Amcor’s Shares Drop 12.3% on Venezuelan Crisis

The global plastics industry is huge. Its market size totals in the hundreds of billions of dollars. And when you think about it, it makes sense. We use plastic for almost everything, from packaging to the automotive industry, and everything else in between.

What we commonly think of when we hear the word plastic is ridged plastics. Rigid plastics include things like plastic buckets and crates. The list could go on, but you get the idea.

Research group Smithers expects the global rigid plastics market to reach US$222.4 billion by 2020. If realised, this would ensure total annual growth of 4.4%. Yet this growth might depend upon the future of oil prices.

In order to make plastics you need oil. There is a process to make plastics without oil — using natural gas instead. Yet a large portion of plastics are generally made with oil.

To see how much oil is needed to produce plastics, let’s look at an example, by seeing how much oil is needed to produce plastic bottles. Luckily enough, the Pacific Institution did such research to save us the time.

In 2006, Americans consumed 31.2 billion litres of water. This required around 900,000 tonnes of plastic to produce the bottles. And to produce these bottles it took 17 million barrels of oil.

Oil is definitely a cost plastics manufacturers want to keep their eye on. Amcor Ltd [ASX:AMC] is one such plastics giant in the business of packaging. And on 8 June, they announced their profits would be impacted by US$40 million.

The announcement has caused shares to tumble 12.3%, to $14.50 per share so far.

It wasn’t high oil prices that affected Amcor, though. Instead, their profits took a beating from low oil prices. This doesn’t make sense. If oil prices are low, shouldn’t it be cheaper to produce plastics?

But the problem wasn’t with plastics. The problem was the country in which Amcor’s plants reside.

Venezuela’s crisis

Amcor owns and operates six of their plastic packaging plants in Venezuela. The country’s economy mostly based on oil exports, making up around 95% of all exports.

So when the price of oil collapses, and government debt rises, stresses start to mount. Oil is now trading around US$50 a barrel. This has more than halved from 2014 figures. The country has a shortage of basic goods, and hyperinflation is just around the corner.

Many economists believe it is now a question of when, not if, Venezuela will default. Venezuela’s central bank said earlier this year that the economy shrank by 5.7%. Official inflation came in at 180.9% in 2015.

This combination spells trouble for the country. And now Amcor and others are being punished as well. Venezuela is draining its foreign currency and gold reserves to stay afloat. In March this year Venezuela moved to float their exchange rate for non-essential imports. This allowed state-owned oil companies to sell dollars into the new market.

The government hopes to boost liquidity and lift revenues from oil. As a consequence, Amcor will also adopt Venezuela’s float. However, the lack of US dollars is restricting their ability to buy products used to make plastics.

A one-off charge of around US$350 million will impact Amcor’s earnings. The one-off charge relates to cumulative foreign exchange losses. But it will also include Amcor’s estimated net assets in Venezuela. After taking this one-off charge, Amcor will no longer be exposed to Venezuela.

Will Amcor survive Venezuela’s demise?

As stated above, Amcor has already taken measures to limit their losses. Venezuela isn’t the only place where Amcor operates, though. They’re investing in emerging markets all over the world. They own and operate more than 80 plants across 27 countries. And as CEO Ron Delia puts it: ‘[We] firmly believe in long term attractiveness, and in our ability to deliver value, from emerging markets.

Härje Ronngard,

Junior Analyst, Money Morning

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