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Raw material shortages, spiraling prices threaten German plastic packaging producers

Last week, the European Plastics Converters Association, headquartered in Brussels, issued a warning to the effect that an extremely undesirable situation was developing with regard to the force majeure declarations by some of the leading polymer suppliers to the European market.

Last week, the European Plastics Converters Association, headquartered in Brussels, issued a warning to the effect that an extremely undesirable situation was developing with regard to the force majeure declarations by some of the leading polymer suppliers to the European market. Today, it was the turn of the IK German Association for Plastics Packagings and Films (Bad Homburg) to sound the alarm.

While current IK economic trend figures give grounds for optimism, with German plastic packaging manufacturers predicting a continued upswing for the second quarter of 2015, this positive development is under threat, says the IK. The reason is that major raw material suppliers currently no longer feel able to meet their contractual obligations toward packaging manufacturers. Deliveries that have already been accepted are being cancelled. And when deliveries are made, they are accompanied by significant price hikes, despite continuing moderate crude oil prices. As yet, there appears to be no end in sight to this price spiral.

Besides the export of large quantities of plastics to regions outside Europe such as China, Africa and Central and South America, the latest shortages in raw materials are mainly due to notifications of force majeure.

In recent weeks, the number of cases of force majeure registered by raw materials producers in Europe has reached "epidemic proportions," according to the IK and other plastics-related associations. Such reports have so far contained no detailed information and consequently make it difficult to ascertain whether the criteria for force majeure have actually been met.

Cases of force majeure presuppose an "act of God," that is, an influence from outside that is completely unrelated to operational circumstances. Hence, merely claiming that incidents or technical problems have occurred is generally not sufficient. The causes lie solely within the area of risk of the raw material supplier. Commercial due diligence dictates in such cases the availability of corresponding storage capacities.

According to the IK packaging association, the current raw material shortages and spiraling prices are presenting manufacturers of plastic packaging—a group that is largely made up of small and medium-sized businesses—with considerable problems. Since raw materials account for as much as 70% of costs, margin losses represent a potential existential threat.

Moreover, in addition to economic damage, the situation is also resulting in significant damage to the public image of the raw material suppliers. The retail trade, food industry, and other key user industries value reliable preliminary suppliers very highly. To date, no other packaging sector, neither paper nor metal, has seen such serious occurrences.

Over the past 25 years, production of plastic packaging in Germany has doubled, not least thanks to the innovative commitment of packaging manufacturers. Producers of raw materials have also benefitted considerably from this development, says the IK association. It is about time that they themselves implement something of the spirit of partnership they always claim, especially from contract customers. Above all, this includes sound economic judgment.

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