Are trade tariffs a major risk to packaging materials pricing?

By Gary Kestenbaum in Consultants on October 14, 2018

How much do you know about factors that affect packaging prices? Gary Kestenbaum gives a perspective from the customer’s view, in light of recent government tariffs.

 

The current trade atmosphere is leaving suppliers and customers uneasy as to where prices of goods are heading. In the world of packaging, we are obviously concerned about tariffs on metals because they are obvious components of packaging and packaging machinery. One has to wonder, though, what the next raw material is that will be added to the list of incoming or outgoing tariffs in this global game of “trade chicken.”

The subject brings to mind some meaningful experiences I’ve had that changes my understanding of pricing.

As a member of product research and development (R&D) at a “Mega Food Conglomerate” (MFC), it was not the cost of business goods and services that kept me up at night—trials, experiments, logistics, commercialization and vendor support were the object of my focus.

It got worse when I moved into packaging. I needed CAD [computer-aided design] samples, dielines, pre-production samples, trial support and, oh, I needed them instantly. After all, I was the client, working for a customer that purchased many millions of dollars’ worth of packaging. The factors that went into pricing for goods and support were invisible to me. I just needed “the Cadillac” of support to make my customers, the internal marketing and business managers, happy!

My mentors in packaging R&D just gave me contact information for the vendor tech support reps and told me to call if I needed anything. Simple enough process, unless you are the vendor tech support reps.

My first packaging introduction to the “$100,000 Pyramid” category “Things That Affect Costs” occurred after an explosion at the Phillips petroleum plant significantly affected sourcing of high-impact polystyrene (HIPS) K-resin. Users scrambled to replace this high-quality resin and were forced to pay more for lesser alternatives, if they were even available. I quickly learned how the costs of polymer resins were linked to the price of oil, which obviously varied year to year, and how bauxite mining and supply issues affected aluminum packaging. Offshore steel pricing could fluctuate with volatility of the Dollar and Euro. Mergers and acquisitions played a role as well, which segues to one of my favorite anecdotes on packaging raw material costs.

Early in my packaging career, I failed to consider paper-based packaging cost volatility the same way I looked at plastics and metals until my life-altering encounter with one particular tech service rep for a major corrugated company.

During my initial training period, my packaging development mentor advised me that when I needed corrugated samples, trial support, documents and such, just place a call to the salesperson at the Giant Corrugated Company (GCC), ask for support and, like magic, it will be provided.

Thus, on one particular day, I called the tech rep and requested a laundry list of support details and timing. The rep cut me off halfway through the call, obviously put off by the self-serving naiveté of my multiple requests. When I asked what the issue was, she gave me a lesson I’d never forget.

She told me the following: The procurement manager of the Mega Food Conglomerateassigned to the Giant Corrugated Companyaccount writes a contract that guarantees GCCthe exclusive right to make zillions of corrugated items at plant locations as listed. The contract ends up including a huge percentage of MFC’s corrugated needs in specific regions of the country. In exchange for the guaranteed business for however long the length of the contract, GCC agrees to provide corrugated to MFCunder razor thin margins. GCC agrees, figuring that they can generate profits on the back end by using excess production capacity at the affected plants to convert corrugated for smaller customers who can’t benefit from said contracts.

Nice concept, except when MFC books 101% of GCC’s production capability. Goodbye excess capacity, goodbye profits.

To make it worse, MFCR&D reps(me, for example)call up GCC tech service with a lengthy list of demands, unaware that tech service runs on a shoestring budget, paid for by the invisible profits not being generated by the contract.

After the lecture, I was flabbergasted. I’d never heard this before. I quickly called my favorite sales rep from the Now Defunct Corrugated Company and related the story to him, waiting for him to tell me how preposterous this fairy tale was. He quietly listened and replied, very calmly, “Yeah, that sounds right.” With dropped jaw, my perspective changed in a flash.

I was well armed with that wisdom as I embarked on a productivity initiative to replace litho-laminated secondary package cartons with an alternative composed of paperboard. As was explained to me, the values plugged into the spreadsheet given to me suggested that pricing for the paperboard alternative looked favorable. As the project stretched on, pricing for the paperboard raw material rose exponentially.

Soon, a multi-million dollar promise of savings was swept away like dirt from a floor, and soon, the numbers for the “cost-reduction” had morphed into a cost increase.

I protested colorfully to the vendor business manager, asking him how this could have gone so wrong. I had been looking at the business portion of the project two-dimensionally rather than three-dimensionally. If I had scheduled a meaningful confab with my procurement rep, I would have learned that the converter of the current litho-laminated cartons, the Cheap Litho Lam Carton Corporationhad been making cartons at cost simply for the honor of doing business with MFC and, wouldn’t you know it, the Cheap Litho Lam Carton Corporation was being purchased by the Big Private For-Profit Group that informed us that, as of the end of the current contract year, they’d be increasing pricing on those litho-lam cartons so that the new owner could actually make a profit! How much of an increase? About 50%!

Whoops! All of a sudden, the paperboard alternative carton reduction-to-increase was, again, a reduction! As Yogi Berra never said, “It’s not over, because, well, it’s apparently never over!” Business circumstances are always changing or not transparent enough for tech folks to fully understand.

Another critical factor to consider, recycled board and specialty board costs are based on market conditions as well. If users of solid unbleached sulfate or other variations of virgin board desire to move to clay-coated newsback or another recycled product, the market may be affected.

So too do changes and complexity in the recycling industry affect cost. Visit a paper recycling plant and take a look with your own eyes at the complexity of converting used paper into clay coated board. Then consider the shrinking raw materials supply chain as print media moves to electronic, turning formerly semi-worthless waste paper into a valuable commodity.

A final thought to consider: Multiple suppliers of paper, aluminum and resins have confirmed to me that, in the real world of supply chain economics, suppliers and converters do not simply pass along cost increases to customers as they occur. Continuous, contract customers typically enjoy relatively fixed costs throughout the contract term.

To a degree, suppliers absorb some material upcharges and adjust costs over time so as not to drive the customer and market into free-fall. Within reason, many suppliers are willing to take calculated risks that increases are cyclical, and that adjustment over time will allow them to recoup some of the lost profits.

The takeaway should be that, while risks of tariffs and trade wars may certainly affect packaging-related goods and services, many other factors consistently impact the same. Customers are best-positioned for successful collaboration with suppliers and vendors when they are aware of the dynamics that influence costs and pricing in each sector and relationship.

 

Gary Kestenbaum is an independent food packaging consultant with 45 years of experience in the food industry as a food ingredient technician with National Starch, a food product developer with General and Kraft Foods, a senior package developer with Kraft Foods and a senior food packaging safety consultant with EHA Consulting Group. He can be contacted at [email protected].

 

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