Price hikes for packaging will put further pricing pressure on food processors, especially the smaller ones, as their margins are being hurt from a stagnant European market and price wars amongretailers.
Packaging accounts for about 10 per cent of a product's cost, according to a report by KPMG.
This week the Packaging and Industrial Films Association (PIFA) and Flexible Packaging Association (FPA) warned its customers to expect the hikes due to the rapid escalation in the cost of gas andelectricity, and the rise in the price of polymers over the past two months.
During the last twelve months, the dynamics of polymer supply have entered a new phase where the patterns of previous years - steep increases followed by rapid price reductions in short cycles- are no longer valid as oil prices breach $70 per barrel, the organisations said.
PIFA's chief executive, David Tyson, said the association's members need to increase prices to stay in business. Last year the UK packaging associations reported energy costs had increased by upto 40 per cent as our members came out of contract with their suppliers.
"But this year we are seeing the figure get up to 100 per cent as long-term contracts expire," he stated in an announcement. "In an energy-intensive industry like ours,this could add between £50 to £100 per tonne depending on the product."
The cost pressure is made worse by the increase in polymer prices due to a combination of tight supply and record oil prices. In July and August prices for some film grade materials rose by up to20 per cent.
The two associations said substantial additional increases are being flagged up for September and October and exacerbated by the Hurricane Katrina effect on oil supplies. The industry predicts thatit will continue to be exposed to further increases in energy prices over the coming winter, which also brings the added risk of disruption to gas supplies if a particularly cold period hits the UK.
"This upward momentum is likely to continue with the prospect of fourth quarter feedstock rising on the back of higher oil prices," Tyson. stated. "Supply is very tight and nothelped by recent production problems in north west Europe which resulted in some grades being put on 'allocation' and some producers closing their order books early in August. This has effectivelyprevented the building of stocks as a hedge for further increases."
Packaging companies are already having cash flow problems due to the supply problems and cost hikes, he said.
The FPA's director, Martin Unwin, said the industry would have to work closely with its customers to achieve some balance on the projected price hikes.
"We fully understand that our customers operate in highly competitive markets and face, just as we do, similar challenges on energy costs," he stated. "We also recognise thatthe purchasing power of retailers is a significant factor. But the support of local suppliers, particularly on shelf-life sensitive products, is a critical part of a sophisticated supply chain and webelieve long-term mutual success can only be achieved through a realistic and sensitive approach by all parties."
The two organisations took time out to launch a further attack on the Climate Change Levy, calling for its removal. They said the film production sector has a strong case as an energy intensiveuser to negotiate a new agreement on the levy for the extrusion sector.
The levy is meant to get industry to reduce carbon dioxide levels.
Prices for crude oil recently topped a record $70 a barrel, while natural gas hovers around $10 per million British thermal units (BTU). The Center for Global Energy Studies expects oil prices toremain above $50 a barrel throughout 2006. Historical prices for natural gas usually were around the $1.25 to $2 per million BTU, according to the Plastics Exchange in Chicago.
Polymer prices, which eased slightly in the second quarter, seem set to return to, and possibly exceed, the record highs experienced towards the end of 2004, according to industry experts.