Since Swedish textile recycler Renewcell began operations at its first commercial-scale recycling plant last year, its biggest focus has been ramping up supply.

But the only thing investors wanted to hear about when the company’s third quarter results landed on Tuesday was how it planned to tackle an unexpected challenge: a lack of demand.

The company, which has developed technology to recycle used cotton textiles into a feedstock for yarns like viscose and lyocell, is among a cohort of material innovators in the process of moving from pilot to commercial scale production.

It’s a significant development for the industry, which is relying on the evolution of emerging recycling technologies, bio-fabricated materials and a shift to greener agricultural practices to help meet incoming government sustainability regulations and brands’ own climate commitments.

But last month, Renewcell provided an unsettling update: while production was continuing to ramp up, the anticipated demand wasn’t there; just 129 tonnes of Circulose — the branded cellulose pulp it produces — was delivered in October, a sharp drop off from 1,500 tonnes in September.

The news blindsided investors, sent the company’s stock plummeting and prompted the abrupt departure of former CEO Patrik Lundström. But beyond that, it highlighted the precarity of fashion’s ambitions to bring materials with lower environmental impact to market, underscoring structural market challenges facing the whole sector.

“When you try to do something in a different way than what has been done before and change a process that involves so many people and so many parts of their organisations, it takes a lot,” Renewcell acting CEO Magnus Håkansson told analysts during a call for the company’s third quarter earnings on Tuesday. The bottom line: “Do the brands want this to happen?”

Complex Supply Chains and Mixed Signals

Though big brands need materials like Renewcell’s Circulose to scale to meet sustainability commitments, the industry is poorly structured to translate that intention into real demand.

Supply chains are fragmented and opaque, meaning innovators need to convince a complicated web of players to buy into what they’re bringing to market. Meanwhile, sourcing teams, who make purchasing decisions about brands’ material mix for each season, are typically disconnected from sustainability strategies — more focused on lowering costs than environmental impact.

Renewcell has tried to make strategic moves to overcome these supply chain hurdles, signing offtake agreements with fibre producers like Lenzing and Sanyou and forming a supplier network of more than 100 yarn and textiles manufacturers who have committed to offer products made with Circulose.

But brands are the ultimate power players here, with suppliers focused on delivering products that meet their requirements. And big brands’ buying teams are ultimately looking to secure material as efficiently as possible at the lowest possible price. That leaves little space for the additional complexity and price premiums that come with working with new innovations.

“There is such a gap between top management and leadership on sustainability,” said Nicolas Prophte, a member of the steering committee for The Denim Deal, a Dutch initiative focused on increasing the proportion of post-consumer recycled content in jeans. “[It’s] disconnected from the business.”

Brand’s including Zara-owner Inditex, Levi Strauss & Co and H&M Group (a major investor in Renewcell) have already worked with feedstock supplied by the recycler’s pilot plant to develop capsule collections. But that hasn’t translated into sales as commercial supply has ramped up.

While the company has sold some 14,000 tonnes of Circulose to date, most of that is still sitting with a sales agent. Only a few thousand tonnes has been delivered to fibre producers and hardly any finished material has reached brands. A commitment from Inditex late last month to buy 2,000 tonnes of fibre containing Circulose was a positive signal to the market, but it’s not enough for Renewcell to live on, Håkansson said in an interview.

“The real demand has to come from the big brands,” he told analysts on Tuesday’s earnings call. “We are ready. We have the production capacity, we have ramped up sufficiently to serve the market, we have the commitment from the fibre producers. But we need more commitment from the brands.”

A Tricky Market

These structural challenges might be less acute if the market weren’t so uncertain at the moment.

Demand for cellulose-based fibres has been down all year and is taking longer to recover than many had anticipated. Apparel retail sales dropped 5 percent in Europe and 3 percent in China in the third quarter, Lenzing said on an analyst call for its third quarter results last week. Heightened geopolitical tensions have dampened any optimism that things could turn around swiftly. Even luxury is feeling the chill.

Those market dynamics are ricocheting through the sector, discouraging suppliers from taking on the risk of devoting time and capacity to producing and marketing new materials that retail at a higher price point, aren’t well known in the market and may require additional spend and effort to incorporate into the production process and meet quality requirements.

“The current environment doesn’t help: There’s a lot of restructuring, it’s extra difficult to absorb premiums and that further triggers short-term thinking,” said Katrin Ley, managing director at sustainable fashion incubator Fashion for Good. “Money isn’t flowing as easily.”

Circulose is roughly 50 percent more expensive than conventional wood pulp, according to a presentation delivered by the company at its capital markets day in May.

Ultimately though, near-term market dynamics are less significant than companies’ willingness to actually make good on sustainability commitments, Håkansson said. With scale, the premium for Circulose could come down and fibres spun from the feedstock are already cost competitive with other lower-impact raw materials like organic cotton or lyocell, according to Renewcell. Available volumes are currently so small that any additional cost is marginal in the scheme of brands’ overall purchasing budgets, the company argues.

“To be sober about it … it’s also a cost game out there and that is not benefitting our case,” Håkansson told analysts. “There has to be a stance taken for circularity, on sustainability to outweigh this.”

Navigating ‘The Valley of Death’

Renewcell’s struggles represent an emerging, but urgent set of challenges facing the industry’s efforts to bring lower-impact materials to scale as more technologies reach maturity and begin the precarious process of coming to market.

“There are two valleys of death that are incredibly challenging for material innovators,” said Fashion for Good’s Ley. The first is at the lab stage, when founders first need to convince venture funders to get behind them. But what the industry is facing now is the second, when a much larger infusion of long-term capital is needed to support infrastructure investments and underwrite the bumpy and uncertain path any new material faces in penetrating the market

Roughly $400 billion is going to be needed to scale up the new material and process innovations required to deliver on fashion’s climate commitments, according to a report published last month by Fashion for Good and private equity firm Spring Lane Capital. Based on the current state of play, that leaves the industry facing a massive shortfall in supply of lower impact raw materials come 2030 when many sustainability commitments come due, according to an analysis by consultancies BCG and Quantis and trade group Textile Exchange.

“Supply chain partners are not yet getting a really clear message aligned across the brands,” said BCG partner Jocelyn Wilkinson. “They have to give confidence and that means placing orders.”

Increases in government regulation in key markets including China, Europe and the US should help support investment, bringing new requirements for companies to include more recycled content in their products and ensure textiles are recycled at the end of their life. But the legislative process is slow and brands are typically reactive rather than proactive in preparing for new rules.

In the meantime the industry needs to find a way to navigate the tricky balance between short-term cost pressures and long-term sustainability ambitions. That means brands need to put skin in the game and start placing orders, industry watchers say.

To break even, Renewcell needs to sell just 3,500 tonnes a month of cellulose pulp, a drop in the ocean of an addressable market that the company estimates stands at 7 million tonnes today. At its current burn rate, the company has enough liquidity to cover two more quarters before it needs to seek additional capital or risk collapse.

The company said it is in positive discussions with companies across the supply chain.

“I believe it’s possible to build momentum,” said Håkansson. “[But] we need big brands and leadership to take a bigger stand.”