The European Commission recently unveiled plans aimed at reducing marine pollution from plastics in the European Union (EU). The measures envisage banning certain single-use plastics, reductions in the use of plastic food containers and drinks cups at the national level and requirements for producers to help cover the costs of waste management and clean-up. We believe the proposals, if adopted in their current form by the European Parliament and EU member states, could result in some incremental cost for European plastic packaging manufacturers and further increase pressure on the industry to design for sustainability and use more recycled materials. However, we consider the proposed ban on certain single-use plastic packaging products as immaterial for rated European plastic packaging companies because they do not tend to produce these products.
We believe that the proposed extended producer responsibility (EPR) scheme and the potential consumption reduction targets may be the most negative for the industry. This is because a broad range of plastic packaging products could potentially be covered under the planned legislation. For example, the proposed provision on consumption reduction targets refers to packaging for “food that is intended for immediate consumption from the receptacle” while under the EPR scheme it refers additionally to “packets and wrappers made from flexible material containing food that is intended for immediate consumption” and “beverage containers”.1 This could cover a broad range of fast food containers as well as convenience and ready-to-consume packaging, which has been one of the faster growing markets for plastic packaging companies.
However, there is also a degree of uncertainty regarding the exact definitions at this stage. In our view, the proposed requirements under the EPR scheme for producers to help cover the costs of waste management, clean-up and raising consumer awareness could result in some incremental costs. In addition, the potential establishment of specific consumption reduction targets by EU member states may increase pressure on packaging companies, retailers and consumer goods companies to consider non-plastic alternatives over time, although those may be limited when considering other important considerations such as food safety or shelf life. Consumers may also increasingly turn away from plastic as alternatives become available or they incur additional costs for plastic packaging either as part of an effort to pass on additional costs to consumers or through levies.
Still, we believe any such effects would be incremental and gradual. The draft bill will need to be approved by the European Parliament and EU member states, which the European Commission hopes will happen before May 2019. EU member states will then need to transpose it into their national laws, which may also take considerable time. As such, there is time for manufacturers to plan for any changes and potential additional costs. Nevertheless, as Exhibit 1 shows food and beverage end markets are by far the biggest end market for European rated plastic packaging manufacturers. Rated plastic packaging companies that significantly serve the food and beverage end market include Coveris Holdings SA (B3 stable), Faerch Plast Mico ApS (B3 stable), GCL Holdings SCA (Guala, B2 stable), Kleopatra Holdings 2 SCA (Kloeckner Pentaplast, B3 stable), RPC Group PLC (RPC, Baa3 stable) and Taghleef Industries Topco Limited (Taghleef, Ba3 stable).
Other proposed measures included in the draft bill, such as the design change requirements for beverage container caps and lids, may also have implications for Guala and RPC, although this may again be more of an incremental change.
For the packaging industry, the increasing importance of sustainability could arguably create opportunities to develop further value-added products for which higher prices can be charged. However, such a scenario would imply that packaging companies are able to pass on a substantial amount of the associated development expenses and investment costs to consumer goods companies, retailers and potentially end consumers. However, in our view it is not certain that this would be the case.
The European Commission's legislative proposal comes just months after it published its broader strategy on plastics, which envisages that by 2030 all plastic packaging in the EU market would either be reusable or recyclable in a cost-effective manner. The UK government is also looking at ways to reduce plastic use with a view to eliminating all avoidable plastic waste in the UK by 2042.2 In March 2018, the UK government unveiled a proposal to introduce a drink bottles deposit return scheme. The details of the scheme are still being worked out, but it is expected to cover single-use glass and plastic bottles, and steel and aluminium cans. These latest EU and UK initiatives clearly show a growing momentum towards more directive regulatory action.