Industry analysis

Unpacking the Dutch plastics packaging industry

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

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

Summary (II)
Supply of plastics packaging (cont)

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 dont 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

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 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

II. Demand

III. Supply

IV. Sustainability

V. Strategy

VI. Appendices

5 Rabobank International

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

Raw material suppliers

Others*

Plastics packaging producer

(industrial, or consumer goods) Others**

(consumer goods)

Retailer

Consumer

Recycler

Raw materials account for 45% of production costs of average plastics packaging; commodity plastics packaging up till 75%

Distinction between commodity and specialty plastics packaging

In general the producer of the goods to be packed demands the packaging i.e. brandowner, industrial company

In the consumer packaging market the retailer plays an important role as the final destination is mostly the supermarket

Packaging is part of the average daylife of consumers

Final link in the production chain is recycling and waste processing

Also important distinction between smaller and larger producers

A Dutch consumer opens seven packagings a day. Which is 140,000 packagings in a life time

Dutch plastics recycling market is fragmented The after use phase of plastics packaging is becoming more and more important because: (i) increased awareness on environmental issues (carbon footprint), (ii) shortage of raw materials, and (iii) upward pressure on raw material prices

67% of plastics packaging is consumer packaging and 33% industrial

Mainly commodity chemicals like PP, PE, and PET

Variety plastics packaging types requires variety of production technologies

The retail industry is consolidated with large chains dominating the Dutch market

Consumer preferences are constantly changing and have impact on packagings

Packaging costs are modest part of total costs making packaging a relatively low interest product

Producers are large international chemical companies i.e. SABIC and Lyondellbasell

Production process of plastics packaging is capital intensive

On top of that, private labels of retailers are gaining market share

Packaging design can persuade consumers to buy specific products and is seen as silent sales man

Chemical companies are important for development of new plastics and new applications of plastics

Large Dutch consumers of packaging pay taxes (Verpakkingsbelasting) of in total EUR 80-85m p.a. These taxes end in 2013

Like the producers of goods they expect packagings to meet their specific demand

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

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%

Dutch packaging market in value*

Wood 5%

Dutch packaging market in weight

Wood 15% Plastics 17%

Eastern Europe 28 7%

Asia 122 30%

Glass 10%

EUR 403bn
Western Europe 102 25%

Metal 12%

Plastics 39%

EUR 3.6bn

Glass 19%

North America 109 27%

Paper and board 34%

Source: Univerity Twente; Nedvang, 2010; Rabobank

Metal 7%
Bron: Zakboek Verpakkingen, 2007

Paper and board 43%

Source: World Packaging Organisation, 2009; Rabobank

Destination of Dutch packaging production in value

Origination of packaging in Dutch market in value

Global packaging end market in value

Export 33%

Other 36%

Import 42%

Food 38%

Dutch market 67%

Dutch production 58%

Personal care 3%

Source: Zakboek Verpakkingen, 2007

Source: Zakboek Verpakkingen 2007

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

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
Energy f or Other production 6% plastics Plastics 3% 4% Chemicals 4% Transport 45%

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

Other 27%

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

Industrial packaging 33%

Electrical and electronics 6% Automotive 8%

Packaging 39%

46 mt
Consumer packaging 67%

Energy and heating 38%

Source: NRK; Hopewell; European Commission, 2009

Source: Plastics Europe, 2012

Building/con struction 21%

Source: NRK; ICPP, 2011

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

Other 14%

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

Film and sheet 9% Blister 4%

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

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

Rigid: ~60% Flexible: ~40%

Household 12%
Food and beverage 57%

PS 9%

Bulk/other 12%
Bottles 25%

Personal care 8%

Closures 12% Pouches 15% Bags 24%

PET 20%

HDPE 17%

Medical and pharma 9%

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

PP 23%

Source: PMCF; data based on US market

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

Public opinion
Plastics packaging suffers from a poor public image. This is mainly due to (perceived) sustainability issues
The perception Some facts I. II. The usage of packaging is an outcome of the demand of our society: more consumption results in more packaging Packaging which litters the streets is not the responsibility of the

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)

