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It only takes one year to go from supply shortage to oversupply! The billion-dollar market for biodegradable plastics is stuck in a cycle of intense competition and difficulties in commercialization. 2022-08-17 16:55 · China Chemical Industry Information Weekly. On January 1, 2022, Lanjing Microorganisms’ PHA production project was established in the Binhai Economic Development Zone in Jiangsu Province; it covers an area of about 130 mu, with a planned annual production capacity of 25,000 tons of PHA. It is expected that 5,000 tons will be produced on an industrial scale by the end of 2022. On July 14, 2022, Angel Yeast (600298.SH) announced a joint venture with Beijing PhaBuilder to establish Hubei Weiqi Biotechnology Co., Ltd. (referred to as “Weiqi Biotech”), in order to work together on the industrialization of a project capable of producing 30,000 tons of PHA (polyhydroxyalkanoates) per year. Mass production of 5,000 tons is expected to begin in 2022 to supply the market. Both parties will utilize their respective resources and channels to expand product sales. Upon completion, the facility will become China’s largest and the world’s third-largest PHA production base, ranking after Japan’s Kaneka and the United States’ Danimer Scientific. According to the company’s description, this facility will be the world’s production line capable of manufacturing the largest variety of PHA types; the first batch produced there will consist of dozens of materials derived from mixtures of PHA, PHB, and P34HB. With the plastic restriction policies in place for many years now, what is the current development status of the biodegradable plastics industry both domestically and internationally? What are the respective advantages of biodegradable materials such as PLA and PHA? “With the introduction of the plastic ban, the market for biodegradable plastics has seen rapid growth. China’s biodegradable plastics market began to develop as early as 2012, but due to low demand in those early years, high raw material costs, and limited production capacity, the industry progressed slowly. Some of the companies that entered this market early were even forced to change their business models because of a persistent lack of orders. It wasn’t until January 2020 that the “Opinions on Further Strengthening the Control of Plastic Pollution” (hereinafter referred to as the “Plastic Ban Order”) was issued. This order called for the orderly prohibition and restriction of the production, sale, and use of certain plastic products, as well as the active promotion of alternative products. Thus, the policy officially shifted from “plastic restriction” to “plastic ban”. Affected by this, the market for biodegradable plastics, which serve as alternatives to traditional plastics, has seen significant growth with a surge in orders. We expect that during the 14th Five-Year Plan period, the biodegradable plastics market will maintain an annual compound growth rate of 11.3%, reaching an income level of over 50 billion yuan by 2025. Meanwhile, the price of biodegradable plastic products has been rising over the past year. For instance, prior to the plastic ban, the price of PLA was 20,000 yuan per ton; currently, in some regions, the market price has reached as high as 50,000 yuan per ton. This has directly improved the overall profitability of the industry; leading companies such as Jinfat Technology and Yifan Pharmaceutical achieved gross margins of nearly 40% in 2019 and 2020, a significant increase compared to 2018. The commercial adoption of biodegradable plastics is being hindered by costs. In 2021, the overall price range for conventional PE/PP plastics was between 7,000 and 8,500 yuan per ton. The price of PET ranged from 5,000 to 6,000 yuan per ton. Among biodegradable plastics, the price of PBAT was around 20,000 yuan per ton, while the price of PLA was even higher at 28,000 yuan per ton. Delivered to the end user, if the merchant uses biodegradable plastics, the cost increases significantly. Taking straws with a length of 23-24 cm as an example, the price for traditional PP straws is 0.05 yuan per straw, while paper straws cost 0.1 yuan per straw, and PLA straws cost 0.2 yuan per straw. The price of PLA is twice that of paper straws, and four times that of PP. “After the ban on plastic was implemented, businesses naturally opted for cheaper paper straws, making it difficult to fully develop the market for biodegradable plastics. The high costs are evident in every aspect. At the labor level, producing one ton of PBAT requires 16–20 workers, whereas only 4 workers are needed for PE (polyethylene plastic) ； In terms of equipment costs, the investment required per ton of PBAT is approximately 4,000 yuan/ton, while the investment per ton of PE is only about 1,400 yuan/ton ； In terms of energy consumption, according to Ruifeng High Materials’ environmental impact assessment data, the total cost of water, electricity, and natural gas per ton of PBAT is 712 yuan/ton. In contrast, the corresponding cost for PE is less than 600 yuan/ton. The largest cost item is raw materials. Taking PBAT, which has the fastest capacity expansion plans at present, as an example, raw material costs account for over 70% of the total cost; the main raw materials are PTA, AA, and BDO. The price elasticity coefficient of PBAT with respect to these three raw materials is approximately 0.4. In 2021, the price of BDO soared; it was around 12,600 yuan per ton at the beginning of the year, but rose to 31,000 yuan per ton by the end of the year, an increase of nearly 150%, which dealt a heavy blow to PBAT, which was in a phase of cost reduction. Some enterprises are already experiencing negative profit margins; at their worst, they incur losses of about 2,000 yuan per ton. Naturally, they have no incentive to resume production. According to media reports, recently **relevant ministries and industry associations organized a meeting between BDO companies and PBAT manufacturers, during which all parties reached an agreement: the BDO companies agreed to offer discounts to the PBAT manufacturers. Policy interventions will inevitably alleviate the cost pressures on related enterprises, but prices are ultimately determined by market supply and demand. As mentioned above, China has planned to build a production capacity of 7 million tons of PBAT. Based on the fact that 0.43 tons of BDO are required per ton of PBAT, these new capacities alone will demand 3 million tons of BDO. For comparison, China’s current total BDO production capacity is only 2.34 million tons per year. Although a capacity expansion plan of nearly 6 million tons per year was launched in 2021, the expansion cycle for BDO is around 2 years, meaning that this