Don't expect the bottom to fall out of packaging in 2009 — but struggling companies will face another tough year.
Several analysts and consultants interviewed recently by Plastics News said while the sector is fairly recession-resistant for plastics processors, companies will have to stay on their toes.
``The good companies are going to be those that can create value in a recession. That's an awfully difficult proposition,'' said Tim Burns, a research analyst at Solon, Ohio-based Cranial Capital Inc., in a Dec. 17 interview.
Burns favors companies with ``great balance sheets, tremendous innovation, large market shares and defensible end markets,'' particularly in those with consistent consumer demand, such as food and beverage, pharmaceuticals and household cleaning products, as opposed to the struggling automotive and construction sectors.
``If you're making a clamshell that holds drill bits, who cares? But if you're making a clamshell that contains medical products, no problem,'' he said.
Cynthia Werneth, a credit analyst at Standard & Poor's in New York, agreed that packaging is largely recession-proof. But she pointed out several highly leveraged companies that could face trouble in the next 12 months, including AEP Industries Inc. of South Hackensack, N.J.; Avery Dennison Corp. of Pasadena, Calif.; and Elmwood Park, N.J.-based Sealed Air Corp., all of which recently had their S&P's ratings downgraded.
``As we get towards the end of 2009 and we look to 2010, if credit markets and access to credit — particularly for low-rated companies — is still a problem, we could have additional downgrades,'' she said in a Dec. 17 telephone interview.
Of the 21 plastics companies in S&P's Dec. 22 packaging report card, three firms — Schaumberg, Ill.-based Pliant Corp., De Kalb, Ill.-based Tegrant Corp. and Treofan Holdings GmbH of Raunheim, Germany — are in the CCC category with negative outlooks, meaning they're at risk of defaulting on their debt. Philadelphia-based Constar International Inc., which filed for Chapter 11 protection on Dec. 30, and Viskase Cos. Inc. of Darien, Ill., were ranked in Selective Default, joining Atlanta-based Atlantis Plastics Inc. and Portola Packaging Inc. of Batavia, Ill., which defaulted in the first half of 2008 and have since filed for bankruptcy.
Werneth said 2009 ``doesn't look like a disaster'' for packaging end markets, despite the global economic crisis that has driven consumers to shift from bottled water to tap water, and corporate sustainability directives such as Wal-Mart Stores Inc.'s goal of a 5 percent reduction in packaging by 2013. She said lower raw-material costs generally will give packaging companies a bit of a break heading into 2009, but that plastic resin costs are expected to be volatile.
Cheryl Perkins, president of the Neenah, Wis.-based management consulting firm Innovationedge, agreed that lower resin prices early in the new year may cause some plastics companies to think about shelving plans to spend more research and development money on sustainability projects.
``Nobody's saying they shouldn't innovate and innovate in a sustainable way, but the question is, in the short term, based on what they have to deliver in quarterly results, can they find the proposition that is a win-win there?'' she said in a Dec. 17 telephone interview. Perkins said broader bioplastics commercialization could be a casualty if the recession drags on past the middle of the year.
Burns was even blunter about the economy's effect on sustainability initiatives. He said the situation reminds him of the late 1970s, when companies talked a good game about improving efficiency while oil prices were high, only to go back to older practices when the economy revived during the 1980s.
``It's almost like doing penance: when the priest looks the other way, the penance is stopped,'' Burns said.