Blow Molding Quarterly

It’s the Monday after Thanksgiving. It’s been an interesting year. I’m overdue for this issue — my apologies. The 2009 Plastics News blow molder rankings came out this month as has the annual International Energy Agency report. Both will get comments below. Resin prices are an interesting story as well — more in the resin section.

U.S. Blow Molding Concentration Ratio

The 2009 Plastics News blow molder rankings suggest a very slight rise in the concentration over last year from 744 to 753. This mostly signifies slightly less shrinkage in the largest companies compared to the mid-size and smallest molders. Most molders reported sales declines over last year. It appears that concentration in the industry has been pretty stable since the Graham acquisition of OI first raised the ratio to 767 from 628 in 2002. The recent low was in 1997 at 425. There has certainly been additional M&A activity but none of it has been able to change the fundamental level of concentration. This means that overall competitive forces are stable with regard to the amount of choice in the market.

However, there are more instances in which the consolidation has led to limited or even no choice of suppliers for some users of molded bottles. The buyers in these situations seem to be, perhaps singlehandedly, supporting profit growth via price increases with some molders. Buyers with decent choices seem to be generally doing better at avoiding aggressive pricing behavior, as would be expected.

The only really large move of late has been Berry Plastic’s emergence as a significant blow molder. They are number 10 this year between Liquid Container and Alpla. This makes them significant, but from being the industry heavyweight.

Graham is going public next year after their deal with Hicks came apart. Their profits are up this year despite demand and sales being down. This is an indicator of lagged pass-through of resin decreases in the early part of the year in combination with higher pricing from customers with less choice of suppliers.

It appears that Logoplaste is about to enter the U.S. market with a new facility in the process of opening. This will help overall competition and put more downward pressure on the concentration ratio. I had thought we might see them here before now, but better late than never. They are building a new R&D center plus some manufacturing right here in a suburb of Cincinnati. They have also recently announced a new plant being built for detergent bottles for P&G in Malaysia. A growing relationship? In addition, Logoplaste has qualified for FDA single-serve certification so perhaps there is a food or beverage customer involved as well.

Market Conditions

The market continues to be soft but has started to improve. All indications are that demand for all manner of plastic products, bottles included, became very soft in 2009. The most recent Census Bureau data for reported plastics industry capacity utilization fell into the upper 40% range in the 1st quarter of 2009 recovering to the low 50% range in the 2nd quarter. This is broadly a post-WW2 record low. Blow molding no doubt was not far behind — I estimate probably into the mid-50% range and perhaps lower. The current Injection Molding Magazine shows packaging markets in the U.S. down from a high index of 148 (1994 =100) in late 2007 to 107 at the low point a couple of months ago. This is a 25-30% reduction in activity. Plastics Technology shows injection molding and extrusion drops also of around 25% and indicated capacity utilization for injection molding in the upper 40% range in both the 4th quarter of 2008 and the 2nd quarter of 2009. The message, it’s been a tough year for molders — no demand. Really, this just confirms what you’ve reading about nearly everything in the economy this year. It’s been a good year for buyers to do strategic shopping.

More recently, there are signs of improvement but only slight. Never-the-less, molders can be expected to use even slight strengthening in market conditions to push through price increases. My current estimate of blow molding capacity utilization overall is in the mid-upper 50% range. Forecasts I’ve seen suggest a slight improvement, but not a lot through 2010. On the graph of this Repton Group data from Injection Molding Magazine, they suggest getting to an index of 114 by the end of next year.

It should continue to be a decent market for buyers.

The IEA 2009 Energy Outlook just arrived. I’ve had only a chance for a very quick scan. The bottom line seems to be a strong likelihood of a return to high energy prices in short order, except for natural gas. Natural gas is seen moving into a glut status largely as a result of the successful development of hydraulic fracturing of shale.

What does this mean? It should mean the gap between oil and natural gas prices continues to expand. Merrill Lynch very recently forecast oil getting back to $100 per barrel in 2010. IEA suggests a return to oil high prices a bit more slowly but still occurring unless the result of the global recession is a permanent shift in demand towards natural gas, renewables, and greater oil use efficiency.

Efficiency is considered by many, IEA and McKinsey are but two I’ve read, to be the least expensive way to address the oil demand problem. However, efficiency must result in permanent demand reduction. Historically, efficiency gains have led to greater total use as the reduction in energy cost per unit of activity resulted in an increase in total demand greater than the efficiency gain since the energy actually got less expensive. There is a public policy need for the cost per unit of use to stay constant and to rise. It’s not clear how this is to be done, if at all. This suggests carbon taxes, gas taxes, and other measures to create a permanently high energy cost.

There are strong indications developed world oil consumption has peaked. But it doesn’t matter. The developing world (China, India, etc) is growing demand at rates much faster than the developed world’s flattened and slightly declining demand. The developed world is becoming price takers more and more with a shrinking ability to influence the market.

The bottom line is that the energy problem is not gone, just delayed. There are comments on the specific resin impacts in the resin section.

To conclude on energy, allow me to share some observations from a book I just finished. It’s titled “Why Your World Is About to Get a Whole Lot Smaller” by Jeff Rubin. Mr. Rubin is the former chief economist of CIBC in Toronto. The essence of his book is that high energy costs will be permanent as a result of oil scarcity and an inability of the supply flow rate to keep up with demand. These high costs will cause some degree of reversal of globalization with both good and bad effects. The good effect is a return of considerable employment to the developed world. The bad effect is significant increases in the cost of goods and labor, but less than continuing to import under the new energy conditions. Some specific points he makes include:

1. Globalization has been heavily dependent on falling transport costs from fossil fuels over the past 200 years.

2. Rising shipping fuel costs and carbon taxes will act like tariffs with the same impact on import/export activity. For example, $200 per barrel is equivalent to a 25% tariff. Add in a $45 per metric ton carbon tax and it jumps to a tariff equivalent of 40%. These are equal to or greater than the post-WW2 tariffs that limited international trade until recently. Some of this already was occurring in late 2007 and 2008 with the U.S. steel industry becoming less costly than the Chinese and seeing strong increased demand as a result.

3. Efficiency gains are necessary but cannot be allowed to translate into total demand gains from lower per unit energy costs. Historically, efficiency lowers unit cost and leads to greater total demand.

4. He advocates openly for protective carbon tariffs. This is a surprise from a conservative economist. He argues that we have a significant comparative advantage compared to developing countries in energy efficiency that is currently not monetized since there is no price for carbon. This is a unique and interesting thought. If we put a cost to carbon, we will push additional work activity to countries not charging for carbon unless we impose carbon tariffs to equalize this cost and incentivize global behavior. (I’m not getting into the climate change debate here) Any recognition of carbon cost will result in a much higher carbon cost to developing world products because of their energy inefficiencies compared to developed world products. The cost of the efficiency difference would be added on top of the shipment costs as illustrated in point 2.

5. More local production will result in both volume disaggregation and lower specialization of skills. This is a very important point given the role growing productivity plays in economic development. Both of these lower real productivity (after 2 centuries of steady gains) and lead to higher costs from non-energy factors in addition to the higher energy costs themselves.

6. Everything, food production, manufacturing, where you work, etc, is done closer to where you live in order to limit the energy costs of moving people and things around.

I’m sure he doesn’t get it all correct, but the principle he is parsing is sound. Where he’s wrong is probably more a matter of degree than calling the wrong direction.

BLOW MOLDING QUARTERLY - HIGHLIGHTS

Quarterly Highlights

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