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Prospects for a post-Covid circular economy | August 2020

Prospects for a post-Covid circular economy

 

Following the Coronavirus crisis, many governments have been keen to put in place ‘green recovery’ programmes, combining the need for economic growth with sustainability. This has been a key part of politicians’ ‘messaging’ – that the crisis should be used as an opportunity to create sustainable economies and that a ‘rebound’ must not come at the cost of the environment.

The development of a ‘Circular Economy’ is one element of these programmes. Although not new, the concept of supply chains structured around re-cycling, refurbishment, re-manufacture, re-use and the prolongation of product life, is being taken up by governments with renewed enthusiasm for reasons which will be discussed below.

Since the crisis, many politicians have sought to highlight the inability of linear global supply chains to deliver

Personal Protective Equipment (PPE) and have promoted localization of production as a potential alternative, not just for PPE but for medicines, food and other critical supplies. In many people’s minds, future resilience will only be achieved by reducing economies’ reliance on extended supply chains which have been shown to be at risk from protectionist trade measures, production bottlenecks and transport disruption. Circular supply chains form a key part of this narrative, as they reduce reliance on global sources of raw materials and promote higher levels of (re-)manufacturing activity in locations within end-markets.

Before the advent of Covid 19 one of the main issues on politicians’ agendas was the ‘climate emergency’ which was increasingly influencing the development of public policy. ‘Circularity’ provides a potential solution for many environmental problems as well as making supply chains more resilient in the face of crises – not only that caused by Coronavirus but also others related to security (such as Huawei’s involvement in the construction of 5G networks).

This mix of public policy goals can be bundled together as a way of achieving so-called ‘strategic autonomy.’ According to European Commission President Ursula von der Leyen, speaking in April 2020, “A circular economy will make us less dependent and boost our resilience. This is not only good for our environment but it reduces dependency by shortening and diversifying supply chains.”

Hence, circularity is being promoted as a way in which supply chains can be made more resilient, alongside other strategies such as re-shoring, near-sourcing and ‘optionalisation’/’China+’

 

Conflation of Strategic Autonomy/Sustainability Goals

 

For the European Union, China and the US are clearly the targets of this policy. A Greek MEP, Anna-Michelle Asimakopoulou, put it bluntly. ‘We need policies that safeguard and grow our industries against Chinese unfair competition and President Trump’s out-of-control tariff diplomacy.’ Talking about China specifically she went on, ‘It is baffling that we are only just waking up to our reliance on what the European Commission calls “a systemic rival”.

For some raw materials, Europe and North America are widely self-sufficient. However, for many Critical

Raw Materials (CRMs) used in the high tech sector (e.g. antimony, beryllium, cobalt, gallium, germanium, indium, platinum group metals (PGMs), natural graphite, rare earth elements (REEs), silicon metal, and tungsten) this is not the case and the regions are highly dependent on China in particular.

For Europe, the figure below for the CRM, Gallium, shows that the vast majority of the element ends up in landfill with only a tiny proportion recycled. One of the difficulties of recycling Gallium (a problem shared by many other materials) is the dispersed nature of the element throughout a product. In many respects the waste highlights the technical and economic challenges which have slowed progress towards circular supply chains and which will have to be overcome if the concept is to become reality.

 

Sankey diagram of Gallium usage in Europe

 

Consultancy Gartner believes that the transformation of supply chains will take place over the next ten years. A survey which was undertaken in 2019 suggested that 70% of what they call ‘supply chain leaders’ will invest in the circular economy over the following 18 months.

 

WHAT DOES A CIRCULAR ECONOMY MEAN

 

As I write in my book ‘Supply Chain Ethics’3, the circular economy is seen as an alternative to existing ‘linear’ economies where products, materials and components are discarded when their usefulness comes to an end, also known as ‘take, make, waste’. Whilst in the latter model, the value of materials reduces to zero over the lifetime of the product, in a Circular Economy, design at the outset ensures that these materials retain some of their value which consequently ensures that it is economically viable to re-use them in one function or another.

In a traditional manufacturing process, ‘virgin’ materials are typically used and there is the assumption of cheap and easily accessible energy. External costs of disposal and the wider environmental disbenefits generated throughout the manufacturing process are borne by society and not the producer or the consumer.

