Materials

Talking to Ron Marsh two days after RPC Group has reported its 2007-8 results is a little like watching a tennis player who has clawed back several games but is still somehow fighting for the match. The group chief executive is understandably pleased with a performance that has served up record sales and respectable profits. As he puts it: "That surprised some people. It's not at all normal in this sector."

But only days earlier, he announced a strategic review of the group’s activities in response to a weak share price and shareholder impatience. Any plant closures that result from the review will not be the first. Four factories have closed over the past couple of years in the UK alone. Alongside new acquisitions in Western Europe, there have been closures in Poland.

The plastics industry is far from being the only industrial sector to have withstood a sustained onslaught from rising energy, raw material, and transport costs. And yet it seems to be stuck in a sandwich layer all of its own, locked between crippling price rises from suppliers on one side and customers that are unable, or unwilling, to accept price rises on a comparable scale on the other. The fact that those customers count the largest grocery retailers among their own customers has not helped matters.

RPC points out that polymer costs have risen by around 80% over five years, rising from 25% of revenue to 33% over that period. This month, on top of regular price hikes related to polymer costs, the group has announced an increase of 4% based on electricity and haulage costs alone. Some competitors suggest this is a great way to trigger a conversation with customers, but that in many cases this exchange may be short, if not monosyllabic.

All the same, Marsh insists: People are starting to realise it’s just not possible for us to take the strain of absorbing cost increases. Margins have been hit again and again. In fact, our results demonstrate that our margins are better than most, but still not good enough.

As he suggests, RPC is not alone in its struggle for that elusive thing: the healthy margin. Nor is it the only international public company in the sector to be run ragged in pursuit of the even more elusive ‘shareholder value’.

A familiar story
Earlier this year, Finland-based Huhtamaki announced the closure of its remaining UK plastics plants at Gosport and Portadown, although Gosport continues to manufacture products for the food service industry. Once again, this appears to be a story of high costs, low margins and impatient shareholders. The company is quoted on the Helsinki stock exchange, but general manager for consumer goods Andrew Lea says: When it comes to packaging companies, city analysts can be just as disparaging in Finland as in the UK.

Lea paints his own graphic picture of the sector’s predicament. With the retailers in a price war, they have shoved the pain up the supply chain to the food producers. And they in turn have tried to push it back to their suppliers. As well as energy bills, he highlights costs that have hit UK companies harder than others: diesel prices and, when it comes to buying polymers on international markets, the sterling exchange rate against the euro.

It was a combination of aggressive pricing and static volumes that did for the Gosport plant. As Lea puts it: Rigid plastics is never going to be a cash cow. It never reaches anything near double-digit return.

But no two plants face precisely the same issues. While Gosport offered a mix of products, the Portadown site was monomaterial, specialising in thermoformed polypropylene (PP), and above all the ‘101’ round pot used for dips and other chilled foods. During the course of last year, there was a move away from PP towards recycled polyethylene terephthalate (rPET), says Lea. The market walked, then ran, away from it.

Of course, plastics are not the only material to have to respond to consumer goods markets that are more ‘fast-moving’ than ever before. But perhaps the plastics industry is its own worst enemy when it comes to the diversity it offers.

RPC’s Marsh takes up the point. It can be disruptive when customers move from one polymer or process to another, and extremely expensive to invest in new technology, he says. I think it’s something we tend not to build into our business model. Product lifecycles are much shorter than they used to be.

As Huhtamaki has discovered, the new interest in recycled polymers has already had a significant impact on demand for these plastics and the ones they replace. Nampak Plastics Europe is among the converters that have agreed supply contracts with Closed Loop Recycling, in its case for recycled high density polyethylene (rHDPE). It is also sourcing material from Greenstar.

Green schemes
Despite the existence of these enthusiastic suppliers, we could in future see increasing vertical integration between converting and recycling operations. There has been a reluctance in some quarters for people to commit to setting up plants, says Nampak commercial director James Crick. So until we’re sure of getting the volumes we need, we’ll keep open the option of setting up our own recycling.

