Beverage can capacity to rise with demand

As demand for aluminium drinks cans revives, the leading canmakers are planning to up their spend on production capacity. Arthur Stupay reports

After years of modest decline in volume, beverage can demand in the world’s largest market, North America, is having a revival. Other large markets, in Europe, Asia and South America, are also moving to metal cans, especially for use with a range of new beverage types that appeal to a widening consumer base.

The problem now in the canmaking industry is adding production capacity to meet the growth of new products to be packaged in cans, including a proliferation of both still and flavoured waters to regular and spiked seltzers.

The result is a sharp increase in capital spending. For both Ball and Crown, total spending is projected to rise from US$1 billion to almost $1.4bn, based on customer commitments and the rise of new beverage types to be packaged in cans.

North American beverage can shipments have been rising at the fastest rate in years. In the fourth quarter of 2019, volume rose by 5 per cent as shown in Table 1. In this category, shipments of cans for alcoholic drinks (beer and spiked beverages) rose by almost 10 per cent. Cans for soft drinks, the largest category, rose by more than 2 per cent. With the increases in capacity, volume gains are expected to accelerate in 2020. The increase meant that total beverage cans shipments in North America reached 97.2bn, a figure last seen in 2008.

Coca-Cola, the largest soft drinks producer, noted that its volume in North America rose by 3 per cent in the fourth quarter, “driven by strong growth in its sports drinks portfolio, premium water brands, Topo Chico and Smartwater, and double-digit increases in Coca-Cola Zero Sugar”. Similar results were shown in Europe as well as in Latin America, led by growth in Brazil and Mexico.

Leading brewer Anheuser-Busch InBev (A-B InBev) also reported significant volume gains in its hard seltzer segment, many available in cans, and attracting consumers from other alcohol segments. But the brand owner’s beer volume dropped by 0.9 per cent in the quarter, offset by strong non-beer volume gains of 4 per cent. Also, A-B InBev’s operations in Mexico and Colombia were especially strong for both beer and non-beer. A similar result was reported by Molson Coors, where volumes of the company’s canned hard seltzer brand, Vizzy, were notably strong. Molson Coors expects this category to triple in volume by 2023.

Ardagh growing, but cautious
Ardagh Group, which produces both metal cans and glass containers, showed good margins, but was capacity-constrained. The canmaker’s Metal Beverage Americas segment, representing 29 per cent of sales, reported higher volume of 9 per cent in the fourth quarter. For the year, unit growth was 7 per cent, assisted by speciality cans, which grew by 17 per cent. Ardagh developed new business in hard seltzers, energy drinks and sparkling waters.

Ardagh’s sales in Brazil, part of this business segment, rose by double digits. It has two canmaking plants (Alagoinhas and Jacareí) and one new end-making plant (Manaus), to supply the market. In the future, Ardagh will add capacity in existing plants rather than build new ones.

Ardagh’s Metal Beverage Europe segment, with 22 per cent of the business, showed lower sales and segment earnings in the fourth quarter. While volume was down in this period, it rose by 2 per cent for the year. Chairman Paul Coulson again emphasised that the company seeks “value over volume” in making sales and capital spending decisions, implying the company declined some business to maintain margins. These results contrasted with Ardagh’s sales of glass containers in Europe, which grew by 6 per cent.
Overall, Ardagh announced a step-up in capital spending, mainly for metal cans, and continued adequate maintenance capital for the company’s glass container business. Ardagh projects “business growth” investment of $250 million in 2020 and maintenance spending for both glass and cans of $350m, an increase from reported capital spending of $498m in 2019.

Ball achieves goals
With demand for beverage cans rising to record levels, helped by new production capacity, Ball had record results in 2019, generating $1bn in free cash flow, after capital spending of $600m. This is also following the sale of the company’s tinplate food can and aerosol operations, beverage can plants in China, as well as the sale of the Argentine tinplate aerosol business. At the same time, Ball has launched an aluminium cup business, with a new production line at the Rome plant in Georgia expected to be operating in the fourth quarter of 2020.

