Unpacking the Dutch plastics packaging industry

Industry analysis

Unpacking the Dutch plastics packaging industry

1

Rabobank International

Introduction This industry analysis aims to provide insight into the Dutch plastics packaging industry 

The industry analysis „Unpacking the Dutch plastics packaging industry‟ is written by Rabobank to - Give interested parties an insight into the Dutch plastics packaging industry - Support relationship management of Rabobank in developing customer relations



The analysis is made in co-operation with VMK, the Dutch Plastics Packaging Association, which is related to NRK, the Dutch Association for the Rubber and Plastics industry



The analysis is based on various interviews with companies and organisations throughout the plastics packaging chain, and on desk research

 

The report focuses on mid and large sized producers of plastics packaging This report can give quick and basic insight in the industry as well as more elaborate knowledge - The summary gives a two page overview - The heading of a slide summarises the most important conclusions on the slide

- The main text body and graphs provide more detailed information on the slide topics

 

The analysis was finalised in April 2012 In the appendices you can find the contact details of the authors of this report

2

Summary (I) Demand for plastics packaging



The size of the global packaging market is EUR 403bn and the size of the Dutch market is EUR 3.6bn (best guess). Paper/board is the most used material while plastics represent the highest value. The food & beverages industry is the most important end market for plastics packaging (~60%)



Plastics packaging has to meet many requirements regarding transport, handling, marketing, informing and usage. These requirements show the versatility of packaging functions. On the other hand, most packaging users regard it as a low interest product



The long term demand for plastics packaging is relative stable: large scale substitution between packaging materials is not expected. We see long term opportunities for plastics packaging as consumers, brand owners and retailers are constantly changing. Plastics packaging could increasingly become a silent sales man: (i) need for more individualisation of packaging and (ii) brand design to stand out and improve customer loyalty



Short term demand is GDP driven: more production and consumption result in more packaging. Thus packaging demand is cyclical but not as cyclical as many other industrial sectors. The average beta (relation between GDP and production) is 1.5. At turning points in the economy it can go up to 4.5 caused by the supply chain/inventory effect. Given the weak economic forecasts we expect 2012 demand for plastics packaging to decline marginally while margins can be pressured due to still high raw material costs and rising labour costs

Supply of plastics packaging



Plastics packaging producers are positioned between raw material suppliers and producers of all kind of goods. This position is in general relative weak as: (i) suppliers are predominantly large chemical companies, (ii) customers are for an important part large brand owners and retailers, (iii) many plastics packaging suppliers are active. We acknowledge the fact that the position will be different per market segment



The plastics packaging industry is highly fragmented: top 50 European producers have a combined market share of 42% of the EUR 50bn European plastics packaging market. This results in fierce (price) competition, modest margins, drive for economies of scale and ongoing consolidation. However, given the many types of materials, products and end markets we can identify a variety of niche markets. This downplays

the level of competition in these niches



Plastics packaging market is mostly a local market (range of ~400km). The top 50 European companies have all production facilities in various countries. Only pure commodities i.e. shirt bags are produced in low cost countries in Asia and traded globally

3

Summary (II) Supply of plastics packaging (con’t)



The Dutch market for plastics packaging is small compared to the Dutch economy. Most Dutch producers are SMEs which serve the Dutch and neighbouring markets. A limited number of producers have more than EUR 50m sales



The production of plastics packagings is characterised by: (i) high raw material costs (average 45%) and (ii) capital intensive production. Raw material prices are volatile which results in high sales and margin volatility. It also makes procurement and sales (contracts) even more important. The capital intensity results in a drive for scale and in margin volatility as capital costs are fixed

Sustainability issues



A major part of discussion on plastics packaging is on sustainability issues. Plastics packaging suffers from a poor public image i.e. plastic soup. On the other hand we see many clear advantages of plastics packaging which we think are underexposed in these discussions. Four sustainability perspectives are relevant in the plastics packaging industry: (A) input of raw materials, (B) production, (C) usage, and (D) after-use. Sustainability will only be effective when all four come together



(A) Bioplastics in the packaging industry is promising. However, to have impact and to become price competitive scaling of production is needed.

Despite many initiatives we don‟t expect this to happen in the next decade. Current annual growth rate is 20%. If this high growth is maintained then still only 4% of the traditional plastics are substituted in 2030. (C) Significant supply chain improvements are possible if (plastics) packaging is better used and further improved. Resulting in less waste and lower carbon footprint in especially the food chain. (D) In the after-use phase we see various options. There is no best solution yet and they must be considered on their economic impact, carbon footprint impact and technological constraints and the outcome will differ per case Strategy of plastics packaging producers



Strategy of companies is largely dictated by: (i) types of products produced (commodities vs specialties), (ii) company size (large vs small), (iii)

current positioning (Customer initimacy, Product Leadership, Operational excellence)



We see several options for: (i) growth strategies i.e. international expansion, integration and aggressive pricing and (ii) growth methods i.e. M&A, nearshoring and focus

4

I. At a glance



Plastics packaging producers are positioned between raw material suppliers and producers of all kind of goods



Size of global packaging market is EUR 403bn and in The Netherlands EUR 3.6bn. Paper/board is most used material while plastics represent the highest value

II. Demand



Packaging is the most important plastics application and widely used in the food and beverage industry



Plastics packaging suffers from a poor public image. This is mainly due to (perceived) sustainability issues

III. Supply

IV. Sustainability

V. Strategy

VI. Appendices

Rabobank International5

Production chain Plastics packaging producers are positioned between raw material suppliers and producers of all kind of goods

Raw materials account



(industrial, or consumer goods)



Distinction between



Recycler

In general the producer of



In the consumer



Packaging is part of the



Final link in the

commodity and specialty

the goods to be packed

packaging market the

average daylife of

production chain is

costs of average plastics

plastics packaging

demands the packaging

retailer plays an

consumers

recycling and waste

Also important distinction

i.e. brandowner, industrial

important role as the final

A Dutch consumer opens

processing

plastics packaging up till

between smaller and

company

destination is mostly the

seven packagings a day.

75%

larger producers

67% of plastics packaging

supermarket

Which is 140,000

The retail industry is

packagings in a life time

Mainly commodity









Variety plastics packaging

is consumer packaging

chemicals like PP, PE,

types requires variety of

and 33% industrial

consolidated with large

and PET

production technologies

Packaging costs are

Production process of

modest part of total costs

international chemical

plastics packaging is

making packaging a

companies i.e. SABIC

capital intensive

relatively low interest

labels of retailers are

product

Producers are large





and Lyondellbasell



Consumer

for 45% of production

packaging; commodity



Retailer

(consumer goods)

Others**

Others*



Producer of goods

Plastics packaging producer

Raw material suppliers

Chemical companies are



Large Dutch consumers of











Dutch plastics recycling market is fragmented



The after use phase of

Consumer preferences are

plastics packaging is

chains dominating the

constantly changing and

becoming more and more

Dutch market

have impact on

important because: (i)

On top of that, private

packagings

increased awareness on

Packaging design can

environmental issues

gaining market share

persuade consumers to

(carbon footprint), (ii)

Like the producers of

buy specific products and

shortage of raw materials,



important for

packaging pay taxes

goods they expect

is seen as silent sales

and (iii) upward pressure

development of new

(Verpakkingsbelasting) of

packagings to meet their

man

on raw material prices

plastics and new

in total EUR 80-85m p.a.

specific demand

applications of plastics

These taxes end in 2013

* Packaging machine manufacturers, label suppliers, ink suppliers ** Contract packers and fillers, wholesale, distributors, packaging designers

6

Key figures (I) – packaging Size of global packaging market is EUR 403bn and in The Netherlands EUR 3.6bn. Paper/board is most used material while plastics represent the highest value Global packaging market in EURbn Other 42 11%

