The analysis of the European market forecasts a continuing squeeze on the supply of beverage cans and possible further price increases in Europe.

Wachovia noted that European beverage can manufacturing capacity is being increased by 16 per cent through 2009. The market is dominated Ball Corp., Crown Holdings and Rexam, who have what the analyst describes as a global "oligopoly" on beverage can manufacturing.

Wachovia makes the case that the announced capacity additions will likely be soaked up by even very conservative demand assumptions.

"Additionally, there seems to be a healthy degree of skepticism at the senior management level of all three can-makers as it relates to the growth outlook, with the market more likely to be under supplied by 2009, rather than conversely - in our view," the study stated.

The "oligopoly" also gives the three companies leverage to recover higher input costs from processors. The result is that operating margins in Europe for beverage can manufacturers can be 300 to 500 basis points higher than in the US, the analysts said.

Rexam holds a 40 per cent share of the European market, Bell a 23 per cent slice, and Crown another 20 per cent.

Wachovia believes that Bell is better positioned to pick up more market share either through acquisition or organic growth, although all three players will likely benefit from the "very profitable" market in Europe.

Ball's operating margins in the European beverage can business is nearly
450 bps higher than the company's US business, leaving the company in the best position to improve margins over the next few years.

Ball is Wachovia's top investment pick amongst the can-makers.

Overall the European beverage can market has been an exception to the mixed fortunes of packagers in Europe. The beverage can market in the US has essentially been flattish, remaining at production volumes of about 100bn.

Meanwhile Europe experienced a growth rate of about 10 per cent in 2006, with volumes showing the same rise year-over-year during the first quarter of 2007.

The margins are higher in Europe compared to the US due to a competitor base that has been consolidated for a longer period of time, while selling into a more fragmented end-market.

The acceleration in growth in Eastern Europe, combined with renewed consumer interest in beer, pockets of legislative change such as the banning of smoking in UK pubs, and a customer base that seems to have a newfound appreciation for the can should eventually bridge the long standing per capita consumption gap in Europe versus the US, the firm stated.

The can's ease of transportation, the ability to customize the packaging and recycling laws are also helping to increase use in cans.

US consumption is 101bn cans for 300 million people, while Europe consumes 45bn cans for 400 million people.

Due to the increasing demand several of the major can-makers are adding capacity in Europe between 2007 and 2008. Capacity in the region is expected to increase by 16 per cent, or by 7.3bn cans.

About 2bn in can capacity came on online this summer, with Ball bringing its Hassloch, Germany plant back on-line, in addition to a new production being added to the Hermsdorf, Germany facility.

While a big headline number, this is essentially replacing old capacity that was taken out due to a fire at one of Ball's plants, Wachovia said.

Ball is also speeding up lines at plants in Radomsko, Poland and Hermsdorf, Germany, helping to increase capacity by about 500 million cans, the company stated.

Meanwhile Rexam is building new plants in Chelyabinsk, Russia and Nuziders, Austria. The plant in Russia is expected to increase capacity by 800m cans. Rexam initially announced it was building a two line can plant for Red Bull in Austria expansion, and has recently added a third line, with capacity from the plant expected to total roughly 1.8bn cans.

Some of the cans produced by the expansion will ultimately be sold to the US and other countries. Red Bull fills its energy drinks in Austria and ships it abroad. Separately, Rexam is also adding a new line at its La Selva, Spain plant, which should increase production by 800m cans, according to estimates.

Crown recently announced that it will be adding a new line to its Seville, Spain plant, increasing capacity by 850m cans.

Polish can-maker Can-Pack is adding a new can line to one of its existing facilities in Poland, which should boost can production capacity by 900m cans.

Demand is expected to increase by 10 per cent in 2007, increasing to 52.6bn cans in two years, the firm forecast.

When factoring in the 7.3bn can capacity that is being added, total capacity for Europe would add up to 53.7bn cans, resulting in effective capacity use of 98 per cent in 2008.

"Arguably, additional capacity would need to be added in a year or two, even if the market shows some slowdown from the current pace," the firm stated.