The plastics processing industry is facing the heat of the economic meltdown, with several small- and medium-sized companies under pressure of closure due to a sudden fall in the price of both processed plastics and resin that has left them with losses and inventory pile-ups.
Resin, the main raw material used in plastics processing, is a by-product of the petroleum industry. Only recently, resin prices had reached $1,800 per tonne when processing units, fearing further increase in prices, accumulated huge stocks of the raw material. Resin prices then suddenly fell to $800 per tonne, coinciding with the fall in oil prices. This was followed by the plastics price falling by almost $1,000 and has left many units with an inventory of raw materials that they had bought at high costs.
Their chances of recovering those costs have now evaporated with the fall in the prices of processed plastics, leaving them with a huge hole in the their balance sheets
Mahmood Ahmadian, General Manger/Director of Rak Petropack, said: "At the moment, the only strong demand is for plastics packaging from the food and beverages sector in the GCC countries. The demand from other major sectors, especially infrastructure – pipelines, construction and automobile – is negligible. Many units in the UAE are overburdened with raw materials and inventory.
"The units are temporarily closed for maintenance and repairs for more than a month now. Only packaging materials for food and consumer products are moving. Companies are calling in all credit and using their sales team to recover money from clients. Credit recovery and credit insurance firms are very active."
Salim Patni, Sales Manager of Al Anaj plastics, said: "We faced a tough time earlier when resin prices reached record levels.
"We procured huge quantities of raw materials as a hedge fearing further price rises. Suddenly, though, the market has crashed. Consumers don't have money to buy our products and we have huge inventories bought when costs were higher, so lowering our prices is hurting us anyway.
"But companies are not closing down. We are waiting and watching the situation," said Patni.
Companies that stockpiled huge quantities of raw material with borrowed funds are worst hit, because the real value of their inventory has come down by more than 40 per cent in two months while they still service their debts at the original levels.
Many small operators have vanished from the market and only the strong and independent companies are here to survive.
Jerry MH Huang, Managing Director of Jundi's Industrial Company, a Japanese machinery maker for plastics units, said: "Investment in new plastics processing units is very slow. Many small- and medium-size processing units are closed due to the financial crisis and big companies are getting stronger now. The strong firms that survive the situation will get new orders, which were earlier placed with the smaller units.
"While companies with good managements are still doing well, those with poor managements are the worst hit. The ones with huge bank borrowings are facing closure. While this is happening all over the world, the situation in the Middle East market is not that severe. The problem is the worst in the United States, Europe and the Asian markets where many plastics units have closed down.
Jundi's Industrial Company supplies plastics moulding machines to units in the UAE, Saudi Arabia, Iran, Syria and Jordan.
"The recession is turning out better than expected for domestic packaging companies because cost-conscious consumers are turning to cheaper domestic products rather than multinational brands. When they are rich and affluent, consumers prefer foreign luxury products. In a recession they look for cheap bargains," Huang said. He added, however, that while his company used to sell six to seven units a month during the good times, it now sells not more than two.
Gustaf Akermark, Senior Advisor, Abu Dhabi Polymers Park, said: "The average annual growth of the demand for plastics has been five per cent and the current problem is only temporary. Huge resources are being created by the big companies to increase plastics manufacturing, and the downstream sector will continue to grow."
Michael Chen, Sales Executive of Kai Mei Plastics Machinery Company, said: "A number of new plastics units which came up in China and other Asian countries during 2008 have got a shock.
"Big companies are becoming more efficient by introducing bigger and faster machines with minimum labour costs. The new trend is to set up 1,000 litre moulding plants and PET packaging. Even in a recession, the demand for plastics packaging is strong for food, detergents, juice and beverages, which is a major market in the Middle East region. Companies are using bigger machines for cost effective operation."
Vishal Agarwal, President of Yudo Hot Runner India, an Indian plastics maker, said: "Unlike US and European clients who want open credit for six months, Middle East companies are ready to give advance payments for orders, especially in the food packaging sector, such as milk bottles, mineral water and juice packagings.
"We supply plastics precision dyes and tools to the Middle East, especially to the UAE and Saudi Arabia. A correct picture of the market will be available only after March 2009."
He said Indian companies are getting orders mainly from the Middle East and the industry is keenly watching the situation to see if there is any ray of hope in 2009.