Eastern Europe 28 7%

Glass 10%

Asia 122 30%

Metal 12%

EUR 403bn Western Europe 102 25%

Dutch packaging market in value*

North America 109 27%

Wood 5%

Wood 15%

Plastics 39%

EUR 3.6bn

Paper and board 34% Source: Univerity Twente; Nedvang, 2010; Rabobank

Destination of Dutch packaging production in value

Origination of packaging in Dutch market in value

Plastics 17%

Glass 19%

Metal 7%

Source: World Packaging Organisation, 2009; Rabobank

Paper and board 43%

Bron: Zakboek Verpakkingen, 2007

Global packaging end market in value

Other 36%

Export 33%

Import 42%

Dutch market 67%

Source: Zakboek Verpakkingen, 2007

Dutch packaging market in weight

Food 38%

Dutch production 58%

Source: Zakboek Verpakkingen 2007

Personal care 3%

Medical and pharma 5% Source: Zakboek Verpakkingen 2007

Beverages 18%

* Dutch packaging industry lacks adequate data on market size. Rabobank has used several indirect sources to estimate market size. We estimate the Dutch market at EURbn 3.6 in 2011 (best guess) while Zakboek Verpakkingen estimates market size at EURbn 5.5 in 2007

7

Key figures (II) – plastics packaging Packaging is the most important plastics application and widely used in the food and beverage industry Plastics consume ~7% of world oil and gas production in weight

Packaging is the largest end use of plastics in Europe in weight

Energy f or Other production 6% plastics Plastics 3% 4%

Other 27%

Industrial packaging 33%

Chemicals 4% Transport 45%

Energy and heating 38%

Electrical and electronics 6%

Packaging 39%

46 mt Consumer packaging 67%

Automotive 8%

Source: NRK; Hopewell; European Commission, 2009

(ii) Market segmentation plastics packaging: end market in value

Source: Plastics Europe, 2012

Film and sheet 9%

Household 12%

Building/con struction 21%

(iii) Market segmentation plastics packaging: product types in value*

Other 14%

Blister 4%

Source: NRK; ICPP, 2011

(iv) Market segmentation plastics packaging: polymer use in weight

Rigid: ~60% Flexible: ~40%

PS 9%

PVC EPS Other 3% 1% 1% LDPE, LLDPE 26%

Bulk/other 12%

Food and beverage 57%

Personal care 8%

(i) Market segmentation plastics packaging: end user in weight

Medical and pharma 9%

Source: PMCF; data based on US market (value); other data suggest that F&B share is higher

Bottles 25%

PET 20%

Closures 12% Pouches 15%

Source: PMCF; data based on US market

Bags 24%

HDPE 17%

PP 23%

Source: Applied Market Information, 2011

: relative strong growth * Note: Accurate data on European situation is unavailable. Industry experts expect share of „Bags‟ to be smaller while share of „Film and sheet‟ to be larger in Europe

8

Public opinion Plastics packaging suffers from a poor public image. This is mainly due to (perceived) sustainability issues The perception

Some facts



I.

Plastics packaging is often negatively associated with because it... - ...litters the streets and contributes to the plastic soup - ...is made out of oil (non renewable)

society: more consumption results in more packaging II.

- ...does not biodegrade

Packaging which litters the streets is not the responsibility of the

packaging industry but of the people throwing it on the streets

- ...seems to be less sustainable than other packaging materials

III. Sustainability has to be regarded within the entire value chain.

- ...is often overused: 79% of English consumers believes products

Current use of plastics packaging is in several ways much better

are over packed (source: Ipsos Mori)

than the next best packaging material (see left figure)

- …is poorly recycled



The usage of packaging is an outcome of the demand of our

IV. Misunderstanding exists about the way products are packed: why

In the end it all comes down to sustainability issues

plastics, why individual packaging, etc? We think better information can take this misunderstanding away* V.

Impact of potential replacement: substituting plastics in Europe with the next best packaging material (x times higher)

equivalent of: household waste of 91m Europeans

equivalent of: 20m heated homes

equivalent of: 21m cars on the road

Plastics

Total masses f or same f unctional units

Plastics

Energy consumption in total lif e-cycle

Plastics

- At the supermarket losses of unpacked fruit and vegetables are 26% higher than for pre packed products - 1.5g plastic film extends shelf life of a cucumber up till 14 days - 10g multilayer film extends shelf life of meat up till 7 days VI. Better waste collection and management (Plastic Heroes), lighter materials, less materials, and new materials (bioplastics) enhance

Alternative material

x 2.7, or 60.8 mt/a

Alternative material

x 2.2, or + 1,240 GJ/a

Alternative material

x 3.6, or + 47.6 mt/a

Some examples underlining this:

recycling and useful recovery and can cause less sustainability issues in the future

GHG emissions in total lif ecycle

Source: Denkstatt, 2011; Eurostat * See „Why are products packaged the way they are‟: http://www.incpen.org/docs/WPAPTWTR.pdf

9

I. At a glance

II. Demand



economic changes; high growth has moderated

  III. Supply

Plastics packaging demand growth was driven by: (i) technological breakthroughs, (ii) social Most buyers regard packaging as a low interest product In a changing world the importance of packaging as silent sales man still increases and will be benificial to plastics packaging

 

Short term demand for plastics packaging is driven by GDP with an average beta of 1.5 We expect 2012 demand for plastics packaging to decline marginally while margins are being pressured due to still high raw material costs and rising labour costs

IV. Sustainability

V. Strategy

VI. Appendices

10 Rabobank International

Long term demand (I) Plastics packaging demand growth was driven by: (i) technological breakthroughs, (ii) social economic changes; high growth has moderated. Most buyers regard packaging as a low interest product Plastics packaging industry has reached maturity

Demand growth has moderated



In 60s-80s plastics packaging demand showed high growth and substituted other packaging materials in particular glass and cans



Demand propelled by: (i) technological breakthroughs on barrier functions, laminated plastics, injection molding, coatings, and (ii) social economic changes: super markets, longer supply chains



60s-80s: introduction and growth  High growth  Substituting other materials  Technological developments  Rise of super markets and longer supply chains

Last decade the substitution almost came to a standstill however we

90s-current: mature  Low growth  Highly competitive  Price pressure  Consolidation

still see opportunities for further demand growth in the long run



In the end, (i) most buyers regard packaging as a low interest product, (ii) the buyers of packaging are not interested in the materials but in the functionalities of the materials (see below)

Packaging has to meet many requirements*

Importance of packaging depends on the product that is being packed

Requirements of the product

Production Distribution

Secondary packaging Primary packaging

Product

Storage

Requirements of: Consumer Retailer Marketer

Share of packaging in value added of products

Transit packaging**

Requirements of:

57%

60% 50% 40% 30%

24%

20% 10%

4%

8%

0% Requirements of legislation

Source: NVC

Chemical commodities

Packaging total

Food and beverages

Cosmetics

* See appendices for more detailed functionalities of packaging material and requirements of product types ** Primary packaging: packaging that comes into direct contact with the product; Secondary: packaging that facilitates the bundling of the products, makes them easier to handle, and makes distribution possible: group packaging; Transit (tertiary): packaging that enables to bundle a large number of products for long distance transport

11

Long term demand (II) In a changing world the importance of packaging as silent sales man still increases and will be benificial to plastics packaging Consumers' preferences change



