As people sanitise and wash hands multiple times a day and disinfect surfaces like never before during the pandemic, demand for plastic pouches and bottles spiked. So much so that makers of such packaging material have started adding capacities.
Companies including Essel Propack Ltd., Uflex Ltd. and Polyplex Corp. have announced capacity additions. Demand has been particularly strong for film-based BOPP and BOPET packaging.
The packaging segment did not see any major disruptions during the lockdown as it was categorised as essential goods, Rahul Jain, president and chief financial officer at SRF Ltd., said in company’s conference call. The company operated at full utilisation levels and was able to start plants faster than competitors, he said, adding that new lines will come up in 18 to 24 months.
Revenue for most companies in the sector jumped sequentially in the quarter ended June on higher demand. Shares of the top packaging material suppliers gained as much as 68% this year compared with a 6.42% decline in the Nifty 50 index.
BOPP is a flexible film used to pack electrical adhesives, electrical applications, printing and lamination . BOPET is a polyester film used for packaged foods, solar power cells, touch-screen panels of mobile phones and flat screen televisions. Bulk of such films are used for packaging food and beverages.
The overall BOPET/BOPP packaging film industry is targeting addition of 900 million tonnes a year of capacity, according to Edelweiss Securities. It’s expected to be commercialised over the next two years.
- SRF has capitalised and commissioned its BOPET film line in Hungary built by its European arm for 80 million euros.
- Essel Propack said added capacity will result in 150 million tubes annually.
- Polyplex said is expected to start a brownfield project for BOPP films in Indonesia with an initial capital cost of $53 million by the first half of fiscal 2022.
- Uflex has decided to scale up its operations internationally by setting up greenfield projects for packaging films in Hungary (BOPP-42,000 tonnes per year), Nigeria (45,000 TPA) and Russia (30,000 TPA) and brownfield expansion in Poland.
Demand for film-based packaging is expected to grow 16% to 4,791 kilo million tonnes per annum in the next two years, according to Polyplex’s investor presentation. The company cited design versatility, cost advantage and newer applications like healthcare for sustained demand growth.
Pankaj Poddar, chief executive offier at Cosmo Films, told BloombergQuint that the company will spend Rs 20-25 crore in the second quarter to increase manufacturing capacities. It will invest in specialty chemicals and master batches for backward-integration of BOPP films, he said, adding that Cosmo expects the speciality segment volume to increase 50-70% in next two years.
Growth is steadily unfolding for Indian BOPET/BOPP players, Shradha Sheth, analyst at Edelweiss Securities, said in a report, adding that the industry’s capacity utilisation is improving amid favourable demand-supply balance. But the plastic films sector is cyclical and some expect capacity additions may be deferred due to Covid-19, she cautioned, adding that demand for some industrial applications is expected to fall.
Cheaper Crude Aids Margins
BOPP/BOPET manufacturing turned cheaper on lower oil prices as global lockdowns to contain the Covid-19 pandemic disrupted trade and economy. Crude derivatives contribute 60-75% of the material costs.
What helped more is that prices of packaging films rose because of higher demand. The South East Asia BOPP Spot price rose 20% to $925 a metric tonne from the May lows, according to Bloomberg data. Brent crude, the Asian benchmark, declined 30% to $46 a barrel during the period.
That increased the spreads, aiding the margins of film-based packing products suppliers such as SRF, Uflex, Polyplex and Cosmo Films Ltd.
The specialty segments including packaging and labeling contributed to higher margins, led by hand sanitisers and hand soaps, Poddar said.
Jain of SRF, however, expects margins to cool off in the second half of fiscal 2021 as inventory stocking reduces and supply goes up as the country comes out of the pandemic.
Rising crude oil prices will also cause the spreads to moderate in the second quarter and the rest of fiscal 2021, Jiten Parmar, co-founder at Aurum Capital, told BloombergQuint.
According to Edelweiss Securities and Polyplex presentation, other risks for the sector include:
- Strong oversupply can drag industry capacity utilisation and undermine prices and profitability
- Rapid developments in end-use technology is a cause for volatility
- Given environmental concerns on plastic use are growing by the day, the ability to recycle plastic waste is driving formalisation in the industry
- Decreasing demand expected in consumer discretionary segment like expensive snack foods, white goods and automobile segment.
- Companies/customers are constantly looking to cut packaging costs without compromising functionality, which may affect volume growth for all players in the industry.
- Currency fluctuations and cyclicality of the sector.
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