- ...does not biodegrade

- ...seems to be less sustainable than other packaging materials - ...is often overused: 79% of English consumers believes products are over packed (source: Ipsos Mori) - is poorly recycled

packaging industry but of the people throwing it on the streets

III. Sustainability has to be regarded within the entire value chain. Current use of plastics packaging is in several ways much better than the next best packaging material (see left figure) IV. Misunderstanding exists about the way products are packed: why plastics, why individual packaging, etc? We think better information can take this misunderstanding away* V. Some examples underlining this:

In the end it all comes down to sustainability issues

Impact of potential replacement: substituting plastics in Europe with the next best packaging material (x times higher)
x 3.6, or + 47.6 mt/a equivalent of: household waste of 91m Europeans Alternative material x 2.2, or + 1,240 GJ/a equivalent of: 20m heated homes x 2.7, or 60.8 mt/a equivalent of: 21m cars on the road

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

Alternative material

Plastics

Plastics

Plastics

Total masses f or same f unctional units

Source: Denkstatt, 2011; Eurostat

Energy consumption in total lif e-cycle

GHG emissions in total lif ecycle

* See Why are products packaged the way they are: http://www.incpen.org/docs/WPAPTWTR.pdf

Alternative material

I. At a glance

II. Demand

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 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

III. Supply

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
Demand growth has moderated Plastics packaging industry has reached maturity

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

Last decade the substitution almost came to a standstill however we 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*

Requirements of the product Transit packaging**

Importance of packaging depends on the product that is being packed

60% 57%

Share of packaging in value added of products

Requirements of: Production Distribution Storage

50% 40%
30% 20% 10% 4%

Secondary packaging Primary packaging

Requirements of: Consumer Retailer Marketer

Product

24%

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
Health awareness Convenience
Brand enhancement/differentiation New packaging materials

Western consumers have changed focus since 2008-2009 crisis - Value for money: highly price sensitive - Simplicity: less complex lifestyles - People, not things: family and friends are increasingly important - Values: value trust and concern about carbon footprint - Convenience: products to last, and to be available locally

On-the-go lifestyles Smaller households Smaller pack sizes

Recycling Older population
Unimportant
Source: PIRA survey, 2009

Consumers target groups are hard to reach: 70% buy decision is done on the spot, 30% of new products are not recognized, shelves become more crowded: average supermarket 20,000-25,000 items

Critical

Source: Euromonitor; ICIS, 2011; F. Koopmans, Kracht van verpakkingen

Retailers and brand owners change

Plastics packaging can be the ultimate silent salesman

Increased competition between brandowners and private labels Increased brandstretching: more products under one label Focus on sustainability: 30% of consumers is willing to switch to more sustainable supermarkets. Sustainability strategy goals

Plastics packaging can fill in the need for - More individualisation of packaging - Brand design to stand out and improve customer loyalty

Furthermore, plastics packaging could gain market share in other products segments i.e. baby food, cans, sauces We see two negative aspects of plastics packaging - Poor image on sustainability (see earlier comments on Public

- Unilever: in 2020 50% water, 50% CO2, 50% waste reduction

- Tesco: in 2010 25% less packaging - Wal Mart: in 2013 5% packaging reduction

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
15% 15%

Demand is limited cyclical

Demand for packaging is positively correlated with production and consumption: the more we produce and consume the more packaging is needed

10% 5%
0% -5% -10%

10% 5%
0%

Most important end markets for plastics packaging are limitedly

cyclical: food and beverage, pharma/medical and personal care (except industrial end markets)

GDP Plastics packaging

-5% -10%

Average beta - relation between GDP and plastics packaging production in volume - is: ~1.5* - Plastics packaging production is cyclical: beta >1... - ...though not highly cyclical i.e. beta chemicals >3

-15%

-15%

Source: Eurostat

France: YoY GDP growth and YoY plastics packaging production growth in volume
15% 10% 15%

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

demand. This a result of the supply chain/inventory effect

- Having limited coordination, communication, information in the supply chain - Made-to-stock production - Holding safety stocks - Overreacting to backlogs

GDP

10%

5%
0% -5% -10% -15%

5%
0% -5%

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

Plastics packaging

-10% -15%

Important issues for individual companies should therefore be

- Procurement strategies - Inventory levels - Competitive position: (un)ability of passing on price increases

Source: Eurostat

* 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)* Sales: volumes x selling prices

Costs:

variable

fixed

Margins

Labour costs

Energy prices (APX)

Industrial production

Consumer spending

Price level (inflation)

Producers prices

Indicators

2008 2009 2010 2011 2012F

100 96,5 98,0

100 97,4 97,8

100 91,1 96,9

100 98,9 100,6

100 70,5 100,9 108,5 ?

