Flexible Packaging Segment - Integrated Report Grupa KĘTY 2023

Rafał Lechowicz

President and Chief Executive Officer of Alupol Packaging S.A.

Following the investment projects completed in the recent years, the FPS – a leader in the market of packaging materials in Central Europe – has developed optimal production facilities in reference to customer expectations. The recent investments in plastics processing (manufacturing of polypropylene and polyethylene films, including high-barrier ones), as well as further development of the technology of paper refining, contributed to relative strengthening the FPS position on the market and increased sales of the new type of packaging compliant with the current market trends.

Production, sales and major assets of the Segment

The Flexible Packaging Segment consists of Alupol Packaging S.A. in Tychy and its subsidiaries, Alupol Packaging Kęty Sp. z o.o. and Alupol Films Sp. z o.o. The Segment is a leader in manufacturing flexible packaging materials in Poland, with the estimated market share of nearly 20%, as well as a recognised packaging manufacturer in Europe. At the same time, the Segment is the largest Polish manufacturer of polypropylene films, with production capacity of 60-70 thousand tons a year, and over 5% share in the BOPP films market in Europe. The production of polypropylene films and sustainable, more homogeneous packaging laminates account for nearly 50% of the Segment’s sales volume.

The 2021-2025 strategy for the FPS has been prepared in the period of major transformations on the packaging market, where expectations have been changing as a result of environmental pressures, focus on cost reduction and food safety, and the related legislative changes.

The strive for sustainable development is forced by the necessity of creating and marketing new forms of laminates, i.e. mono-structures characterised with lower weight and higher material homogeneity. Despite the observed pressure on plastic packaging and replacing it, where possible, with packaging based on refined paper, the position of the former seems not to be threatened. Plastic-film-based packaging protects the packed food as no other packaging, extending the food shelf-life, which finally prevents food wasting. Additionally, such packaging production requires much less energy. Also the costs of the packaging transport, and consequently the transport of products packed in them, are incommensurably lower compared with the ‘more sustainable packaging’, such as jars or tins. Polypropylene film is one of the components of homogeneous laminates, which is highly important in the context of achievement of the environmental objective to replace classic multi-material packaging with such that complies with the circular economy concept.

The packaging manufactured by the Alupol Group is intended for the instant food sector mainly, whereas other significant recipients are also the sectors of fresh foods, confectionery, salty snacks, dairy, pharmaceutical and chemical industries. The main recipients of flexible packaging were international concerns such as: Nestle, AB Foods, Upfield, McCormick, Lorenz, Dr. Oetker, Brüggen, Aryzta, Koninklijke Douwe Egberts, Orkla Foods, Perfetti van Melle, Danone, as well as respected regional companies, which apart from their own brands offer private label products to chain stores. These include, among others: Prymat, Maspex, Tarczyński, Mlekovita, Foodcare, Animex, Serpol Cosmetics, Sokołów, Koral, Mlekpol, Mokate, and Woseba. The main recipients of polypropylene films are mainly European companies in printing, floral, textile, haberdashery or adhesive tape industries, such as Sylvaphane Holland B.V., Delo, Constantia, Perfon, T.D.K., Dalpo, and Saba. None of the customers of the FPS contributed to more than 10% consolidated sales of the Segment, and there is no other dependence on one or more customers.

The Segment products are distributed both on the Polish market and abroad, with the latter responsible for approximately 50% of the Segment’s consolidated revenue. The largest export markets are Germany, the Netherlands, Ukraine, Hungary, Italy and Switzerland.

Plant in Tychy
Plant in Oświęcim

The Polish market is a place of activity of the largest international packaging manufacturers, such as Amcor, Mondi, Constantia, Huhtamaki, Walki Group, Wipak, or Südpack, as well as many domestic companies, including KB Folie, Drukpol, Supravis Group, Marpol, Ergis, and Bogucki Folie, for example.

In addition, suppliers from Turkey, India, Egypt and Saudi Arabia have recently become increasingly active on the European packaging market, taking advantage of cheaper raw materials and energy, and marketing their products at very low prices.

Such a large number of players competing with each other, as well as the oversupply of production capacity in the industry, is forcing an increasingly strong competitive struggle. This phenomenon, coupled with the growing trend among the Segment customers requiring specific suppliers of raw materials to be used in the packaging produced for them, has resulted in growing pressure on margins.

