Recycling Markets and Commodity Markets

The circular economy is emerging as a key lever both for the ecological transition and for the security of supply. In this context, it is becoming increasingly important for procurement departments to understand how recycling markets for different commodities interact with markets for primary-source commodities, and how prices in these two areas influence each other.

A stylized map of the circular economy

Materials entering recycling processes move through several stages within a specific value chain. They originate as production scraps from the processing of virgin raw materials or as waste and scrap generated during the use of finished products, and they eventually become recycled materials used as substitutes for primary commodities.
The figure below presents a stylized map of this system, placing the process of using virgin raw materials alongside the recycling process of scraps, waste, and end-of-life materials.

The map highlights two main markets that contribute to shaping the recycling economy. The first concerns the commodity still in its scrap or waste stage; the second relates to the recycled commodity, which can act as a substitute for the virgin commodity. It is therefore useful to distinguish between a market for “commodity scrap” and a market for the “recycled commodity.”
Alongside these two markets within the recycling economy, there is naturally the market where the virgin commodity is traded. Strong interconnections exist among these three markets. As the circular economy expands, the relationships between the scrap market, the recycled commodity market, and the virgin commodity market tend to strengthen, increasingly influencing one another. In this context, analyzing only the functioning of the virgin commodity market may be too limited. It becomes necessary to extend the analysis to the markets within the recycling economy and to the relationships linking them.

Each of these three markets is associated with a price: the price of the virgin commodity, the price of the recycled commodity, and the price of the commodity scrap. Understanding how these prices influence one another is essential for analyzing how raw material markets function in a context characterized by the growing importance of the circular economy.

Interactions between scrap prices, recycled commodity prices, and virgin commodity prices

In this first stage of the analysis of the relationships between recycling markets and the virgin commodity market, several case studies were examined, focusing on measuring how prices in the three markets influence one another. As a measure, the long-term elasticity of changes in one price with respect to changes in the others was used ^[1]. Elasticity is a dimensionless measure, meaning it has no unit of measurement, which allows for an immediate assessment of the strength of the relationships between prices.
The cases analyzed (aluminum, PET, and polypropylene) concern markets in which recycling plays a significant role in the EU market. In these markets, the share of consumption covered by recycled material is substantial, and the relationships between scrap prices, recycled commodity prices, and virgin commodity prices therefore become particularly evident.

The case of aluminum

The case of aluminum is particularly relevant due to the significant role that recycled (or secondary) aluminum plays in total aluminum consumption in the EU. This share is generally estimated to range between 40% and 60%, depending on the source.
The figure below shows the relationships between prices in the different markets considered. In addition to the prices of aluminum scrap, primary (virgin) aluminum, and secondary (recycled) aluminum, the price of alumina has also been included. The latter is closely linked to the price of primary aluminum, but it may also have relationships with aluminum scrap, as both can potentially act as inputs within the aluminum value chain.
The figure reports both the estimated elasticities between the different prices and the average level of the various prices over the period 2020-2025. Differences in the average prices provide a first indication of the economic importance of the different processes that allow the transition between the various stages of primary and secondary aluminum production.

The estimated elasticities between the different prices highlight the strong relationship that scrap prices have with both primary aluminum prices and secondary aluminum prices. In the case of aluminum, the two recycling markets therefore appear to be significantly integrated. Through the scrap market, moreover, the recycling economy also appears to be strongly connected to the primary aluminum market. Scrap prices also show a relationship with alumina prices, although with a lower intensity.
By contrast, the prices of primary aluminum and secondary aluminum, both quoted on the London Metal Exchange (LME), appear to be relatively weakly correlated. This result may reflect the strong link that the primary aluminum price quoted in London maintains with the corresponding price traded on the Shanghai Futures Exchange, both of which are influenced by conditions in the global aluminum market. Conversely, the price of secondary aluminum quoted on the LME tends to reflect European market conditions more closely.

The case of polyethylene terephthalate (PET)

The share of recycled PET in total PET consumption in the EU is estimated to be around 25%. This share is currently experiencing strong growth, also driven by the increasing consumer preference for packaging made from recycled materials.
The figure below shows the relationships between prices in the different markets considered. In this case as well, in addition to the prices of scrap, virgin PET, and recycled PET, the price of terephthalic acid has been included, as it is the main production input for PET.

In the case of polyethylene terephthalate as well, the price of scrap acts as the link between the recycling market and the virgin PET market. In this case, the relatively weak relationship observed between the price of recycled PET and that of virgin PET seems to reflect the higher level of standardization of virgin plastics compared with the greater differentiation of recycled PET, which often meets a more specific and segmented demand. A possible confirmation of this interpretation is provided by the average price level of recycled PET, which is very similar to that of virgin PET. This result is possible only if the potential quality gap of the recycled material is offset by a higher degree of specialization in demand.

The case of polypropylene

The share of recycled polypropylene in total industrial uses of polypropylene in the EU is still relatively limited. This makes it possible to analyze how the relationships between the recycling market and the virgin raw material market may evolve as the share of recycled commodity in total consumption increases.
The figure below summarizes the relationships between the different prices, including the price of propylene, the main feedstock used in the production of polypropylene.

The elasticities shown in the figure describe a more linear structure of relationships between prices in the recycling market and those in the virgin material market. Scrap prices appear to be mainly linked to the price of recycled polypropylene, while the relationship between the primary and secondary markets seems to operate mainly through substitution effects between recycled polypropylene and virgin polypropylene. In this case, the scrap market therefore appears to play a less central role than in the cases of aluminum and PET.

Conclusions

The analysis of the three cases considered shows that the recycling economy of commodities does not constitute a system separate from the market for virgin raw materials, but is instead closely integrated with it. The intensity and structure of this integration, however, can vary significantly depending on the specific commodity.

In the case of aluminum and PET, the scrap market plays a central role in linking the recycling market with the virgin raw material market. Through scrap prices, a large share of price changes is transmitted across the different stages of the production chain. In these markets, the recycling system therefore appears to be strongly integrated with that of primary production.

In the case of polypropylene, however, a different structure emerges. The connection between the primary market and the recycling market seems to occur mainly through substitution effects between recycled and virgin material, while the scrap market plays a less central role. This result is consistent with the still relatively limited role that polypropylene recycling plays in the overall consumption of the commodity.

Overall, the results suggest that, with the growth of the circular economy, the analysis of raw material markets can no longer be limited to the study of the virgin commodity market alone. Understanding how scrap markets and recycled commodity markets function is becoming increasingly important in order to correctly interpret price dynamics and the relationships between the different stages of raw material value chains.