- October 01, 2010, By Frank Perkowski, Business Development Advisory
Packaging papers include a wide range of grades, applications, markets, and forms, which are driven by very different dynamics and circumstances in many cases. Because of this, these papers often are not thought of as one category. However, they also have a lot in common. This includes similar papermaking and converting operations in many cases, a common set of competitive substrates and materials, similar end-user/supply chain requirements, and similar distribution channels to name a few.
The ten major application categories that are detailed in a newly released study consist of three basic packaging formats:
- Bags and wraps (grocery bags, multiwall bags, industrial wraps, foodservice papers, food processing papers)
- Labels and tags (label facestock, release base, tags)
- Packaging wraps (single-ply wraps, multi-ply wraps)
Taken as a whole, these market applications represent about $7.9 billion in annual US sales at the finished packaging sales level, nearly 3.9 million tons, and more than $4.0 billion in paper sales in 2009. The ten major application categories range from a low of 135K tons annually in the case of food processing papers to about 640K tons in the case of release base papers.
From a paper converter's perspective, these papers represent on average a little more than 50% of the total cost of sales, reflecting for most converters their largest cost area. But the relative significance of paper cost in each application varies quite a bit and depends on the amount of total value added in the converting operation and the type of processes employed.
It is also generally true that the attractiveness of a particular packaging paper market from a converter's standpoint is related to how much value is added to the substrate in the converting process. Consequently, the most attractive markets tend to be those where the cost of the paper or substrate is a relatively small part of the total converted cost, and so label papers, release papers, and packaging wraps (single and multi-ply) are segments that have the potential to offer the greatest profit for independent converters.
Figure 1 (right) provides an overview of each of the ten major application segments and shows the total paper substrate expenditures by converters and the estimated share of total packaging paper costs for each application category. As can be seen, there is a wide variation by category in terms of the importance of paper in the overall packaging cost structure. It ranges from a high of 80% in the case of tags to a low of 35% in the case of label facestock in which the finished label typically involves several material and chemical layers as well as numerous value-added converting processes to make the final packaging material.
Taken as a whole, these papers typically require a wide range of processing to meet the end-use requirements of each application. While some of these processes, such as clay coating, are done at the paper mill and on the paper machine in particular, most are performed off line and at an off-site facility, typically an independent converter.
At a minimum, the paper must be converted into a packaging format such as a bag, pouch, wrap, tube, label, or container of some type and may require little, if any, further surface treatment to meet the end-user's specification. Applications that involve uncoated papers of one type or another in fact represent the largest single segment at about 29% of the total packaging paper volume. The next largest segment involves the addition of a functional coating or barrier treatment of some type and includes applications mostly in the release paper, one-ply packaging, foodservice paper, and multiwall bag categories that most typically require release or greaseproof treatments.
Another set of applications, amounting to about 35% of the total volume, consists of clay-coated papers (typically done at the mill) with or without some type of functional coating. The balance of the category, representing about 10% of the total, involves lamination of base stock to one or more other substrates to meet a particular set of performance requirements.
Figure 2 provides an overview of the total category volume in terms of surface finishing processes employed. Obviously, these percentages vary significantly by application and paper grade. In summary, the study shows that the majority of packaging paper applications receive one or more surface enhancements (in addition to package forming) providing ample opportunities for converters to add value and differentiation to their final packaging paper products.
Major Opportunities & Challenges Ahead
While there hasn't been much in the way of major packaging or material breakthroughs in this segment in the recent past, that could change in the next few years. For a number of reasons, we expect there to be several developments that will impact these markets significantly and the use of packaging paper materials by converters and end-users. Following are a few general observations and forecasts that are worth noting:
Emerging technology developments will likely impact future demand levels | We have identified nearly 30 emerging/new technologies and technical developments related to these papers that are actively in development and/or in various stages of market testing and commercialization. While many also are being pursued by flexible packaging/film-based suppliers, the opportunities are clearly available to paper producers and converters as well, and they have the potential to change the competitive landscape in these markets.
We have categorized these individual technology developments into six different types including smart/intelligent packaging solutions, active packaging solutions, coating enhancements, fiber enhancements, manufacturing/converting process changes, and package design innovations.
Sustainability initiatives will affect/increase paper preferences in many cases | On balance, we believe that the growing interest in sustainability and the resulting changes being made in packaging materials and processes will have a positive demand impact on paper-based materials in the future. This shift on the part of many consumer packaged goods (CPG) companies will affect each of the paper categories to different degrees and could slow or stop recent share declines for paper (as in paper grocery bags and multiwall sacks) or potentially reverse recent share losses in others (as in single- and multi-ply packaging papers and foodservice papers).
These improvements in market performance will come for the most part at the expense of film, foil, and synthetic substrates in flexible packaging markets due to a perceived benefit for paper-based materials by users in the areas of recyclability, compost ability, recycled content, renewable fuel usage, and less reliance on petroleum-based materials. While paper materials generally have a disadvantage in terms of energy and water usage per unit, these negatives are perceived to be less destructive to the environment by most CPGs and packaging consumers.
The economic downturn will change consumer buying habits | The current economic downturn coupled with increased interest in sustainability likely will change consumer buying and usage habits with respect to flexible/paper packaging materials in significant ways within some market segments. We have seen this before, most notably after the 2000 recession when consumers reduced their discretionary spending levels (and in some cases their use of disposables and communication papers) and increased their purchasing of bulk packages, private label brands, and discounted products.
In addition to similar behavior changes that are likely to be more severe this time around compared to the previous downturn, we expect to see more significant changes with respect to packaging materials that will include, for example, a preference for packaging materials that are lower in weight, more friendly to the environment (as perceived by the consumer), and more local in nature. To the extent that the downturn continues, we believe these behavioral changes will be more significant and longer lasting.
Fewer paper producers/mills in the future will strengthen the overall paper supply base | Most of the packaging paper segments we studied still are highly fragmented in terms of paper supply despite the significant consolidation that has taken place in the industry over the past 10-15 years. For this reason and combined with other factors — such as the lack of capital for technology upgrades and expansions, declining demand in some segments, and the influx of new, more efficient mills into the packaging paper supply base — more than a handful of mills are likely to be shutdown or redirected in the next few years.
While this may cause some supply disruptions initially, this should make the remaining mills more viable long term. Part of this consolidation process will result in more streamlined product offerings from individual mills and companies, which also will enable these companies to be more competitive long term and more capable of responding to new market challenges.
Frank Perkowski is the president of Business Development Advisory, Marietta, GA, a specialized consulting firm focused on North American paper and paper-based packaging markets. The firm works with companies to identify and assess growth opportunities. For more information on the referenced study on Packaging Paper markets, contact firstname.lastname@example.org or visit www.bd-advisory.com.