The circular economy ‒ reusing materials and reducing waste ‒ is a critical strategy for delivering a lower-emission, more sustainable future. It’s the goal of countless regulatory initiatives, not least the United Nations Plastic Treaty currently under negotiation, and has been adopted as a key part of the business vernacular. However, despite this rising tide of corporate commitments and regulatory targets, the global economy remains wedded to an extractive, rather than circular, model. 

Businesses have been slow to fully embrace circularity for multiple reasons, not least economics. There is money to be made from circularity, but allocating margins fairly across fragmented value chains is difficult. As the biggest beasts in the value chain – with the greatest capital and capability ‒ there is a compelling responsibility on commodity-producing companies to take a lead. However, corporate targets today remain stubbornly focused on individual companies, rather than on measures that would enable the entire circular value chain to thrive. 

Companies need to explore different ways of building relationships across industries for circularity to flourish. In this report, we focus on three key initiatives across different industries – electronics, plastics and biofuels ‒ where companies have come together in precisely this manner, pointing a way forward for other sectors too. Through joined-up thinking, a pathway to increased circularity remains open. 

A circular value chain is only as strong as its weakest link. If one company has no incentive to participate, the whole value chain can break down. In established, commoditised markets (such as gasoline), value allocation is coordinated by the price signal. However, in nascent, pre-commoditised markets typical of circular value chains (such as biofuels), transparency is lacking, presenting commercial challenges to businesses trying to make progress on circularity, among them: 

• International oil companies (IOCs), technology companies and waste management firms all operate with different capital bases, risk appetites and cashflow needs, complicating expectations about what ‘fair value’ looks like. 

• Without a clear route to value, waste-processing companies and new technologies will not be induced to bring supply to the market.  

Moreover, there are operational challenges for companies adopting circular business models. For starters, new systems need to be put in place to track material flows and staff will need to be trained to act in ways that promote the value chain as a whole. Sales and procurement teams, for example, need to operate differently when success depends on the whole value chain rather than just their own business.  

These challenges, though, can be overcome as long as the system can generate sufficient cash. We see three broad circular product models where that can happen. 

First, products where supply from waste costs less than virgin production. These are typically markets with the highest rates of secondary material usage and the closest to commoditised markets. Collecting plastic bottles to make fibres is a good example, with a global recycling rate of 56%. 

Second, products where the cost of the processed waste supply is at a premium to virgin production. But that premium can be easily absorbed in the price paid by the end consumer because of the fractional impact of material cost on the price of the final product. 

Third, products that come at a cost premium that cannot be absorbed by the consumer. Fuels are the classic example. Here, the margin must be supported by policy ‒ usually through demand mandates – but this can be substantial. While a typical refinery could generate a net margin of 2-5%, the equivalent for renewable diesel, for instance, has been 20-35% in recent years. 

LYB’s enthusiasm for joint ventures as a means of aligning external expertise with its core competencies to help it reach its ambitious 2030 targets has seen subsequent investments in waste management and technology companies as it seeks to build capacity 60-fold. 

Fuelling the future through vertical integration 

Biofuels – fuels derived from non-fossilised organic matter and its processed derivatives ‒ will play a key role in the journey to net zero, providing carbon-neutral molecules to power hard-to-abate transport sectors. Eni is a leading biofuel producer with ambitious plans to expand from 1.7 million tonnes per annum (mtpa) of biorefining capacity in 2023 to 5 mtpa by 2030, during which time global production is forecast to expand by one-third. 

A key challenge to the growth of the sector comes from the need to secure reliable access to sustainable biofeedstocks, which are severely constrained. To derisk the availability of feedstocks in future, Eni has invested in vertical integration into the agricultural sector in Africa. Recognising that its capital and expertise could be used to benefit farmers in the region, Eni has helped source land that does not compete with food production and provides security of income to farmers through its long-term feedstock needs.  

In return for this upfront capital investment, Eni will fulfil 20% of its feedstock needs, providing a material hedge against future volatility and boosting the market through ‘greenfield’ investment. 

Adding value to value chains 

What marks these three case studies as examples to emulate is not that they provide a template. Joint ventures are not ‘the solution’ to recycling, not all refiners should invest in farming and e-waste will require more than the CEP arrangement to drive circular outcomes in the future.  

What they show is that adopting the right forms of value-chain relationship – driven by the needs of the company and the value chain – can serve to introduce coordination, laying the foundation for circular value chains to grow together.