Major drivers for future growth of packaging industry

Western consumers have changed focus since 2008-2009 crisis

Health awareness Convenience

- Value for money: highly price sensitive

Brand enhancement/differentiation

- Simplicity: less complex lifestyles

New packaging materials

- People, not things: family and friends are increasingly important

On-the-go lifestyles

- Values: value trust and concern about carbon footprint

Smaller households

- Convenience: products to last, and to be available locally



Smaller pack sizes

Consumers target groups are hard to reach: 70% buy decision is

Recycling

done on the spot, 30% of new products are not recognized, shelves

Older population

become more crowded: average supermarket 20,000-25,000 items Source: Euromonitor; ICIS, 2011; F. Koopmans, Kracht van verpakkingen

Unimportant

Retailers and brand owners change

Plastics packaging can be the ultimate silent salesman

  



Increased competition between brandowners and private labels

Plastics packaging can fill in the need for

Increased brandstretching: more products under one label

- More individualisation of packaging

Focus on sustainability: 30% of consumers is willing to switch to

- Brand design to stand out and improve customer loyalty

more sustainable supermarkets. Sustainability strategy goals



- Wal Mart: in 2013 5% packaging reduction

Furthermore, plastics packaging could gain market share in other products segments i.e. baby food, cans, sauces

- Unilever: in 2020 50% water, 50% CO2, 50% waste reduction - Tesco: in 2010 25% less packaging

Critical

Source: PIRA survey, 2009



We see two negative aspects of plastics packaging - Poor image on sustainability (see earlier comments on Public

opinion)



Note: at this moment in industrial endmarkets sustainability is seldom an main issue or selling point

- „Cheap image‟ which would not be suitable to high end and luxury products

12

Short term demand (I) Short term demand for plastics packaging is driven by GDP with an average beta of 1.5 Germany: YoY GDP growth and YoY plastics packaging production growth in volume

Demand is limited cyclical

15%

15%

10%

10%

consumption: the more we produce and consume the more

5%

5%

packaging is needed

0%

0%

GDP

-5%

Plastics packaging

-10%



Demand for packaging is positively correlated with production and

Most important end markets for plastics packaging are limitedly cyclical: food and beverage, pharma/medical and personal care

-5% -10%

-15%



(except industrial end markets)



-15%

Average beta - relation between GDP and plastics packaging production in volume - is: ~1.5* - Plastics packaging production is cyclical: beta >1...

Source: Eurostat

- ...though not highly cyclical i.e. beta chemicals >3

 France: YoY GDP growth and YoY plastics packaging production growth in volume 15%

demand. This a result of the supply chain/inventory effect - Having limited coordination, communication, information in the

15%

GDP

Beta can move up to 4.6: production is not always in line with end

supply chain

10%

- Made-to-stock production

5%

5%

- Holding safety stocks

0%

0%

-5%

-5%

10%

Plastics packaging

-10% -15%

-10% -15%

- Overreacting to backlogs



Sales and margins of the plastics packaging industry is - next to final demand - also highly dependent on raw material prices



Important issues for individual companies should therefore be - Procurement strategies - Inventory levels

Source: Eurostat

- Competitive position: (un)ability of passing on price increases

* Data on the Dutch plastics packaging industry is limited. We therefore assume that above figures also apply to the Dutch plastics packaging industry

13

Short term demand (II) We expect 2012 demand for plastics packaging to decline marginally while margins are being pressured due to still high raw material costs and rising labour costs Simplified model for determining the profitability of the plastics packaging industry (2008 = 100)*

Price level (inflation)

2008

100

100

100

100

100

100

100

100

100,0

2009

96,5

97,4

91,1

98,9

70,5

71,9

49,1

102,8

101,2

2010

98,0

97,8

96,9

100,6

100,9

105,2

69,7

104,0

102,5

2011

99,3

96,9

99,9

105,5

108,5

115,3

91,0

105,4

104,9

2012F

98,6

96,1

98,8

?

?

?

?

107,4

107,0

Indicators

Producers have been able to pass on higher costs in recent years. Most important drivers for lower sales have been lower volumes

Source: Rabobank analysis

Margins

Indicative direction

=

fixed

Labour costs

+

Energy prices (APX)

variable

PP prices

Costs:

PE prices

-

Producers prices

selling prices

Industrial production

x

Consumer spending

volumes

GDP

Sales:

Prices seem to remain at a high level. However this depends on many variables: (i) demand: economy, stock levels, expected price development, (ii) supply: supply strategies, temporarily shut downs, (iii) oil prices: OPEC cartel, political situation M-E, high capex need of oil majors, EUR-USD exchange rates, high Asian demand

* Notes: This is a simplified model which doesn‟t take into account changes in stock levels, utilisation rates, (in)flexibility of production factors etc. The model can be used to qualify and discuss important sales and margin drivers. Sources: Datastream, CBS, Consensus Forecasts. Producers prices: refers to selling prices of Dutch producers of Rubber and plastics. PE prices: Polye LDPE-GP Film, Spot FD NWE E/KG. PP prices: PP Copolymer,Spot FD NWE E/KG. Energy (APX): APX TTF-Hi All-Day Index E/MWh - PRICE INDEX. Prices are all average prices in a year

14

I. At a glance

II. Demand

III. Supply



Fragmented and highly competitive market is likely to witness ongoing consolidation and is squeezed between strong suppliers and customers in the value chain



Competitive position is partly determined by the company size and by the type of plastics packaging products which are being produced

IV. Sustainability



Largest part of production costs is related to raw materials. Raw material prices are volatile and related to oil prices causing volatilty in companies‟ sales and margins



Plastics packaging industry is capital intensive like most manufacturing industries however significantly less than process industries. Related to capital intensity is the utilisation risk

V. Strategy



European plastics packaging industry is highly fragmented and is consolidating however on a company level we identify many niche markets. Dutch producers are mostly SMEs which serve the Dutch and neighbouring markets

 VI. Appendices

Producers are mainly situated in the South and East of The Netherlands, and in the West near Westland region

15 Rabobank International

Competition (I) – 5 forces Fragmented and highly competitive market is likely to witness ongoing consolidation and is squeezed between strong suppliers and customers in the value chain New entrants

 Entry barriers are medium high as knowledge and

relative high capex is needed to be really competitive and to gain scale  E-European production has entered the W-European markets in last years  Asian products entering the European commodity markets

Suppliers

Industry competition

Customers

 Concentrated industry of international plastic resin

 We regard plastics packaging for the most part as

 Buyers of plastics packaging are for a significant part

suppliers: large chemical companies and chemical wholesalers  Compared to the more fragmented packaging industry suppliers hold a strong position

commodities: high volumes, highly competitive  In W-Europe a large number of producers are active  This environment results in: (i) ongoing consolidation, (ii) margin pressure  Producers can deliver value added by customer intimacy and/or product leadership

large food & beverages producers  These companies hold a strong position towards the fragmented packaging industry  Packaging however is seen as a way to differentiate from competitors  Some customers also have in-house production capabilities and could pose a threat to packaging activities

Substitutes

 Substitution between packaging materials poses little

Low importance

threat to plastics as other packaging materials have been substituted to plastics i.e. glass bottles are replaced PET bottles  Plastic packaging growth outpaced growth of other packaging materials  In the long run bioplastics might substitute regular plastics

High importance

16

Competition (II) – large versus small Competitive position is partly determined by the company size... Large plastics packaging producers

  Markets



European or global market Serving large international clients in many geographic

Small plastics packaging producers

 

Smaller local market (range of 400km) and niches Serving clients which demand specific

markets

service/products and/or are not the prime clients of

More diversified: several plastics packaging materials

large producers

and/or other packaging materials, several production



technologies

More specialised: limited plastics packaging materials and production technologies, possibly offering more products via wholesale



Operational excellence: most obvious strategy



making use of economies of scale

 Strategy

Product leadership: possible on several products,

are less competitive



large company has more R&D resources



Customer intimacy: more difficult as large companies

Operational excellence: difficult as production costs Product leadership: possible on limited number of products, limited R&D resources



are less flexible

Customer intimacy: preferred strategy as small companies offer more flexibility and are a better match for smaller clients

