KUALA LUMPUR: As sales volumes shrink amid the global economic slowdown, stiffer competition from European plastics packaging manufacturers could put further pressure on the local industry.

European manufacturers could be closing in on local plastics packaging producers, according to Kenanga Research, as local companies are faced with rising energy cost following a hike in the electricity tariff in January 2023.

Meanwhile, the European companies are enjoying cheaper gas prices for production.

In a note, Kenanga reported that Europe’s benchmark Dutch Title Transfer Facility (TTF) gas futures has fallen more than 80% from its peak to under EUR40/MWh due to a mild winter in Europe.

This is expected to move higher as the consensus forecast for Dutch TTF gas futures is at an average of EUR50-60/MWh in 2023, it said.

Meanwhile, Kenanga believes local producers contending with the domestic electricity tariff hike should be able to manage the additional cost as it only makes up 4% to 6% of total production cost.

“Also helping, is the Green Electricity Tariff (GET) programme of Tenaga that offers an exemption to Imbalance Cost Pass-Through (ICPT) surcharge of 20.0 sen/kWh via a subscription charge of 3.7 sen/kWh (resulting in an effective savings of 16.3 sen/kWh).

“However, this offer to buy renewable energy is capped at 30% of total electricity consumption, subject to the availability of quota and only valid for six months ending 31 Jun 2023 for now,” said Kenanga.

The research firm noted that Thong Guan Industries Bhd, BP Plastics Holding Bhd and Scientex Bhd have signed up for the programme.

Kenanga also believes local players could mitigate the weaker sales with their ongoing positioning towards higher-margin products such as premium stretch films and premium blown film packaging.

Additionally, the local industry could benefit from the softening cost of input resin as well as the easing in labour shortage that should boost productivity and efficiency.

For the longer-term, Kenanga expects local players to grow at a faster pace as they gain market share from overseas manufacturers that are losing competitiveness due to the rising production cost.

“Plastic packaging players under our coverage have put in place fairly aggressive expansion plans to take advantage of the situation,” it said.

For the 2022-2027 period, Mordor Intelligence projects the global plastic packaging market to grow at a CAGR of 3.5% in 2022-2027.

Kenanga maintained its “neutral” recommendation on the plastics packaging sector amid the global economic slowdown.

It said Thong Guan was its top sector pick for its earnings stability underpinned by a diversified product portfolio.

The research firm also noted Thong Guan’s growth prospects as it expands its production capacity for premium products while having a deeper penetration of the US and Europe markets.

It also favoured the company’s product innovation via collaboration with the likes of ExxonMobil to create more environmentally friendly products.