Plastic packaging sector in cost, volume squeeze

By Ahmed ElAmin

- Last updated on GMT

Related tags Raw materials Packaging companies Plastic

Major US plastic packaging companies are facing a double squeeze --
falling demand for theirproducts and lowered margins due to the
high cost of raw materials, according to a report fromStandard
& Poor's.

The strategies rated companies are taking in response to the squeeze signal the response plasticsuppliers are taking to keep costs down for their customers.

"To counter volume and operating margin pressures, most companies are implementing variouscost cutting measures including rationalizing manufacturing capacity, improving operating efficiencies, andsourcing raw materials from low-cost locations overseas,"​ S&P stated.

Companies such as AEP Industries have successfully restructured through the sale of its underperformingbusinesses. Larger, global players such as Sealed Air Corp. have focused on making their supply chainsmore efficient and on reconfiguring its global geographic reach.

Sealed Air strategy has been to invest in new production capacity in developing markets around the world,and to improve the operating efficiencies of existing facilities. The company has also invested in new technologies to drive additional productivityincreases, S&P said.

The volume and margin squeeze marks a turn of fortunes for a sector in which demand is generally considered to be recession resistant,since it is primarily derived from relatively stable end markets such as beverages, food, household cleaningproducts, personal care products, medical products, and other consumer goods, the ratings agencysaid in its report.

Most of the packaging companies rated by S&P cater to such stable segments. However nearly 30per cent of the 28 rated US packaging companies have significant exposure to less stable markets such as industrial andprotective packaging segments, S&P noted. These companies tend to be among the hardest hit by slowing growth inthe manufacturing sector, and as a result, could potentially face financial problems in the future.

Those supplying films are also facing the problem of operating in a highly fragmented market plagued withovercapacity, particularly in the stretch film and other industrial film segments.

Recent economic data indicates US annual gross domestic product (GDP) growth slumped to 1.6 percent in the third quarter of 2006. This market was the weakest growth in over three years. S&P'seconomists forecast the slowdown is expected to continue, with 2.7 per cent GDP growth forecast for the fourth quarter of 2006, and2.1 per cent in 2007.

In addition, the price of raw materials used for making plastics has compounded the adverseeffects of lower volumes. Plastic resins such as polyethylene, polypropylene, and polyvinyl chloride (PVC) are keythe raw materials for plastic packaging companies, the cost of which has risen dramatically during the past two years.

Prices of plastic resins have declined slightly since August 2006, in line with lower prices of oil and naturalgas, although still remain at elevated levels.

"Most of the companies do not have contracts with customers that allow for a pass through of raw material price fluctuations, unlike the contractual pass-througharrangements widely prevalent in the rigid plastic packaging and metal and glass packagingsegments,"​ S&P stated.

Given the commodity-type product mix and intense competitive pressures, the conjunction of eventshas resulted in a further squeeze to already low operating margins of around 10 per cent for mostcompanies, S&P stated.

S&P has given negative outlooks on the ratings of half the companies involved in the industrial and protective packaging segments.One is on CreditWatch with negative implications.

Notably, Intertape and Atlantis Plastics have tight liquidity and are close to violating financial covenants under their bank creditfacilities, S&P reported.

The Intertape Polymer Group, has annual sales of $830m and produces carton sealing tape, masking tape, shrink films, masking tapes, flexible intermediate bulk containers,electrical tapes, duct tapes, and stretch wrap. Atlantis produces stretch films to wrap pallets of industrial and commercial goods for shipping or storage and customfilms. The rest of the company's sales, about 28 per cent of its annual $440m in revenues, are ininjection-molded products.

Sealed Air and Sonoco Products should be better able to withstand short-term pressures given their strongbusiness profiles, S&P stated. The two companies benefit from leadership positions and branded products, contributionsfrom some differentiated products, geographic and customer diversity, and consistent cash generationfrom operations.

"However, the broader credit trends for the remainder of 2006 and 2007 are likely to be unfavorable, with the growing potential for a slowdown in the cyclical industrial economy expected to be anegative factor,"​ S&P concludes.

Related topics Processing & Packaging

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