awareness, more PET packaging needs to be collected through new policies, changes in consumer habits and better recycling infrastructure.

For example, to reach the widely quoted "25% by 2025" target for rPET content in all US bottles, PET recyclers would need 1.75 billion lbs of collected PET or 85% more collection than in 2022. And to achieve 50% recycled content by 2030 in US bottles, 3.87 billion lbs of post-consumer PET feedstock would be required -- more than three times the weight collected in 2022, NAPCOR said.

Improved collection levels in the US could also help ease supply and demand imbalances, which often drives market price for bales higher.

The US West Coast has been experiencing strong export demand for feedstock bales throughout 2024, particularly for material going into Mexico.

Mexican participants have been actively seeking competitive-priced feedstock bales, placing pressure on the US recycling infrastructure to increase collection rates to meet both domestic and export needs, as well as future legislative and voluntary recycled content goals.

Post-consumer bottle bales in Mexico are of higher quality compared to US bales, meaning bales produced in Mexico have a higher PET post-consumer bottle content, commanding higher prices. As a result, Mexican bales also lead to a higher production yield when processing them into PET flakes.

However, lower quality bales from US West Coast are competing with bales from Mexico. Mexican buyers still choose to source bales from the US West Coast for two main reasons. Firstly, the cost-competitiveness of US bales is favorable for some buyers compared to the elevated bale prices in Mexico. Secondly, buyers are seeking to secure a supply outside of Mexico due to anticipated supply constraints in coming months.

According to Ecología y Compromiso Empresarial, or ECOCE, the estimated national consumption of PET containers in Mexico was 860,000 mt/year in 2023, with 177,000 mt being post-consumer recycled resin.

The total installed capacity for recycled plastics in Mexico is 753,000 mt/ year, according to ECOCE. This number is projected to increase in the latter half of 2024 and the beginning of 2025, as PET companies continue to expand their production capacities.

Consequently, bale price hikes in Mexico are expected due to strong demand leading to supply constraints, as collection levels in Mexico have yet so to see a significant increase.

As a result, increased demand to import US-produced bales into Mexico has elevated bale prices for domestic US buyers. Simultaneously, US West Coast recyclers face severe challenges in adjusting their flake pricing to match the higher feedstock bale prices.

The presence of competitively priced-import flake, mostly from Southeast Asia, has put downward pressure on clear flake prices, resulting in "razor thin" profit margins, according to a Southern California-based recycler.

According to Commodity Insights data, the spread between FOB Los Angeles clear flake and CFR US West Coast clear flake ex-Southeast Asia from January to June held at $133/mt, despite narrowing due to higher ocean freight prices and lower seasonal demand for domestic US clear flakes.

Read part 2: As high inflation dents consumer demand, sustainability and plastics recycling initiatives take a hit.