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Packaging & Container Industry: Emerging Market Land Grab
To most investors, the post-recession global economy appears quite bifurcated. On one hand, wealthy developed regions, such as Europe, Japan, and the United States, struggle to sustain modest economic recoveries by historical standards. On the other hand, many emerging markets in Asia and South America are firing on all cylinders. With lackluster prospects in advanced economies, numerous companies in the Packaging and Container Industry (P&C) are focusing on growth opportunities abroad. Indeed, a land grab seems to be well under way as acquisitions, joint ventures, and expansion projects have increased over the last year.
Why Emerging Markets?
The motivation for P&C companies to expand into emerging markets is two-fold. First, the tremendous economic growth occurring in many Asian and South American countries will probably support rapidly rising wages and standards of living for years. As more middle class consumers evolve in places like Brazil and China, consumer spending should increase for staples as well as discretionary goods, which augurs well for increasing demand for P&C products.
Second, a number Packaging and Container markets in advanced economies are near saturation, leaving very little room for growth. For instance, over the thirty years between 1970 and 2000, beer consumption in the United States increased 1.6% annually, while the total population grew at an annual rate of 1.1%. Annual volume seems to barely outstrip population growth. As a result, fierce competition arises between companies in the Packaging & Container Industry for marginal market share.
P&C Industry heavyweights Ball Corporation (BLL) and Crown Holdings (CCK) are set to square off in the South East Asian beverage can market. The large-cap Ball Corporation, which primarily manufactures metal and plastic packaging for the food and beverage industry, totaled $7.6 billion in sales last year. In March, the company announced it will build a beverage can plant in Vietnam through its joint venture with Thai Beverage Can Limited. Ball will retain an approximate 50% economic interest in the plant, which is expected to begin production in early 2012. Not to be outdone, can competitor Crown Holdings, which recorded $7.9 billion in sales over 2010, declared it will expand beverage can production at all three of its existing Vietnamese facilities. The company will add a second beverage can line to its plant in Hanoi as well as upgrade its Ho Chi Minh City facilities. According to Crown, the capital spending projects should boost capacity considerably by 2012 as well.
In December, Owens-Illinois (OI), a global leader in glassmaking with slightly more than $6.6 billion in sales last year, purchased the glass container manufacturing business of Hebei Rixin Glass Group Co. in northern China. The acquisition, which includes two plants that produce glass containers for the Chinese domestic beer market, has more than doubled the company’s production capacity in the country. In addition, Owens-Illinois also entered into a joint venture with the Berli Jucker Public Company Limited of Thailand to bolster its presence in Southeast Asia. The large Asian footprint will probably support decent top-line advances over the next 3 to 5 years.
Turning to South America, many companies within the Packaging & Container Industry have been actively expanding their reach in this region. Indeed, Ball Corporation and Crown Holdings are both boosting production capacity in these locales as well. Crown is ramping up capital spending to upgrade Brazilian beverage production facilities. Moreover, Ball’s majority-owned Brazilian beverage can joint venture plans to erect a new manufacturing plant in the country’s northeast region. Furthermore, Owens-Illinois purchased the largest Brazilian glass container manufacturer Companhia Industrial de Vidros for $594 million in September. Companhia Industrial de Vidros served the beverage, food, and pharmaceutical markets.
MeadWestvaco Corporation (MWV), which produces a wide range of packaging solutions for consumer and industrial markets, is looking to get its share of action in the hot Brazilian market. The company plans to spend approximately $325 million this year to increase its corrugated packaging operations in Brazil.
Despite the compelling motivation behind expansion into emerging markets, strong profits are not guaranteed. For instance, currency swings and a number of country-specific risks may undermine a company’s investment in emerging markets. Recently, Venezuelan President Hugo Chávez has created a slew of problems for multinational companies operating within his jurisdiction. Not only did Venezuela devalue its currency twice last year, but it also expropriated private sector property and assets. Two of Owens-Illinois’ plants, which had been operating for over 50 years, were seized without warning by Chávez’s regime. Additionally, Venezuela nationalized 11 oil rigs owned by Helmerich & Payne (HP) in 2010. Even though these events proved to be near-term hiccups, investors should note the increased risk associated with a company’s expansion into developing regions.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.