It takes a brave person to predict what’s going to happen to any commodity or market in 2022. However we have been talking to all of our suppliers and scouring the appropriate news channels to try and piece together as much information as possible to help our clients in the Flexible Packaging and Card Manufacturing industries.
Volatility & Agility
These are the two the key words in our opinion, when it comes to considering how best to look at the supply (and purchasing) of flexible film and plastic film products in 2022. Volatility; because there are some many different, often unpredictable, influencing factors in play that will affect pricing and logistics. And agility; as we believe that it’s important to build a flexible purchasing strategy that enables your business to roll with the inevitable punches the market and world will throw your way at certain times during the forthcoming year.
The Factors - Predictable
Let’s focus initially on what we do know with some certainty. Freight and logistics costs are likely to remain at the current high levels throughout 2022. There is still an imbalance of supply and demand in sea-freight, land-freight, warehousing and probably air-freight. More sea-freight capacity is scheduled to hit during 2023 as the new container ships that have been ordered are launched. And whilst shortages of vehicles, drivers and warehousing are being tackled, and new capacity is being built, it will take a while before that has an impact on supply and pricing. Air-freight is a little more difficult to predict as it’s linked to some degree to the growth (post pandemic) in regular consumer travel. If the world continues to unlock the number of flights is likely to increase and airlines have and continue to adapt planes to carry more cargo. But let’s not be naive and not acknowledge that air-freight pricing is to some degree going to pinned to sea-freight pricing. So we don’t anticipate a significant reduction in air-freight costs during 2022.
The Factors - Unpredictable
And this is where we really step into the unknown. The best we can do is identify the factors in play and commit to watching them closely and more importantly reacting quickly when we see more predictability in the numbers. Here’s the long list:
Inflation (Interest rates) - I think we’re all agreed it’s going to rise. The key indicator is when will it reach a point when it starts to affect consumer behaviour, when will people start to reduce their spending and demand slackens off?
Oil prices (Energy costs) - A really tough one, the price for which is at a record high right now. It would take a really brave person to predict the path pricing will take in 2022. And of course it’s closely linked to the Geopolitical situation.
The Pandemic - Another tough call as the world is in the midst of the Omnicrom variant right now. However, there is talk of an end to lockdowns and a return to some form of normal life in Q2. However the threat of variants still looms and markets remain nervous.
Natural disasters - The great Texan freeze marked the start of the dramatic increases in resin prices last year. Are we confident that adverse weather events won’t cause further disruptions this year?
Increased resin capacity - Whilst the pandemic affected new capacity build plans it’s clear that there is a large amount of new capacity due on stream in PE and PP in the near future. The pandemic and potential shortages of staff may have an impact on when this capacity actually enters the market.
Sustainability - From April 1st 2022 the UK Government is starting to charge a £200 per tonne “tax” on any plastic film that doesn’t contain 30% PCR content (Post Consumer Recyclate) It appears that other Governments are considering or on the verge of implementing similar levies. It will be interesting to see how that unfolds and the impact on purchasing.
Geopolitics - Again I think we all acknowledge there is more political instability globally than in recent years, how will this affect the supply of gas and oil as an example. But there are other political developments such as relations between the West and China that could have a significant impact on pricing and supply.
As this recent survey in Numerator shows if inflation starts to rise then consumers will cut back on non essential “luxury” purchases. This will leave retailers with an excess of stock and again have an impact on travel. In terms of food packaging it will drive a growth in own brand and discount hunting.
Polymer and Paper Pricing
At the time of writing is appears that for the first time in a while we are seeing a softening in PE and PP pricing but most of the market analysts believe that we will see prices starting to rise again as the year progresses. However PET demand remains strong and it appears that pricing will remain at current levels and higher for longer.
In relation to specific flexible packaging grades, this could leave to a short - term softening in BOPP and CPP pricing, although we still have to negotiate Chinese New Year! Then as the year progresses will may start to see increases again. BOPET pricing could remain close to current levels for a while.
Likewise for consumers of PVC for card production, there is no sign that prices will reduce any time soon. Particularly as producers are attracted by other more lucrative channels and are switching production capacity from PVC to other more sustainable polymers.
As a business we also have a substantial involvement in paper and paperboard supply and the bad news is that in the medium term it looks like pricing will continue to climb and availability will continue to be tough. Card producers that use paperboard and flexographic food packaging producers (looking to switch to paper-based products) need to be aware of the significant supply and pricing challenges ahead.
The supply of all printable substrates is heavily influenced by consumer demand and we are still to some degree in the grip of the pandemic consumables spending spree, where people unable to spend on travel are spending more on food and “luxury” consumables. If inflation takes hold in certain regions of the world, then demand for these items (that rely on many forms of packaging) may suddenly drop quickly. We are then in an oversupply situation and prices may start to soften.
2022 is likely to be a roller coaster ride in terms in material costs!
Conclusions
The $64’000 question. And as you can see it’s virtually impossible to approach 2022 with any degree of certainty in respect of any area of purchasing. It’s a cliche’ but the only certainty is uncertainty.
Therefore as we said at the start an agile purchasing strategy is essential. Being prepared to switch and change suppliers, materials and commitments to clients is vital.
What’s also clear is that most raw material costs are only going in one direction in the short - medium term, and that’s up. Even if material prices stabilise and even reduce as the year unfolds, energy and freight cost for example look likely to remain high in the longer term.
It’s also looking pretty clear that inflation in most economies is set to grow, and considerably, and that brings in the issue of changes in consumer buying behaviours. is it therefore a good idea to prepare a strategy for a change in the type of products you’re currently producing? Will there be a shift from higher quality to own brand discounted products, with all the pressure that will put on your pricing.
And then there are decisions to be made about material supply shortages, if one of your key materials was suddenly unavailable at short notice, what contingency plans do you have in place? Are you going to increase the amount of stock you carry? Remembering that interest rates and the cost of borrowing are also set to increase.
Are you in close contact with all your key suppliers? Are you aware of where you sit in their pecking order? Do you have the power buying to have complete confidence of a place at the discussion table if suppliers are forced to choose who they trade with and supply?
We’re sorry to ask more questions than we can provide answers but ultimately each business must make their own decisions about the factors that are likely to affect their business the most.
However coming back to that word agility. If there is one change in approach we think is absolutely essential it’s being prepared for change. If you currently buy key raw materials from one main supplier and one back up, then talk to four more about what they can offer you.
Take an honest look at where you sit in the pecking order of all of your suppliers, and ask yourself the question; if there was a problem do we have the power and or influence to make sure we are a priority? If the answer is no, then look to work with alternative providers that do have that place at the table.
And finally it feels like all of the above is leading to one huge ultimate challenge for everybody, pressure on margins. Your clients are going to fiercely resist all upward price pressure and every lost % digit will have an impact on your bottom line. Look at down gauging, re-sourcing and alternative materials as soon as you can.