Petrochemical Prices Hit 6 Year Low – A Saving Opportunity?

Posted 13/11/2015

Even though plastic is a relatively recent invention we long ago stopped marvelling at its versatility and ubiquity in everyday life. The food and drink industry, in particular, has exploited the properties of plastic to deliver functional, hygienic and low-cost packaging, from the chunky 2 litre fizzy drink bottle to the few grams of plastic in the humble bread bag.

A report from Platts, a leading provider of petrochemical information, in September 2015 reported that the Platts’ Global Petrochemical Index (a benchmark basket of seven widely used petrochemicals) was at its lowest level since May 2009. That sounds like good news for consumers but is it good news for Procurement?

We all have a vague understanding that plastic is made from oil and that in some way the price of crude oil has an impact on specific plastic prices. The packaging buyer has the more detailed knowledge that one of the distillation products from crude oil is naphtha, the “feedstock” for molecule cracking plants that produce ethylene, which is in turn the feedstock for polymerisation plants that produce specific plastics including low-density polyethylene (LDPE), high-density polyethylene (HDPE) and polystyrene. Manufacturers then convert these plastics into a wide range of different products by thermoforming, extruding or injection moulding.

So much for the chemistry, what about the money? The prices of naphtha, ethylene and each major type of plastic are not only driven by the feedstock price, they are also a function of the conversion costs, manufacturing capacity, stock levels and demand for the product. Therefore, changes in the price of crude oil aren’t immediately reflected in plastic prices although they do usually trickle down.

The question is: if I negotiate a reduction in the price of plastic bags because of a reduction in the price of LDPE, because of a reduction in the price of ethylene, because of … etc, have I made a saving? The obvious answer is yes, the unit price of the bags has decreased and, if packaging is not the main cost driver of my company’s product, I am probably not under pressure to immediately pass on that saving to my customers. But, if my company is selling in a competitive market-place it’s likely that before long we will need to compete on price and the additional margin achieved from lower bag prices will be short-lived.

The truth is that the packaging buyers at all of my competitors are also negotiating “savings” based on reductions in the crude oil price and that none of us have created any competitive advantage for our employers. Indeed, keeping track of feedstock trends and ensuring that plastic prices reflect any downward movement is vital to avoid competitive disadvantage, rather than create any true value.

To manage this dynamic some buyers link the raw material element of the purchased product to a published feedstock price, or index, to make these price movements automatic. This might be appropriate if your supplier has little buying power with the feedstock suppliers but it does absolve them of any responsibility, or incentive, to push cost-down pressure further up the supply chain.

Many plastic packaging items are in the “leverage” category but once the packaging buyer has made sure the goods are supplied at, or just below, the market price then the real value will come from changes that competitors cannot immediately copy, such as new specifications that reduce the weight of plastic used, quality improvements that increase the shelf-life of the pack contents, innovative methods for the packaging to carry marketing messages direct to consumers or packaging changes that make the product easier to use and earn a price premium.

Petrochemical prices are at a 6 year low and plastic prices will soon follow, but these low prices are easily available to all competent buyers and the standard strategy of maximising competition has limited value for the buyer. To create points of difference the real savings will come from unique packaging solutions that use low-cost materials in new ways.

We’d like to understand your views on the value of simply following commodity prices or what challenges will be faced in practice by adopting a new strategic approach in packaging categories to realise those real points of difference?

Tagged by topic: Ingredients and Packaging

  by Paul Lee

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