UK prices for recovered materials have increased substantially over the past year or so. For some materials, prices are now comparable or even higher than the peaks that they reached in mid-2008, just before the onset of the global financial crisis that caused commodity markets, including those for recovered materials, to fall sharply.

Because recovered materials can often be used as substitutes for virgin materials, prices for recovered materials typically track those for virgin commodities.
These too are at high levels. Virgin commodity prices have risen sharply over the past year or so because of both structural factors (such as the recovery from recession and rapid growth in emerging markets such as China), which have increased demand for a range of commodities, and temporary supply shocks (such as floods or droughts which
have affected agricultural commodities and the unrest in the Middle East on oil). However, prices of some virgin commodities fell sharply at the beginning of May and, reflecting this, prices for some recovered materials also declined. Commodity markets subsequently stabilised and, at present, it seems that this was a limited correction as opposed to the start of a trend decline.

Glass

The story for glass is strikingly different to that for other materials. Green and mixed-colour cullet prices have fallen sharply (by around 80 per cent for mixed-colour cullet) over the past year. Part of the reason for this is the decline in packaging waste recovery note (PRN) prices, which can provide price support for cullet used in lower-value recycling applications (in particular, aggregates) and exports. PRN prices fell sharply in late 2010, when it became clear that the glass packaging recycling target for 2010 would be met comfortably. Moreover, the glass target for 2011 was not increased and this led the market to believe that this too would be comfortably met. Since early 2011, glass PRN prices have been stable at around £10 per tonne, half their level of a year ago, but it took time for the decline in PRN prices to feed through to contract prices. As a result, green and mixed-colour cullet prices gradually fell throughout the first few months of 2011. Prices now appear to reflect the full effect of lower PRN prices so seem likely to stabilise at this lower level. Clear and amber cullet prices have been less affected by changes in glass PRN prices and, as at May 2011, were broadly unchanged from their level a year earlier.

Paper

UK recovered paper prices have risen by around 50 per cent over the past year, and currently stand at around £120 per tonne for OCC (old corrugated cardboard) and news and PAMs (periodicals and magazines) and £100 per tonne for mixed paper grades.

Recovered paper prices have risen because of a combination of strong demand from paper mills in both Europe and China (the latter continues to be the largest overseas destination for UK recovered paper) and limited supply because consumption of paper products (such as newspapers) is on a long-term downward trend in developed economies. Virgin pulp prices, by contrast, are five per cent lower than a year ago, so do not seem to be a significant factor driving recovered paper prices at the moment.

Notwithstanding the long-term downward trend in paper consumption, recovered paper collections were slightly higher in the first few months of 2011 than in the same period of 2010. UK paper mills used slightly more paper in the year to April 2011 than they did in the year to April 2010. Meanwhile, in the first quarter of 2011, exports of recovered paper rose to their highest quarterly level since 2008 Q1. However, as yet, it is not clear whether this trend will be sustained.

Plastics

Prices for most grades of recovered plastic bottles are close to historical highs. As at May 2011, PET bottle prices were around 50 per cent higher than a year earlier, while prices for mixed bales of bottles were around 80 per cent higher, driven by strong Chinese demand. In contrast, HDPE and LDPE prices were flat or slightly lower over the year, although prices remain close to their previous highs in mid-2008.

The reasons for the divergence in trends between PET and HDPE prices are not clear. One possible explanation is emerging demand for food-grade rPET. Another is the link between PET prices and cotton prices because polyester is a substitute for cotton in textiles manufacturing. Cotton prices have more than doubled over the past year in the wake of flooding in Pakistan that led to the failure of last year’s cotton harvest.

Prices for virgin plastics are, as one might expect, closely correlated with crude oil prices. As at end-May 2011, prices for virgin HDPE, LDPE and PET all stood 25-30 per cent higher than a year earlier, despite some weakening during May in line with the fall in oil prices.

Metals

Recovered metal prices are also high. Prices for used aluminium cans rose to a record high of £950 per tonne in April, driven by rising virgin aluminium prices. Although virgin aluminium prices declined by about five per cent in early May, this has not, as yet, passed through to recovered aluminium can prices.

Steel can prices have risen steadily over the past year and by May 2011 had returned to close to their July 2008 peaks. The same is true of prices for non-packaging steel grades. As with many other commodities, recovered steel prices have broadly mirrored their virgin counterparts in recent months.

Despite some small falls in prices in May, prices for many recovered materials are currently high by historical standards. In many cases, this is part of a global story about commodity market strength. The strength in commodity prices and recovered materials prices can be explained by a combination of robust demand and adverse supply shocks. As and when the supply shocks dissipate, the boost to supply may lead to some moderation in prices. But some market participants have questioned whether some commodities might be overvalued and hence vulnerable to a steeper fall in prices.

Demand for recovered materials, both in the UK and in its main export markets, appears solid. The Chinese economy – a key export destination for the UK’s recovered paper and plastics, in particular – is forecast to continue to grow at over nine per cent per annum in 2011 and 2012. But even if prices were to fall, it is likely that underlying demand for UK materials would remain.