Mechanical recycling includes all purely mechanical and physical processes for treating used plastics, while retaining the molecular structure of the polymer molecule. Mechanical recycling is one of the most frequently used methods for recycling of thermoplastic polymers.

One of the most common amongst those polymers is PET. Within that, PET beverage bottles enjoy a high recycling performance, whereas PET trays and polyester textiles are harder or not possible to recycle mechanically. PET bottles uniformity in terms of material composition and packaging format makes it easier to guarantee the quality of the recyclate. This in turn has ensured recycled PET commands a premium relative to other plastic polymers, driving relatively high collection and sortation rates both in high and low income countries. Mechanical recycling can produce "food grade" recycled PET, which is marginally lower quality than virgin equivalent. However, examples of 100% recycled PET packaging, such as beverage bottles, are common. While PET bottles cannot be recycled indefinitely, it is still possible to use mechanical recycling to create systems that are almost equivalent to "closed loops". Chemical recycling (depolymerization) is used primarily as a way to recycle the hard to recycle PET such as trays and polyester textiles.

High-density polyethylene (HDPE) also enjoys high recycling performance and is often systematically collected and recycled. However most of the recycling technology used for HDPE is adapted to heavy duty applications like water piping and does not meet the needs of other markets such as the packaging industry.

Recycling polypropylene (PP) and low-density polyethylene (LDPE), while technically possible, is challenging due to the high costs associated with sorting the materials from other plastics. Many recycling facilities today operate manually and are not equipped to sort low value plastics.

Mechanical recycling cannot produce \"food grade\" recycled content for PP/PE. This means there is an opportunity to use alternative technologies such as chemical recycling to produce food grade recycled content using pyrolysis. However, globally the opportunity for chemical recycling is small according to the Towards Ending Plastic Pollution report (Systemiq (2023). Towards Ending Plastic Pollution by 2040), and barriers to developing the infrastructure (and safeguards) are higher in the global south.

Because of the difficulty and high cost of sorting, transporting, cleaning and reprocessing plastics of all kinds, in many places it is only economically viable to recycle a few select types (usually PET and HDPE).

Costs and revenue model

Mechanical recyclers' business models rely primarily on feedstock prices, recycling yield, and recyclate prices. Volatility in recyclate prices is usually passed on to aggregators and plastic collection operators. Profit margins can vary considerably based on geography and plastic polymers. Profit margins for flexible plastics recycling are usually in the low single digits, while rigid recyclers in developing countries with a substantial recycling sector such as Indonesia or India tend to enjoy profit margins around 15%.

Depending on the target polymers to be recycled and the complexity of the facility, a mechanical recycling facility generally requires a moderate initial capex for infrastructure, equipment, and land, with the business model benefiting from economies of scale. Operating expenses usually include material purchase and processing, logistics, and other SG&A expenses.

Market development

According to The Circulate Initiative's Plastics Circularity Investment Tracker the total deal value in the mechanical recycling sector globally was $30 billion between 2018 and 6M 2023. While plastic pollution is most pressing in emerging markets, they receive only a small proportion of the overall investment: in the same period Asian countries attracted $3.5 billion of private investments, Latin America and the Caribbean $590 million, and Africa only $43.7 million.

In developing countries, the recycling industry is often largely fragmented with operators from all sizes and capabilities ranging from large, professional operators equipped to handle substantial volumes and multinational offtakers, to small-scale recyclers operating at the local level, often acting as intermediaries. The industry is also often loosely regulated and monitored. While there is a supply-demand gap for recycled plastic, the growth of the industry is dependent on securing stable and high quality feedstock. The lack of supply chain transparency is often a concern for buyers who are seeking to strengthen the social and environmental standards of their supply chains.

Finally, the industry is currently ill-equipped to handle changes in price. Price volatility due to supply and demand shocks, as well as the lack of long-term offtake agreements, means that the waste collectors (both formal and informal) are often the ones most affected as recyclers look to maintain their margins.

Established recycling industry actors already actively invest in the sector, looking to achieve scale and secure feedstock supply. In addition, packaging companies and other plastic users actively invest through their value chain in an effort to vertically integrate and secure supply of recycled materials.

While public-private partnerships can fund and operate recycling services, they have been impeded in part by the limited capacity for planning and scaling these services at the city level. The privatization of these services is becoming more common due to a combination of a lack of government resources and the potential for profitability as the demand for recycled content escalates, hence driving more investments into the space.

Traditional commercial early-stage investors such as venture capital funds can also fill an important gap in financing by investing in early stage or small scale recycling operations in emerging countries focused on high value plastic such as PET. Specialized impact investors have also played an important role in financing early stage expansion of small-scale recycling operations in emerging markets. Early-stage investments are critical to increase their scale and offer the operational buffer necessary for these companies to mature and become more robust.

Recycling infrastructure projects are usually able to meet the criteria necessary for concessional capital deployment through blended finance interventions. Development finance institutions such as the IFC, ADB, and DEG have participated in a large blue loan financing package to fund investments in recycling infrastructure.

Recycling investment offers the opportunity to deploy a variety of financial interventions, including:

• Concessional debt / equity aimed at providing favourable terms of rates relative to commercial capital by taking first losses on the value of the investment. The use of concessional debt / equity helps shift the risk-return ratio for private investors to an acceptable level, and bring down the weighted average cost of capital for a project.

• Risk reduction tools that protect investors against capital losses such as guarantees or insurance schemes.

Other enabling conditions

• Quality feedstock: Stable and high-quality material feedstock with low contamination levels.

• Environmental and ethical standards: Supply chain practices and transparency should align with environmental and ethical standards.

• Price competitiveness: The stability and competitiveness of recycled plastic prices are critical, potentially achieved through technology advancements or market interventions.

• Recycling offtake commitments: Strong demand commitments and long-term offtake agreements are critical to enable recyclers to invest in more and better processing capacity. It is therefore not sufficient to just use recycled content. Companies must create constant and predictable demand for it.

• Competition from virgin plastic: The primary issue is that competition with (often cheaper) virgin materials make the business case for recyclers relatively uneconomic and leads to higher costs for producers adopting secondary materials. Recyclables have to compete with long established, highly international and competitive virgin material markets which still offer the same product at a (more) reliable quality and usually at lower prices. Recently certain recycled materials such as PET have seen a rise in popularity and are able to command a premium to market prices.

• Investment Dependence: Investment in recycling hinges on improving upstream waste collection through consumer behavior campaigns, infrastructure development, and plastic producer intervention.

• Assurance of supply: Plastic recycling initiatives require financing and assurance of a stable supply of recyclable materials. Investors need to ensure that there is a reliable source of feedstock for recycling operations.

• Political instability / Exchange rate risks / Lack of familiarity and data on EMDE markets / Lack of insight on local market conditions and investment opportunity

Reference:

Acatech /Circular Economy Initiative Deutschland / Systemiq (2021). Circular Business Models: Overcoming Barriers, Unleashing Potentials

PEW, Breaking The Plastic Wave

Systemiq (2022). ReShaping Plastics: Pathways to a Circular, Climate Neutral Plastics System in Europe

ETC (2019). Mission Possible Sectoral Focus: Plastics

The Circulate Initiative, The Plastics Circularity Investment Tracker: Monitoring capital flows to tackle the plastic pollution challenge, 2023