  Costs

Lower raw material costs due to quantity contracts Lower production costs due to large machinery and

 

equipment, and more specialised operating personnel



Offshoring/nearshoring in search for lower production costs

Higher raw material costs Higher production costs, however larger flexibility in costs in the short run, lower overhead costs



Offshoring/nearshoring more difficult: (i) operational excellence is a difficult strategy, (ii) span of control

17

Competition (III) – commodities versus specialties ...and by the type of plastics packaging products which are being produced Commodity plastics packaging

Business model

Strategy

Production

Pricing

Competition

   

Cost driven (capex, scale)



Specialty plastics packaging Marketing driven (PMCs)

Cyclical

   

Operational excellence (best total cost), or customer



Product leadership (best product) or customer

Process technology driven Low margins and high volumes

intimacy (best solution)

   

Larger part raw material costs

 

Prices more cost push

  

Many competitors, large markets

Long product cycles and limited product range Made-to-stock, long production runs Easier to recycle

Price drivers: raw material costs, supply/demand balance

Competition on price, market share and capacity utilisation

Medium to high entry barrier: know how and technology are

Clients

Low switching costs: many suppliers, easy switching Standard terms Less service needed

Less cyclical

   

Larger part labour costs

 

Prices more demand pull

  

Less competitors, smaller markets (niches)

Fast and flexible production capacity needed Made-to-order, short production runs More difficult to recycle

Price drivers: perceived value added

Competition by differentiation High entry barrier: long term experience needed, advanced technology, patent protection



to other supplier

 

High margins and low volumes

intimacy (best solution)

easily accessible, large amount of capital needed



Product research oriented

Higher switching costs: few suppliers, customer‟s production has to be adapted

 

Longer term customers with specific commitments Customized package is essential

18

Production (I) – production cost distribution Largest part of production costs is related to raw materials

 

Most important part of production costs are raw materials However differences exist between companies and in time - Related to type of plastics packaging: commodity type of plastics

packaging have a larger share of raw materials costs when

Distribution of production costs 100% 90%

7-22%

Differences in raw material costs

80%

- Related to the company size: larger companies benefit from

20-35%

compared to specialties 70%

economies of scale resulting in better procurement and lower - Related to the raw material prices: raw material prices are volatile (see next sheet) - Related to technological progress: producers are able to use less

raw materials while keeping functionalities at the same level i.e. lighter and thinner packaging



Distribution in production costs is relative stable in the long run - Labour costs depend on: (i) wages (tracking somewhat above inflation) and (ii) on number of employees per ton output which is expected to be lower in time due to technological progress - Energy costs are related to (i) energy prices (oil and gas) and (ii)

15%

60% 50%

20-75%

contract prices

15%

25%

40% 30% 20% 10% 0%

45% Raw materials

Labour

Energy

Other

more efficient production technologies : average % of production costs : range in % of production costs Source: Interviews; The packaging federation; CBS

19

Production (II) – raw materials Raw material prices are volatile and related to oil prices causing volatilty in companies’ sales and margins Chemical price volatility

Chemical and oil prices (2007 = 100)



250

Most important raw materials are chemical commodities i.e. LDPE, LLDPE, HDPE, PP which tend to track the direction of the oil price



Chemicals prices also influenced by

- Demand: economic activity, speculation i.e. forward buying, substitution between polymers

200

Oil

- Supply: capacity, temporarily shut downs, supply strategies - Other: EUR-USD rates (USD quoted commodities)



Volatilty of chemical prices is high (though not as high as oil):

150

- YoY price variations of 20% are common resulting in variations of

LDPE

PP

-10% or +10% in sales if prices are passed on - Inventory level and consequently the procurement strategy of

companies are important as they can save the day

PVC

100

- Volatility can ultimately result in serious margin pressure or relief



Chemical companies and producers of plastics packaging have an ongoing discussion about variations in European and Asian prices

50

- Plastics packaging producers argue that Asian prices are most of the time significantly lower and result in a competitive advantage of Asian producers of plastics packaging - Chemical companies argue that listed prices are not comparable

between regions* and that Asian producers benefit from lower costs of labour and investments - Rabobank doesn‟t take sides and thinks it is a fact that Asian producers are becoming more and more serious competitors

0 5-1-2007

5-1-2008

5-1-2009

5-1-2010

5-1-2011

5-1-2012

Oil: Crude Oil-Brent Dated FOB USD/BBL (EUR) LDPE: Polye LDPE-GP Film, Spot FD NWE EUR/KG PVC: PVC Domestic UK GBP/MT (EUR) PP: PP Copolymer, Spot FD NWE EUR/KG Source: Datastream

* Difference (i) in quoted spot prices (like ICIS) and prices paid which are an outcome of negotiations, (ii) in delivery conditions of prices like in- or excluding transport, insurance, service etc.

20

Production (III) – capital intensive Plastics packaging industry (part of Rubber and plastics) is capital intensive like most manufacturing industries however significantly less than process industries Machinery share in capital equipment

High capex need

100% 80%

68%

62%

60%

57%

73%

76%

79%



produce goods

57%

- Compared to other sectors of the Dutch economy manufacturing

46%

industries are more capital intensive: relative high capex and low

40% 20%

Investments are needed in capital goods (capex) in order to

opex, or high capex per employee

8%

- In the Dutch Rubber and plastics industry - of which plastics

0%

packaging is an important part - 73% of capex is related to machinery i.e. extruders, molds

 Source: CBS, 2010; Rabobank

The initial investments of less advanced machinery is not very high making it relative easy to start producing. Especially, in the early days family run businesses started producing plastics packaging.

However state-of-the-art machinery will be significantly more

Capital equipment per employee (in EURk)

expensive 1.200 959

1.000 800



- Volatile margins as costs on capital goods are fixed: low

643

600

flexibility of production capacity (low marginal costs)

400

200

Capital intensive (high capex) industries are characterised by

161

86

-

92

120

183

259

- Economies of scale: capex per good produced is lower when scale is larger



Capex in plastics packaging industry per employee is - compared to other manufacturing industries - up to par. Process industries like chemical and oil industry are much more capital intensive

Source: CBS, 2010; Rabobank

21

Production (IV) – utilisation risk Related to capital intensity is the utilisation risk which is another way of expressing volatile margins and low marginal costs Resulting under utilisation risk costs

Utilisation risk option tree: plastics packaging producers have to deal with utilisation risks No overcapacity Enough demand to fully fill capacity

No additional (under) utilisation risk costs

Production is scalable, so reduced output

Utilisation

Overcapacity Capacity cannot be fully filled

Share of fixed costs

Only original products can be produced with overcapacity

Production is kept at full output

Price is kept constant and some produced units are not sold

Share of fixed costs + variable costs + warehousing + obsolescence costs

Price is decreased to sell all produced units

Reduced margin for all units sold

Capacity is used for other products own company

Low margin difference between original and other product

Capacity is used for other products of other market players

Low margin difference between original and 3rd party product

Other products can be produced with overcapacity

Source: McKinsey; Rabobank

22

Suppliers (I)- Europe European plastics packaging industry is highly fragmented and is consolidating however on a company level we identify many niche markets Fragmented industry with many niches



- Top 25 companies: 31% combined market share

- Top 50 companies: 42% ...resulting in a competitive enivironment especially in commodity packaging



The industry is consolidating fast as most major companies have acquired competitors in last years in order to - Make use of economies of scale: procurement, production, sales - Gain market share and/or become market leader which could result in higher margins

- Focus on core activities (ongoing investments and divestments)



0

Highly fragmented European plastics packaging industry (EUR 50bn*)...



