Soaring raw material prices and the threat of more hikes in the pipeline have dominated the plastics scene in Europe over the past 12 months.
Despite a shortlived mid-2005 lull, plastics processors have faced relentless pressure on their costs throughout 2005. Compounding the misery, plastics and additive suppliers announced a fresh round of price increases in the fall.
Uncertainty has gripped the region's plastics industry as processors brace themselves for the price spiral to continue through into 2006. High oil prices and a persistent materials shortage in Europe, exacerbated by continuing demand in Asia, have forced processors to raise prices on their own products. But passing on extra costs has become more and more difficult.
With raw materials representing as much as 70 percent of selling prices, processors have warned their customers that they can expect to pay even more for products in the future.
``In terms of sheer survival for many firms, substantial increases in plastics product prices will be absolutely necessary to recover something of the rises in costs,'' said Alexandre Dangis, managing director of the European Plastics Converters Association (EuPC).
With escalating energy costs across the region, some plastics firms have seen electricity and gas prices rise by more than 100 percent in recent months. The extra burden has helped create ``a terrible pincer movement'' for companies often unable to raise prices in the face of tight competition or customer unwillingness to accept a price hike, Dangis said.
Europe's plastics industry growth in recent years has been a pale reflection of its former self. Even so, revised estimates for the industry's performance during 2005 show negative growth in some of plastics' main segments, according to Paris-based economist Frank Wittendal. Even the normally resilient packaging business grew by just 0.6 percent in 2005, in the face of weak economic conditions across mainland Europe and in the United Kingdom, and fresh environmental pressures, according to Wittendal.
Although manufacturers in industrial and consumer product segment - particulary automotive and other consumer durables - fared better than forecast growth, that area still only expanded by 1.1 percent.
Semi-finished products, a segment initially expected to grow some 2.3 percent, is estimated to have fallen by 0.5 percent, according to Wittendal's recent study of plastics processors in the European Union. He attributed the results to ``destocking due to negative expectations concerning price changes.''
As for plastics in the construction market, any growth in EU's new Eastern European states appeared to be countered by lower-than-expected volumes in the building sectors of Spain, France and the United Kingdom. Overall, an estimate made in May, of 0.8 percent growth, turned into a drop of 3.1 percent by November. This compared with less than 1 percent growth in 2004, the study said.
Overall, plastics processing across Europe was estimated to fall 0.4 percent in volume in 2005, Wittendal said.
Looking ahead, the overall prospects for 2006 are a little more positive, with a prediction of 1.4 percent volume growth. ``This is better than the performance [in 2005], but still very weak. It is not a good situation for converters,'' the economist said.
Just five years ago, plastics industry growth in Europe was 5-6 percent per year.
``For companies used to growth rates of, say, 5-6 percent, this is negative growth and a lot of companies will go out of business, said Wittendal, who takes a cautious approach to forecasting, since optimism has been proved wrong in recent years. ``There will certainly be more concentration [of capacity] in the sector,'' he predicted.
Bigger plastics processors will be able to reshape their businesses, adjusting to the changing times, but ``smaller companies will be lucky to be acquired,'' he stressed.
Packaging volumes in Europe are forecast to grow 2.7 percent during 2006, the best result for a couple of years, and semifinished products are expected to return to the sort of growth achieved in 2004, with a 2.2 percent rise.
According to the study, Europe's industrial and consumer products segment should see volume growth of 1.1 percent next year, precisely the same as the revised estimate for 2005. But the building and construction area will show more modest growth once more with a predicted rise of just 0.5 percent, according to Wittendal.
The European plastics picture is clearly colored by the lackluster performance and weak growth of most of the Western Europe national economies. Despite its still vibrant export record, Germany has remained sluggish for much of 2005, while other Eurozone countries like Britain, Italy and Spain have slowed down after driving ahead in recent years.
There remains a marked divide between the performance of the countries of Western `old' Europe and eastern newcomers to the EU such as Poland, Hungary and the Czech Republic.
However, there are signs that, with its recent change of government, Germany - traditionally Europe's driving force - may just be turning the corner. Estimates for the last quarter of 2005 show growth of around 3 percent.
The struggle to deal with constant cost hikes has meant managers in processing companies have been diverted from their role as innovators, aiming to add value to plastic products, suggested David Williams, president of Brussels, Belgium-based EuPC.
``We have got to get added value from products. Innovation reduces the cost burden. ... If we had stable material prices we could get people back to innovating, which is what they should be doing,'' said Williams, former chairman of Linpac Group and now a business consultant.
The pressure has fallen heavily on Europe's many small and medium-sized processors, which tend to be the industry innovators, he added.
Williams said packaging, especially for food, has growth potential and predicted that, though growth would not be ``exciting,'' the automotive segment would make progress in 2006. Construction and packaging ``will hold up pretty well,'' he noted.
Raw material prices will stay high into 2006, he said, but the plastics industry should benefit in the medium term from lower oil prices and from new oil capacity coming on-stream in the Middle East.
Processor leaders agree that one area that has helped hold back Europe's packaging segment growth is the welter of new EU regulations coming out of Brussels in recent years.
Last year also saw the threat of environmental regulation to packaging producers in France with the shock parliamentary vote to ban nonbiodegradable plastic bags. But the row was defused when a compromise was reached by French legislators limited the ban to supermarket carrier bags.
EuPC Vice President Joachim Eckstein said the EU Commission has vowed to cut back the number of regulations it introduces in future. He predicts growth of only about 1 percent for plastics as a whole this year as customers are keeping their stocks low and only buying what they absolutely need.
``Our potential for growth is very limited ... people are not spending money, they are holding back and so consumption is not growing,'' said Eckstein, who chairs EuPC's raw materials committee. He stressed that processors in the region are not able to pass on previous material price rises and are continually having to try to catch up with each new hike announced by suppliers.
Plastics machinery manufacturers in Europe were optimistic about a better second half in 2005, after a business confidence survey conducted by their trade group, Euromap, reflected weaker Western European and Chinese orders. Confidence among suppliers was higher concerning business prospects for 2006. Euromap measured confidence among suppliers in Austria, France, Germany, Italy, Switzerland and the United Kingdom, reporting its findings in September.
One continuing trend among Europe's plastics processors in 2005 was mergers and acquisitions, with private equity groups, many from the United States, taking the lead. Industry leaders believe the trend will continue in 2006, providing the consolidation some have called for in recent years.
But, Eckstein said, processing will continue to be a business for small and medium-sized firms, with some larger groups being broken up to create new and innovative players.
* * *
* Just five years ago, plastics industry growth in Europe was 5-6 percent per year.
* Plastics processing across Europe was estimated to fall 0.4 percent in volume in 2005.
* Looking ahead, the overall prospects for 2006 are a little more positive, with a prediction of 1.4 percent volume growth.