PLAPBAT Report 010321

I spent some time musing on the PLA PBAT market, i.e., the bio-degradable packaging materials, in China. It originates from my long-time habit of trying to be as personally responsible and sustainable as possible. I started by researching the PLA trash bags I use, produced by private firm Torise Biomaterials(江苏天仁生物，https://www.placn.cn). I recommend Torise Biomaterials’ products, which are easily accessible on Taobao. However, since it is a private firm, I cannot model on its profitability and future. 

PLA and PBAT, respectively polylactic acidand polybutylene adipate-co-terephthalat, are a type of bio-degradable lactic-based polymer films derived from wasted food. The 100% biobased PLA-based polyesters can 100% bio-degrade in real soil environment (Weng et al., 2013). PLA is more brittle (strain at break ~3.8%) and PBAT tougher (strain at break ~710%). Some may use a blend of PLA and PBAT (Jiang et al., 2006). In general, PLA is more stable than PBAT and is considered a relatively practical material that is also environmentally friendly.

Good Parts:

i) PLA/PBAT production is on the small streak of fast-growing emerging field, with an annual CAGR of roughly 3%. This reminds me of the explosive streak of renewables for energy, vis-à-vis below (green development on top chart and orange development on lower chart). 

ii) strong policies globally. Let’s be clear, policies have been one of, if not the strongest driver, of global demand in social goods. The Tragedy of the Commonshas proved market failure ghastly real. Governmental actions have been strong stimuli, without which capitalism will only make our future a dystopia. Noticeable policies include: 

a) The EU

The EU has the biggest market share of 52% of the bio-degradable market in 2017 (Zhongtai Securities). Ambiguous in its specific policy guidance, the EU however is very committed in completely crossing out single-use plastic (SUP) from the economy by 2030 (The EC’s A European Strategy for Plastics in a Circular Economy, 2018 and Questions & Answers: A European strategy for plastics, 2018). In the battle to encourage new energy use, the EU faced strong doubts at the beginning yet proved to be very successful. I consider the EU’s effort credible. 

b) China

         Nation-wide (Jan 19th, 2020)《关于进一步加强塑料污染治理的意见(80号文)》, which lists “missions” to make it green in heavy-plastic industries such as e-commerce, delivery, food delivery, ones of the fastest growing industries in China, etc. by 2022. 

         Province-wide policies see strong hand in the new economy open zone Hainan province. On Dec 16th, 2019, Hainan province banned single-use non-biodegradable plastics (《海南省全面禁止生产、销售和使用一次性不可降解塑料制品实施方案》琼办发〔2019〕35号). In short, policies have led to consistent increase of PLA price. 

         However, since the “plastic ban” enacted on Dec 31st, 2007, China has not seen an actual significant reduction on plastic bags (《国务院办公厅关于限制生产销售使用塑料购物袋的通知》). The “plastic ban” from a decade ago already “banned” usage of single-use plastics thinner than 0.025mm, which has not been successfully executed. Although more or less to no avail, policies are strong indicators of the government’s determination to transition a white-polluted country into green. Stocks and market demand for sustainable polymers have seen short-term surge after policies. 

iii) ESG goals. 

Sometimes, capitalism’s pursuit of ROE may not be the only goal. I would argue ROE to be a rather monotone measure for success. By performance, ESG investment may seem lacklustre. However, humanity and our planet earth are richer than ROE measurement. 

iv) Average Profit Margin 

            Chinese firms have a general profit margin of 15% from 2015-2019, with (publicly traded) leaders Kingfa on 16%, Ruifeng Chem 24.2%, Cofco 14.1%, Huafon 24.0%, Wanhua 28.0%. Certain firms post a profit margin of roughly 30%, such as Jindan on 34.2%. 

            Given the composite investments beyond PLA/PBAT of firms respectively, profit margin on lactic solely needs to adjust down. However, this is higher than EVs. 

Drawbacks:

i) Ambiguous Demand / End Market Ceiling

Aggressive forecast and report posted the global biodegradable market in 2018 at $1.1 billion, with a CAGR of 9.4% (IHS). However, such figure varies across reports and makes no clear total addressable market (TAM). Certain figures posted $3.7b for 2019, but generally, analyses give a rather optimistic CAGR projection of 9%. Within the bio-degradable production capacity, starch-based plastics took 37% of shares in 2019, and PLA and PBAT in total 48% (IHS). I have doubt for the TAM and CAGR projection, considering PLA and PBAT are still weaker products, in both functional (durability) and economical (cost) sense. In addition, its recycling and ecosystem are yet to be activated. 

These projections are based on Euro-US with a focus in the American demand, yet the majority of the Chinese demand comes from export, which is Euro-centric. The domestic organic growth itself is dubious. The world’s biggest lactic polymer producer NatureWorkshas been doing edge-cutting research on its Ingeo product and discovery on the possibility of circular economy in the US. I adore the idea, but it is a concept yet to catch up in China. 

There is increasing investment, guided by governmental effort (with non-optimal allocation of capital and its return), to expand production capacity, but the end demand is unclear. Sale side reports need to adjust down. 

Summary:

The development of EVs in the past one decade has been first pushed by the governments and then end demand caught up. Now, I would argue there is a tremendous overvaluation today. Regardless, can lactic polymers be the next EV? Maybe. Reality is harder than expectation. Global EV sales had been growing at a general CAGR of 21% from 2011-2018 (JATO EV global sales), being an extremely fast-growing energy sector on the end use despite its relatively very small size in energy use in general. Lactic polymers are yet to come to a breakpoint. 

A few applications of lactic polymers to watch closely include soil cover film in agricultural setting, medical appliance, etc. 

Contrary to sale side reports, I do not think the industry is at a breakpoint. It is before the zero point. I enjoy perusing over energy and new energy and I will continue to watch the oil-enabled PP/PET (plastics) and the bio-degradable materials. 

Recommendation: Watch. 

Note:

1. Interested readers on the PLA/PBAT upstream sourcing from food and end recycling challenges via landfill / real soil environment, can refer to Choi et al. (2018) for further look. 

2. 

3. For individuals. Bio-degradable plastics can only bio-degrade in 100% real soil environment, meaning landfill mixed with plastics and bio-degradable plastics will make the latter lose its function. For individuals to try to help the economy in anyways, do recycle your plastic bags and use shopping bags on grocery. Buying bio-degradable plastics also help with the industry and the economy. 

Reference

Weng, Yun-Xuan, et al. “Biodegradation Behavior of Poly(Butylene Adipate-Co-Terephthalate) (PBAT), Poly(Lactic Acid) (PLA), and Their Blend under Soil Conditions.” Polymer Testing, vol. 32, no. 5, 2013, pp. 918–926., doi:10.1016/j.polymertesting.2013.05.001.

Jiang et al.(2006). Biomacromolecules, 7, 1, 199–207https://doi.org/10.1021/bm050581q

Choi, B.; Yoo, S.; Park, S.-i. Carbon Footprint of Packaging Films Made from LDPE, PLA, and PLA/PBAT Blends in South Korea. Sustainability 2018, 10, 2369.

BIODEGRADABLE PLASTIC AND WORLD BIOPOLYMERS MARKET 2019-2020. ECTC Chemical Technologies. 

中泰证券. (2020). 《可降解塑料专题汇报: 巨大市场临近爆发，行业龙头先行布局》

中国新闻周刊.(2020). 《新限塑令：塑料越限越多成一个难解的“死结》

Report by Zhuorui Fu 01/02/21