Top 25 European producers by European plastics packaging sales in EURm (2010)

Listed plastics packaging producers have a stable performance in last 5 years: average EBITDA margin is 12%

500

1000

1500

2000

2500

Amcor (Aus) Alpla-Werke (Au) Sealed Air Corporation (US) Aptar Group (F) Linpac Group (UK)

RPC Group (UK) Constantia Flexibles (Au) Klockner Pentaplast (G) Promens Hroup (Ice) APPE (UK) Bericap (G) Grupo Armando Alvarez (Sp) Mondi Group (UK) Pregis Corporation (US) Wihuri Oy Wipak (Fin) Schoeller Arca Systems (NLD) Rexam (UK)



However, given the many types of materials, products and end markets we can identify a variety of niche markets. This downplays the level of competition in these niches



Furthermore, plastics packaging market is mostly a local market

(range of ~400km). Top 50 companies have all production facilities in various countries



Greiner Packaging (Au) Nordenia International (G)

Trioplast Industrier (Swe) Papier Mettler (G) Clondalkin Group (NLD) Bemis Europe Flexible Packaging (US) British Polyethene Industries (UK) Bischof + Klein (G)

Only pure commodities i.e. shirt bags are produced in low cost countries in Asia and traded globally

Source: AMI, Plastics packaging producers, 2011

* Rabobank estimation based on Eurostat 2008 data and calculations on volume and selling prices

23

Suppliers (II) – The Netherlands Dutch producers are mostly SMEs which serve the Dutch and neighbouring markets

Dutch market relative small



We estimate the Dutch plastics packaging market at EUR 1.4bn* representing 2.8% of the European market



Dutch plastics packaging industry is relative small compared to

other countries - Relative to GDP: 4.4% vs 2.8% - Relative to industrial sales: 4.5% vs 2.8% - Sales growth in E-Europe but also in Belgium has been significantly higher



On the other hand, 26% of top 50 have production facilities in The Netherlands



-

50.000.000

100.000.000

150.000.000

1. Combipac [BPI]

2. Oerlemans Packaging 3. VFP [Clondalkin]

4. Kivo 5. Hordijk Verpakkingsindustrie

6. Tredegar Film Products [Tredegar] 7. Polymer Logistics [Polymer Logistics]

8. Plasticum Groep

Two of the European top 50 producers are headquartered in The Netherlands: Schoeller Arca Systems and Clondalkin Group



Top 20 Dutch producers by sales in EUR (2010) Note: list is not complete due to lack of data**

Likewise the European market the Dutch market is fragmented - 150-200 companies produce plastics packaging (source: Eurostat; Companyinfo) - Most are SMEs with an average sales of EUR 7-10m and ~40 employees (Source: Eurostat; Companyinfo) - Most companies serve the local market within 400km range

and/or serve niche markets

9. Modiform 10. Scholle Europe B.V. [Scholle Corporation]

11. Krehalon Industrie [Kureha Corporation] 12. Rexam Plastics Europe [Rexam]

13. Constar International Holland [Constar] 14. Graham Packaging (Zoetermeer en Etten-Leur) [GPC]

15. Houweling International 16. RPC Bramlage [RPC Group] 17. Pregis [Pregis]

18. Dijkstra Plastics 19. Curtec International Holding

20. Rosti Nederland

Source: Companyinfo (KvK); company websites * Estimation based on: (i) volume of plastics packaging in Dutch market according to Nedvang in 2010, (ii) an average raw material price of EUR 1,500 per ton and, (iii) distribution of production costs. Estimation only includes the production of plastics packaging and excludes other activities in the industry i.e. contract packers and fillers, wholesale, distributors, packaging designers ** Note: list is not complete as not all companies post their data at Companyinfo (KvK). Sales is based on most recent available data in Companyinfo of companies with plastics packaging production as prime activity. The graph excludes Schoeller Arca Systems and Clondalkin Group. Between brackets the name of the international holding/mother

24

Suppliers (III) – The Netherlands Producers are mainly situated in the South and East of The Netherlands, and in the West near Westland region Plastics packaging producers in industrialised regions



Geographic distribution of top 20 Dutch producers (numbers refer to the main location of the companies in last sheet)

Manufacturing in The Netherlands is mainly situated outside the Randstad: Southern and Eastern part of The Netherlands. Due to - Historical context

- Lower land prices - Availability of labour - Good accessibility

 

Likewise, packaging producers are also situated in these regions 12

Furthermore, we identify a cluster of packaging companies near

1 4

Westland. The horticulture in glasshouses is concentrated in this region

17

11

3

18 5

9

14 15

13 2

11

7 8 10 19 20

16 6

Source: Companyinfo; company websites

25

I. At a glance

II. Demand

III. Supply



Four sustainability perspectives are relevant in the plastics packaging industry: Input, Production, Usage, and After-use. To be effective all four(!) have to come together

 IV. Sustainability

Bioplastics in packaging industry is promising however to have impact scaling of production is needed. Ongoing discussion on environmental pros and cons: entire supply chain has to be considered



Low hanging fruit: improve supply chains by using (plastics) packaging better. This results in less waste and lower carbon footprint especially in the food chain

V. Strategy



Recycling and recovery of plastics packaging is going into the right directions however many more steps have to be taken: better sorting methods, better plastics feedstock and new

applications

 VI. Appendices

In the after-use phase we see several options. There is no best solution yet and they must be considered on their economic impact, carbon footprint impact and technological constraints and the outcome will differ per case 26 Rabobank International

Sustainability framework Four sustainability perspectives are relevant in the plastics packaging industry*: Input, Production, Usage, and After-use. To be effective all four(!) have to come together Sustainability framework*

Global sustainability problems...

...and contribution of plastics packaging

   

   

Raw material shortage Increasing global population and rising incomes Increasing emissions of CO2 and GHG Increasing waste problem

Plastics packaging production consumes raw materials and energy More consumption and a higher welfare result in more plastics packaging Production and after-use of plastics packaging result in emissions Plastics packaging is a fare part of total waste; especially as the supply chain is not closed resulting in littering streets and environment (plastic soup)

Packaging

A

**

B

Input (raw materials)

Main sustain-ability

Problem

reduction

 

C

Production (production process)

D

Usage

After-use (collection, re-use, recycling, recovery, disposal)

(packaging functionalities)

issues

Bioplastics



Substitutes

Lighter/less plastics in



packaging



Energy efficient production

Protecting materials from



damaging

  

Preserving food and

Policies, initiatives and

projects



Packaging waste as

beverages

feedstock: recycling, energy

Optimising supply chains

recovery

Informing consumers and handlers

* We have not the intention to address all possible sustainability issues regarding plastics packaging production. We only focus on the ones which are best suited for underlying report. See for a more comprehensive list of sustainability indicators: UN, Indicators of sustainable development, 2002 ** Letters refer to explanation on next sheets

27

Input

A

Bioplastics in packaging industry is promising however to have impact scaling of production is needed. Ongoing discussion on environmental pros and cons: entire life cycle has to be considered Bioplastics: biodegradable and biobased plastics are not the same

Raw materials

Finished product Biodegradable Non-biodegradable Nonrenewable

Traditional PE, PP, PET

Ecoflex (BASF) Bionelle (Showa Denko)

(partly) Renewable

Rilsan (Arkema) Sorona (Dupont) Bio-LDPE (Braskem) Plant Bottle (Coca-Cola)

PLA (Natureworks) Starch based (BIOP) PHB (Biomer)

Source: Wageningen University

Considerable production growth needed of bioplastics (annual production in mt) 700

Global plastics production  2010: 265 mt plastics production  2010-2030: CAGR 4%  2030: 581 mt plastics production

600

500

Optimistic scenario  2010: 0.7 mt bioplastics production  2010-2030: CAGR 38%  2030: 488 mt bioplastics production  2030: plastics-to-bioplastics substitution 84%***

400

Potential for bioplastics in packagings is large

300

 

200

Biobased largest potential and is expected to outgrow biodegradable Driven by marketing and footprint* strategy some multinational F&B

Realistic scenario  2010: 0.7 mt bioplastics production  2010-2030: CAGR 20% (current growth rate)****  2030: 22.5 mt bioplastics production  2030: plastics-to-bioplastics substitution 4%

companies are already using bioplastics i.e. Coca-Cola (Plant Bottle), Danone (PLA cup), Heinz (bioPET) To have really impact three key issues must be addressed

100

- Scaling of production to ensure feedstock and become more price

- Ensuring biomass with no impact on food supply/environment

2030

2028

2026

2024

2022

2020

2018

2016

- Improving the functionality i.e. barrier function

0 2014

38% growth p.a. needed (!) to substitute 84% of plastics in 2030

2012

competitive**. Main production is expected to be outside Europe.