The Circular Economy would mean that there would be fewer virgin materials used and this has a double benefit. Firstly, it means that there is less impact on the environment in terms of the extraction of these materials – a key point in terms of sustainability. Secondly, there will be less reliance on the countries which provide these materials e.g. China.

In effect, circularity divorces economic growth from the consumption of natural resources, resulting in economic and environmental benefits as well as improved supply chain resilience.

However, the shift from linear supply chains to circular will be very challenging. Marina Mattos, a Postdoctoral Associate at the MIT Center for Transportation and Logistics, comments, “A critical supply chain challenge is how to reconfigure distribution channels, forecast methods and technology to generate value across business ecosystems. To achieve this goal, companies must create new business models and improve supply chain management functions.”

One way in which to improve levels of circularity will be to reduce product complexity and this can only be achieved at the design phase. If a product contains multiple materials, each one will have its own ‘loop’ which in turn will have to be closed if circularity is to be attained.

In March 2020 the European Commission set out a number of policy objectives within its Circular Economy Action Plan, part of the ‘European Green Deal’. At the time, Executive Vice-President for the European Green Deal, Frans Timmermans, commented, “To achieve climate-neutrality by 2050, to preserve our natural environment, and to strengthen our economic competitiveness, requires a fully circular economy. Today, our economy is still mostly linear, with only 12% of secondary materials and resources being brought back into the economy.” The objectives include:

  • improving product durability, reusability, upgradability and reparability, addressing the presence of hazardous chemicals in products, and increasing their energy and resource efficiency;
  • increasing recycled content in products, while ensuring their performance and safety;
  • enabling remanufacturing and high-quality recycling;
  • reducing carbon and environmental footprints;
  • restricting single-use and countering premature obsolescence;
  • introducing a ban on the destruction of unsold durable goods;
  • incentivising product-as-a-service or other models where producers keep the ownership of the product or the responsibility for its performance throughout its lifecycle;
  • mobilising the potential of digitalisation of product information, including solutions such as digital passports, tagging and watermarks;
  • rewarding products based on their different sustainability performance, including by linking high performance levels to incentives.

 

IMPACT ON TRADE

 

Given that a large proportion of the raw materials and finished goods consumed in Europe and North America are produced in Asia (specifically China), a move to a Circular Economy could have a profound impact on global trade. Fewer products would be shipped due to a combination of a reduction of demand (as products would have longer lives and more assets would be ‘shared’ thereby increasing asset utilisation) and an increasing amount of goods and components remain in circulation in consumer markets. User perception and behaviour will also have an important impact on demand for new products. If consumers can be convinced that using refurbished products involves no diminution of quality; no issue with data protection (for electronics) and is more socially acceptable, then there will be less reason to buy new releases of goods.

 

Impact of Circular Economy on Trade

 

The effect of the shift is shown in the figure below. Presently large volumes of new products and raw materials are shipped typically from Asia to the rest of the world. They start off with high value but rapidly their value diminishes and a large proportion of the volume ends up in landfill. If refurbishment technology can be improved, if products can be designed for recovery of parts and if the concept of circularity and ‘sharing’ is accepted by consumers, a much greater proportion of parts and products will stay in circulation in the end user markets.

This will mean that shipment volumes from Asia will necessarily decrease although it is impossible to say by how much. In terms of raw materials, the IIEP says, ‘In the EU, the supply of primary raw materials remains a necessity as, even with all waste turned into secondary raw materials, the demand for raw materials would still exceed this amount.’

 

The shift from Linear to Circular Supply Chains

 

If materials can be recovered in Europe and North America, they can be used to feed local manufacturing presently dependent on their import. They may even be exported back to other manufacturing locations in developing markets as input into intermediate components. Unless Europe and North America develop/reshore far greater downstream manufacturing capabilities, however, it would seem unlikely that recovery of materials would have a major impact on volumes of finished goods being imported from Asia. At present, the low cost labour available in these markets for the assembly of products is too much of a competitive advantage although this may change with the development of 3D Printing.

One sector which may benefit is the trade of second-hand goods to developing countries. However, the benefits are not unalloyed. Exporting products which have reached their end-of-life in developed markets has the effect of breaking the closed loop systems which are being set up to ensure recycling/refurbishment etc. Once a product has been exported it is difficult to enforce ‘extended producer responsibility’ regulations or to ensure that the product is properly dealt with once its value has diminished to such an extent that there is no further use for it in its secondary market.

