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Jun 02, 2023

Plastics Industry: Five Factors to Watch in 2023

Michael Benson and David Evatz | Jan 26, 2023 As with the beginning of every

Michael Benson and David Evatz | Jan 26, 2023

As with the beginning of every year, there is no way to say for certain what the next four quarters will bring for the plastics industry. Despite rising inflation, geopolitical tension, and other challenges over the past year, plastics M&A activity during 2022 was generally in line with historical averages. Going into 2023, here are five factors we’re watching to see how they impact the plastics market.

Companies are watching the state of the US and global economy, and many are preparing for a potential recession that could impact product demand in certain segments, ultimately cutting into revenue for plastics manufacturers.

The severity and duration of a potential recession will certainly affect the market. Previously, even within 2022, challenges included pandemic-related supply chain and labor issues. Now, while certain supply chain obstacles have improved, a recessionary environment is impacting demand, especially for cyclical industrial and discretionary consumer products. As a simple example, a consumer is less likely to make a large discretionary purchase while inflation and high interest rates lead to a greater expense as a portion of their income.

However, not all end markets will be negatively impacted to the same degree. Serving a stable and more resilient end market such as medical or packaging within a wider recession can allow a plastics manufacturer to weather negative economic trends fairly well, resulting in the potential for a solid year of growth in 2023 if a company's end market performs well.

At the end of 2022, raw material prices started to drop partly due to improved supply chain dynamics and an oversupply of certain types of resin. Since resin prices make up such a significant cost of running a plastics business, companies are eager to see how pricing in 2023 will shape up. Currently, it seems that the lower demand within some market segments is contributing to lower, more stable resin pricing in certain categories.

Throughout 2022, the Fed worked to manage inflation through rising interest rates while trying to avoid hurting the economy through over-heightened costs of capital. Any tapering of inflation or future rises in interest rates will have ramifications for plastics companies and the overall M&A market.

As interest rates rise, theoretically a buyer cannot pay as much for targets if the cost of capital is higher, which may lower company valuations in certain situations and not align with a seller's goal. This may lead some companies to delay a sale until a potential valuation better aligns with their expectations. However, given that most companies in the plastics sector typically use a more moderate level of debt to fund acquisitions compared to many other industries, this impact may be more muted.

Over the past couple of years, plastics companies have needed to pay a premium for labor in a tightening employment market. The labor shortage seems to be stabilizing, which will offer these companies more options in maintaining the continuity of a quality labor pool.

Ultimately, while concerns loom for many over the potential of a recession and lower demand in specific end markets, a stable end market may allow 2023 to be a strong year for certain plastics companies. While headwinds exist in the form of inflation and rising interest rates, it appears that resin pricing and the supply of labor are both stabilizing.

From an M&A perspective, activity did soften during the second half of 2022 as inflation and interest rate increases started to impact deal activity. While there continue to be economic headwinds and challenges in certain segments, there is still significant demand for high-quality plastics companies from both strategic and financial buyers, which is expected to drive M&A activity in 2023.

About the authors

Michael D. Benson is a Managing Director in Stout's Investment Banking Group. He is responsible for the execution of investment banking transactions, which include mergers, acquisitions, divestitures, and the private placement of senior debt, subordinated debt, and equity securities.

David M. Evatz is Head of the Plastics & Packaging Industry Practice within Stout's Investment Banking Group. He has extensive mergers and acquisitions experience, having executed numerous M&A and corporate finance transactions, including buy and sell side assignments, leveraged buyouts, joint ventures, fairness opinions, and the private placement of senior debt, mezzanine debt, and equity securities.

Stout provides a full range of strategic alternatives including merger and acquisition (M&A) advice, private capital raising, financial sponsor coverage, and other financial advisory services to family-owned businesses, portfolio companies of private equity firms, and divisions of large corporations.

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