I recall a lunch many years ago with two executives from Exxon Mobil. They laughed at what they saw coming for the flexible packaging industry. Resin prices would start rising soon and wouldn’t stop. Exxon would mint profits while many converters, unable to pass through the increases, would die. Their giddiness wasn’t simply sadistic. Resin companies had seen their prices fall for years as customers played rivals against each other. But the worm had turned. Resin producers had consolidated to three or four from more than 10, which meant market power had shifted to survivors like Exxon and Nova Chemicals.
The two laughing sales guys proved prophetic. Over the last five years resin prices have quadrupled. The margins of those companies like Exxon that control their feedstocks have skyrocketed as natural gas (the primary source for plastics in this country) prices have collapsed. The producers also more closely match their production to demand, slashing capacity to keep margins high rather than increase inventories. That’s why even with new poly production slatted for 2017, prices won’t decline. Resin manufacturers will simply shut older plants as needed. With only a few producers setting the market — and most following the lead of Exxon — the resin industry has transmogrified into an oligopoly.
Rising resin costs have met their match in customers unwilling to accept increases. After all the food companies most of us sell to in turn sell to grocers who have kicked, screamed, and scratched to fight-off price hikes. It’s not hard to see why. Grocery margins remain mired in the low single digits. Kroger boasts an operating margin of about 2.8%. Mighty WalMart can only do slightly better at 3.4% but its profits have flat-lined for several quarters. There’s no room to raise prices because competition in the food aisle remains too stiff. So like some Medieval torture victim, the flexible packaging industry finds itself pressed to death.
Worse yet resin pricing isn’t the only cost hitting us. Trucking charges have zoomed thanks to diesel, health insurance continues its mad, mad double-digit march, and the price of white ink has edged up 20% over the last five years driven by pigment cost. Workers wouldn’t mind a little help keeping up with inflation as well. We’ve tried to outrun these by increasing productivity and holding the line where we can. But you can’t outrun the law of diminishing returns forever.
In fact, the rush to boost productivity has likely hurt the industry. Many of us have tried to cut costs by replacing old, less efficient capacity with new, faster machinery. But recent vintage printing presses often produce nearly twice as much as the ones they replace. If too many companies take this route — and they have in the packaging industry — overcapacity ensues. So many new printing presses have been bought over the last few years, one executive from a large press manufacturer said he couldn’t fathom how the industry would ever make a return. Many companies won’t.
Well the desperate do desperate things. Not every packaging sector faces overcapacity — some have already consolidated — but where too many machines chase too few customers prices have fallen while costs climb. Even in segments where consolidation has shrunk the field to just a handful, customers fight increases pointing to the pressure exerted by WalMart. Eventually something has to give. Maybe high prices will force down plastics use. Or consolidation will continue until flexible packaging companies have the market power to emulate their resin suppliers. Even then it will take some courage to reflect increases. My father’s quip sums up the industry’s historical mindset: “If there were only one converter, he’d still cut his own prices.”