Like many sectors, the UK plastics industry has seen transaction volumes fall sharply in recent months, as a consequence of COVID-19.
Our latest report – ‘A Sustainable Future - Plastics’ – has revealed that the number of deals decreased by 75% from April to the end of June 2020 (25 in 2019) – deal volumes that have largely tracked movements in GDP. Before the pandemic, valuations in the plastics sector were on the increase. And, surprisingly, these have held firm with record levels of cash to deploy, alongside international acquirers.
There’s certainly an appetite in the market for deals. In fact, until lockdown, there was an increasing level of private equity interest and a resurgence of deals in Q1 2020. This mirrors 2019 figures that show private equity was involved in 24% of total deals. The changing regulatory environment, further consolidation of a fragmented market, and greater clarity on the political landscape, all point to a likely upsurge in M&A activity in the plastics sector in the coming year, subject to the ability for government policy to thwart a second spike in cases of COVID-19.
But it’s that very pandemic that has had far-reaching consequences on the plastics market – in some cases positive, in others the coronavirus has caused dramatic decline, directly related to the resilience of the end markets served. Those linked to the automotive, aerospace and certain consumer sectors, for example, have radically different expectations to a few months ago. Hard hit manufacturers have seen early supply-side restrictions, followed by demand-led declines.
However, the current demand for suitable medical equipment is highlighting just how important UK manufacturing and engineering is to the economy. The plastics industry is working tirelessly to play its part during the pandemic and has become vital in the UK’s fight against the virus. Many companies across the industry have shown an admirable response to help the country with donations, innovations and meeting sudden spikes in demand for key products. These range from medical packaging and hand sanitiser bottles, to components for ventilators, not to mention packaging for food and toilet rolls.
The efforts are clear to see. Epwin Window Systems used its 3D printing capabilities to produce two types of PPE to support NHS frontline workers; while, chemicals supplier INEOS, supplied over 4 million bottles of sanitiser free of charge to hospitals and built a production facility in just 10 days that is capable of producing one million bottles per month. It’s fair to say that manufacturers have stepped up to meet the challenge of an incredible upswing in demand for PPE, which according to the World Health Organisation, saw a hundred-fold increase as of February 2020.
It wasn’t many months ago that single-use plastics were vilified and increasingly rejected due to their long-lasting environmental footprint, and manufacturers were under a huge amount of pressure to adapt due to declining consumer demand and government scrutiny. The message was clear: plastics were out of favour. Then the pandemic struck. Indeed, the pandemic has highlighted the value of plastics in terms of versatility, hygiene, convenience, extending the shelf-life of products, and the lack of suitable alternative materials.
A recent YouGov poll revealed that ‘the environment’ has dropped to fourth place in terms of perceived priority. And in recognition of the current requirement for plastics, plans to ban single-use plastic under the Environment Bill have been put on hold.
In spite of its importance and the current high demand dynamics, it would be dangerous for the sector to become complacent. In the medium term we expect that the shape of the sector will need to adapt significantly. The call for recycling has already returned and consumer pressure is sure to follow. There is an underlying expectation that plastics manufacturers will need to develop robust recycling methodologies in the next five to 10 years. For the plastics manufacturing industry to continue to be held in the high esteem it deserves, it will need to accept its responsibility to innovate, contribute, and support initiatives to develop recycling capabilities. By doing so, and continuing to go ‘above and beyond’, it can look to build on its current position of strength.
While the Government has delayed the agenda for environmental reform, it has stated it remains committed to the plans. In spite of the recent heroic actions of UK plastics manufacturers, we still don’t see that single-use plastics will be given much room in the ‘new reality’. It’s important that the sector continues to promote new product development and recycling initiatives to position for the future. However, as a minimum, we do hope that decision makers will have learnt valuable lessons from this period, which will provide a better educated and balanced debate.