Raw material price hike forces PBG profit warning

Related tags Cost

The rising cost of aluminium, oil-derived chemicals and other raw
materials has lead to major soft drink packager Pepsi Bottling
(PBG) to issue a profit warning, illustrating the increasing impact
that peak metals and plastics prices are having on manufacturers.
Anthony Fletcher reports.

Pepsi Bottling said the warning was based partly on expectations that packaging costs in 2005 will be above 2004 levels. "We haven't seen cost increases like this in our industry for more than a decade,"PBG​ chief executive John Cahill said on a conference call with Wall Street analysts.

Cahill also indicated that the challenge of rising raw materials costs will likely continue into 2005. "We expect to incur a more than $100 million increase in our packaging and sweetener costs versus 2004, which will have an impact on our profitability next year."

Natural gas - a starting point for the production of polyethylene - has shot up in price this year, with the effect that chemical giants have continually passed on the cost to packaging firms. As a result the international price for naphtha, which is extracted from petroleum and is also used to make polyethylene, has increased from US $222 a tonne in May 2003 to US $420 a tonne in August.

The price of benzene, which is used to make styrene, has now reached historically high levels. Prices have been rising steadily since the start of the year, and are now double what they were six months ago.

Another sizeable jump in iron ore contract prices is anticipated in 2005. Expectations vary, but even the most wary and modest forecast is for a double-digit percentage increase. Some market-watchers believe prices could rise by more than 20 per cent.

Steel producers can therefore expect to pay considerably higher prices - some forecasts are for contract prices to double in 2005, adding an estimated $US35 per tonne to steel production costs.

Other steel making inputs such as alloys have also gone up in price. The cost of ferro-manganese has more than doubled in the last twelve months.

Every aspect of the packaging industry has been hit. Sun Chemical for example increased the price of all packaging inks and coatings by three to seven per cent in November, blaming rising petrochemical costs.

"Petrochemicals are the key ingredients in many of our products, and there has been a steady rise in the cost of all our raw materials, which have spiked in recent months with the run-up in oil prices,"​ said Richard Pettifor, Sun Chemical corporate vice president and president, North American packaging inks division.

"Other leading factors contributing to rising costs have been environmental compliance, freight and rapidly escalating employee health care costs."

It is too early to say whether petrochemical prices will come down. The underlying drivers behind supply and demand at each step of production remain unclear.

However, it appears that the availability of two absolutely basic materials, benzene and propylene, may be depressed for several years, for reasons beyond simple plant construction. This would significantly affect the packaging industry, which uses both benzene and propylene as the starting point for the production of packaging materials.

The situation is further aggravated by shortages of containers, tight availability of parcel tanker ships, rising freight rates - due in part to oil prices - and growing cases of port congestion. PACIA points out that the common 20-foot shipping container has just doubled in price to $4000.

Related topics Processing & Packaging

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