Planning for Uncertain Packaging Costs in 2017

If your company purchases packaging materials like corrugated linerboard and resin products, prepare for bumpy pricing activity this year.

Most companies budget for the upcoming year sometime in the fall, and base their cost estimates on then-current market conditions and industry predictions.  Late last year, analysts predicted a relatively flat 2017 in terms of packaging costs, based on the prior year’s activity, forecasted demands, and production capacity at most of the major packaging materials producers.  2017 has started off anything but flat, with linerboard and resin manufacturers both announcing price increases in the first six weeks of the year.

In late January, linerboard manufacturers announced a $50/ton increase, and now resin producers have put forth a $.05 /lb. increase, effective in late February/early March.  According to industry experts, factors supporting this resin increase include “improving domestic and global demand and rising feedstock costs, fueled by higher than expected finished goods purchases in late 2016”.  

Industry analysts tend to look at price announcements suspiciously, as we have all seen one or two manufacturers “float” an increase announcement to see what the market will do. Often, the increase is rescinded when other manufacturers don’t follow suit, instead using the competitor’s announcement to gain market share through pricing. In this case, however, it took no time at all for the major producers of linerboard and resin to jump on board.  By late January, all the major linerboard producers had announced increases. Resin manufacturers also quickly followed Exxon Mobil’s lead with increases of their own. Exxon Mobil has already announced a second increase of $.06 per pound for March. Although they don’t have nearly as much support for the second increase, market conditions could still justify price activity.

Not surprisingly, film manufacturers didn’t waste any time announcing price increases on finished goods, with nearly all major producers notifying customers of an immediate 7% increase across the board. On the other hand, corrugated carton manufacturers have been slower to announce specific box increases, perhaps waiting to see if the linerboard increase will change as it did in September, when the announced $50/ton increase settled in at $40.

Regardless of the final linerboard number and potential resin increases, it appears that we are off to a rocky start for 2017 and it may be time to adjust packaging budgets now. Perhaps one (or more) of these might be a good place to start:

  • Many packaging distributors increase inventories of popular packaging items in anticipation of rising prices – subject to the usual manufacturer limitations on pre-increase orders.  Customers with forward-thinking suppliers may find opportunities to mitigate increases for a few weeks - or months.  Contact your supplier now to negotiate a price protection period based on projected demands and supplier on-hand inventory.
  • Customers with pricing mechanisms in place could see a lesser increase, and get a 30 to 45 day reprieve; but, it doesn’t look like suppliers will offer much more flexibility than that.  If you don’t have a pricing agreement in place already, the odds are a supplier won’t set one up for this round of increases; however, it is a good time to initiate discussions about a formal pricing mechanism / indexing provision for the future.
  • Longer-term expectations are for a second round of film price hikes, driven by Exxon’s already-announced March resin increase, so buyers are well advised to anticipate future increases and prudently consider options as financial resources permit. As with the first two points, there are things a company can do to mitigate increases – based on financial position, liquidity, cash / credit availability. Building reasonable inventories of commonly used items is the first, and most widely used, option.  You might consider issuing longer term purchase orders - that a supplier can use to purchase additional inventories or raw materials, in support of the promised purchases.  If space is an issue, but cash is not, perhaps prepaying for additional inventory that is held at the supplier might work.

One certainty is that doing things as we’ve always done them may not be the best approach to the months to come. A creative mind and strategic vision will be valuable assets in 2017.

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