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 also the major input for captive power generation. Energy costs have gone through the roof for almost all manufacturers of packaging materials and consumables.
• It is the major feedstock or raw material for a wide variety of packaging 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 like glass bottles, plastic jars/bottles and metal cans which are not only poor 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. According to what many flexible packaging convertors have reported, even major polymer suppliers are unwilling to accept orders except on the terms that supplies will be billed at prices applicable on the date of dispatch, whatever they might be. 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. In all my years in the packaging business, I have never seen such a spate of official press releases from almost the entire spectrum of packaging suppliers announcing periodic across-the-board price increases.

This whole business has queered the pitch for not only packaging suppliers but all brand owners as well. Not only have they had to take on board substantial packaging and transportation cost increases, they have had severe problems passing on any increases to consumers who are already reeling under the impact of double-digit or near double-digit inflation in almost all parts of the world.

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. Just take a look around in the Indian market and you will see a plethora of new revised biscuit packs with totally “irregular” package contents like 182 grams or 74 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. Even in places like the USA, consumers are up in arms against major consumer goods manufacturers like Kellogg, Unilever, Pepsico/Frito-Lay, General Mills 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. This trend has now become a global phenomenon. According to market research major Nielsen, 30 per cent or more of packaged goods have lost content over the last one year. Major segments affected include ice cream, cereals, breakfast foods and processed foods. The US Bureau of Labor Statistics has also reported that soaring energy and commodity prices have resulted in severe cost increases for processed foods. Between April 2007 and April 2008, inputs like eggs, corn and wheat have witnessed price increases of 44.9 per cent, 69.5 per cent and 96.9 per cent respectively.

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 other than OPEC’s desire to milk the situation. 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 tended to display a ratchet-like propensity; 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.)

One sincerely hopes that, for the sake of the Packaging industry, some kind of sanity is restored and the business situation returns to normalcy quickly. At the end of the day, it is the man in the street who ends up paying for the cost increases and it is the intermediate manufacturer who gets squeezed, quite often into ruin or bankruptcy. In the case of flexible packaging convertors, raw materials constitute between 60 per cent and 80 per cent of total variable costs and the wafer thin margins they operate on can get eroded overnight by a single input cost increase.