Swings and roundabouts29 July 2002
Simon King, director of PCI Films Consulting, looks at the reasons behind materials' price rises
The European converting industry has worked hard in recent years to improve margins and efficiencies. But now with plastics film, aluminium foil and paper prices all looking set to increase, much of that hard work could be undone.
Most flexible packaging converters will have noted the rise in the price of PE, PP, PVC and PS polymers since January 2002. The cause of this latest cycle of price increases to converters is more complex than the rising cost of raw materials. It is the result of a combination of factors inherent in today's flexible packaging supply chain.
These involve a tightening supply and demand situation within substrate industries, linked to a lack of investment in new capacity over the last 12 months, as well as the recent weakness in the euro against the dollar, which are affecting prices of substrate imports. Also influencial is a rationalization at all levels of the supply chain; in polymers creating suppliers with a stronger selling position, less willing to compromise on price; in end-users creating larger and stronger buying forces, equally unwilling to accept price increases. In addition, rising oil prices mean increased raw material costs.
Substrate producers have successfully resisted upward price pressures from raw material producers, particularly polymers, for long periods. However, in recent months, the M&A activity and temporary outages of production capacity has meant that polymer producers have been more successful in pushing through significant price increases. Now that film producers have already started to pass on these extra costs, the next stage of the battle will be between converters and end-users. Which of them will be able and willing to sacrifice margin or put up prices?
The table above illustrates the influence of many of these factors across both raw material and substrate prices.
The newly enlarged converting groups will be better placed to resist increases and also to recover some of these cost increases once they do hit. Others will have their already low margins even further squeezed, although they might take a leaf out of one continental converter's book. He has gone down the 'toll converting' route; encouraging major customers to negotiate prices direct with the substrate suppliers, then agreeing with them the added value element he will deliver. He can therefore concentrate on managing the processes over which he has control and so do better at managing his margins.
'European Price Trends - Substrates & Raw Materials' is a new study which tracks quarterly price movements from the mid 1990s through to mid 2002, and provides price outlooks and explanations for 12 categories of substrate and raw material.
|Major influences on raw material and substrate prices|
| Raw material
A general downward trend for polymers, pulp and aluminium in 2001 is now being reversed.