additional capacity will not be available on a large scale until at least 2023. What is even more noteworthy is that BDO is produced in China exclusively using the calcium carbide-acetylene method. Under the policy of dual control over energy consumption, it has become normal for calcium carbide manufacturers to limit their production, and it remains uncertain whether production levels will be able to keep up in the future. Taking all factors into account, the process of reducing costs for biodegradable plastics such as PBAT is a long and arduous one; failing to lower costs will directly suppress demand in the long term. Therefore, it is practically impossible to see a significant increase in their use in the short term. Degradable plastics are ultimately an industry with a very high degree of homogenization; all competition will revolve around cost. In the future, the industry will continue to evolve through a cycle of \"competition – cost reduction – increased demand – further competition – further cost reduction\", until production costs approach the theoretical minimum, or until market demand becomes less sensitive to costs. After several rounds of reshuffling, most manufacturers will be eliminated until an oligopolistic structure emerges in the industry. It should be noted in advance that price competition will become increasingly fierce as the production capacity of the entire industry increases. The investment required for a single 100,000-ton PLA production line is at least 1.5 billion yuan. Depreciation alone accounts for approximately 1,500 yuan per ton in the cost of PLA. As prices continue to decline, the pressure exerted by these fixed costs will only increase. Based on the previous loss of 2,000 yuan per ton, a production line with a capacity of 100,000 tons would incur losses amounting to 200 million yuan. If the production capacity is later increased to 500,000 tons, those losses could reach 1 billion yuan. This represents an unbearable burden for most companies in the industry; those with poor cost control capabilities end up having to give up their market share. Crazy competition: it only takes one year for a product to go from being in short supply to being available everywhere. The main types of biodegradable plastics include PLA (polylactic acid), PBAT (poly(p-terephthalate-co-butylene adipate)), PHA (polyhydroxyalkanoates), among others; currently, the two most common types of biodegradable plastics on the market are the first two. The table below shows the prices, gross profit margins, and production capacities of these three materials. In January 2020, the Ministry of Ecology and Environment issued the strictest plastic ban in history, which came into effect at the end of 2020. As a result, at the beginning of 2021, there was indeed a shortage of biodegradable plastics. Coupled with rising prices for raw materials, biodegradable plastics became extremely popular. PHA, the star among biodegradable plastics, is highly favored by investment firms due to the addition of the concept of synthetic biology. Seeing this booming trend, numerous listed companies hurried to enter the market, planning to add substantial new production capacity and establishing a large amount of intermediate-product production capacity. According to incomplete estimates, by 2025 the total production capacity of biodegradable plastics will reach 8 million tons, which is 3-4 times the actual demand. Greed will ultimately make this industry fearful. Furthermore, PLA, PBAT, and PHA have no bargaining power either upstream or downstream, and the cost of raw materials accounts for a high proportion. The raw material for PLA is corn; the raw materials for PBAT are petroleum and coal; the raw material for PHA is glucose. The cost of these raw materials accounts for over half of the total production cost. In the case of PBAT, the cost of raw materials even makes up as much as 90% of the total cost. For biodegradable plastics, no amount of effort can make up for a lack of inherent qualities. Costs such as manufacturing expenses and labor costs can be reduced through industrial optimization; however, raw material costs represent a “real burden” that cannot be lowered through one’s own efforts. Biodegradable plastics is a purely cost-sensitive industry. As long as the basic performance requirements are met, downstream customers are only concerned about the price. For example, the straws in bubble tea shops are made of biodegradable plastic, but it’s just a straw – customers don’t care about the material or brand of the straw. Using high-end materials does not improve the quality of the bubble tea, and biodegradable plastic also gives no bargaining power to manufacturers. The frenzied capacity expansion, coupled with the industry’s low standing, has eroded the profits of biodegradable plastics. Although biodegradable plastics were a hot topic in 2021, their actual profitability is far below the average level of the chemical industry. The table below shows the gross profit margins of companies in the biodegradable plastics industry for 2021 and Q1 2022. In the biodegradable plastics sector, companies can only operate at a loss in order to build awareness; they have passion but lack financial resources. Epilogue: The enthusiasm for investment and financing in the field of synthetic biology, both domestically and internationally, will continue. In 2021, foreign synthetic biology startups such as Zymergen (ZY.US) and Ginkgo Bioworks (DNA.US) went public, which in turn boosted activity in the primary and secondary investment markets related to synthetic biology worldwide. In 2022, the boom in synthetic biology also spread from abroad to China. Genz Capital has compiled recent domestic investment and financing activities in the field of synthetic biology. Currently, these activities remain concentrated in early-stage financing rounds, such as angel and Series A rounds. The chemical and pharmaceutical industries are the sectors where synthetic biology technologies are most widely applied. An article published by Yuanqi Capital on June 30, 2022, mentioned that driven by ESG demands and supported by carbon neutrality policies, the market potential and growth prospects for synthetic biology companies are quite promising. However, scaling up production and achieving commercialization have always been challenges to the profitability of these companies. As synthetic biology “platforms,” Zymergen and Ginkgo require high initial research investment, and the revenue generated solely from contract research services (CRO) is limited and not sustainable. If one lacks the ability to sustain hematopoiesis, even if financing can be continuously obtained from capital markets, valuations tend to drop to rock bottom once the initial enthusiasm subsides.