Flexible packagers ‘suffering’ from uncertain raw material supply

By Joseph James Whitworth

- Last updated on GMT

Klöckner Pentaplast, Linpac, Polifilm and Sealed Air have raised prices
Klöckner Pentaplast, Linpac, Polifilm and Sealed Air have raised prices

Related tags Contract Europe

A spate of force majeure declarations by EU polymer manufacturers is putting industry under severe pressure, according to Flexible Packaging Europe (FPE).

More than 30 ‘force majeure’ declarations by polymer manufacturers in Europe since March has led to significant shortages in supply resulting in about only 80% capacity being available, depending on the polymer, said the association.  

So many declarations in such a short period are testing market power, being used as a tool to increase prices or show the need for investment in and maintenance of ageing European polymer production facilities, it added.

LyondellBasell, Ineos, BASF, Total, Repsol, Naphthachimie (JV of Total and Ineos) and SABIC Europe have all made declarations at some point in the last few months.

FPE said one solution could be to suspend import duties which were increased from 3% to 6.5% on 1 January 2014 for PE and PP imports from Gulf Cooperation Council countries.

Prince increase and unstable supply

Stefan Glimm, chief executive director of FPE, said polypropylene (PE) and polyethylene (PP) had been the main polymers affected but it has also had an impact on polyvinyl chloride (PVC).

“Prices from February to June have gone up in some cases by 50% according to Platts notifications,” ​he told FoodProductionDaily.

“The raw materials cost is 60-70% of what companies face and there is inconsistent supply. They ask for 100 tons but get 50 so have to change more often on machines to fill demand of customers in the food industry.

“If you order 100 tons but are supplied 50 one day and get the next 50 the day after you have to supply twice and change production runs so efficiency is going down.

“When it makes up 60-70% of costs of flexible packaging manufacturers there is an economic need to pass it on, it is a question of timing and it depends on the contracts they have with customers as they will be different with the suppliers and the food industry.”

Klöckner Pentaplast, Linpac, Polifilm and Sealed Air have all raised prices in the past few months.

Petrochemical prices, expressed as a monthly average, increased $41 per metric ton (/mt) from April to $1,093/mt in May, according to the latest monthly Platts Global Petrochemical Index (PGPI).

Glimm said if convertors question the force majeure they risk their supply which would have a knock-on effect on production for customers.

Prices were low before and some of the reasons for force majeure have come without detail such as ‘unforeseen technical problems’. If the customer wants to question this they have to go to court, if you stand up and question you can be pretty sure you won’t get your material with priority.

“Force majeure has no legal definition the only way to clarify is to go to court and it is very hard to prove anything. If they do stand-up they risk killing their supply, so they can’t really do anything for the risk of it not being delivered and the effect that will have on obligations and contracts to ensure supply with customers.”

Facility investment call

High reported profits should enable polymer suppliers to invest in capacities to avoid such technical problems in the future, said Glimm.

“Our main message is we expect suppliers to ensure consistent supply, in the case of a technical problem, have back-up solutions,” ​he said.

“Force majeures were announced in March and April and when they came back on stream new ones were announced. We are not in the glass industry, we don’t have a glass ball to see the end of this, we don’t know how suppliers will act, we have no indications on that.

“The worst situation depends on the companies, smaller firms will have more problems to ensure supply, it is not only the raw material increase, when you stop production or increase schedule complexity , costs increase as you change run orders on machines to fulfil the needs of the customer.

Members have been faced with sudden cancellations of agreed deliveries followed by offers with the same volumes but significant price increases, added the association.

Others have reported rumours of suppliers holding on to stocks of materials.

Amcor, Clondalkin Group, Constantia Flexibles Group, Eurofoil, Novelis, RUSAL and Wipak are member companies.

Guido Aufdemkamp, executive director of FPE, said: “In the short term companies will not change material, there are no signs of it but there is increasing pressure on the supply industry to go back to normal.

“Packaging material depends on the machinery, it is not easy to change packaging product. In the mid to long term material composition might be amended if shortages happen too regularly.

“The products converters need are different, some need films or granules for co-extrusion, within one company and plant they might need two versions of materials.

“As material is not available to run production at once, one order has to be split which increases changes on machinery equipment (printing and laminating).”

Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties prevents one or both from fulfilling obligations under the contract.

FPE joins concerned industry voices

FPE member companies joined others who have expressed concerns about the current raw material supply situation after their annual conference in Dubrovnik.

The European Plastics Converters Association (EuPC) said compounders and processors are struggling to get adequate supplies of polymer to meet contractual obligations towards customers

Force majeure could lead to processing companies leaving the EU to re-establish themselves in Asia where there is a more favourable polymer supply situation.

EuPC launched a Strategic Alliance for Polymer Supplies in Europe last month as polymer prices have been driven to levels not seen in the past decade, at a time when oil prices are still relatively low.

''The unavailability of certain grades of polymers and record polymer prices have forced some converters to close production lines,” said ​Alexandre Dangis, EuPC managing director.

“We hope that polymer producers in Europe will reinvest current margins in the ageing European production sites in order to maintain a credible European polymer base to serve the plastics converters in a sustainable manner.”

Four national organisations representing the plastics packaging industry in Europe, Elipso (France), IK, (Germany), BPF and PAFA (UK) also called for a return to normal supplies earlier this year.

Rapidly escalating ethylene prices has been driving up the price of several polymers and there is no announcement of any return to normal supply conditions or on the trends ahead, they said.

“It is understood that polymer producers are increasingly likely to invest in the faster growing markets of Asia and the Americas,” ​said the associations.

“Consequently there is unlikely to be significant investment forthcoming to support the European marketplace. [An] ageing plant is more prone to breakdown and likely to suffer from the maintenance issues frequently cited as a cause of the 'forces majeures'. 

“An urgent restoration of normal supply is imperative, say the four organisations, as the industry is in danger of losing credibility with its customers as we want to avert any possibility that they look to alternative materials to satisfy their needs.”

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