As part of its Action Plan, the European Commission (EC) has spoken about ‘mainstreaming circular economy objectives in free trade agreements, in other bilateral, regional and multilateral processes and agreements, and in EU external policy funding instruments.’ What this actually means for future trade arrangements remains to be seen but ensuring closed loop systems may be part of its objectives.

 

THE ECONOMIC IMPACT

 

The shift to a Circular Economy could have positive economic benefits. The Ellen McArthur Foundation published research which claims that the circular economy could result in a net materials cost savings opportunity for the high tech and automotive sector of $340 to $380 billion p.a.5 rising to $520 to $630 billion p.a. for more radical changes. For the FMCG sector (packaged food, apparel, beverages etc), circularity could bring savings of over $706 billion p.a. According to the EU, manufacturing firms spend on average about 40% on materials. It believes that ‘closed loop’ models can increase companies’ profitability, while sheltering them from resource price fluctuations.

It is hoped that by investing in refurbishment technology, more value will be retained in a product, allowing the re-seller to sell at a higher price. This will generate value in the supply chain which will allow for investment in reverse logistics and additional technologies creating a virtuous cycle. This could be reinforced by establishing second-hand markets with more transparent pricing as well as information on condition and performance – important issues when overcoming the barriers for consumers of buying pre-used devices.

 

High tech

This sector is of high priority given that waste levels are continuing to rise (in the EU they are growing at 2% a year and that less than 40% of electronic products are recycled. An Ellen Macarthur Foundation report estimated that in 2016, 44.7 million tonnes of e-waste were generated globally, of which 435 thousand tonnes were mobile phones. In Europe an Ecodesign Directive has been proposed which will increase products ‘energy efficiency and durability, reparability, upgradability, maintenance, reuse and recycling’. There are also plans for a ‘common charger’ across brands and an EU-wide take back scheme for old phones.

 

Batteries and vehicles

Given the importance of electric vehicles (EVs) to the automotive sector, the volume of batteries which will need to be disposed of at their end-of-life will be very substantial. One estimate suggests that for sales of EVs in 2017 alone, this would amount to 250,000 tonnes or 0.5m cbm of unprocessed waste7. For this reason the EC is implementing rules on recyclable content and the recovery of valuable content in Europe. It is also promoting ‘product-as-a-service models’ to ensure better utilization of existing assets, which will reduce the demand for virgin materials. Lithium-ion batteries contain cobalt which is mined extensively in the Democratic Republic of Congo. The industry there has attracted criticism for child labour practices, environmental mismanagement and the sale of conflict minerals to support local warlords. Recycling this element within the end-user market would reduce this reliance although efforts are being hampered as batteries are presently difficult and dangerous to disassemble.

 

Plastics and Plastic Packaging

With packaging requirements reaching record levels due to a surge in home shopping during the Coronavirus, the reduction of over-packaging is a priority for all administrations. The reduction of the complexity of packaging is being researched and this will help to increase recyclability. A labelling system for different types of packaging is also being assessed.

Much of regulators’ focus is being directed towards the reduction of microplastics and the marine pollution by single use plastics. According to the World Economic Forum, 95% of plastic packaging material value ($80–120bn) is lost annually after a short first use8. Regulations could include mandatory requirements for recycled content and other waste reduction measures. However, as the Institute for European Environmental Policy puts it, ‘…the current trends of a restriction in opportunities for the export of plastic waste for recycling, suggest a need to develop a more active European market for recycled plastics, alongside measures to reduce the generation of plastic waste. The challenge lies in the lack of well-defined quality standards for plastic waste and recycled plastics.’

 

Textiles and fashion

Only an estimated 1% of textiles are recycled into new clothing resulting in an economic loss of more than $100 billion of materials a year10. There are hopes that it would be possible to create a secondary market which would stimulate textile re-use and other initiatives such as providing better access to repair services. There may also be laws such as extended producer responsibility which pushes the responsibility for recycling upstream.

