Packaging Shows Gradual Improvement

Our forecast for plastics packaging calls for steady-to-better market demand in the U.S. in the coming months and quarters. That’s no reach, as the trend in market demand for plastics packaging has been steady-to-better for a long time.

And there is little reason to expect that this will change in the foreseeable future. The overall rate of expansion in the economy is about 2%. It has averaged 2% growth for the past four years, and will expand at that rate through the end of this year. In 2014, this pace is expected to accelerate to about 3%, and the bulk of this growth will come from a rise in consumer spending. This will provide a welcome and gentle tailwind to the market demand for plastics packaging in the coming months.

But because packaging is such a high-volume, low-margin business, a “gentle tailwind” doesn’t necessarily ensure that plastics processors will be much more profitable. Plus, there are other market forces that may prove to have a greater impact.

One of them is the cost of resin. For most packaging processors, the cost of material is by far the largest portion of their overall manufacturing expenses. And here the outlook is mixed. As the accompanying chart shows, the price of resin is very near its all-time high. And it is reasonable to expect that these prices will be pushed higher as market demand improves.

However, there is also some relief on the horizon. Historically, resin prices have correlated closely with the price of crude oil, which has been the predominant raw material for resin makers. But the industry is rapidly switching to natural gas feedstocks. The recent burgeoning of the domestic natural gas industry has resulted in a sharply lower price for gas vs. oil. At some point in the not-too-distant future, this will put downward pressure on resin prices.

Another factor that will increasingly affect resin prices is recycling. Recycling rates in the U.S. now are lower than in other industrialized countries. But many U.S. corporations, both large and small, are engaged in business and marketing campaigns aimed at pushing the rate of consumer recycling higher. Many cities and towns across America are also actively trying to enhance recycling rates through the use of public awareness campaigns, taxes, and outright bans on certain packaging products. It is possible that the ultimate result will be a significant decline in resin prices.

A third factor that will have a strong impact on the profitability of plastics processors is the trend in profits for the food and kindred products industries in the U.S. The latest data from the food industry indicates that total profits are running at all-time highs. This means that food companies have money to spend on new products, and they will likely do so as soon as they are convinced that consumers are willing to spend more money. This bodes well for the plastics packaging sector.

WHAT THIS MEANS TO YOU

•Current political efforts to ban certain types of plastics packaging products must be used as forums by processors to tout the environmental advantages of the material. Good science will prevail if processors are willing to make the case.

•Under-developed economies that lack the infrastructure to support high volumes of transportation or refrigeration will emerge as large markets for technologically advanced packaging products such as multi-layer films and bottles.

•Plastics packaging possess many advantages that are currently under-valued in the marketplace. These include recyclability; ease of manufacturing, handling, shipping, and storing; and extended product life. Processors must make a greater effort to illuminate these values.