100 71,9 105,2 115,3 ?

100 49,1 69,7 91,0 ?

100 102,8 104,0 105,4 107,4

100,0 101,2 102,5 104,9 107,0

99,3
98,6

96,9
96,1

99,9
98,8

105,5
?

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

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 doesnt 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

Indicative direction

PE prices

PP prices

GDP

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 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 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

IV. Sustainability

V. Strategy

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

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

We regard plastics packaging for the most part as

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

Buyers of plastics packaging are for a significant part

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

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

Low importance High importance

16

Competition (II) large versus small

Competitive position is partly determined by the company size...
Large plastics packaging producers Small plastics packaging producers

Markets

European or global market Serving large international clients in many geographic markets More diversified: several plastics packaging materials and/or other packaging materials, several production technologies

Smaller local market (range of 400km) and niches Serving clients which demand specific service/products and/or are not the prime clients of large producers

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

Strategy

Operational excellence: most obvious strategy making use of economies of scale Product leadership: possible on several products, large company has more R&D resources Customer intimacy: more difficult as large companies are less flexible

Operational excellence: difficult as production costs are less competitive Product leadership: possible on limited number of products, limited R&D resources 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 Specialty plastics packaging

Business model

Cost driven (capex, scale) Process technology driven Low margins and high volumes

Cyclical
Operational excellence (best total cost), or customer intimacy (best solution) Larger part raw material costs Long product cycles and limited product range Made-to-stock, long production runs Easier to recycle Prices more cost push Price drivers: raw material costs, supply/demand balance Many competitors, large markets Competition on price, market share and capacity utilisation

Marketing driven (PMCs) Product research oriented High margins and low volumes

Less cyclical
Product leadership (best product) or customer intimacy (best solution) Larger part labour costs Fast and flexible production capacity needed Made-to-order, short production runs More difficult to recycle Prices more demand pull Price drivers: perceived value added Less competitors, smaller markets (niches) Competition by differentiation High entry barrier: long term experience needed, advanced technology, patent protection

Strategy

Production

Pricing

Competition

Medium to high entry barrier: know how and technology are

easily accessible, large amount of capital needed

Clients

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

Higher switching costs: few suppliers, customers 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

Differences in raw material costs

Distribution of production costs

100% 90% 80%

7-22%

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

15%

packaging have a larger share of raw materials costs when

compared to specialties - Related to the company size: larger companies benefit from economies of scale resulting in better procurement and lower contract prices - Related to the raw material prices: raw material prices are volatile (see next sheet) - Related to technological progress: producers are able to use less

20-35%

70% 60% 50% 40% 30% 20% 10% 0%

15%

20-75%

25%

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)

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

200

Oil

Volatilty of chemical prices is high (though not as high as oil): - YoY price variations of 20% are common resulting in variations of -10% or +10% in sales if prices are passed on - Inventory level and consequently the procurement strategy of

150
LDPE

PP

companies are important as they can save the day

- Volatility can ultimately result in serious margin pressure or relief

100

PVC

Chemical companies and producers of plastics packaging have an ongoing discussion about variations in European and Asian prices - 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
0 5-1-2007 50

between regions* and that Asian producers benefit from lower

costs of labour and investments - Rabobank doesnt take sides and thinks it is a fact that Asian producers are becoming more and more serious competitors

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.

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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
100%
80% 60% 40% 20% 0% 8% 79%

High capex need

62%
46%

68% 57%

73%

76%

Investments are needed in capital goods (capex) in order to produce goods - Compared to other sectors of the Dutch economy manufacturing

57%

industries are more capital intensive: relative high capex and low
opex, or high capex per employee - In the Dutch Rubber and plastics industry - of which plastics 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.