Global volume at Ball rose by 5 per cent last year, the highest in years. The company projects annual volume growth of 4-6 per cent over the next five years, according to operations chief Dan Fisher. The canmaker also expects volumes in North and Central America to rise in the range of 4-6 per cent; South America by 5-8 per cent; and Europe by 3-6 per cent, a pick up from a year ago. In total, Ball expects to increase global capacity by 8bn units through to 2021, a major step-up in volume, spurred mainly by new products packed in cans. Ball currently makes about 100bn beverage cans a year.
In North America, Ball’s beverage can volume rose by 2 per cent in the quarter and by 4 per cent for the year, with speciality cans growing by 5 per cent in the quarter and by 9 per cent for the year. The growth was held back by lack of capacity and issues related to the start-up of a new plant at Goodyear in Arizona. In 2020, lines will be added at the existing plant in Georgia, while a new plant will start up in Texas during the second half of 2020. In addition, Ball will also construct two new plants making speciality beverage cans – one at Glendale in Arizona and another in the northeast – each with two lines initially. These come on stream in the first quarter of 2021.

In South America, Ball’s volume was up by 3 per cent in the fourth quarter and by 8 per cent for the full year. The new plant in Paraguay started on schedule, while the canmaker expressed readiness to add capacity in Brazil to meet demand growth.

In Europe, volume was flat following a strong fourth quarter last year. For the year, volume rose by 5 per cent, a rise from the previous year. Ball will add to existing facilities in Europe, as with the plant near Madrid in Spain, as customers install additional can filling capacity, supporting market growth and newer drinks in speciality cans. Also, Russia and other European governments are actively trying to reduce the use of larger PET bottles. Ball projects 11-13 per cent growth, excluding Egypt and Turkey, taking into account the company’s reluctance to accept low-margin business.

Ball also announced plans to cut overheads in the Middle East by closing the Dubai office and shifting management responsibility of the plant near Cairo in Egypt and the plant at Manisa in Turkey to the UK. Ball’s canmaking plants in Saudi Arabia and India will be reported in as a “non-reportable category”, along with the company’s burgeoning aluminium cups business.

As noted last year, Ball’s Aerospace operations continued to show strong gains. In 2019, revenues rose by 25 per cent and the division added more than 1,000 people for a variety of space and technical programmes. Management projects that annual operating earnings will rise by more than 15 per cent over the next few years.

The company’s operating earnings in the beverage can business rose by 16.5 per cent with operating margins at 13.1 per cent in 2019, as shown in Table 2. These results show the continued strength of Ball’s plans to restore margins and profitability to accompany gains in volume, a prerequisite for the company’s planned expansion in several markets, overcoming past headwinds in freight and logistic costs, and aluminium scrap credits from the supplying companies.

Crown continues growth
Crown reported a 7 per cent increase in beverage can volume, lifting sales by 4.8 per cent; but this was offset by lower results in the company’s European Food and Transit Packaging segments. Strong volume gains fuelled capital spending to meet customer demand, to $600m, up from $432m in 2019 and $462m in 2018. Crown continues to project free cash flow at $600m in 2020. The canmaker started commercial production at four new production lines in 2019 and will complete at least three new lines in 2020, along with the conversion of two lines from steel to aluminium in Spain.
In the Americas, beverage can volume rose by 8 per cent in the quarter, led by the operations in North America, which grew by “low double digits”.

In the Americas segment sales rose by 6.5 per cent in the quarter and operating profit by 25 per cent with margins of 17.3 per cent, as shown in Table 3. Crown planned to complete a third line at Weston in Ontario, Canada in January 2020 and a third line at Nichols in New York early in the second quarter. In South America, volume grew at a slightly slower rate, before the start-up of a new plant at Rio Verde in Brazil, which began operations in November.

Volume in Crown’s European segment increased by 9 per cent, supported by two new plants in Italy and Spain. The canmaker reported increased volume in Eastern Europe, France and Turkey, with plants running at capacity. But the conversion of the two lines from steel to aluminium at Seville in Spain will have an impact in the first quarter while the plant is out of action.

Crown’s European food can segment, the second-largest, was down slightly, again due to the poor harvest, as inventories were cut. Lower volume also hurt margins due to cost increases in steel and other consumable categories.

The operations in Asia Pacific, including China, showed an increase in sales and segment earnings, with volume rising by more than 10 per cent. Crown has cut back China volume and sales are now close to $85m, significantly lower than in previous years.
Transit Packaging accounted for close to 20 per cent of total sales and segment earnings. Sales were down due to reduced volume and pass-through of lower raw material prices. Backlogs are up and results are expected to improve in 2020.

Crown’s chief executive Tim Donahue again reiterated that the board is reviewing both the canmaker’s business portfolio as well as capital allocation. Crown’s aim is to promote growth, assuring the company’s capability to meet the needs of customers worldwide, as can demand accelerates.

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