For plastics in packaging, 2010 looks to be a lot like 2009.
Compared with building materials or automotive applications, 2009 was pretty good to plastics packaging converters and processors.
Sure, there were notable exceptions: PET bottle giant Constar International Inc. and big film extruder Pliant Corp. went belly-up; but overall, demand for packaging stayed pretty stable, said several experts recently interviewed by Plastics News.
That trend is likely to continue in 2010 but the experts differ on how much growth there will be for the industry.
Some of the things that drove growth over the years prior to the recession fancy drink cups, for example you're not going to see as much [demand], at least early on, Cynthia Werneth, a credit analyst at Standard & Poor's in New York, said in a Dec. 10 telephone interview.
BMO Capital Markets noted that despite a drop in sales in the third quarter of 2009, gross profit increased by a median of about 5 percent among 17 of 30 companies tracked in its latest industry report. BMO noted that gross margin increased among 26 of the 30. The rigid packaging sector had the largest median gross profit increase, at about 10 percent.
Tim Burns, a research analyst at Cranial Capital Inc. in Solon, Ohio, predict 2010 will be flat as a pancake for packaging.
The plastics industry is the most volatile of the segments of packaging, because resin moves quite quickly both up and down. When things move up or down, there's obviously quite an impact on the sales and balance sheets of the converters, he said Dec. 16.
Will Frame, who leads the paper, plastics and packaging practice at Deloitte Corporate Finance LLC in Chicago, agreed that raw materials and power costs are an unknown for companies heading into 2010. But, more important, the economic upheaval that closed out the decade has made firms look at their operations with jaundiced eyes, he said: The lesson from the last two years is that you need to focus on what you're good at. Simply continuing with a collection of assets some of which you like and some of which you don't really focus your attention on the assumption of that has been challenged.
Burns said packaging companies in 2010 will focus on four core areas: rightsizing their corporate footprint, industry consolidation, price mix and pushing productivity with modest capital expenditures.
They really can't control volume, and they really can't control raw material cost movements, and lastly, they really can't control their customer actions, he said.
So those firms that succeed will be those that get heavy on the right end markets, which Burns said are flexible packaging; pumps and dispensing systems, especially for pharmaceutical products; and aseptic-fill packaging.
Ambient-term beverages and liquid food whether in PET or paperboard will become increasingly acceptable to a traditionally cold-channel consumer here in America. I don't think it's out of the realm of possibility that Coke and Pepsi will begin to put ambient-temperature [milk and juice] products in between their cans and PET containers on the warm shelf, Burns said.
Frame agreed that medical and flexible packaging will have success in 2010. He also cautioned that sustainability a 2008 industry byword that seemed to fade a bit in 2009 will be back in the new year, whether the term sustainability is taken to mean green or business-success-friendly.
The foot was off the gas on the environmental side in 2009, because there was the sense that everyone had a lot of fires to fight, he said. I think it's a mistake to think that's gone away. I think that pressure will be there I don't see 2010 being a dramatically different year, but it's a long-term trend that sensible producers will get ahead of.
According to Burns, sustainability in 2010 will mean three things to packaging companies: cost reduction, a growing environmentalist mind-set among producers, and cost reduction.
JoAnn Hines, a packaging consultant in Kennesaw, Ga., foresaw 2010 as a watershed year for packaging, particularly that made from plastic, for new pressure from eco-activists and lawmakers.
There's gong to be a lot of sturm und drang among packaging initiatives and moving packaging forward from a regulatory standpoint, only because it's such a hot issue with the [green] climate, she said.
Hines acknowledged that despite widely publicized consumer fears over bisphenol A content in polycarbonate children's food containers, and the phthalates used to soften vinyl not to mention the six plastic-bag bans enacted in the U.S. in 2009 there's not a great chance that government regulations will get far tighter.
Even the bio-alternatives are so limited in their scope and application, you couldn't go out and, wholesale, change everything that's in plastic into a more environmentally friendly material, she said. It's like the Wal-Mart [Stores Inc.] mandate: They mandate these things that have to be done. But only about 10 percent of the [suppliers] in the past two years have been able to implement their scorecard.
Much of the financial uncertainty that gripped packaging firms in late 2008 and 2009 has dissipated, Burns and Frame said.
The market [in 2009] was more comfortable with the companies [that were] raising new debt at higher rates than the companies taking a hit on these maturities at lower rates. It was a strange phenomenon, Burns said.
Frame predicted that movement in the industry on the financial side will largely be done among the largest firms: High-yield debt markets are much more open than the financial lending markets. There's quite a dramatic gap. I expect that might narrow slightly, but I don't expect that to go away.
Werneth said a lot of packaging companies in 2009 underwent successful refinancing to get them out of existential trouble; only a handful of companies hold S&P's CCC rating.
Across the industries that we rate, we've seen good appetite for low-rated debt. We do have some meaningful maturities, as we look out, [2011 and 2012] in particular, she said.
S&P's most recent packaging report card, released Oct. 1, stated that 26 of the 36 companies rated had stable outlooks. The ratings agency's next report on the sector is due out this month.
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