News

The packaging sector, like the rest of the printing industry, is being squeezed left, right and centre at the moment, thanks to that lethal cocktail of overcapacity, falling profits and rapidly rising energy costs. But, unlike some sectors, over the past few months packaging printers have decided to take some much-needed action and they are bravely passing on the rising cost of production to their clients at the risk of losing future business.

Reports suggest that 13 firms have recently upped their prices, including industry big hitters Amcor and Chesapeake. The latter announced that it would be increasing its prices by around 10%.

I think the situation is worse than ever before, says Chesapeake’s UK marketing manager Bob Houghton.
We are faced with rises in both energy and raw materials, and these are significant double-digit rises.

Like Chesapeake, Nampak Europe says that it has also been forced to ramp up its prices. Energy, raw materials and fuel costs have escalated to such a level that the company says it had no option but to recover them through price increases in a bid to protect jobs and viability in the long term.

While these measures may stem the tide, the bad news continues to roll in. Earlier this month, Scottish Power, E.ON, Npower and Scottish & Southern Energy revealed that further price hikes were in the offing following moves by rival operators EDF and British Gas, the latter having increased prices by as much as 44% in some regions.

But, amid all of this doom and gloom, there have been some rays of light. The price of next-day gas delivery has fallen by 32% over the past month, from 69p to 47p. Forward gas prices have also dipped, from 104p per therm in June to 88p at the time of writing. And crude oil prices have also dropped by almost 20%, barrels are now priced at around $118, having reached a high in July of $147.

So what does all of this mean for the future of the industry? For many companies in the beleaguered packaging sector, the recent good news about energy prices falling could be a case of too little, too late.

Reason behind the rises
Increasing the prices charged to customers should help to shore up the financial performance of some companies, but many are afraid of taking this route, as they fear it may lose them business. Fortunately, most customers understand that price rises are a business necessity, according to CFN Packaging’s managing director Jayson Clark. Our clients are realistic enough and they understand why we have to do this. In these times, it’s important to have a good customer base and sensible pricing, he says.

Chesapeake’s Houghton concurs with Clark, adding: We are working with our customers to mitigate the costs and, in some cases, it’s about offering different materials for products. But the key point is that we have been communicating what we are doing effectively.

Chesapeake has gone to great lengths to inform both its customers and the general market why it has had to put up its prices. We in the packaging industry have to be very clear and explain to our customers that we simply have nowhere else to go, says Houghton.

Thanks to the efforts of companies like Chesapeake, customers do understand why the price hikes are occurring, with many leading brands acknowledging the issue in recent financial reports. For example, Cadbury and Northern Foods have both posted improved results over the first six months, but they have also both warned that their supplier costs are likely to increase in the second half of the year.

With everyone in the same boat, it will make it harder for these brands to shop around and get better prices for their packaging, and Packaging Federation chief executive Dick Searle has a stark warning for those that are tempted to slash prices in these troubled times: I don’t think they will be able to survive for much longer.

At the end of the day, survival is the name of the game. That’s why, in addition to putting up prices to offset the higher cost of manufacturing, many packaging companies are continuing to look at ways of saving energy to help both their bottom line and the environment.

CFN Packaging has been particularly busy in this area. The firm specialises in printed plastic carrier bags and plastic packaging for the food and retail market. It’s a family run business that has been operating for around 30 years and the Skegness firm’s next big move is to bring its operation under one roof.

Cutting costs
Currently, it operates in two buildings, but, from next month, it will move into one site. This will help it to keep its energy use, and therefore costs, under control. It also has a couple of other solutions up its sleeve, according to Clark. We work with energy brokers to get the best energy deals and this has helped a little bit.

What has also helped is the development of its Biothene Plus product. When you extend the film for printing, it requires lower temperature settings, says Clark. It also results in our machines using less energy.

Like CFN, Chesapeake has also been busy over the past two years, putting in place plans to conserve energy. Houghton says part of its efforts saw the group carry out a ‘root and branch’ review of its energy consumption. At some sites, we turned everything off to see where the main energy drivers were. We have gone into a lot of detail to reduce consumption and I think it’s very beneficial for any company to do. You need to scrutinise and understand exactly what’s being used, he explains.

Culture of efficiency
He adds that there is a culture of energy saving at the company, ranging from presses to lights and, in a sector that is so energy hungry, even small measures can lead to big savings. However, Houghton warns that, while looking at energy savings helps the situation, it isn’t the final solution.

As the Packaging Federation’s Searle notes: Resource efficiency has been in the upper most thoughts of the industry’s mind for a very long time, but the problem is that there is now very little fat to cut – the packaging sector is pretty lean and mean already.

This means there’s no room for manoeuvre: prices have to go up, which is good news for overseas rivals. Those that operate outside of Europe have two key advantages over UK packaging companies: lower labour costs and lower energy bills.

While energy costs are higher in the UK compared with the rest of Europe, the continent as a whole pays more for energy than the rest of the world, explains Searle. But companies that do go down the overseas route face a longer supply chain and issues of quality, he cautions. There may also be another major downside to outsourcing overseas. With the rising cost of oil making transportation increasingly expensive, will companies start to think twice about going outside Europe?

Whatever happens with the overseas question, the UK packaging sector is bracing itself for stormier waters ahead, fearing that things are going to get a whole lot worse before they get better.