Processors and OEMs push back, increasing consumer-goods prices

Material suppliers and processors serving the consumer-goods market are increasingly passing on the energy and resin costs they have largely absorbed over the last two years, acknowledging that energy and raw material inflation could be here to stay.

George Thomas, VP and general manager of Ampac Flexibles (Cincinnati, OH), a producer of high-end barrier pouches for the consumer market, says that going back to July 29, 2005, prime linear low-density polyethylene resin, which acts as the industry benchmark, jumped 67% by November 2005, before falling off, and then rising 10% again. Foil costs have shot up as well.

“Obviously, the energy costs to operate our plants, ship our products, and travel to our customers and meetings, etc., has all gone up,” Thomas says. “The systemic impact has probably been over 25% of our selling price—more in certain circumstances.”

Thomas says Ampac hasn’t been able to pass through 100% of the cost increases, but it has encountered sympathetic clients and suppliers. “Our customers have worked with us in almost every case with a lot of understanding of the hardship we are under,” Thomas says. “For the most part, [customers] have understood this and accepted the pass-throughs as they came to us.”

The challenge has been especially difficult in medical products or others that require FDA approval of new materials if Ampac were to switch to lower-cost resins, including trials and testing. In areas where it could switch, however, including retail luxury shopping and security bags, Ampac took changes a step further, and for the first time in its history imported lower-cost resins from Asia. “Today we continue this practice,” Thomas says of the imports, “and feel it give us stability in supply and price.”

OEMs relent, raise prices

Consumer goods giant Procter & Gamble (P&G; Cincinnati, OH), which is the market’s 8-million lb gorilla, boasting 22 “billion-dollar brands,” including such ubiquitous household products in beauty, healthcare, food, and cleaning as Tide, Pantene, Folgers, and the recently acquired Gillete, added 1% to sales growth in Q2 2006 through price increases.

The company posted a Q2 2006 sales increase of 25% to $17.84 billion, and as always, it continues to emphasize marketing and brand appeal, often driven by the unique packaging plastics offers. P&G overcame commodity cost increases that negatively impacted gross margins 100 basis points through price increases across several segments.

Last year the company launched two strategies to fight the rising commodity and energy prices, placing a greater emphasis on higher margin products like specialty beauty and healthcare, and targeting developing markets with products that cater to lower-income individuals.

To that end, beauty unit volume was up 9%, with an earnings increase of 20% in the second quarter, while healthcare volume jumped 32%. Together, beauty and health now make up 47% of P&G sales and 50% of its earnings.

In the company’s 2005 annual report, former vice chairman of the board at P&G, R. Kerry Clark, said the company is trying to improve inventory control and lower manufacturing costs through standardized platforms, localized raw material supply, and the use of contract manufacturing to deal with resin costs that were up 20% for the year.

At Unilever, Group Chief Executive Patrick Cescau said during a discussion of that company’s second quarter that accelerated savings and “an increasing contribution from price” will help it to growth “in spite of harsher than expected commodity cost environment.”

In Europe, where sales were up .3% through the first six months of 2006, there had actually been a small reduction in price (-.4%), but in North America, 3.2% sales growth was driven by volume and price increases (+1.5%), and in Asia/Africa, where sales grew 8% in the first half, 1.2% in price increases in categories like laundry care offset higher costs.

Johnson & Johnson (New Brunswick, NJ) boosted product prices 7.6% from the second quarter of 2005 to Q2 2006, helping it to record sales of $13.4 billion for the quarter. Kimberly-Clark (Dallas, TX) used broadly higher net selling prices, which were up 2%, to overcome what it called significant cost inflation, and boost Q2 sales 4.4% to $4.2 billion. The company also asked for help from its suppliers through its FORCE (focused on reducing costs everywhere) program, which led to savings of $50 million. The diaper giant of Huggies fame, said it had to absorb $100 million in cost inflation in the second quarter, with $30 million going to polymers and superabsorbents; $25 million in higher energy costs; and $35 million in increased distribution costs.

Resin manufacturers get pinched

For materials supplier Dow Chemical (Midland, MI), which has a significant presence in consumer goods through its polyolefins (PO) lines (second behind Basell (Sittard, Netherlands) in total PO, first in polyethylene (PE)), sales, volume, and price increases couldn’t help it overcome higher feedstock costs. For its Basics Plastics segment, Q2 2006 sales of $2.99 billion, were 16% higher year-over-year, with volume up 5% and prices up 11%. In spite of the double-digit gains in prices and sales, however, earning dropped 6%.

In comments to investors, Geoffrey E. Merszei, Dow executive VP, called the pressure “unyielding,” and said the feedstock and energy costs were $1.6 billion higher in the first half of 2006 than the previous year. Merszei said that marked the 16th consecutive quarter of year-over-year cost increases, with the last nine over 18%.

The company reported that oil and naphtha had reached record levels in the first half of 2006, and while natural gas was mostly flat, ethane had risen with naphtha. Comonomers for PE were up $250-million year to date, but in North America, in spite of price-increase announcements, prices initially dropped in Q1 2006. PE prices ended up 14% for the second quarter, and there is no immediate end in sight, with Merszei predicting that Dow’s third quarter energy and feedstock bill will be $400 million higher than the second quarter.

Fellow global polyolefins leader, Basell, which holds a commanding stake of global PP production and 21% market share in North America, saw its PO revenue up from €1.745 billion to €2.248 billion, but its earnings dropped due to “weak cracker margins in Europe” from €188 million to €134 million.

In spite of such movements, especially in a market like consumer goods where margins are razor thin, Ben Matuska, plastics market manager for Dow’s North American consumer durables, appliances, and electronics markets, says plastics remain safe from wholesale material switchovers in everyday products.

“Nearly all of our durables customers have made a long-term commitment to plastics,” Matuska says, “and established manufacturing operations and supply chains to support that commitment. There also have been significant, commensurate increases in the prices of wood, metal, concrete, and paper. At the end of the day, plastics are still one of the best long-term solutions to the overall manufacturing cost equation.”

Tony Deligio | [email protected]