2010



Source: Rabobank analysis based on European Bioplastics; ICIS; PlasticsEurope

* European Bioplastics states that life-cycle analyses show that bioplastics can reduce CO2 emissions by 30-70% (source: ICIS, 2011) ** Biobased ethylene glycol (EG) which is used to produce bioPET is estimated to be 30-40% more expensive than petroleum based materials (source: ICIS, 2011) *** According to the University of Utrecht bioplastics could technically substitute 84% of the current polymers **** Source: European Bioplastics: 2010 bioplastics production: 0.7 mt, and 2015E bioplastics production: 1.7 mt

28

B

Production and Usage

C

Low hanging fruit: improve supply chains by using (plastics) packaging better. This results in less waste and lower carbon footprint especially in the food chain Production focusses on using less raw materials

Use (plastics) packaging to optimise supply chains





From an economic and (sometimes) environmental point of view using less materials is profitable for producers

- ~33% of edible parts of food produced for human consumption

- Producers who can operate their machinery as efficient as

gets lost or is wasted (globally)

possible have a cost advantage in this competitive industry

- 22% of food bought by consumers (UK) is wasted ...

- Buyers are very interested in lighter packaging: (i) lower prices,

- ...of which 64% could have been avoided by better planning

(ii) lower transport costs

- 30% of packed food is disposed without ever being touched

- Specialties are mostly priced per m2 while commodities per kg.

- #3 of the most important opportunities to save resources is food

This drives specialty producers to manufacture thinner products



Some facts

Packaging machineries can lower raw materials and energy input.

waste*



High price of this machinery is offset by lower production costs

The usage/functionalities of (plastics) packaging is already improving efficiency in the supply chain - Protecting goods - Preserving food

Food losses and waste (kg/capita/year) 350 300 250 200 150 100 50 0

less waste less waste

- More efficient handling - Informing consumers

Consumers



Producers to retailers

less transport less waste and better use

However, we think more effort should be put in using (plastics) packaging in optimising food supply chains which will result in further reduction of waste and of the carbon footprint



Therefore, we opt for introducing and developing new packaging

Latin-America

S-Asia, SE-Asia

N-, W-Af rica, Central Asia

Subsahara Af rica

Industrialised Asia

Source: FAO, 2011

N-America & Oceania

Europe

technologies on a larger scale i.e. active and intelligent packaging**: absorbers soaking up oxygen and prolonging shelf life, freshness indicators helping consumers to assess food condition, modified atmosphere packaging Source: FAO; Nestlé; WRAP; McKinsey

* McKinsey, Resource revolution, 2011. Most important opportunities: #1 Building energy efficiency, # 2 Large scale farm yields, # 4 Municipal water leakage, # 5 Urban densification ** Note: (Active) packaging has to meet the strict regulation (EC) No 1935/2004 of the European Parliament and of the Council on materials and articles intended to come into contact with food

29

After-use (I)

D

Recycling and recovery of plastics packaging is going into the right directions however many more steps have to be taken: better sorting methods, better plastics feedstock and new applications Positive trends in recycling of plastics packaging



NLD in European top 10 though countries like Germany, Belgium, and Sweden are doing better

In recent years higher awareness on waste recycling and collection municipalities in better collection/recycling, Avalex: recent successful pilot project Rijck to stimulate consumers, and Sita: investments in newest sorting systems

  

PET success due to purity of PET and deposit system Higher feedstock prices making recycled plastics more competitive

Europe (2010)

via policies, projects and initiatives i.e. Nedvang: supporting

R&D efforts to optimise recycling process: better cleaning, better

Plastics waste: 24.7 mt

Disposal (landfill*):

Energy recovery:

Recycling:

42%

34%

24%

sorting i.e. NIR (Near Infrared), new applications for recycled

Still a lot to do: some difficulties when recycling plastics



Recycling of multilayer plastics is more difficult than that of mono plastics. In their turn, multilayer plastics have better barrier functions and are thus better to preserve food



Biodegradable plastics dilute non-biodegradable plastics. Many consumers don‟t know the difference between the two



Recyclers want to use batches of used plastics which are pure and secure (homogenous waste streams)

The Netherlands (2010)

plastics

Plastics waste: 454 kt**

Energy recovery:

Recycling:

52%

48%

R1-incineration: 33%***

Other useful usage: 19%***

- Only post-industrial plastics can deliver this - Post-consumer plastics are more diluted and therefore more expensive to recycle to constant or higher quality plastics

Source: PlasticsEurope; Nedvang

* For countries which don‟t enforce a landfill ban on combustible waste ** Note NLD data: only plastics packaging. Plastics packaging has a higher recycling rate than other plastics applications *** Based on Nedvang 2010 report: 48% is recycled and 52% is used for energy recovery. This 52% includes 17% „other useful usage‟ (including co-firing cement kilns and other types of incinerators). 30 Furthermore we assume that 95% of the remaining 35% (52%-17%) is being incinerated in R1-incinerators. So we conclude: 33% (95% of 35%) R1-incineration, and 19% (17%+(35%-33%)) Other useful usage

After-use (II)

D

We see several options. There is no best solution yet and they must be considered on their economic impact, carbon footprint impact and technological constraints and the outcome will differ per case Recycling (excluding re-use of products*)



Difficult to sort out different



kinds of plastics, and to sort out and recycle heterogenous





Emissions do occur when

depolymerisation (pyrolysis)

burning plastics for energy

Several pilots and projects

recovery



however non has been really

Recyling can consume a lot of

successful yet

environmental impact depends

Investments and scaling needed

on technology of the incinerator



Plastics degenerate each time

to become competitive



they are recycled





Plastics-to-Fuel via

Energy-from-Waste

plastics energy



Waste-to-Energy/

Plastics-to-Fuel

Probably not all plastics are

Still virgin raw material needed

possible and sorting issues as in

when producing plastics

recycling might remain



In accordance to that

On the positive side we see that plastics have high caloric value

Economic analysis: capex and opex

Sustainability/life-cycle analysis: carbon footprint of the entire production chain

Technical analysis: technological (im)possibilities, BAT (Best Technology Available)

* Though re-use of products is an important aspect in recycling (see Ladder of Lansink product re-use instead of material re-use) we won‟t discuss it in this report. Also the pros and cons of sourceseparation and post-separation are not discussed. Fore more information on these subjects please contact the Rabobank

31

I. At a glance

II. Demand

III. Supply

IV. Sustainability



In order to excel and become market leader producers should focus on one following disciplines: Customer Initimacy, Product Leadership, or Operational excellence. On other

V. Strategy

disciplines a minimum required performance level is still necessary



Packaging producers will position themselves depending on company size and type of product which is produced

