State of the Plastics Industry: Navigating Through Uncertainty Toward a Resilient Future

The plastics industry encountered significant challenges in 2023. Amid geopolitical and macroeconomic uncertainties, the industry witnessed a downturn in merger and acquisition (M&A) activity, with only 344 transactions, marking an 18% decrease from 2022. This dip was below recent historical averages, reflecting a cautious approach by investors and companies alike in the face of rising interest rates and a volatile market environment. 

But 2024 offers evidence for cautious optimism.  

Economic headwinds and industry impact

2023 was characterized by a multitude of economic stressors that rippled through the plastics industry. Heightened operating costs, upward wage pressure, continued inflation, and the looming threat of a US recession contributed to a dampened appetite for M&A. Customer destocking and end market softness further exacerbated these challenges. Companies also faced difficulties in accessing labor, complicating operational efficiency.

In parallel, equity markets showed resilience, regaining ground amid a challenging backdrop. However, debt market activities, such as leveraged loan primary issuance and high-yield primary issuance, though outpacing 2022, remained subdued compared to historical averages. The increased cost of acquisition financing due to rising interest rates created an additional hurdle, impacting buyers’ ability to meet sellers’ valuation expectations.

Additionally, the unemployment rate remained low, consumer confidence was robust, and US GDP growth, though slowing, outperformed expectations. The Federal Reserve’s strategy in raising interest rates helped cool inflation, signaling a possible end to the rate-hike cycle.

Company performance and market dynamics

Many plastics businesses experienced flat or declining performance in 2023, primarily due to continued destocking by end customers and demand softness in certain markets like consumer discretionary. This led to reduced transaction volumes and numerous instances of M&A processes being put on hold due to valuation gaps.

Looking into 2024, there is cautious optimism. Stabilization of stocking levels and an improvement in demand are expected, in line with the macro and capital market environments. However, labor market volatility and a potential decline in US labor force participation in 2024 could amplify wage-growth pressures.

Industry and commodity trends

The manufacturing sector, including plastics, faced contraction in 2023, yet optimism is growing for a turnaround in 2024. Oil production reached record highs, with consequent impacts on resin pricing. The stabilization in resin prices, especially in commodities like PVC and high-density (HD) PE, corresponded with a slowdown in demand in sectors like housing and construction.

On the raw material front, resin pricing has stabilized or declined as supply chain dynamics continue to improve. Effective control of material supply and labor economics remains a key differentiator for businesses navigating these challenging times.

2024 outlook: M&A and market trends

As we look ahead, the prospects for 2024 are cautiously positive. While megadeals may continue to be limited, a rebound in middle-market M&A activity is anticipated. Factors contributing to this outlook include plateauing interest rates, expected to fall in the second half of 2024; decelerating inflation; normalization of stocking levels and end market demand; and subsiding fears of a US recession. The US presidential election also looms as a factor to watch, with potential implications on the macroeconomic, political, and geopolitical landscapes.

For business owners contemplating exits, key considerations include the financial performance and health and prospects of the end markets served. Flexibility in timing the market to optimize valuations will be crucial.

Navigating forward

While challenges persist, the industry is poised for a gradual recovery, driven by stabilization in macroeconomic indicators and a potential resurgence in M&A activities. Businesses that adeptly navigate these turbulent waters, balancing operational efficiency with strategic market timing, are likely to emerge stronger in the evolving landscape. 

About the authors

Michael D. Benson is a managing director in Stout’s Investment Banking Group. He is responsible for the execution of investment banking transactions, which include mergers, acquisitions, divestitures, and the private placement of senior debt, subordinated debt, and equity securities.

David M. Evatz leads the Plastics & Packaging Industry Practice within Stout’s Investment Banking Group. He has extensive mergers and acquisitions experience, having executed numerous M&A and corporate finance transactions, including buy and sell side assignments, leveraged buyouts, joint ventures, fairness opinions, and the private placement of senior debt, mezzanine debt, and equity securities.

Stout provides a full range of strategic alternatives including merger and acquisition (M&A) advice, private capital raising, financial sponsor coverage, and other financial advisory services to family-owned businesses, portfolio companies of private equity firms, and divisions of large corporations.