Hike in packing prices due S&P says

By Ahmed ElAmin and Simon Pitman

- Last updated on GMT

Related tags: Contract

Food processors can expect the higher raw material costs hitting
packagers to be passed on soon depending on their contracts. This
means that, depending on contractural obligations, cosmetics and
toiletry producers can expect the higher costs to be passed on

Many manufacturers have responded to recent price hikes by managing their packing inventories more efficiently and by downguaging to lower priced products, says a Standard & Poor's report releasedthis week.

Those using rigid plastic containers, metal and glass for their products will be most affected by increasing in packaging prices in the short term, S&P says.

Ongoing raw-material price pressures, mainly due to significant hikes for plastic resin, and limited year-over-year volume growth are the key issues facing the packaging industry, stated S&P​credit analyst Liley Mehta.

"End customers are also managing their inventory balances in anticipation of raw-material price movements, and smaller order patterns have affected volume growth for plastic packagingsuppliers,"​ she stated.

The prices of certain plastic resins, including polypropylene and polyethylene, have declined in recent months. However the trend has been offset by increased oil and natural gas prices and effortsby the petrochemical companies to push through further hikes. This could lead to further increases in plastic resin prices during the remainder of the year.

Several of the packaging companies remain focused on restructuring actions, increased productivity and cost savings to offset the increased raw-material costs.

The increases could potentially add more pressure to flexible plastic packaging companies. In contrast, companies producing rigid plastic containers are less vulnerable because they generallyoperate under contractual arrangements with most customers.

This allows for pass through of raw-material price fluctuations to customers, though with a few months' time lag, S&P stated.

The US glass packaging sector is also being hit by higher natural gas prices and increased soda ash prices. Glass producers are expected to gradually recoup higher energy costs through the priceadjustment formulas contained in many of their supply agreements with customers, S&P stated.

Many cosmetics companies have been converting from glass to plastic packaging, the analyst stated. However, this is part of long-term trend within the industry, whereby many manufacturers are opting for high quality resins as a cheap and more practical alternative to glass.

Volume trends in glass packaging were favourable for packers in Europe supported, where growth was supported largely by the beverage industry.

In the metal can segment packagers have been able to pass on steep increases in steel prices to their customers. This is due to the mostly contractual nature of therelationships with their customers, which for the most part is cheifly supported by the drinks industry, but also includes aerosol cans used for hair and shaving products.

Related topics: Markets, Pricing Pressures

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