A bright year for canmakers

The year 2020 looks promising for canmakers as economies worldwide continue to thrive and demand for cans grows. Arthur Stupay reports

With many economies prospering in 2019, the main issue in 2020 for business executives and canmakers is whether this seemingly prosperous period will continue, and for how long?

Currently, inflation in the leading economies – especially the US, the EU and China – is not a major issue, even though budget deficits are soaring. For the US and other countries, the central government budget deficits continue to climb at an accelerating rate due to recent tax cuts, even though there was hope that with the pick-up in economic activity, budget deficits would eventually fall.

In the past, high deficits and full employment have increased the prospects for inflation, lifting interest rates. But a few forecasters are predicting significantly higher interest rates or economic weakness. The International Monetary Fund (IMF) now expects improved economic performance this year, raising its growth rate estimate for 2019 and modestly cutting projections for this year.

The IMF’s current GDP projection for global economic growth in 2020 is 3.3 per cent, as shown in Table 1,  compared with 3.4 per cent in its October forecast. The forecast for the US economy has been raised from the October report, with the EU reduced slightly.

Despite pockets of regional hostilities, the world has avoided a major military conflict. Also, the trade war between the US and China and between the US and its neighbours, Canada and Mexico, has been averted. The largest economies remain prosperous with employment increasing and unemployment falling. Another major positive for 2020 is that inflation remains benign, with the advanced economies only showing modest price index increases.

For the US, starting last year, cost increases in important industrial categories for canmakers have risen only slightly, considerably below the rates recorded in 2018. For instance, the cost index for transportation and warehousing logistics was up by less than 1 per cent in 2019, well below a year earlier, as shown in Table 2.

At the same time, the wholesale price index for plastics packaging and carton board were down. Even the index for metal can prices, according to government data, was lower in 2019 compared with a year earlier. But this trend may differ from the actual pricing arrangements of canmakers according to their contractual terms. In contrast to the results for 2019, the rise in the price index for metal cans in 2018 was more than 9 per cent – among the highest in years.

If there are signs that price indices rise by more than 2 per cent as the year progresses, interest rates may increase, as central banks in the largest economies take action to stem inflation, maintaining growth while reducing the prospects for further price increases. This may slow the increase of GDP even below the modest rates projected. Higher interest rates also increase the risk of loan defaults – an anathema to the banks – and may hurt capital spending.

The metals market in 2019 is very different from that of 2018. As an example, the price of basic aluminium has been on a downtrend. Also, energy costs have fallen dramatically, due to the ample availability of gas and oil, resulting in a major glut of these products.

On the other hand, aluminium coil imports are rising dramatically, raising costs and posing a challenge for the canmakers in 2020 as they seek to recapture past cost increases, which constrained margin recovery last year.

On the volume front, the beverage can industry is one of the sectors that is expected to exceed previous growth records, even if the economy slows. This reflects the major efforts of canmakers and their customers to promote sustainable practices, especially recycling of metals and other items. The use of cans is expected to grow at the expense of many types of plastics packaging – especially bottles – as consumers recognise the impact of poor past practices that encouraged pollution.

In addition, higher personal income as the economy grows is expected to spur beverage consumption; not only for conventional soft drinks and beer, but also for higher-value new products, such as craft beer and newer beverage varieties that flourish in a growing economy. This is expected to be positive for metal cans, which are the main sustainable package for drinks.

Weak aluminium price
With the price of ingot lower at the beginning of 2020, Alcoa and other aluminium companies are trimming their smelting capacity to shore up prices. Producers will also seek markets that provide the highest returns, such as the automobile industry.

In a presentation at last October’s Canmaker Summit in London, Kamil Wlazly, an analyst with Wood Mackenzie, said the production of aluminium coil for can manufacture in the US was projected to fall by 8 per cent while imports had soared by more than 60 per cent. Wlazly attributed the US’s decline in canstock production to the growth in demand for aluminium by the automotive sector as carmakers sought to reduce vehicle weight to reduce fuel consumption.

Aluminium coil imports for canmaking are growing from Saudi Arabia, China and Thailand, among other locations. Suppliers in these countries are increasing production to meet growing demand – especially from the US.

Another uncertainty, which may constrain the take-up of aluminium for making cars and light trucks, is the growing use of taxi services such as Uber and Lyft. Furthermore, the shift from conventional petrol and diesel engines to battery-powered cars – and the potential adoption of autonomous vehicles – could eventually hit demand for cars and the supply of coil to the sector.

China will continue to dominate aluminium production, spurred by its government support. But most of the production is used within the country’s strongly growing internal market. Aluminium producers that are not state-owned or supported are expected to focus on cutting costs and capacity reduction to improve their profitability. That said, production of aluminium coil for beverage can production will remain an attractive market.

Volumes and capital spending rise
The beverage can industry worldwide is expected to chalk up record volumes in 2020, building on the performance of 2019 when in the first nine months volumes rose by 3-4 per cent in the US and EU, and even more in South Asia. Last year was a turning point as many beverage brands, retailers and consumer groups were drawn to products that promoted sustainability at the expense of non-recyclable packaged products.

The largest beverage companies, especially Coca-Cola and PepsiCo, are bullish on their volume projections this year. Promotional spending is expected to rise to support the growing number of new products launched.

As a result, consumption in the largest markets is projected to increase after years of flat or falling demand. This is leading to increased demand for beverage cans, which is approaching the industry’s capacity. Areas of growing demand range from water, flavoured water and seltzers in cans, to diet drinks and craft beers in cans.

Packaged beverage consumption varies widely by region and country, influenced by preferences for traditional beverages and impacted by differences in consumer income, which affects demand for both the products consumed and the packs they come in.

The highest beverage can use is in North America, at 268 units per capita (2016), as shown in Table 3. This compares with 81 units in western Europe, 45 in Eastern Europe and only 27 in the Asia Pacific region. This illustrates the potential for growth in demand for aluminium cans as the world economy expands and consumers turn to more sustainable and recyclable packaging, such as cans.

With increased metal can demand, the companies will have to increase capacity, since many are running plants at maximum operating rates. This will increase capital spending, especially in the US and Canada, Mexico, and South and Central America, notably Brazil. In addition, capacity is expected to lift in the EU, Russia and in South Asia, following strong growth in expected volume.

We will highlight this rise as the data becomes available. But in previous reports, we estimated that that spending on plant expansion by the major producers will likely exceed US$2 billion, or more than 6 per cent of total sales.

More information from Arthur Stupay, Tower Research, 12526 Cedar Road, Cleveland Heights Ohio 44106, USA. Tel: 1 216 241 3078. Email [email protected]