Your Business Outlook - January 2008

After expanding by close to 4% in 2007, output of injection molded packaging will expand by at least another 4% to 5% in 2008. The strongest growth will continue to be in food and beverage packaging, such as caps and closures. The residential construction sector will remain sluggish for most of 2008, and this will continue to inhibit demand for products such as molded pails.

OIL PRICES, FOOD PROFITS

Several factors will affect overall demand for plastics packaging this year, but none are more important than the price of crude oil. Its price correlates closely with the price of resins, and resin costs are the largest input in the total cost of manufacturing most types of packaging. At present, both crude oil and resin costs are quite high, but the supply/demand fundamentals indicate a gradual downtrend in these prices for most of 2008.

Another factor that will greatly affect the market for plastics packaging is the trend in profits for the food and beverage industry. Traditionally, food industry profits also correlate closely with the price of energy because the processes involved in producing, shipping, and storing food products are all very energy-intensive. However, this relationship between energy prices and food industry profits has diminished, largely because of recent technological advances in plastics packaging. The result is that the food industry has enjoyed record profits in the past few years despite the fact that energy prices have steadily increased.

After a gratifying gain of 15% in 2007, profits for the food industry will rise another 5% to 7% in 2008. This will provide plenty of incentive for the development of new food and beverage products, many of which will be put into newly designed plastic packages.

The food industry is one of the largest end-markets for plastics, but the trend in the whole retail sector is another good indicator of future demand for packaging. For instance, the cosmetics and healthcare industries have also benefited from improvements in plastics packaging, and retail sales in these two sectors will continue to enjoy above-average growth. After expanding by more than 7% in 2006, overall growth in U.S. retail sales (excluding autos) decelerated to just over 4% in 2007. Growth will hold close to 4% during the first half of 2008 but will start to pick up in the second half. By this year’s end, growth in retail sales will be right at the long-term average of 5%.

LONG-TERM TRENDS

So while the cyclical indicators such as retail sales and food industry profits portend another year of solid growth in the near-term demand for plastics packaging, a couple of long-term trends also bode well for this industry. The first is energy prices. Plastics packaging is typically much less-energy intensive to manufacture than are products made from glass or aluminum. And because plastics also tend to weigh less, these products cost less to ship. Recent technological advances such as thin-wall molding have enhanced this advantage.

Lower shipping costs are becoming increasingly important because of a second long-term trend: The volume of products being shipped is increasing. Some of this is due to changes in the wholesale distribution system in this country (i.e., the “big box” stores), and some is due to the rapid growth of online purchases. The growth in these market sectors has increased demand for packaging that enhances storage and shipping stability. It has also promoted use of products that improve both security and inventory tracking controls. A computer chip embedded in the packaging is one example of this type of product.

About the author

Bill Wood, an independent economist specializing in the plastics industry, heads up Mountaintop Economics & Research, Inc. in Greenfield, Mass. He can be contacted by e-mail at BillWood@PlasticsEconomics.com. His monthly Injection Molding and Extrusion Business Indexes are available at www.ptonline.com.