At first glance the outlook for the rigid plastics industry looks rosy. In a survey published by the british plastics federation in july last year, more than 60 of plastics companies predicted an increase in annual turnover and many of those businesses have since gone on to deliver on this prediction. However, what&rsquos also come to pass over the same period is their forecast that profits would remain flat as a result of crippling raw material price rises and fluctuating demand. So just how healthy is the rigid plastics sector at the moment and what opportunities and challenges loom large on the horizon it&rsquos difficult to assess the true health of the rigid plastics industry as a whole.
There are relatively few public companies so much of the financial information proffered forth is unverified or anecdotal. One public plastics group that does have to issue statements about its financial performance is rpc, which recently reported that revenue and profitability had increased significantly over the last six months. Despite this strong showing ron marsh, group chief executive of rpc, says things are not easy at the moment. &ldquothe industry has managed to pass raw material price rises on to the customer but you&rsquore getting more money tied up in working capital as a result of the cost of materials being higher.
There&rsquos always a lag factor because you don&rsquot recover the cost of the raw materials until after a period, whether that&rsquos three months, six months or longer. This has taken a toll on people&rsquos financial performance in the sector.&rdquo those companies that have performed well despite the raw material price hikes are the ones who have responded to consumer trends by delivering cutting edge packaging concepts. In the rigid plastics world innovation is a tried and trusted formula for success, according to nicholas mockett, an m&a expert at moorgate capital. &ldquothe more innovative packaging companies do tend to be more likely to make profits.
Of course there will be diminishing marginal returns at some point but unique intellectual property helps lock in business at better margins and customers often pay more for something novel which helps their product stand out on shelf or have a longer shelf life or be more consumerfriendly.&rdquo that&rsquos where groups like rpc and linpac play to their strengths. Although linpac&rsquos vicepresident of marketing and innovation jo stephenson admits that the sector faces serious challenges she says that demand has remained stable and significant trends are emerging that are driving packaging design changes. &ldquofor example, consumers are eating more cheap cuts, minced products and white meats instead of more expensive read meat joints in the protein sector,&rdquo says stephenson. &ldquothis leads to changes in packaging demand trends in terms of different pack size standards, split packs for portion control and extended shelf life and new flexible packaging demands.&rdquo shifting materials another continuing trend is the shift from heavier materials like glass to lightweight plastics.
Pi global&rsquos innovations director steve kelsey describes rigid plastics as the designer&rsquos best friend because &ldquoit&rsquos cheap enough as a material and from a design point of view it&rsquos flexible enough to deliver an awful lot&rdquo. Then there are the sustainability benefits. &ldquoif your corporation&rsquos target is to reduce the weight of the packaging you use the really easy way of doing it is switching from glass to plastic, which delivers big wins,&rdquo he adds. As a result some plastics companies predict a brighter future. &ldquoappe is working on several major material conversion projects &ndash not just from glass but from other materials too &ndash and foresee that this trend will continue for the foreseeable future,&rdquo says kinza sutton, appe marketing manager. But don&rsquot expect monumental changes to occur in the way that they have over the last few years, cautions rpc&rsquos marsh. &ldquowhat we continue to have is progressive growth of a couple of percentage points per year moving into plastic from other materials.&rdquo another fillip in recent months has been the uk&rsquos burgeoning export market.
While domestic sales have been sluggish the eurozone has proved particularly fruitful ground for uk businesses with markets further afield also reaping rewards thanks to favourable currency exchange rates. And as the uk is a mature economy offering limited scope for growth, the emerging economies in europe and beyond are an attraction proposition going forward. &ldquoaccording to pira, the uk food packaging industry will see less than 2 growth per annum in the next five years. Many central and eastern european countries, the middle east and asian nations will experience 5 plus growth on average,&rdquo says linpac&rsquos stephenson.
There is a caveat to that. The tumult in europe &ndash several countries are already reportedly in recession &ndash is bound to eventually result in falling demand which will inevitably have an impact on sales in the eurozone. As a result some plastics companies are weighing up opportunities outside european boundaries, both in terms of exports and from a manufacturing base point of view. &ldquoappe has ambitious expansion plans that reach beyond western europe, of which more details will emerge during 2012,&rdquo says sutton. &ldquothe first step of this expansion is the opening of a new factory in poland later this year.&rdquo looking beyond the eurozone is a sensible strategy for growth according to mockett. &ldquouk companies should look at higher growth markets where their leading edge technology can be exploited, such as brazil and india where we are seeing interest from local players in doing mergers or strategic alliances or acquisitions of companies in developed markets for technology transfer.&rdquo so there are opportunities out there but there are also serious challenges. While some raw material prices dropped towards the end of last year polymer prices have been creeping back up with the cost of pet and ps rising by approximately &euro100 per tonne in recent weeks
Then there are demand issues with packaging volume sales slowing due to industry sectors such as automotive and fmcg groups hit hard by the ongoing recessionary climate. Even some hardier businesses have been adversely affected by the downturn, says mockett. &ldquoretailers have reported falling sales in food and this may have had downward pressure on profits as packaging volumes will have declined,&rdquo he explains. Lower volumes and lower profits could in turn lead to more mergers and acquisitions, speculates mockett, as companies seek to align capacity with demand and realise synergies such as buying power. &ldquosimilarly shareholders who are no longer receiving a return on capital that covers the cost of capital may be incentivised to sell out,&rdquo he adds. The fragmented nature of the packaging industry makes more m&a activity likely going forward. But overseas exports and expansion coupled with brands moving into plastics from other materials will go some way towards offsetting some of these challenges for rigid plastics
Key challenges for rigids raw material prices while some prices lowered at the tail end of 2012 polymer prices have been steadily rising over the course of january with linpac estimating that the cost of pet and ps increased by around &euro100 per tonne in the first month of the year alone
. Availability of materials in recent months there&rsquos been limited availability of raw materials in the pet market &ndash particularly pta &ndash which has had an impact on price, but this could ease in the not too distant future as planned new capacity comes onstream in europe. Slowing demand as the uk teeters on the brink of a doubledip recession even food retailers like tesco are seeing sales decline. Some packaging experts fear that if demand continues to fall some companies may start to chase volume and this in turn might drag prices down across the rest of the market.
Rigid plastics in numbers 55 percentage of plastics companies that had problems getting supplies of polymers over 12 months to year end june 2011 34 to year end june 2012, percentage of plastics companies stating an intention to increase their number of employees 35 percentage of companies exporting to western europe predicted an increase in export turnover 16 growth per annum of plastics consumption in india, one of the largest potential markets for exports
