Looming energy cost hikes threaten packaging profits

- Last updated on GMT

Related tags: Petroleum

Analysts have suggested that it is just a matter of time before
energy prices increase further, bringing more bad news to plastic
packaging manufacturers who are finding it increasingly difficult
to absorb rising costs.

If this were to happen, it would likely have a knock-on effect on food and beverage manufacturers.

The root of problem is that the cost of natural gas and petroleum, the starting point for the production of many types of packaging resins, has increased consistently over the past 12 months. Oil-based resin used in plastic packaging has increased in price by seven per cent over the past six months, suggesting that the price increase trend is far from abating.

These price increases have hit firms that rely on plastic for packaging. Pepsi bottling group for example reported last month that net income for the first quarter 2005 was $39 million, compared to 2004's first quarter income of $50 million. This is the first time that quarterly profit has fallen in almost two years.

And now it seems that things could be getting worse for manufacturers. If prices do increase, then it will be manufacturers who will suffer.

According to CMAI, a chemical industry consultancy, between 50 and 75 per cent of the costs within the packaging sector have been passed along to the end-user. But in the retail segment, less than 10 per cent of the costs have filtered through.

This shows that while retailers have been able to resist the full impact of the price increases on products, manufacturers have been unable to do so.

Indeed, manufacturers again find themselves caught in the middle. Resin producers have been able to pass rising costs because of global demand - largely from China - and are in a position to divert supply if a packaging manufacturer refuses to pay higher tariffs.

Oil prices struck $50 a barrel for the first time since November earlier this year, prompting traders to forecast a return of the record prices seen last autumn. According to the Financial Times, the European cold snap has pushed fuel prices higher, with gasoline prices in Asia hitting a record of $60 a barrel.

And there are fears that these high prices could be sustained. Crude oil futures rose to a four-month high after Saudi oil minister Ali Naimi claimed that prices could stay between $40 and $50 a barrel for the rest of the year.

The comments by the Organisation of the Petroleum Exporting Countries' lead producer will fuel fears that the tight supply-demand picture and high prices are here to stay.

Related topics: Processing & Packaging

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