AKRON, OHIO (Jan. 12, 10 a.m. EST) — Makers of bottles, containers and other forms of rigid packaging contended with an old nemesis in 2003, that of profit margin, while doing their best to grow their companies.
The struggle for profit, especially in PET bottles, was one of the drivers leading Owens-Illinois Inc. to consider selling its blow molding operations, a move announced Dec. 11.
The sprawling plastics unit had sales of close to $1.8 billion in 2002 and is a leader in food and beverage packaging.
Yet, while sales hold steady and conversion to plastics continues, the Toledo, Ohio, company's earnings before interest, taxes, depreciation and amortization, dropped 19 percent for the first six months of 2003, compared with the same period a year earlier.
And consider the case of PET bottle producer Ball Corp. The Broomfield, Colo., company, which also makes metal cans, saw a dip in earnings for bottles. Pricing declines from customers were partly to blame, the company said.
And when other explanations fail, the company also blames Mother Nature.
“Our PET operation has suffered from some of the same issues as [its] metal beverage brothers — a hurricane, power outages and the cool and damp weather,” said Leon Midgett, the company's chief operating officer for packaging, in an Oct. 28 conference call.
Whatever the reasons, the thin profit margins in bottles have deterred some short-term investment in capital or technology, said William LeMaire, managing director of packaging consulting firm PakIntell LLC of West Chester, Pa.
Even so, several disruptive technologies are on the horizon in PET that could take the industry upward, he said.
Still, with the economy expected to improve in 2004, the prospects for packaging suppliers will only rise so much, he said.
“An improved economy doesn't mend some of the systemic problems that plastics packaging suppliers face in any year,” he said.
“The biggest problem is a marketplace that stomps its feet and cries out for innovations but is reluctant to reward the innovators with real profit sharing.”
A study published in December by Minneapolis-based U.S. Bancorp Piper Jaffray Inc. suggests a historical pricing problem. EBITDA margins for rigid packaging companies from 1998-2002 were fairly light, according to the study.
Only two companies had margins above 20 percent: Berry Plastics Corp. and O-I, whose margins now are dropping. Six of the 13 companies listed had margins under 15 percent.
In other parts of the industry, growth has been more pronounced.
Light-gauge thermoforming, for both trays and blister packaging, has continued its rise in packaging and has drawn some acquisition interest.
In the latter half of 2003 alone, two large deals were consummated that included thermoforming as a driver: Berry Plastics bought injection molder Landis Plastics Inc. and said it planned to grow thermoforming as a key part of the Landis business.
And European packaging giant Svenska Cellulosa Aktiebologet, or SCA for short, bought blister packaging leader Alloyd Co. Inc.
Bottles made from high density polyethylene also continued to sell at a steady, albeit unspectacular, pace. New and expanded plants were launched by Plastipak Holdings Inc. and Alpla Werke Lehner GmbH and Co., an Austrian company gaining a toehold in North America.
That news had analysts upbeat about prospects for 2004, if good weather holds up and prices rise.
“I'm more bullish on rigid packaging than on flexibles,” said David Solo-mon, managing director of Goldsmith, Agio, Helms & Lynner LLC in New York.
“Thermoforming has become an inexpensive alternative. And PET continues to be a glass substitute.
“If the customer pays a little more for it, it will help the market and the products.”
But, Solo-mon added, the risks continue to face smaller, commodity-end blow molders that might not have the capital to invest in higher-value, specialized products.
A few large companies — including leading North American PET player Amcor PET Packaging of Manchester, Mich. — are capturing more of a market that seems to be crystallizing, he said.
“[Merger and acquisition] activity is better in a mature market where change is slowed,” Solomon said. “Amcor can really build a high-volume business around very automated equipment, take out inefficiencies and be a low-cost producer with pricing power.
“The marginal guys have to get out because they can't make any money.”