[Part 1 of 3]
Converters in the United States face significant challenges, but there may be opportunities for those that can properly adapt their businesses to current and future market conditions

By Brendan O'Neill, Editor-in-Chief, CMM Online

The converting industry in the United States is facing one of the more challenging times in recent memory thanks to a number of factors, all of which have been developing during the past 3-5 years and have spiked dramatically within the last 12-18 months.
      Those issues include, but are not necessarily limited to, the rising cost of raw materials (specifically petroleum products), the consolidation of companies through mergers and acquisitions within the converting industry, the economic recession in the United States and weakness of the U.S. dollar, and the demand for more "sustainable" products and practices, spearheaded by the global goliath retailer Wal-Mart. Obviously these issues affect certain segments of the converting industry in varying degrees, but it seems that each of the major areas of converting (flexible packaging, folding carton, corrugated) is facing these issues in some way.

Flexible Packaging
According to Flexible Packaging Association's 2007 State of the Industry Report, growth of flexible packaging continues at a compound annual growth rate (for 1996-2006) of 3.7 percent, with annual sales estimated at $23.5 billion. The 'value-added' part of the flexible packaging industry includes those companies that add significant value by performing multiple processes (extrusion, lamination and printing), and accounts for $18.3 billion in annual sales and does not include retail shopping bags, consumer storage bags, wraps or trash bags.
      The FPA members are primarily part of this 'value-added' segment that also includes labels and narrow-web products, and the FPA estimates that there are approximately 430 U.S. flexible packaging manufacturers, with the top five accounting for about one-third of industry revenue.
      Large companies (those with more than $500 million in annual revenue) account for more than 50 percent of industry revenue, while the market share of small (less than $50 million in annual revenue) and mid-size ($50- $500 million in annual revenue) companies declined to 44 percent in 2007, versus 67 percent in 1996.
      With regard to materials and processes in the U.S. flexible packaging market in 2007, film, sheet and plastic resins account for 67 percent of the flexible packaging materials purchased. The Report details that 73 percent of participants use polyethylene (PE) resin, 5 percent use polypropylene (PP), 4 percent use PVC and 2 percent use polyester or nylon resins.
      The survey results also note that more than 94 percent of converters print, 89 percent manufacture bags and pouches, and more than 85 percent laminate. Sixty percent of converters extrude, coat or produce stand-up pouches.
      These trends and statistics show a strong, viable industry that appears prepared for changing market conditions and can maintain or even grow during these tough times. But the question remains, how will U.S. flexible packaging converters respond to current market challenges?

Rising to the Challenge
Robert B. Zaborowski, Director of Business and Economic Research for the FPA, provides some insight on the market, as well as a sneak peek at the yet-to-be-released 2008 State of the Industry Report.
He says that the FPA projects the U.S. flexible packaging industry 2008 sales revenue to increase 1.4 percent to about $26 billion, representing a slight reduction in the rate of growth, but growth nonetheless. He also notes some of the specific concerns of the U.S. flexible packaging converter.
      "This data showed converters (both FPA members and non-members) rated raw material cost and availability as the number one issue/concern for 2008," says Zaborowski. "In fact, 85 percent of survey participants ranked raw material cost and availability among their top five issues for 2008. Furthermore, close to half of survey participants ranked raw material cost and availability as their number one issue or concern in 2008.
      "The 2008 Report revealed a recurring theme in survey participant responses in the key drivers for raw material cost and availability as indications of the impact on 'margins' and 'profitability.' A prime example of this cited by several participants included: 'difficulty passing along cost increases.' Others raised concerns about material 'shortages,' 'fewer sourcing options' and 'problems getting film,'" he says.
      Finally, the 2007 Report shows that U.S. flexible packaging imports grew by 14 percent while exports increased by 21 percent. On average, from 1993-2006, imports increased at a rate of 13.6 percent while exports grew at a rate of 9.4 percent.

Written for our media partner, Converter magazine in the United Kingdom

Continued in Part 2

Fri Jul 25 13:39:00 CDT 2008