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Rising raw materials costs have continued to put pressure on even the biggest packaging producers this summer.

Beverage can maker Rexam announced a fall in pre-tax profits of more than one third as a result of rising aluminium prices. In the corrugated packaging sector, Smurfit Kappa and DS Smith said further price increases may be required to counter higher input costs (see below).

And plastic packagers such as British Polythene Industries and RPC also had their margins hit – the latter suffering a 28% drop in annual pre-tax profits, despite rising sales. The glass sector, too, has spoken of the problems of increased energy costs.  

As packaging production is generally a very energy intensive process, rising oil prices will be felt across the industry. But the plastics sector suffers the most direct hit because polymer manufacturers are forced to put up prices in response to their own rising input costs.

US firm Dow’s annual bill for feedstock and energy costs almost trebled to £11bn ($22bn) from 2004 to 2006. In the second quarter of this year alone, costs were £350m more than the preceding three months – the largest sequential quarterly increase in the company’s history.

Despite looking at all the options, given the current environment the company says there is “no option other than to increase prices”.

However, high prices do not necessarily translate into high margins for raw materials producers, according to Nova Innovene polystyrene business director Pierre Minguet. He says producers are in a similar situation to converters seeking to improve earnings. “The restructuring we have done as a firm has helped, but we are clearly below any reinvestment level,” he says.

Not only are polymer prices at an all-time high, but European converters also face higher costs than their North American and Asian counterparts, a situation that RPC Group chief executive Ron Marsh says can have a “damaging effect on the industry”.

According to the London Metal Exchange, the price of polypropylene (PP) in Europe can be £50 to £100 per tonne more expensive than in Asia, and £100 to £150 more than in North America. “It’s criminal to impose a major price differential on European manufacturers,” says Marsh.

Small cost, high value
Constant movement in polymer prices further affects firms. Over the past two years the global price of PP has fluctuated erratically inside a $400 band (£200 at current prices), although never fallen below $1,000. Pricewater-houseCoopers forest, paper and packaging leader Clive Suckling suggests that “uncertainty is worse for firms than consistent high costs”.

Suckling believes, however, that packaging companies can afford to be bolder in their price negotiations with customers, and less concerned about losing contracts. “Something that is often forgotten is that packaging is quite a small part of the cost of a product, but can be of high value when looking at the role it plays,” he says.

However, Linpac plastics innovations manager Alan Davey says there is “reluctance to accept price increases”, despite it being necessary to recoup costs. Davey is also sceptical that the answer to the problem lies in bioplastics, which might herald a move away from oil-based polymers.

“Bioplastics actually take up more resources than conventional polymers, and that would be reflected in the price,” he says. “While there’s perhaps a superficial attraction, it’s not necessarily the best solution.”

Another way to deal with high material prices might be to shift production to lower-cost economies, although that raises its own questions – such as carbon footprint – and would likely depend more on a customer moving than on oil prices.

The fact, however, is that packaging in general will reflect economic activity and remains dependent on a range of unpredictable factors. Lansdowne Resources packaging analyst Tim Rothwell says there’s “no evidence of significant change” on the horizon at the moment. “But all of the factors could change as has happened in the past. It’s all cyclical,” he adds.

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BOARD GOES UP
With corrugated raw materials prices constantly rising, packaging manufacturers such as Smurfit Kappa have warned of further price increases to compensate. And, according to Pricewaterhouse-Coopers forest, paper and packaging leader Clive Suckling, there is “no doubt” more raw material cost rises will occur.

“Evidence has shown margins have been trimmed and producers are looking at ways to pass cost increases on,” he says.

Europa Partners packaging specialist Nicholas Mockett says that the more consolidated materials supply base in the corrugated sector might be one reason for high prices. He also believes that an increase in the supply of quality recyclate could drive down raw material costs.