Packaging industry attempts to pass on high input costs

By staff reporter

- Last updated on GMT

The global packaging industry has struggled through another quarter
of high input costs at the start of this year, according to a
report from Standard and Poor's.

However prices of plastic resins, including polyethylene, polypropylene, polyethylene terephthalate (PET), and polystyrene have declined since December 2005, reflecting seasonally soft demand and relatively lower prices of natural gas, which is the key ingredient used to produce plastics in the US.

The report gives cosmetic and toiletry manufacturers an indication of the direction prices are going for their packaging materials, allowing them to budget ahead. Last year prices spiked for plastic packaging due to the record prices for oil and natural gas.

But this year, it looks like those prices could ease off somewhat. For example, prices of all grades of polyethylene resins declined fourcents per pound each month from January through April 2006, S&P reported.

However, plastics manufacturers announced price increases for polyethylene and other resins for May and June, which are expected to take effect and could again exert pressure on operating results in the second half of 2006.

Petrochemical companies are again attempting to offset adverse year-over-year energy comparisons in their businesses although the success of these efforts is unclear at this point, the ratings agency stated in its report.

Rising geopolitical tensions over Iran's nuclear program and still-strong demand have boosted crude oil prices to about $70 per barrel so far in 2006. In contrast, prices of natural gas have been retreating to around $6 per mmbtu, from an all-time spot market high of near $16 per mmbtu in mid-December 2005. Mild winter weather resulted in lower heating demand and left record amounts of gas in inventory, S&P explained.

The key trends in the global packaging sector remains negative, reflecting an increase in inflationary cost pressures arising from high and volatile raw-material prices in the US and Europe, as well as elevated energy costs.

"For many packaging companies, 2006 will remain a challenging year and various factors, including the movement in natural gas and oil prices, resin price trends, and the pace of consumer spending will determine the degree of pressure on several issuers,"​ S&P stated.

In the plastic packaging sector several of the companies reported improved operating results for the first quarter of 2006 as prices for plastic resins moderated. This followed a relatively weak fourth quarter of 2005, when many companies struggled with peak raw-material prices and supply issues in the aftermath of the hurricanes along the US Gulf Coast.

Such companies have generally been quite successful in implementing selling price increases, and have ongoing productivity enhancement and cost savings initiatives to offset the increased raw-material costs.

The metal and glass packaging sectors are also under pressure arising from volatility in aluminum prices in the case of beverage cans, and elevated natural gas and soda-ash prices continuing to drag down the earnings of glass packaging producers.

Moves by Wal-Mart Stores and other large retailers to reduce inventories in recent months has also affected sales and order patterns for some packaging companies. In the US, there is an additional concern that a potential economic slowdown caused by significant energy cost inflation and a weaker housing sector could result in a reduction in discretionary spending by consumers.

High natural gas prices in the US. and Europe hurt the operating results of glass container manufacturers in 2005, and are expected to continue to pressure earnings in 2006. Other cost inflation occurred in freight and raw materials, namely soda ash.

However, US producers expect to recoup most of this through price adjustment formulas under their contractual arrangements with customers in 2006, S&P stated.

Owens-Illinois, the global leader in glass packaging, reported a 60 per cent earnings decline in the first quarter of 2006 as compared to the prior year because higher raw-material and energy costs more than offset selling price increases and productivity initiatives.

The company expects to recover about 75 per cent to 80 per cent of the cost increases in 2006.

"Given the accelerated conversion to plastic from glass in certain food segments, and a slowdown in beer volumes, capacity rationalization of glass packaging could be warranted in the US in the next few years,"​ S&P forecasts.

In Europe, glass manufacturers tend to lock in gas prices for a year and then negotiate selling prices, thereby locking in margins.

"As these contracts come up for renewal, it may prove more difficult to achieve full recovery of cost inflation, especially in markets that are suffering from overcapacity, such as Germany, and potentially the UK, which had capacity additions in late 2005,"​ S&P stated.

In the metal packaging sector higher prices continue to be passed through to customers in general, because of the contractual nature of most sales. However, aluminum prices have risen sharply and remain highly volatile.

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