The story for the 2006 packaging market is one of continued consolidation across all sectors and more sourcing of key resins from overseas.
One only has to look at 2005 for proof of consolidation activity across flexible and rigid packaging, with major deals like Apollo Management LP of New York nabbing Pembroke, Bermuda-based Tyco Plastics' film business. Sun Capital Partners Inc. of Boca Raton, Fla., made its own mark by sweeping up Exopack Holding Corp. of Spartanburg, S.C., Cello-Foil Products Inc. of Battle Creek, Mich., and Packaging Group of Concord, Ontario. Consolidated Container Co. LLC of Atlanta made three acquisitions in 2005.
Likewise, officials from firms like Viapack Inc. of New York said they're seeking small to midsize blown film extruders for partnerships, as principals want to bridge a notoriously fragmented market.
Technology developments will continue in earnest, as stand-up pouches take market share from materials like cans. Where you'll see it: Next time you're at the store buying chow for a pooch or feline, check out all the new pouches that hold wet pet foods.
Biomaterials will continue to make their way into bottles, too. Husky Injection Molding Systems Ltd. of Bolton, Ontario, is working with Biota Brands of America Inc., Cargill Dow LLC and machinery maker SIG Corpoplast to develop a fully compostable bottle for Biota's line of Colorado spring water.
Separately, Coors Brewing Co. of Golden, Colo., worked with an unidentified packaging firm to make its Coors Light Plastic Bottle Cooler Box, which was named Best New Packaging Innovation for 2005 by Convenience Store News. Graham Packaging Co. LP of York, Pa., and Ball Corp. of Bloomfield, Colo., make 16-ounce plastic bottles for the beer, a Coors spokeswoman said in a recent telephone interview. She would not disclose what company makes the cooler box.
Several packaging industry officials interviewed for this story reported sourcing resin from overseas producers for the first time, or learning of other producers that are doing it for the first time.
``Import is coming in like crazy,'' said Alfred Teo, chief executive officer of Lyndhurst, N.J., film producer Sigma Plastics Group, in a Dec. 14 telephone interview. ``A lot of producers like myself are forced to get import resin because we have to survive. We're trying to keep our heads above water. Eventually, once [importers] get a foothold here, they will take market share from domestic producers.''
In blow molding, the U.S. market is plagued by overcapacity and a very consolidated end-market base, said Ghansham Panjabi, a New York equity analyst with Charlotte, N.C.-based Wachovia Securities. Companies like Ball Corp. are pushing toward more barriers in their bottles, so the industry can expect to see more value-added activity.
On the film side, Panjabi had raised ratings estimates for Pactiv Corp. and Sealed Air Corp., believing that lower resin prices can serve as a tailwind for the packaging sector during 2006.
Asian resin is starting to hit the U.S. market and Gulf region capacity is starting to come back, Panjabi said.
``You may have the makings of oversupply in certain cases,'' he said.
The industry also will see a more favorable global beef trade environment, Panjabi wrote in a recent report, which will contribute to healthy top-line growth for 2006 for companies like Sealed Air that supply film to that market. The Japanese government agreed Dec. 12 to lift a two-year ban on U.S. and Canadian beef imports, which previously had represented a $1.7 billion market.
Officials are looking toward general macroeconomic forces to affect their businesses greatly in 2006. Some packaging companies will continue to push through price increases to offset the impact of resin prices and transportation costs.
Blow molder Graham announced a 3 percent price increase that took effect Jan. 5. The company said in a news release that the packaging industry as a whole is facing increases in resin pricing, energy and transportation because of global increases in energy-related costs made worse by hurricane damage.
``This is above and beyond our normal wage inflation and is the first time in more than 20 years that we have seen our costs rise this significantly - more than we can make up for through gains in productivity and cost improvements,'' said Philip Yates, Graham's chairman and CEO.
``Every year until now we have been able to deliver better pricing to our customers by investing heavily in new technology and utilizing our manpower to maximum efficiency,'' he said. ``The current unprecedented rise in all energy-related costs goes above and beyond what we can absorb and offset.''
Continued increases in short-term interest rates are likely to have an impact on economic growth, which will affect the packaging industry, one official said, and loss of manufacturing jobs has a ripple effect because domestic manufacturers would use domestically produced packaging for their goods.
``As long as we continue to lose manufacturing in the United States, flexible packaging and packaging in general will continue to be under duress,'' said Jack Riopelle, president of custom bag maker Wisconsin Film & Bag Inc. and Southern Film & Bag Inc.
Industry officials will have to wait to see what 2006 holds, as economic forecasts vary. According to the National Association for Business Economics based in Washington, oil prices will be lower than previously expected. That group issued a Nov. 22 report based on a panel of 45 forecasters. A barrel of crude oil was trading at about $59 at the end of 2005, according to NABE, and is projected to cost $53 at the end of 2006, down from September projections of $63 and $55, respectively. Those same forecasters estimated that natural gas prices would be $12 per million Btu at the close of 2005 but would drop to $9 per million Btu at the end of 2006.
According to the same group, industrial production is not expected to improve much in 2006. The panelists had expected industrial production growth to accelerate from 3.2 percent in 2005 to 3.6 percent in 2006, but now, the panelists place production growth at 2.9 percent in 2005 and 3.1 percent in 2006. Capacity utilization, the panelists said, will rise from an average of 78.2 percent to 79.4 percent in 2006.
Sigma's Teo has his own opinion on capacity utilization among film and bag makers, which was at 60-70 percent during the first part of 2005 and then began to rise.
``It was improving until about four weeks ago, I think because import finished goods are coming in now,'' Teo said Dec. 14. ``Supplies went up too fast. The warehouses are full and business in general slowed down.''
Still, Sigma will continue its acquisition hunt.
``We'll continue to pluck away,'' he said. ``We continue to grow internally with product line, and continue to invest in new technology. And we also continue to look for acquisition opportunities.''
And Sigma's activity is a sign of the times, one source said, as firms that are hanging on by their fingernails seek relief by selling. Strategic buyers believe they need to be global, and financing has come back to the record levels of the 1980s and 1990s.
``A year ago, everyone thought the worst was over,'' said Thomas Blaige, CEO of Blaige & Co. LLC of Chicago. In terms of resin pricing, ``2005 has just lambasted people. If things don't let up in 2006, there will be a whole slew of companies that need to seek relief. Something has to happen.''