Blowmoulders face the same cost pressures as other converters, and underline the same need to pass on the burden to customers. But unlike some other processes, the relatively high volumes demanded from blowmoulding make inplant or hole-in-the-wall operations a viable alternative to more traditional supply models.

Nampak has inplant facilities at dairy customers Arla Oakthorpe, Dairy Crest Chadwell Heath and Severnside, and Robert Wiseman’s Bellshill and Trafford Park. Sales director Jamie Tinsley lists limited transport requirements, reduced line wastage and overall line efficiency improvements as factors helping to contain costs, but also restricting carbon emissions and general environmental impact.

But he adds: We see it as crucial that the major dairies have both the benefit of inplanted bottle supplies but also complete back-up from our two mother-site operations. These two larger plants are at Consett and Newport Pagnell.

Cost concerns
And in spite of the advantages in operating costs, logistics and wastage, others point to the high capital costs and long payback periods for this type of inplant operation. Some suggest that, on a contract initially signed for seven years, payback for the converter may not start to kick in until year five. Once again, this is not the type of business plan that makes shareholders jump for joy.

Blowmoulders want to ship empty bottles as short a distance as possible. But as other factories close, what about the option of sourcing more space-efficient finished plastics packaging from overseas?

Here, there is something of a mixed message from Huhtamaki. On the one hand, Lea stresses the seasonal and short-term fluidity of demand for many plastics formats. I don’t think overseas sourcing is a realistic proposition, he says. You see some amazing spikes in demand, and you need supply that you can replenish in days. You can’t do that if it’s spending weeks travelling on a boat from China.

Yet at the same time, Huhtamaki is not simply moving out of plastics production in the UK and into paperboard alternatives to CPET ready-meal trays. It is also choosing to ship in those containers from its production sites in Central Europe.

So what of UK-produced plastics? Could it be a simple question of supply and demand complicated by specific cost problems? Lea says: There probably was overcapacity, that’s the truth of it.

Marsh at RPC argues: Having taken the medicine and cut the cost base, for those of us that can survive the current situation I think there’s every prospect that we will emerge with more of a buyers’ market.

Paradoxically, he suggests, other materials that have not had such a tough time and have undergone less extreme treatment may not share rigid plastics’ healthy prospects.

PREMIUM PRESSURES
Smaller niche converters are not sheltered from the ‘perfect storm’ of high costs and tight margins affecting bigger, international players.

Robinson Plastic Packaging runs two injection moulding plants in the UK, with a further plant in Poland. Other sites in the UK and Canada specialise in paperboard packaging.

Plastics division sales director Jeremy Brook says: Robinson was a family-owned company for 150 years, and only fairly recently floated on London’s AIM (Alternative Investment Market) exchange. The shareholder profile tends to be fairly loyal, so the impatience of City investors is not such a factor with us. But we are still under the same market pressures as everyone else.

Robinson has longstanding relationships with many of the largest food and drink brands, but can take nothing for granted. Personal relationships and mutual support are increasingly coming under pressure as buyers change and more centralised ‘cost-out’ agendas come into play, says Brook.

The ‘premium versus commodity’ distinction is still important for Robinson. But Brook says: Even in premium areas where there used to be more flexibility about pricing, you are more likely to hear, ‘this is the maximum the project can withstand’.
Regarding overseas production, Brook makes the point that, while labour costs may be lower in Central Europe, and energy costs are not quite as high as in the UK, polymer prices represent the single most significant cost, and they are international.

But do the peculiarities of the UK situation mean brand owners will source more plastics from overseas in future? Brook hopes not, and underlines the current importance of responsive supply and short lead times: Unfortunately, with today’s emphasis on costs, some customers will be tempted to find ways around these supply chain issues, too.