Capital equipment per employee (in EURk)

1.200 1.000 800 600 400 161 183 259 643 959

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

expensive

Capital intensive (high capex) industries are characterised by - Volatile margins as costs on capital goods are fixed: low flexibility of production capacity (low marginal costs) - Economies of scale: capex per good produced is lower when scale is larger

200
-

86

92

120

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

No additional (under) utilisation risk costs

Utilisation

Production is scalable, so reduced output

Share of fixed costs Price is kept constant and some produced units are not sold Share of fixed costs + variable costs + warehousing + obsolescence costs Reduced margin for all units sold

Overcapacity Capacity cannot be fully filled

Only original products can be produced with overcapacity

Production is kept at full output

Price is decreased to sell all produced units Capacity is used for other products own company

Low margin difference between original and other product

Other products can be produced with overcapacity Capacity is used for other products of other market players Low margin difference between original and 3rd party product

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 European producers by European plastics packaging sales in EURm (2010)
0
Amcor (Aus) Alpla-Werke (Au) Sealed Air Corporation (US) Aptar Group (F) Linpac Group (UK)

Highly fragmented European plastics packaging industry (EUR 50bn*)... - Top 25 companies: 31% combined market share

500

1000

1500

2000

2500

- 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

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) Greiner Packaging (Au) Nordenia International (G)

- Focus on core activities (ongoing investments and divestments)

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

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

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

Furthermore, plastics packaging market is mostly a local market

(range of ~400km). Top 50 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
* Rabobank estimation based on Eurostat 2008 data and calculations on volume and selling prices Source: AMI, Plastics packaging producers, 2011

23

Suppliers (II) The Netherlands

Dutch producers are mostly SMEs which serve the Dutch and neighbouring markets
Top 20 Dutch producers by sales in EUR (2010) Note: list is not complete due to lack of data**
1. Combipac [BPI]

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
2. Oerlemans Packaging
3. VFP [Clondalkin]

50.000.000

100.000.000

150.000.000

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

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

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

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

Netherlands 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

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]

and/or serve niche markets

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 Furthermore, we identify a cluster of packaging companies near Westland. The horticulture in glasshouses is concentrated in this region
14 15 9 13 2 7 8 10 19 20 11 12 4 1

17

11 18

16 6

Source: Companyinfo; company websites

25

I. At a glance

II. Demand

III. Supply

IV. Sustainability

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 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

V. Strategy

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 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

**

Input
(raw materials)

Production
(production process)

Usage

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

(packaging functionalities)

Main sustain-ability

issues

Problem

reduction

Bioplastics

Lighter/less plastics in

Protecting materials from

Policies, initiatives and

Substitutes

packaging
Energy efficient production

damaging
Preserving food and beverages Optimising supply chains Informing consumers and handlers

projects
Packaging waste as feedstock: recycling, energy recovery

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

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
Finished product Biodegradable Non-biodegradable Raw materials Nonrenewable Ecoflex (BASF) Bionelle (Showa Denko)

Traditional PE, PP, PET

600

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

(partly) Renewable

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

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

500

Source: Wageningen University

400

Potential for bioplastics in packagings is large

300

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

Biobased largest potential and is expected to outgrow biodegradable Driven by marketing and footprint* strategy some multinational F&B
200

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 - Scaling of production to ensure feedstock and become more price competitive**. Main production is expected to be outside Europe. 38% growth p.a. needed (!) to substitute 84% of plastics in 2030 - Improving the functionality i.e. barrier function - Ensuring biomass with no impact on food supply/environment

100

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%

0
2010 2012 2014 2018 2020 2022 2026 2028 2030
28

2016

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

2024

Production and Usage

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 - Producers who can operate their machinery as efficient as possible have a cost advantage in this competitive industry - Buyers are very interested in lighter packaging: (i) lower prices, (ii) lower transport costs - Specialties are mostly priced per m2 while commodities per kg. This drives specialty producers to manufacture thinner products

Some facts
- ~33% of edible parts of food produced for human consumption gets lost or is wasted (globally) - 22% of food bought by consumers (UK) is wasted ... - ...of which 64% could have been avoided by better planning - 30% of packed food is disposed without ever being touched - #3 of the most important opportunities to save resources is food waste*

