Surging Oil Prices Create Havoc

Packaging industry and consumer products companies badly hit

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The surge in crude oil prices has created turmoil in the packaging industry. Oil is a very important input for the industry and impacts it in various ways: It is by far the major source of heat energy for the packaging industry. It is the major feedstock or raw material for a wide variety of materials like polymers and petrochemicals like solvents and other additives. Transportation costs across the entire supply chain have really shot up. This has particularly affected rigid packaging systems which are poor not only on cube utilisation but are also low on transport cost efficiency.

The situation has been especially trying in the last six months during which oil price escalation has been particularly severe and polymer prices, for example, have gone up by as much as 20 per cent or more during a single month. Adding to the woes of additional costs is the uncertainty factor; nobody knows what benchmarks should form the basis of even short or medium term supply contracts. Packaging convertors have been the worst hit because they get squeezed between large intransigent raw material suppliers and the consumer product companies who are notorious for not granting any price increases unless they absolutely have to. I have never seen such a spate of official press releases from packaging suppliers announcing periodic across the board price increases.

This has led to a universal trend where even the largest brand owners have had to resort to cutting back on package sizes or package contents. You see a plethora of new revised biscuit packs in the Indian market with totally “irregular” contents like 127 grams or 138 grams. These have all had to be reformulated purely to maintain the same price points as those that existed before the oil prices started going up. Consumers are up in arms against major consumer goods manufacturers like Kellogg, Unilever, Pepsico/Frito-Lay and Henkel since the package contents of well-known brands have all been reduced to avoid increasing prices. Many brand owners have had to resort to shaving ounces off their packs to offset cost increases. This is often accompanied by packaging changes to distract the consumers’ attention from the downsizing.

The unfortunate part is that there seems to be no respite in sight. The oil price rise has been sharp, sustained and, apparently, without any plausible reason. It does not look likely that oil prices are going to stabilise in a hurry. On the contrary, given the rumblings of the USA and it’s minions on Iran, a military confrontation could really send the situation spiralling out of control. The other disconcerting thing about oil is that, historically, price rises have displayed a ratchet-like tendency; they only move in one direction – upwards. Even when supplies subsequently ease up, they never seem to recede. (The sole exception was probably during the aftermath of the Gulf War, during which they had sky-rocketed due to severe disruption in supplies.)

I sincerely hope that, for the sake of the Packaging industry, some kind of sanity is restored and the business situation returns to normalcy. At the end of the day,  it is the intermediate manufacturer packaging suppliers who gets hurt.