Rising raw-material costs for packaging trickling down to strapped consumers

Suddenly, there seems to be a growing stream of price-increase announcements from both packagers and suppliers to the industry. This comes just aspurchasingdata.com says the May index for raw materials is 31.4 percent higher than it was a year ago.

As raw-material and transportation costs have edged up over the last several years, the industry has been trying to increase its prices to keep up with the accelerating costs of production. However, rising costs have easily outpaced price hikes, and margins have been squeezed as though they are in a vise grip.

The message is the same in virtually every release on pricing: “The record rise in raw materials and energy costs is affecting companies throughout the global value chains. We have been working diligently to offset these unprecedented cost increases, however, this dramatic escalation is forcing us to make structural changes to our product pricing.”

What's new is that the industry now is seeing substantial price hikes of up to 25 percent in a single leap for some materials — especially those based on petroleum — that are essential to packaging. Some companies have taken the unusual step of announcing across-the-board price hikes on all their products. In the past, many companies were happy if they could get 2 or 3 percent more on selected products every couple of years.

In times of plenty, many buyers of packaging had come to expect that they could even force price reductions, in the same way consumers had come to expect continuously lower prices on items such as computers, TVs, food and clothing. No one in the packaging supply chain seemed to have any pricing power.

Increases of this magnitude will have a significant impact. In a recent New York Times article, Procter & Gamble is forecasting that it will spend an additional $2 billion on oil-based raw materials and commodities during its upcoming fiscal year.

For years, converters have been tightening their belts to drive any unnecessary costs out of their manufacturing and sales processes. Lean manufacturing is very much in vogue. Staff sizes have been reduced. But you have to ask, “How much more can be cut?”

What we see now is classic cost-push inflation in which the cost of converting spirals upward and eventually trickles all the way through the chain to consumers. The price hikes affect virtually all converting materials, including film, label, adhesives and inks.

Due to the weak economy, it has been difficult to pass along these costs that have accumulated throughout the supply chain. At some point, though, retailers will have to make substantial price hikes, and consumers will say, “Enough is enough.” Then, they will slow their purchases dramatically.

These are times that can inspire structural changes in an industry. Excess packaging and production waste are being attacked. Companies clamor for innovations that make their processes more efficient.

However, converters need to map new strategies for buying raw materials. It's likely they're doomed if they wait for costs “to return to normal.”