A continuation of raw material price increases, combined with signs of a U.S. economic slowdown, could put further pressure on results of the global packaging industry.
In a research report, Standard & Poor’s analyst Liley Mehta noted that prices for plastic resins like polyethylene, polypropylene, polyethylene terephthalate (PET) and polystyrene have risen in recent months, with the uptick continuing in August. The increase reflects a tightening demand-supply balance, the analyst said, and contradicts the price declines seen between January and April of this year that were due to seasonally soft demand and relatively lower prices of natural gas.
“In the U.S., natural gas is the key feedstock used in the production of plastics,” Mehta said. “Second-quarter earnings comments from companies in the metal and glass packaging sectors indicate continued pressures arising from volatility in aluminum prices it he case of beverage cans, and elevated natural gas and soda-ash prices adversely hurting earnings of glass packaging producers.”
Within plastics packaging, Mehta said the larger players reported improved operating results for the second quarter, while smaller names struggled to pass through the higher raw-material costs. Cash generated from operations by many of the smaller companies has also been squeezed by higher working capital requirements.
In glass packaging, those high natural gas prices in the U.S. and Europe hurt container manufacturers last year and continued to do so in the first half of this year. Mehta said higher costs on other fronts – including freight and raw materials (especially soda ash) - also hurt results.
“However, U.S. producers expect to recoup most of this through price adjustment formulas (generally on an annual basis) under contractual arrangements with customers in the latter half of 2006 and 2007,” Mehta said.
In Europe, Mehta noted that glass manufacturers tend to lock in gas prices for a year and then negotiate selling prices.
“As these contracts come up for renewal, it may prove more difficult to achieve full recovery of cost inflation, especially in markets that are suffering from overcapacity, such as Germany, and potentially the UK, which had capacity additions in late 2005.”
Metal packaging companies, meanwhile, continue to pass through their higher metal prices to customers as a result of the contractual nature of most sales. Good weather in the U.S. and Europe has driven strong demand in beverage cans in the quarter. Mehta said food can sales were up in North America, but were hit in Europe by weather-related issues within the vegetable pack.
The analyst pointed out that rules requiring deposits on beverages have hurt the beverage-can business in Germany for the past few years as the country didn’t have a nationwide system to handle returns.
“A new deposit redemption system went in place and retailers began stocking beverage cans in the second quarter of 2006, which should eventually result in full restoration of beverage can sales in Germany,” Mehta said.