Packaging machineries can lower raw materials and energy input. 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 less waste less waste less transport less waste and better use - Preserving food

Food losses and waste (kg/capita/year)

350 300 250 200 150 100 50 0 Consumers Producers to retailers

- More efficient handling - Informing consumers

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

N-, W-Af rica, Central Asia

Therefore, we opt for introducing and developing new packaging 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

Europe

N-America & Oceania

Subsahara Af rica

Source: FAO, 2011

S-Asia, SE-Asia

Latin-America

Industrialised Asia

Source: FAO; Nestl; 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)
NLD in European top 10 though countries like Germany, Belgium, and Sweden are doing better

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

In recent years higher awareness on waste recycling and collection via policies, projects and initiatives i.e. Nedvang: supporting successful pilot project Rijck to stimulate consumers, and Sita: investments in newest sorting systems Europe (2010) municipalities in better collection/recycling, Avalex: recent

Plastics waste: 24.7 mt

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

Disposal (landfill*): 42%

Energy recovery: 34%

Recycling: 24%

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

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

The Netherlands (2010)

Still a lot to do: some difficulties when recycling plastics

Plastics waste: 454 kt**

Energy recovery: 52% R1-incineration: 33%***

Other useful usage: 19%***

Recycling: 48%

Biodegradable plastics dilute non-biodegradable plastics. Many

consumers dont know the difference between the two Recyclers want to use batches of used plastics which are pure and secure (homogenous waste streams) - 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 dont 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)

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*)

Plastics-to-Fuel

Waste-to-Energy/ Energy-from-Waste

Difficult to sort out different

Plastics-to-Fuel via

Emissions do occur when

kinds of plastics, and to sort out

and recycle heterogenous plastics

depolymerisation (pyrolysis)
Several pilots and projects however non has been really successful yet

burning plastics for energy

recovery

In accordance to that environmental impact depends on technology of the incinerator

Recyling can consume a lot of energy Plastics degenerate each time they are recycled Still virgin raw material needed

Investments and scaling needed to become competitive Probably not all plastics are possible and sorting issues as in

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

when producing plastics

recycling might remain

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 wont 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

V. Strategy

In order to excel and become market leader producers should focus on one following disciplines: Customer Initimacy, Product Leadership, or Operational excellence. On other disciplines a minimum required performance level is still necessary

VI. Appendices

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

Positioning

F
Evaluate success of strategy via KPIs Organising strategic assets

B
Organise assets and align operations with desired positioning

Evaluating

Developing growth strategy

Develop growth strategies, both on direction and method

Source: Rabobank

( Letter refers to explanation ) on next sheets

33

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 Building strong and long term

Minimum required Efficient production and taking costs out of supply chain for customers. Focus on Total Costs of Ownership

relationships. Focus on deep

customer knowledge and understanding

Customer intimacy Best total solution

Operational excellence Best total cost

Source: Treacy and Wiersema

34

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 Large

Company size

35

Organising strategic assets

Product leadership Best product Innovative staff Product and concept driven Loose-knit structures Operational excellence Best total cost Relative small staff Process driven Disciplined teamwork and centralised organisation Customer intimacy Best total solution Service oriented staff Client problem solving driven Entrepreneurial client teams

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 Personnel

Machinery and equipment

Product specified machinery,

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

Standardised machinery, no frills Built for longer production runs and

high output

Flexible client specified

machinery Built for client needs

Facilitate short time-to-market

Product delivery and basic service

cycle

Maximum flexibility in order to

meet customer demand

IT

Technologies enabling

cooperation and knowledge management Investments and financial resources

Integrated low cost systems

Customer databases linking

internal and external information

Focus on R&D and product

development

Focus on improvement of current

working methods

Focus on service concepts for

the customer

36

Developing growth strategies

Choose direction and methods for growth

Growth directions: where are we going to?

Growth methods: how do we get there?

