China Packaging 2022H1: Modest Revenue Growth, Faster Consolidation, and a Green Low-Carbon Direction

In product scope, China’s packaging industry now includes paper, plastic, metal and glass packaging, plus packaging printing and packaging machinery, forming an independent, complete and well-segmented industrial system. Its rapid expansion has supported domestic consumption and export goods, while playing a key role in protecting products, smoothing logistics, driving sales and serving consumers.

With downstream consumption losing momentum, leading packaging companies managed only slight revenue growth in 2022H1: revenue rose 3.8% year on year, while 2022Q2 alone fell 4.2% year on year. The slowdown stemmed from mixed downstream demand: total retail sales of consumer goods grew 8.4% in 2022H1, yet tobacco and liquor retail sales slipped 1.7%, soft drink output grew just 3.3%, and mobile phone shipments dropped 5.1%. These shifts weighed on makers of corrugated boxboard packaging, color boxes, cigarette labels and plastic packaging. By segment, paper packaging, cigarette label, metal packaging and plastic packaging companies posted 2022H1 revenue growth of 4.3%, 8.0%, 2.5% and 1.5% respectively. In addition, pricing for some products, such as corrugated boxboard packaging, tracked raw material declines, further dampening revenue growth.

Industry consolidation remains led by major players, whose competitive edge is increasingly evident. In earlier years, tighter environmental rules and higher labor and raw material costs accelerated M&A, sharply improving the bargaining power of leading firms along the value chain. Metal, plastic and paper packaging sub-sectors all benefited as downstream customers became more concentrated, with orders flowing to packaging leaders. At the same time, leaders strengthened existing customer stickiness through high-quality services and nationwide reach, while accelerating new market layouts and expanding share.

Packaging companies are also becoming comprehensive service providers, extending into new businesses and higher-value products and services. Downstream products are increasingly varied, packaging requirements are rising, and brand owners favor leaders with broad service capabilities. Through acquisitions and R&D, companies are deepening their industrial chain reach, such as cross-sector social packaging, smart packaging IoT and one-stop design and development services.

2022H1: Retail sales growth slowed

2022H1: Beverage output growth slowed

Even as overall utilization stayed relatively soft in the first half, packaging profitability still improved.

1. From a macro angle, the CPI-PPI scissors gap widened. PPI reflects raw material prices, while CPI reflects product prices. The PPI-CPI gap peaked in 2018Q2 (at 4.7% and 1.9% respectively), then reversed quickly and continued widening through July 2019 (at -0.3% and 2.8% respectively). This broadly matches the path of packaging companies’ gross margins moving from low to high. Accounting for raw material inventories, profitability is expected to keep improving in later quarters.
2. Bargaining power supports profitability. As consolidation advances and leaders gain market share and negotiating strength, profit expansion has lifted gross margins, most visibly in the metal two-piece can sector and the corrugated boxboard paper packaging sector.

2022Q2: The PPI-CPI gap widened

Paper packaging: key companies (Jinjia Co., Yuto Technology, Hexing Packaging and Meiyingsen) recorded a notable year-on-year gross margin improvement in 2019Q2, up about 2.1pct. The reasons were:

1. Raw material prices declined. Paper prices were high in 2018Q2, while in 2019Q2 major paper grades fell sharply year on year: coated paper, offset paper, ivory board, white board and kraft linerboard dropped 19%, 14%, 13%, 12% and 20% respectively. Given the raw material inventory cycle, industry profitability is likely to improve further quarter on quarter in 2022Q3.
2. Consolidation strengthened bargaining power. Paper packaging continued to consolidate; for example, corrugated boxboard paper leader Hexing Packaging kept order volumes growing against the market trend, and consolidation helped industry profitability bottom out and recover.
3. Value-chain added value increased. Using paper packaging as a platform to deliver high value-added services to brand owners lifted overall gross margins. Jihong Co., for instance, leveraged packaging to expand into precision marketing and cross-border e-commerce, deeply integrating online advertising with offline packaging operations.

Metal packaging: key companies (Org Technology, CPMC Holdings (0906.HK), Baosteel Packaging and Shengxing Group) posted an arithmetic average gross margin of 17.8% in 2019H1, up 0.7pct year on year. The improvement came from:

1. The two-piece can industry returned to an upward track. After excessive capacity additions, the sector suffered consecutive losses in 2016-2017, while leaders stepped up consolidation (including Org Technology taking a stake in CPMC Holdings and acquiring Ball Asia Pacific, and Shengxing acquiring Pacific Can, among others). CR4 market share now reaches 70%, bargaining power has risen markedly, and the industry has entered a profit upcycle. In early 2019, two-piece cans successfully raised prices by 0.7-0.8 fen per can; in 2022H1, the two-piece can gross margins of Org Technology, Baosteel Packaging and CPMC Holdings rose 6.5pct, 2.2pct and 0.2pct year on year respectively. 2) Raw material prices were stable with a slight decline. In 2022H1, aluminum ingot prices fell 4% year on year, and overseas LME aluminum spot prices dropped 17% year on year, lifting gross margins in the two-piece can sector.

Paper packaging profitability vs. raw material price trends

Two-piece can price hikes drive gross margin recovery

Future trends for China’s packaging industry: green, low-carbon and environmental protection as the main development axis

1. The regional landscape will gradually shift

The packaging industry layout centered on the Yangtze River Delta, Pearl River Delta and Bohai Rim will not change quickly for a considerable period and will continue to develop alongside regional economies. However, the large-scale development of western China and the revitalization of the old industrial base in Northeast China will markedly alter the sector’s overall imbalance. For outstanding packaging enterprises in the “three major blocks,” this opens an expansion and development opportunity.

1. Moving toward holistic and systematic solutions

Traditional systematic packaging solutions, such as buying packaging materials with free machines, are facing pressure as the market matures. Suppliers that cannot offer complete solutions will see weaker bargaining power with customers because they cannot systematically cut packaging costs. Packaging companies therefore need holistic, systematic packaging approaches.

1. Structural adjustment will accelerate

As the domestic and international development environment changes, and as economic quality and structural contradictions overlap, China’s packaging industry will enter a critical phase: moving from a golden development period into a problem-prone period. Long-standing structural and quality defects—overcapacity, excessive reliance on energy and resource consumption, weak independent innovation, limited corporate competitiveness, and a mismatch between industry scale and economic returns—will become more apparent. This makes regional industrial restructuring in the coming years unavoidable. Structural adjustment is a survival-of-the-fittest process, an optimization and reorganization process, and an opportunity for stronger players to take off.

1. “Green, low-carbon and environmental protection” will be the main axis of future packaging development

With the implementation plan for green packaging in the express delivery sector introduced, e-commerce, express delivery and food delivery industries will be among the first to restrict a range of non-degradable plastic packaging uses. The plan also urges local governments, especially cities, to step up implementation.

—This article is adapted from China Packaging Network (pack.cn); original link: http://news.pack.cn/show-379430.html