Asian banks cautious on chemical recycling

The Asian chemical recycling industry requires funding to mature. Akash Ravinran looks into whether financial institutions want to commit to investment in order to help the industry mature

Chemical recycling used in conjunction with carbon capture technology and renewable energy sources is being touted as a less carbon-intensive means of dealing with the abundance of plastic waste in Asia. For the industry to mature, it requires considerable investment in infrastructure and chemical recycling technology. But banks, private equity and venture capital firms have taken a cautious approach when it comes to financing chemical recycling projects.

A major pyrolysis solutions provider said upwards of $100mn is required to set up a chemical recycling facility compared with $1mn-2mn needed for building a mechanical recycling facility.

Chemical recycling plants are essentially petrochemical facilities, requiring capital for reactors, condensing columns and storage units before even considering the potentially higher utility costs of a more energy-intensive process. Banks are naturally wary given the disparity in investments required between the two methods of recycling.

Additionally, building and operating chemical recycling plants are likely to be much more challenging than running a mechanical operation. A major pyrolysis solutions provider said the majority of smaller players seeking to start up chemical recycling projects do not have the required expertise to run a chemical recycling facility. And, given that chemical recycling of plastic remains relatively unproven on a commercial scale, with only a limited number of plants in operation worldwide, financing such a project would require banks to take on significantly more risk. The same pyrolysis solutions provider said the probability of such projects obtaining financing is fairly low.

The majority of upcoming Asian chemical recycling capacities are being developed by large petrochemical companies who finance their projects through internal revenue and do not require external financing. But it is likely that funding from non-industry sources will be needed if the chemical recycling industry is to grow in line with the current ambitious projections.

Feed the machine

A key consideration financial institutions take when looking at financing chemical recycling projects is feedstock security. Countries in Asia have an abundance of plastic waste, but this does not necessarily equate to feedstock.

The perception with chemical recycling is that plastic waste, primarily polyolefins, can be deposited into a chemical recycling facility to produce pyrolysis oil. However, a major Indonesian recycler recently conducted a waste characterisation study for Indonesia, which showed that a high degree of sorting must be done prior to chemical recycling. Hydrotreatment, removal of organic waste and other pretreatment costs can be significant. Financial institutions list feedstock aggregation as a prerequisite for financing such projects. A prospective chemical recycler is unlikely to obtain financing without it.

Financial institutions are also considering how much demand there is for the chemical recycling product and what kind of returns are expected from financing a project. A major Indian chemical recycler said that transactions of pyrolysis oil are based on quality and approved on a case-to-case basis, whereas banks are likely to look for firmer guarantees. Standard Chartered Bank executive director for downstream and chemicals, Karthik Sathi, said they are looking for a project that gives guaranteed offtake, priced at a premium. The premium ensures that returns are secured and tied through the downcycle.

Banks will also be looking for assurances about downstream demand. On one hand, it is widely expected that legislation that enforces recycling content in technically-challenging applications such as food packaging and car parts (currently proposed in Europe) will support demand for chemically-recycled plastics in the long term. But, in some cases, the role of chemical recycling within these regulations is yet to be clarified, and certain brands have expressed their reticence to engage wholesale with chemical recycling while it remains, to some extent, uncharted territory.

What can be done?

Feedstock aggregation as a prerequisite for financing of chemical recycling poses a challenge for prospective Asian projects. Countries such as South Korea with a formalised waste collection sector are able to provide a steady stream of plastic waste feedstock as collection and sorting rates are notably higher than southeast Asia. But the informal waste collection sector in nations such as Thailand and Indonesia impede collection and quality of feedstock.

Given these challenges, market participants said that government intervention through investment in collection infrastructure can aid feedstock aggregation efforts. Doing so is a step towards helping smaller players to gain financing from financial institutions.

Banks see a lack of scale in recycling projects, Sathi said, although a major pyrolysis solutions provider that scales is not a be-all and end-all to increase profits. Upscaling a chemical recycling facility increases capex costs and could amplify concerns around quality and consistency of feedstock that could end up making the final product specifications harder to control. Market participants suggested that starting at a smaller scale would enable improvements in technology and supply chain that would make it easier for projects to capture economies of scale in the future.

In many cases, the risk taken by financial institutions is too high and the infrastructure is not sufficiently developed for the prerequisites for financing to be met. Under current circumstances, the probability of smaller players getting financing is fairly low. "Private equity and venture capital firms are not doing charity," a major pyrolysis solutions provider said.