Despite sluggish growth in the U.S. economy so far in 2015, demand for many types of plastics packaging products was solid in the first quarter, and the economic fundamentals are in place for accelerating growth in the second half of this year.
Our outlook is based on data gleaned from our quarterly survey conducted for the Plastics News Business Monitor Index. This survey is designed to provide a breakout of the largest end markets for plastics products and this includes both packaging and containers/closures.
The index for packaging in the first quarter was 107.5 (a value above 100 indicates an increase in overall business activity when compared with the previous quarter). This is stronger than the 104.5 index value for the entire plastics processing industry in the first quarter. In fact, the packaging sector was among the strongest of all the end markets we analyze.
The rise in our first quarter packaging index was driven by strong gains in the sub-indices for new orders, production, and payrolls.
The strong gains in these categories more than offset the declines reported for export orders, backlogs, and prices received. It is worth noting that the packaging sector reported the strongest decline in the prices received category. Our index calculation weights this as a negative factor because most of the time lower prices received indicates weakening market conditions. But that is not the case this time.
The lower prices this year are the result of declining resins prices. Processors are able to pass through these lower materials prices yet still maintain margins. Thus, the lower prices this year are quite likely a boon to overall demand. So at this time, lower prices are likely driving higher profit.
In order to test this assumption, we include a question in our survey on profitability. The majority of the packaging respondents (57 percent) expect to be more profitable this year than they were last year and about a third (32 percent) expect to be just as profitable. So it is clear that the sharp decline in the prices is not having a detrimental effect on processors' profits at this time, and there is strong evidence to suggest that it is actually having a positive effect.
All of this is having an uplifting effect on the respondents' expectations for the coming year. The sub-index that measures future expectations for packaging processors is a salubrious 151.9. This is at the top for all of the end markets we measure. Not surprisingly, these optimistic expectations are generating an increase in capital spending plans for the coming year.
Containers and closures
The other packaging related end market that we measure and analyze is plastic containers and closures. The index for containers/closures in the first quarter was 103.1. This is lower than both the values for the packaging sector (107.5), and the entire plastics industry (104.5). But despite this below-average reading, I still believe the demand trend is rising at an above-average rate.
A look at the table above shows that the sub-indices for new orders, production levels, and employees are all quite healthy. They are not quite as strong as they are on the packaging table, but they are well above the overall plastics industry average. As is the case with the packaging index, the containers/closers index was pulled down substantially by the “prices received” component. But here again, this is actually a positive. A strong contingent of container and closure manufacturers expect 2015 to be just as profitable, or even more profitable, than 2014. This conclusion is supported by the very strong future expectations sub-index of 150 for containers and closures manufacturers.
Fundamentals driving packaging growth
Based on the results of our survey, I would say that the processors who identify themselves primarily in the packaging category are doing a bit better than those who focus mainly on containers and closures, but that both of these sectors are performing well. And the economic fundamentals that drive demand for both of these categories continue to improve.
One indicator that is particularly encouraging is the trend in profit levels for manufacturers of food and kindred products. Profits for food and kindred product manufacturers hit an all-time high in 2014 of nearly $60 billion, which was a robust increase of 10 percent from the previous year. A strong trend in profits supports increased investment for R&D, marketing and new product introductions. Rising levels of these activities bode well for suppliers of plastics packaging.
Another promising trend this year is the rise in retail sales at establishments that sell mostly packaged products. A lot has been made in the business press of the sluggish growth in overall retail sales, but the main reason for the slow growth is the sharp decline in sales at gas stations. Fortunately, gasoline is not a product that is purchased in plastic packages. Retail sales at food and beverage stores are up 3.1 percent, sales at health and personal care stores are up 5.7 percent, and non-store (online) sales are up 4.5 percent. All of these rates are above the long-term averages, and all of these types of establishments are big end markets for packaging.
So the economic fundamentals that portend stronger growth are in place, and both packaging and container and closure manufacturers have high expectations for this year. We also asked survey respondents about their biggest concerns for the future. The majority of their responses paralleled those from the overall industry (i.e. global economic conditions is at the top of everybody's list) with a few exceptions. Manufacturers of these products were more worried than other processors about: consolidation in the supply chain; consumer perceptions of plastics; and maintaining shareholder returns.