The raw materials market in 2023 was heavily influenced by the turmoil in the global energy market following Russia’s invasion of Ukraine. This had far-reaching consequences for the economy, leading to a significant increase in operating costs. The geopolitical situation and the global economy were unstable and the risk of commodity price fluctuations was ever-present. Concerns about a recession and high price volatility prompted reductions in raw material purchases and inventory levels. An upturn in purchasing activity was observed at the end of the year. With satisfactory availability of raw materials, packaging trends evolved towards eco-friendly solutions using alternative materials. The segment availed of many geographically diversified sources of materials. Aluminium foil and polyester film are mainly purchased from Far East countries, polyethylene and polypropylene granulates are sourced from the Middle East, Asia, and Europe. Other raw materials and production materials are purchased mainly from European suppliers.

In 2023, the share of none of the suppliers of raw materials, semi-finished products and materials exceeded 10% of the Segment’s consolidated sales revenue, and there is no dependence on one or more suppliers.

Owing to high inflation, high interest rates and thus a decline in consumer purchasing power, not only in Poland but also in other European countries, the packaging market suffered a reduction in order levels in 2023.

The industry continues to struggle with the lack of clear regulations and guidelines defining sustainable ‘green’ packaging. In this legal and economic environment, the FPS has focused primarily on activities compliant with market trends, i.e. improving the laminates produced (thinner layers, reduction of packaging dimensions, more homogeneous material and less printing) so that, despite the modifications made, they guarantee the safety of the products packaged in them.

On the BOPP film market, the downward trend in demand continued in 2023, mainly influenced by the situation on the European and Asian markets. A large group of the Segment customers reported problems of high inventories following increased purchases in 2022. The customers also informed about reduced utilisation of their production capacity and even forced production downtimes due to the lack of satisfactory order volume. In the opinion of the majority of the Segment customers, the year was also very difficult and challenging due to very low demand for BOPP films. Consumption of food products decreased significantly, which was related to the decline in consumer purchasing power as a consequence of the rising cost of living.

In addition, the global situation on the BOPP market made it difficult to enter new markets and acquire customers, as the price pressure from primarily Asian but also European competitors, who significantly increased their production capacity last year, was enormous. In order to win new orders, the Segment was forced to compete aggressively primarily with the suppliers from India, Turkey or China, as a drastic drop in demand for BOPP films was also observed in these markets. Due to the aggressive pricing policies of its competitors, the margins applied by Alupol Films were also reduced in order to attract orders.

Despite the difficult economic environment, the consolidated 2023 revenue of the Flexible Packaging Segment reached PLN 1,206 million and was lower by about 20% y/y due to a significant drop in raw material prices and demand, especially for BOPP films. The share of the Segment’s foreign sales increased by 5 p.p., to 50%.

Year 2023 watched a clear acceleration in the transformation of the marketed packaging structure. Classical structures that had been successfully manufactured for several decades began to be replaced on a large scale by new, environmental solutions.

Numerous projects were carried out together with our customers in this area, thanks to which laminates in new configurations were introduced, such as mono-film, characterised by lighter weight and greater material homogeneity. New solutions in flexible packaging are based mainly on the use of polypropylene and polyethylene films in laminates. There were also developed new PPB^TM films based on polypropylene, produced in blown-film extrusion process. These are used as a component of homogeneous two-layer laminates, where the second layer is made of BOPP film manufactured at Alupol Films in Oświęcim. BOPP/PPB^TM laminates reflect very good mechanical and barrier properties. Therefore, they may be used in packing many types of food, e.g. instant foods, seasonings, coffee, fresh meat, cold cuts, bread, etc. The laminates comply, at the same time, with the guidelines of the European strategy for closed-circuit plastics. In that regard the OPP/PPB laminate manufactured by the Segment was awarded the ‘Made for Recycling’ certificate, confirmed by research carried out at the German Fraunhofer Inistitute, in compliance with the bifa Umweltinstitut GmbH methodology.

At the same time, laminates are being developed on the basis of paper, paper refined with heat-sealable, high-barrier varnishes, or thin polymer layers with heat-sealable and barrier properties. The new-technology laminate was tested with regard to fitness for recycling, and a positive result confirmed with suitable certificates was achieved.

All the proposed solutions guarantee food safety and may be printed either with the rotogravure or flexographic techniques. Due to the specific properties of the PPB^TM and HBF9^TM, the 3-, 4- and 5-layer laminates available on the market, containing aluminium, plastic and paper, may be replaced with 2- or 3-layer laminates of lower basis weight and more homogeneous structure. This means that the laminates require less material than the ones applied so far, which contributes greatly to reducing the quantity of plastics introduced to the market and reduces the impact on natural environment.

Following the 2021–2025 Strategy, the investment projects of the Segment will be limited in the Strategy period to maintaining production potential at an unchanged level. In 2023, all capital expenditure covered replacement projects.