D
Current product New product

Current market

Mergers and acquisitions Market penetration Aggressive pricing Better service Product development Broaden product offering Develop new products Nearshoring

New market

Focus Market development International expansion Diversification Integration (vertical, horizontal) Organic growth

Source: Rabobank based on Ansoff product market matrix

37

Developing growth strategies growth directions

Explanation 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) Delivering a better service/price ratio than competitors. Essential growth direction when going for customer intimacy 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 Example (anonymous companies) 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 A producer of PE packaging has its own logistical service in order to deliver conform clients wish. Furthermore the company can response immediately on customers demand as it holds stocks for them 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 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 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

Where are we going to?

Growth directions Aggressive pricing

Better service

Broaden product offering

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 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

International expansion

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

Developing growth strategies growth methods

Explanation M&A is the quickest way to grow. Financial resources and management capabilities are required. Above average risk profile Example (companies are made anonymous) 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 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

How do we get there?

Growth methods Mergers and acquisitions

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

Focus

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 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

Organic growth

39

Evaluating
Financial perspective

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

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

Benchmarking

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

Customer perspective
KSFs Market penetration Customer satisfaction KPIs Market share % new customers TCO % satisfied customers % long term customers % sales in new markets

Internal business perspective

KPIs KSFs Optimal production process Utilisation rates % failure costs Production costs/output Efficient order processing (JIT) # days from order to delivery % wrongly delivered

Vision and strategy

Geographic presence

Market research learned that the product Several areas were further product

Efficient production (lean and mean) also

Innovation perspective
KSFs More product innovation KPIs R&D/sales Sales from new products Customer opinion Time-to-market

knowledge was insufficient in relation to the positioning as Product leadership player development is possible i.e. pack minimalisation, shelf-life prolongation, active and intelligent concepts, improved funcionality, new printing technologies and bio plastics

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

Better market exploitation

40

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 Plastics Metals Paper Carton board Glass Wood Barrier functionality Design freedom Printing ability Mechanical vulnerability Recyclability

Low score on criterion

High score on criterion

42

Functionalities and requirements (II)

Plastics packaging functionalities per product
Biochemical Mechanical
43

Biological*

Chemical

Product

Distributing

Informing

Protecting and preserving

Food Costs of distribution

Legislation and sales promotion

Perishable goods

Pharmaceuticals

Speed less important, reaching right consumer

Safe use

Drugs perishable and potentially dangerous

Non food/non durables Low importance

Use and application

Less importance apart from volatile and oxidation sentive substances

Durables

Amounts of space taken up

Packaging plays minor role

Protect against mechanical shocks vibration, electrical charge

Industrial/bulk goods

Packaging optimised for transport

Distribution information, quality logos

Larger units, less complex

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

Physical

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 chlorine VCM PVC ethylene oxide methane natural gas ethane ethylene polyethylene LDPE LLDPE HDPE ethyl benzene styrene cyclohexane benzene nitrobenzene MDI phenol cumene acetone aromatics toluene xylene LPG isobutane C4 butadiene olefins oil naphtha hexene butene octene Raw material propylene Base chemical Intermediate End product High volume plastics acrylonitrile acrylic acid polypropylene styrene acrylonitrile polyacrylonitrile acylic fibres isobutylene polybutadiene methanol MTBE ABS acetic acid nitrolene paraxylene PTA TDI DMT PET MMA phenolic resins polystyrene caprolactam adipic acid nylon 6 nylon 6,6 ethylene glycol caustic soda

Source: Rabobank

44

Glossary plastics (I)

Frequently used words and terms
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.

Additives

Blends

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.

45

Glossary plastics (II)

Frequently used words and terms
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.

Engineering plastics

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 materials 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

46

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

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 thermoplastics 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.

Thermoset plastics

47

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

Industry Knowledge Team (IKT) Industry Analyst IKT - Manufacturing T. +31 30 712 27 06 E. arnold.hardonk@rabobank.com

MKB Sectormanagement Sectormanager Industrie T. +31 30 216 48 24 E. s.a.maas@rn.rabobank.nl

Wouter Verster

MVO Grootbedrijf T. +31 30 712 33 64 E. wouter.verster@rabobank.com

Ronald de Vries

Industry Knowledge Team (IKT) Industry Analyst IKT Energy and Waste T. +31 30 712 31 70 E. ronald.de.vries@rabobank.com

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