Plastic Balance Sheets

The post “Plastic Choking Waterways…and Portfolios” on October 8, 2021, laid out which companies are responsible for the fetid plastic fouling the land, oceans, lakes and rivers around the world.  Shareholders are well served by attention to the liability a company has accumulated as a consequence of their plastics output.

About 8.3 billion tons of plastic has been produced since the 1950s.  Unfortunately, only about 9% of all plastic is recycled and 12% is incinerated, leaving 79% of that plastic to sit in landfills or circulate at large on land or in waterways.  

The World Economic Forum in partnership with the Ellen MacArthur Foundation found that if plastic pollution continues at the current pace, the world’s oceans will contain more plastic than fish by the year 2050.  Yes, by 2050 the ocean could hold 937 million tons of plastic and just 895 million tons of fish.

Plastic is not just unsightly.  It is toxic.  Scientists sponsored by the United Nations estimate that as many as 1.0 million marine birds and 100,000 marine animals die after eating plastic.  At the current rate of plastic proliferation, by 2050 at much as 99% of the world’s seabird populations will be eating plastic.  The plastic breaks up into tiny pieces called ‘microplastics’ and enters the food chain.  Researchers in the United Kingdom estimate Britons already eat an average 70,000 microplastics each year.

Too small to see with the human eye and capable of entering the digestive systems of all living organisms, microplastic are particularly toxic.  These tiny bits of plastic can cause inflammatory lesions and oxidative stress.  Studies reveal the potential for metabolic disturbances, neurotoxicity and increased cancer risk in humans. 

As microplastics proliferate in the food chain, it seems highly likely that major producers of plastic could ultimately be vulnerable to class actions by the afflicted or their health insurance companies.  Some plastic producers might argue that it would be difficult to trace a microplastic back to the original producer and thus they cannot be sued.  However, the problem appears to be mushrooming to such as specter of danger that it seems plausible the largest of plastic producers could be held liable as a group.

In this post we review the balance sheets for each of the top plastics producers to determine 1) whether a pollution liability is recognized on the balance sheet or at least in management’s discussion and 2) how well fortified the balance sheet might be against a large legal action.

ExxonMobil (XOM:  NYSE) is typical of the oil and gas producers.  There is no liability for plastics pollution recognized on its balance sheet.  Indeed, there is no contingency for any of the myriad difficulties the world is now facing due to climate change that has resulted from the drilling, processing combustion of petrochemicals.  However, ExxonMobil has finally at least recognized the risks of climate change and the potential for regulatory action by various government jurisdictions, referencing the topic in one paragraph among the risk factors faced by the company.  However, there is not one single reference to liabilities associated with derivative products such as plastics.

Manufacturers of intermediate and final goods may have less insulation against environmental pollution.  Dow Chemical (DOW:  NYSE) has reported an accrued liability totaling $1.2 billion for “probable environmental remediation and restoration costs”, representing management’s best estimate of the price tag for future clean-up.  The company has also addressed risks to the company’s assets and investment returns presented by the impact of plastics on the environment.  It is one paragraph in the risks section of Dow’s annual report, but it does represent a significant step forward for Dow in at least acknowledging its plastic products can cause harm to human health and the environment.  The paragraph even lists a number of single use plastic products and forewarns that demand for its these items is at risk as consumers “selectively reduce their consumption of plastic products.”  More common place is a self-serving acknowledgement of a risk to sales and earnings due to changing consumer preferences for competitors’ non-plastic or recycled plastic products.

Dow is also set apart among the plastics producers, by setting a goal of collection and reusing or recycling at least one million metric tons of plastic waste by 2030.  Dow has also pledge to have 100% of its products sold into reusable for recyclable products by 2035.

PetroChina Company Ltd. (PTR:  NYSE) is representative another approach by petrochemical producers.  As is required in China since 2018, the company pays an environmental protection tax, for which the levy changes according to the amount of emissions relative to pollutant discharge standards in China.  PetroChina has paid taxes totaling $66.1 million for the three years the environmental tax has been in force.  For PetroChina this is the beginning and end of any concern for environmental liability.  This ‘pay the politicians’ tax and we are good’ mentality may very well protect operators in China and other parts of Asia where the accumulation of wealth trumps the environment.

 

TOP SINGLE-USE PLASTIC POLYMER PRODUCERS
Company	SYM	Operations	% Plastic Waste	Market Cap*
ExxonMobil Corp.	XOM	Crude oil and natural gas producer	5.9%	$263.2 B
Dow	DOW	Packaging, specialty plastics, intermediate chemicals	5.6%	$43.8 B
Sinopec Shanghai	SHI	Oil and gas refining, synthetic fibers, polyethylene resins	5.2%	$5.8 B
Indorama Ventures	INDOY	Petrochemicals, polyethylene resins	4.6%	$7.5 B
Saudi Arabian Co.	2222.SR	Integrated oil and gas producer	4.2%	$2.0 T
PetroChina Co. Ltd.	PTR	Integrated oil and gas producer	4.0%	$168.5 B
LyondellBasell NV	LYB	Petrochemicals, olefins, polyolefins	3.9%	$32.8 B
Reliance Industries	RELIANCE.NS	Oil and gas refining, distribution	3.1%	$240.0 B
Braskem SA	BAK	Thermoplastic resin producer	3.0%	$8.3 B
Alpek SA de CV	ALPEKA.MX	Polyester, plastics and chemicals producer	2.3%	$2.6 B
		Group Total	41.8%
*Foreign currency values converted to US dollars as of 10/11/21

 

TOP SINGLE-USE PLASTIC POLYMER PRODUCERS
SYM	% Plastic Waste	Cash	Total Assets	Environment Contingency		Book Value	Footnote Reference*
XOM	5.9%	$4.4 B	$332.8 B	-0-	$164.1 B		None
DOW	5.6%	$5.1 B	$61.5 B	$1.2 B	$13.0 B		Risk Factors
SHI	5.2%	$7.2 B	$45.5 B	-0-	$30.0 B		None
INDOY	4.6%	$14.9 B	$453.2 B	-0-	$135.2 B		None
2222.SR	4.2%	$76.1 B	$510.4 B	-0-	$293.6		Risk Factors
PTR	4.0%	$18.6 B	$389.7 B	-0-	$214.1 B		None
LYB	3.9%	$1.8 B	$35.4 B	-0-	$8.0 B		Risk Factors
RELIANCE.NS	3.1%	$25 B	$176.4 B	-0-	$106.7 B		Sustainability Pledge
BAK	3.0%	$9.3 B	$86.1 B	-0-	($3.9) B		Risk Factors
ALPEKA.MX	2.3%	$550.0 M	$106.4 B	-0-	$2.2 B		Circular Economy Pledge
Group Total	41.8%
*Reference to plastics pollution liability in management’s discussion and analysis of financial results.

 

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.