VI. Appendices



Subsequently various growth directions and growth methods can be chosen by plastics

packaging producers to enhance their growth strategy

32 Rabobank International

Strategic framework Strategic model consisting of three phases and an evaluation phase

Obtain position that differentiates from competition

A

Positioning

F

B

Evaluate success of strategy via KPIs

Organising strategic assets

Evaluating

Organise assets and align operations with desired positioning

Developing growth strategy

Develop growth strategies, both on direction and method

C

D

E

refers to explanation ( Letter ) on next sheets

Source: Rabobank

33

A

Positioning (I) – market leaders

Producers should focus on one of three disciplines in order to excel and become market leader. On other disciplines a minimum required performance level is still necessary Product leadership “Best product”

Specialty products for in general smaller markets. Focus on R&D and innovative products and product applications

Performance level

Market leaders

Minimum required

Building strong and long term

Efficient production and taking

relationships. Focus on deep

costs out of supply chain for

customer knowledge and

customers. Focus on Total Costs of

understanding

Ownership

Customer intimacy “Best total solution”

Operational excellence “Best total cost”

Source: Treacy and Wiersema

34

A

Positioning (II)– likely positioning

Packaging producers will position themselves depending on company size and type of products which are produced Commodity

Operational excellence: Best total cost

Type of product

Customer intimacy: Best total solution

Product leadership: Best product Specialty Small

Company size

Large

35

B

Organising strategic assets

Strategic assets are that set of goods (tangible or intangible) which the producer has generated and which are essential to differentiate from competition Strategic assets

Product leadership Best product

Operational excellence Best total cost

Customer intimacy Best total solution

Personnel

 Innovative staff

 Relative small staff

 Service oriented staff

 Product and concept driven

 Process driven

 Client problem solving driven

 Loose-knit structures

 Disciplined teamwork and centralised organisation

 Entrepreneurial client teams

 Product specified machinery,

 Standardised machinery, no frills  Built for longer production runs and

 Flexible client specified

high output

machinery  Built for client needs

 Facilitate short time-to-market

 Product delivery and basic service

 Maximum flexibility in order to

 Technologies enabling

 Integrated low cost systems

 Customer databases linking

 Focus on R&D and product

 Focus on improvement of current

 Focus on service concepts for

Machinery and equipment

state-of-the-art  Built for shorter production runs Supply chain

IT

cooperation and knowledge management Investments and financial resources

development

cycle

working methods

meet customer demand

internal and external information

the customer

36

Developing growth strategies

C

Choose direction and methods for growth

Growth directions: where are we going to?

D

E

Current market

Current product

New market

Growth methods: how do we get there?

New product Mergers and acquisitions

Market penetration

Product development

Aggressive pricing

Broaden product offering

Better service

Develop new products

Nearshoring

Focus Market development

Diversification

International expansion

Integration (vertical, horizontal) Organic growth

Source: Rabobank based on Ansoff product market matrix

37

D

Developing growth strategies – growth directions

Where are we going to? Growth directions

Explanation

Example (anonymous companies)

Aggressive pricing

Pricing below market prices. Most likely in commodity markets and viable for a producer when production costs are lowest in the field (lean and mean) and financial resources are sound (risk on price war)

A midsized and troubled Dutch packaging producer is using the price instrument in order to win tenders and to ensure sales and efficient capacity utilisation

Better service

Delivering a better service/price ratio than competitors. Essential growth direction when going for customer intimacy

A producer of PE packaging has its own logistical service in order to deliver conform client‟s wish. Furthermore the company can response immediately on customers‟ demand as it holds stocks for them

Broaden product offering

Playing on the trend of one-stop-shopping. Offering a broad range of packaging products and/or materials. Mostly used when going for customer intimacy

A small Dutch packaging producer wants to invest in new machinery. In this way the producer can offer an additional line of products which it can easily sell to current customers. Another producer is also wholesaler so it can offer a full range of products

Develop new products

Essential growth direction when opting for product leadership. Product developing is often in cooperation with raw material supplier, customer, packaging designer, or machine supplier. Ongoing development is necessary to avoid the commodity trap

A packaging producer is developing – together with printing machine manufacturer - new printing technologies which are better for the environment. Another major producer focuses on high value-added flexible barrier solutions and has R&D costs which are twice as high as their competitors

International expansion

Enter new markets. Strategy can be useful in order to serve internationally operating customers in multiple countries and/or take advantage of fast growing markets. Most likely for large producers

A European top 50 producer sold its PET packaging business. The proceeds were used to expand its tobacco packaging activities in emerging markets like China and Ukraine

Integration

Diversification is regarded as being a high risk strategy as normally a company has limited knowledge of other products in other markets. Horizontal integration i.e. other packaging materials, or vertical integration (backward, forward) might be less risky

A PET packaging producer has acquired a PET recycling company. In this way the rPET feedstock is more secure however the company is now also more exposed to the volatility in the rPET and PET markets

38

E

Developing growth strategies – growth methods

How do we get there? Growth methods

Explanation

Example (companies are made anonymous)

Mergers and acquisitions

M&A is the quickest way to grow. Financial resources and management capabilities are required. Above average risk profile

A French top 50 producer has made a large acquisition in 2010. It acquired three production sites in the UK. In 2009 the largest European producer has enhanced its position by acquiring the flexible packaging production business of a major Australian mining company

Nearshoring

Nearshoring to E-Europe is a more likely growth method than offhoring to other emerging markets like Asia. Nearshoring mostly done because of lower production costs (labour costs) and sometimes done because of entering new markets. Most likely in more commoditised markets in which low production costs are the main competitive advantage

A Dutch midsized PE bags producers has a Joint Venture with a small E-European producer. In this way it benefits from lower labour costs for its commodity products which are sold to German customers

Focus

Divest non-core business and reinvest proceeds in core business. Strategy can be useful for (too) diversified packaging producers

A large British packaging producer restructured and consolidated its position. It sold part of its flexible plastics and paper packaging activities which were seen as non core business

Organic growth

Relatively cheap growth strategy with relatively low risk profile. Disadvantages: low speed, some growth directions difficult to realise via organic growth, e.g. international expansion

A small Dutch producer lacks financial resources and market position to acquire competitors. Via investments in machinery which makes production more efficient (lower production costs and faster production) it hopes to achieve above average growth

39

F

Evaluating

One way to evaluate a strategy is with the Business Balance Scorecard (illustrative example) Financial perspective

 Winning new customers while maintaining current customers is key

KSFs  Lower working capital

 Customer surveys learned that many customers wanted to be serviced in more countries. International expansion is necessary

 Shareholder return

KPIs  Inventory/sales  Working capital/sales  Creditor days  ROE  Free cash flow

Customer perspective KSFs  Market penetration

KPIs  Market share  % new customers

 Customer satisfaction

 TCO  % satisfied customers  % long term customers

 Geographic presence

knowledge was insufficient in relation to the positioning as „Product leadership‟ player

 Several areas were further product

development is possible i.e. pack minimalisation, shelf-life prolongation, active and intelligent concepts, improved funcionality, new printing technologies and bio plastics

learned that working capital was not up to standard and could be optimized

 Shareholders indicated that they are not

satisfied with the returns on their equity and the dividend pay-out. Cash from working capital is needed to increase pay-out

Internal business perspective

Vision and strategy

KPIs KSFs  Optimal production process  Utilisation rates  % failure costs  Production costs/output  Efficient order processing (JIT)

 % sales in new markets

 Market research learned that the product

 Benchmarking

 # days from order to delivery  % wrongly delivered

 Efficient production (lean and mean) also Innovation perspective KSFs  More product innovation

 Better market exploitation

KPIs  R&D/sales  Sales from new products  Customer opinion  Time-to-market

depends on variety of products and the need/possibility to made-to-stock or made-toorder

