Packaging: Significant impact on plastics
All substrates were not created equal in the face of inflation. Key to assessing inflation exposure in the packaging sector is understanding:
- cost structure
- contract structure and
- market structure.
Metal packagers generally have strong pass-through mechanisms embedded in contracts and, therefore, minimal exposure to input-cost inflation. Strong demand for beverage cans has shifted pricing power towards can-makers which operate in a consolidated market structure. Glass packagers produce glass (as opposed to metal packagers which only convert metal sheets into metal containers) and therefore have a different cost structure: raw material, labour, and energy each account for approximately 20-25% of total costs, and freight costs also account for close to 20%. The industry operates under multi-year contracts with monthly/quarterly pass-through of cost provisions including energy. This means labour and freight inflation are likely to be the main components impacting glassmakers’ margins in the near term.
On the contrary, the plastic packaging industry has lower pricing power. Cost pass-through mechanisms (where they exist) come with a 60 to 90-day lag, which means resin prices can have a substantial impact on margins. This could squeeze out highly-levered resin packagers. Weather-linked disruptions – by taking petrochemical capacity offline – have also impacted volumes.
Source of all market data quoted in this report: Bloomberg.
Additional reporting by Eugenia Lara Armas, Credit Analyst.