Prognosticating packaging in 2008

Resin’s reaction to record-high oil and gas prices; M&A machinations and the consolidation of packaging into larger players; and a growing clamor for environmental sustainability will shape packaging in 2008

At press time, oil was flirting with triple-digit futures prices with no reasonable expectation for relief on the horizon and a new landscape forming. “What oil and gas do to resin is put a floor in the pricing,” explains Bill Bowie, COO of Resin Technology Inc. (RTi; Ft. Worth, TX), a resin-purchasing consulting firm, adding that packaging is especially sensitive to raw material costs. “[Packaging] has very, very slim margins. There’s really no value-add there where you could distinguish yourself beyond the guy across the street that’s trying to sell the same product.”

Packaging processors might be looking forward to 2008 with some trepidation, but RTi sees potential relief possible in the coming year, largely on the basis of planned capacity expansions in polyethylene (PE) and polypropylene (PP) in the Mid and Far East.

According to Scott Newell, RTi’s director client services, any movement down in PP prices will still depend oil. “We are limited how far the market can drop in price by oil and gasoline prices,” Newell said. “They kind of keep a floor underneath the market.” In spite of that, Newell says some forecasts have propylene down $0.10, leading him to forecast that PP could fall as well, but it will likely trade within a $0.10 band.

On the PE side, Mike Burns, global director for PE at RTi also sees the potential for processor relief. “Weak demand, building inventories, and the lack of export opportunities in 2008 due to increased global capacity, should decrease the PE prices in 2008,” Burns states.

Polyethylene terephthalate, however, isn’t likely to see similar price reductions next year, according to RTi’s global PET director, Mike Dewsbury. “While approximately 3 billion lb of capacity increases have been announced for the U.S., most of this will not come up until 2009,” Dewsbury says. “Demand growth has used up much of the capacity added over the last few years, and 2008 should be relatively snug, at least in the first half of the year.”

The rise of private equity in packaging

Following a year that saw big strategic (Rexam buying the remaining plastics business of O-I) and financial (Blackstone Group buying Klöckner Pentaplast) acquisitions in packaging, the M&A market might slow in 2008 on the basis of tightening credit, but according to analyst Applied Market Information (AMI; Bristol, England) the rapid pace of deals over the last five years has already left its mark.

According to a report released in September, 14 of the top 50 European packaging producers are now owned by private equity, compared to just one in 2002. The moves have also consolidated power in the hands of fewer firms, with the top 50 companies now representing approximately 40% of the total plastics packaging business in Europe, compared to a 30% stake for the top 50 in 2002. In total, AMI’s top 50 had sales of more than d21 billion in 2006, processing 7.7 million tonnes of polymers at more than 650 plants.

Activity is strong across the Atlantic as well, with BMO Financial Group reporting that packaging deal volume in 2006 reached 351 transactions, representing a 5.5% increase over 2005.

Withstanding sustainability

Sustainability moved beyond buzzword to corporate creed for many OEMs in 2007, with an immediate impact on packaging. Below two heavyweights, retailer Wal-Mart and brand-owner Kraft Foods, outline their sustainability priorities, with Wal-Mart taking the next step and implementing its packaging scorecard in 2008. According to David Cornell, founder of consultant DD Cornell Associates LLC, Wal-Mart has expanded the traditional ‘Three R’s’ of reduce, reuse, and recycle, to ‘Six R’s’ adding: Renew (renewable energy in production and shipping), Revenue (cost is an object), Read (continue to assess situation). Cornell, and Roger Zellner, director of sustainability and global technology and quality at Kraft Foods, offered a glimpse of the sustainable packaging future during the Society of Plastics Engineers (SPE; Brookfield, CT) annual Blow Molding Conference (Toledo, OH; Oct. 10-11).

Wal-Mart Packaging Scorecard (beta tested at a small number of suppliers in 2007, implemented fully in 2008) showing the respective weights for variables in the creation and shipment of packaging

1. 15% Greenhouse gas generation

2. 15% Material value (changing)

3. 15% Product/Package Ratio

4. 15% Cube Utilization

5. 10% Transportation

6. 10% Recycled Content

(after 2008)

7. 10% Recovery Value

(likely change)

8. 5% Renewable energy

9. 5% Innovation

Kraft crafts sustainability gameplan

Zellner told the assembled blowmolders at the SPE conference that for Kraft, the packaging still must protect the environmental investment in the product, saying using resources to create cheese, for instance, but then having it rot due to insufficient packaging, is immoral. Reduced packaging and recycling are preferred sustainable paths for Kraft, with the ultimate goal being, “renewable materials made with renewable energy,” but in the interim, Kraft, and therefore its packaging suppliers, are focused on three areas:

1. Quantify benefits in entire life cycle

• Must reduce waste (landfill,

toxins, water, or greenhouse gas)

• Or use less non-renewable

resources

2. Engage renewable technology

• Bio-tech driven industry

• Early stages of development

3. Longer term—nonfood focus (cornstalk vs. corn kernel, move to biomass for resin and energy production)

• Financially must be sustainable