 

Global material flows for clothing

 

Construction and buildings

The construction sector accounts for about half of all extracted materials and, at 374 million tonnes, generates about 35% of the EU’s total waste. Whilst 70% of waste is collected, it is usually used in ‘backfill’ – filling in holes on construction sites. The challenge will be to preserve the value of construction waste which would make recycling economically worthwhile. Other non-market led interventions may include minimum recycled content requirements for some construction projects.

 

CONSEQUENCES FOR LOGISTICS

 

Logistics will have a key role to play if government and industry are to facilitate the transformation of supply chains from linear to circular. Geographic considerations are important as companies may have marketing distribution structures in place in multiple countries, but not the ability to handle returns, refurbishment, redistribution, recycling, maintenance or the ability to enable the other important aspect of circularity, ‘sharing’. A further challenge is creating a predictable flow of returned goods which would allow a stable structure to be put in place to handle them.

The development of distribution structures will be one way in which 3Pls will be able to support their customers. Many of the larger logistics service providers have dense international, national and local networks of facilities. Express companies will, for instance, be able to ramp up returns operations using parcels shops. Logistics companies can provide testing and repair services before re-introducing the products back into the supply chain (increasing so-called ‘inventory velocity’). Although these services have been provided for several decades, 3PLs will benefit from bigger volumes at higher margins. In addition, logistics providers may also undertake the recovery of materials from end-of-life product as a value adding service, either through partners or at their own facilities.

There certainly seems to be an appetite for more ‘reverse logistics’. The Gartner survey referenced above showed that 27% of respondents are already using digital technologies for reverse logistics and that a further 39% intend to do so in the next two years. This, the authors believe, shows the increasing levels of interest in integrating the returns process into existing operations.

That being said, many elements of a circular economy will have negative consequences for the logistics industry. The transition from linearity to circularity will result in less international transportation, as fewer finished goods and raw materials are moved out of Asia. There will be less warehousing space required to store internationally sourced goods or packaging required to protect them. On the other hand, this shift will benefit domestic and regional logistics providers – mainly road-based – as increased levels of secondary raw materials, intermediate and finished products circulate within markets.

 

CONCLUSION

 

The likelihood of a transformation of economies from linear to circular is unlikely to be driven by the market alone or be achieved in a short period of time. Presently the lack of value left in products and their constituent parts once ‘out of the wrapper’ militates against new circular business models being established, at least in mass markets. However, this may change. Governments may be minded to intervene in markets where they believe external disbenefits are not being addressed. These disbenefits include environmental impacts as well as security or medical (eg PPE), from a ‘strategic autonomy’ perspective. This intervention could well take the form of taxes on consumption and on production as well as increasing regulations such as producer responsibility. This may create a compelling case for companies to create circular supply chains through a series of local recovery, regeneration, repair and recycle loops.

Parts of industry prefer a different approach. According to Tech UK, a technology membership organisation, governments should, ‘Encourage market pull for non-virgin products and materials: Focus on positive incentives and tackle the disjointed approach which adds complexity to the policy landscape and generates perverse incentives that discourage the right behaviours.’

As far as the logistics industry is concerned, circularity will benefit domestically-focused, road freight-based or value adding logistics companies. However, there will inevitably be negative consequences for international transport companies and freight forwarders. As Europe and North America strive for greater levels of ‘strategic autonomy’ and sustainability, volumes from Asia and particular China will face a concerted headwind. The extent of this headwind is yet to be determined and to a large degree depends on the level of government intervention in the sector.

 

ABOUT THE AUTHOR

Professor John Manners-Bell
Chief Executive
Transport Intelligence

Professor John Manners-Bell is Chief Executive of global market research organisation Transport Intelligence and Honorary Visiting Professor at the London Metropolitan University’s Guildhall Faculty of Business and Law. He has been a long time adviser to the World Economic Forum chairing its Logistics and Supply Chain Agenda Council and leading specific projects related to Risk, Ethics, E-commerce, Supply Chain Talent and Food Losses. He has also advised numerous organisations including the European Commission, World Bank and Inter-Americas Development Bank as well as providing evidence on Brexit to a UK House of Lords Select Committee. He has written five books on the industry – including ‘Supply Chain Risk Management: Understanding Emerging Threats to Global Supply Chains’. This won the Mention Speciale ACA-Bruel Prize for supply chain literature in 2014 and the Royal Logistic Corps Foundation award in 2015.

 

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