 Commodity producers with a limited product offering can have more efficient production and might be better able to deliver JIT

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I. At a glance

II. Demand

III. Supply

IV. Strategy

V. Sustainability

VI. Appendices

   

Functionalities and requirements of plastics packaging Position of plastics in petchem production chain Glossary plastics Contact details

41 Rabobank International

Functionalities and requirements (I) Plastics packaging and other packaging materials Packaging materials

Barrier functionality

Design freedom

Printing ability

Mechanical vulnerability

Recyclability

Plastics Metals Paper Carton board Glass Wood

Low score on criterion

High score on criterion

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Functionalities and requirements (II)

Perishable goods

Speed less important, reaching right consumer

Safe use

Drugs perishable and potentially dangerous

Low importance

Use and application

Less importance apart from volatile and oxidation sentive substances

Amounts of space taken up

Packaging plays minor role

Protect against mechanical shocks vibration, electrical charge

Packaging optimised for transport

Distribution information, quality logos

Larger units, less complex

Non food/non durables

Durables

Industrial/bulk goods

Mechanical

Legislation and sales promotion

Physical

Costs of distribution

Chemical

Informing

Food

Pharmaceuticals

Protecting and preserving

Distributing

Biochemical

Product

Biological*

Plastics packaging functionalities per product

Low score on criterion, or not relevant

High score on criterion * Biological: micro organisms i.e. molt, bacterials; Biochemicals: enzymes; Chemical: oxygen; Physical: i.e. UV, absorption of moisture or aroma; Mechanical: breakage, contact with other objects

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Position of plastics in petchem production chain Simplified flow diagram of the derivatives from petrochemical production. High volume plastics account for 75% of the European plastics demand salt

caustic soda

chlorine VCM

PVC ethylene oxide

ethylene glycol

polystyrene

caprolactam

nylon 6

adipic acid

nylon 6,6

methane LDPE

natural gas ethane

polyethylene

ethylene

LLDPE HDPE

ethyl benzene

styrene cyclohexane

benzene

nitrobenzene

MDI phenol

phenolic resins

acetone

MMA

cumene

aromatics

toluene

nitrolene

TDI DMT

xylene

paraxylene

isobutane

isobutylene

butadiene

C4

olefins oil

PET PTA

LPG

naphtha

polybutadiene hexene

methanol

butene

MTBE

octene

acetic acid

ABS

Raw material propylene

polypropylene

Base chemical Intermediate

acrylonitrile

styrene acrylonitrile polyacrylonitrile

acylic fibres

acrylic acid

End product High volume plastics

Source: Rabobank

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Glossary plastics (I) Frequently used words and terms

Additives

Blends

A wide range of substances that help in the processing of parts or in the physical and chemical properties of a final product. The additives are added to basic resins by the resin supplier before being supplied to the production plant. Examples of additives include UV stabilizers, antbacterial additives, flame retarders, dyes and pigments, photochromics, reinforcing fibers and plasticizers. Blends can be used to tailor-make plastics with specific chracteristics that cannot be achieved by a single polymer. They are a physical blend of two or more polymers to form materials with a combination of characteristics of both materials. Typical and common blends: ABS/PC, polyamide, PC/PP, and PVC/ABS. Blends are an additional form of tailoring polymers to those created by co-polymerization, and differ drom co-polymers in that they are physical mixtures, not chemical.

Commodity plastics

A way of dividing plastics is by categorizing them as either engineering plastics or commodity plastics. Commodity plastics have relative low physical properties and are commonly used in the production of everyday low-cost products. This classification group includes vinyls, polyolefins and styrenes.

Co-polymers

The mixing of two or three compatible monomers in order to form a new chemical compound which can be used to create a material that has a combination of the qualities of both monomers. This differs from a blend in that they are not physical but chemical mixtures.

Elasticity

The amount a material recovers to its orginal shape and size after it has been deformed. This is different to the testing of plastic behavior which describes the way a material stretches and does not return to its orginal shape or size.

Elastomers

Elastomers are rubber-like materials but with far more processing potential. They can be processed in the same way as thermosetting materials. Elastomers may feel like rubbers but technically differ by their ability to return to their orginal length once they have been deformed, rubber being able to return to its orginal shap more quickly and easily.

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Glossary plastics (II) Frequently used words and terms

Engineering plastics

There are a number of ways of classifying plastics: thermoplastic/thermoset, amorpheus/crystalline. Pared with commodity plastics, engineering plastics are another way of categorizing. They are generally of a much higher cost with superior physical, chemical, and thermal qualities and used in applications with demanding environments. They include acetals, acrylics, polyamides and polycarbonates. Fibrous materials like glass and carbon which give enhanced mechanical properties like stiffness. Nonfibrous materials fillers such as hollow spheres, can be used to reduce the overall weight of a part.

Fillers

Hardness

The ability of a material to withstand indentation and scratching. The most common test are the Rockwell and Durometer tests which are graded in Shore hardness from Shore A soft to Shore D hard. Examples of hard plastics include melamine, urea and phenolic formaldehydes, and PET. Low-density polyethylene and elastomers are examples of soft plastics.

A material‟s ability to absorb energy. The final product is determined also by shape, thickness, and temperature. Impact resistance

The individual molecules which joined together form a polymer chain. Monomers

The true definition of plastic does not describe a specific material but how a material acts. In common language, polymers are know as plastic due to the way they behave physically i.e. their shape can be easily changed. Plastics

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Glossary plastics (III) Frequently used words and terms A flexible, long chain of monomer molecules which displays different characteristics according to the chemistry of the monomers and the size and shape of the molecules. Polymer

Polyolefins

This important group of polymers is made up of polyethylenes and polypropylene. Polyolefins are the largest produced plastics in the world accounting for 45% of the plastics production. Together with vinyls and styrenes, polyolefins are classified as commodity plastics.

Generally used to describe the basic polymerization material e.g. polystyrene, ABS which can also be described as polymers. Resins

The maximum pulling strain that can be applied to a material before it fractures. Tensile strength

Thermoplastics

Thermoset plastics

A material that can by the action of heat be softened, melted and reformed without any change in properties. This means that off-cuts and scrap from manufacturing processes can be reground and reused, and products made from thermoplastics can more easily be recycled. The shape of thermoplastic‟s molecules is lineair, allowing them to move easily under heat and pressure. Thermosetting plastics do not soften when heated and cannot be reused. Due to this characteristic they do not have the same processability as thermoplastics. As opposed to thermoplastics, their molecules form a crosslined network that limits movement within the chain.

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Contact details Rabobank International Corporate Clients Visiting address Croeselaan 28 3521 CB Utrecht Postal address P.O. Box 17100 3500 HG Utrecht The Netherlands

Arnold Hardonk (author)

Steffanie van der Maas

Wouter Verster

Ronald de Vries

Industry Knowledge Team (IKT) Industry Analyst IKT - Manufacturing T. +31 30 712 27 06 E. [email protected]

MVO Grootbedrijf T. +31 30 712 33 64 E. [email protected]

MKB Sectormanagement Sectormanager Industrie T. +31 30 216 48 24 E. [email protected]

Industry Knowledge Team (IKT) Industry Analyst IKT – Energy and Waste T. +31 30 712 31 70 E. [email protected]

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Disclaimer This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank International (“RI”). The information and opinions contained in this document have been compiled or arrived from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by RI or any of its affiliates to enter into a transaction, nor is it professional advice. This information is general in nature only and does not take into account an individual‟s personal circumstances. All opinions expressed in this document are subject to change without notice. Neither RI, nor other legal entities in the group to which it belongs, accept any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. All copyrights, including those within the meaning of the Dutch Copyright Act, are reserved. Dutch law shall apply. By accepting this document you agree to be bound by the foregoing restrictions.

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