Rexam to renegotiate beverage can prices in Europe

By Ahmed ElAmin

- Last updated on GMT

Related tags: Rexam, United states dollar

Global packaging provider Rexam says it will begin renegotiating
contracts with its European clients later this year in a bid to
recover some of the rising costs of the aluminum used in its
beverage cans.

The company has also been cutting costs and improving efficiency across it manufacturing plants in a bid to tamper the effects of high input costs. Rising prices for raw ingredients such as aluminum and plastics has increased the cost of packing for food and drink manufacturers over the past year.

Rexam is one of the world's top five consumer packaging companies and has been reorganizing to focus its global operations on beverage packaging in metal, glass and plastic. It has been on the acquisition trail over the past two years in a bid to expand across all packaging segments.

Aluminium is by far the largest raw material cost for the group, which spends about £1bn (€1.5bn) a year on the metal for its beverage cans.

Aluminium prices, which are based in US dollars, rose steeply in the six months to 30 June 2006. In the Americas, Rexam is largely unaffected by the changes in the cost of aluminium as major customers agree the cost in advance with their suppliers, effectively resulting in a cost pass through.

In Europe, the company hedges both the metal and the associated US dollar to euro currency exchange through a three year rolling programme, such that aluminium is fixed in euros, the principal transaction currency.

In its financial report for the first six months of this year, the company said this year is now largely covered at prices well below recent peaks, while 2007 remains partially hedged.

As part of its ongoing management of aluminium input costs, Rexam renegotiated a US contract for the future supply of aluminium which gave rise to a profit of £14m in the first half of 2006. This, together with price surcharges, has helped to mitigate the effect of the higher aluminium cost on the European beverage can operation, the company reported.

"We intend to continue to manage actively the effect of aluminium costs through contract renegotiation, hedging and surcharges as appropriate,"​ Rexam said this week. "Looking forward to 2007, we will be renegotiating contracts with our European customers later on this year and it is our intention to reflect the aluminium price prevailing at that time in our pricing structures."

Meanwhile the company's overall margin of our beverage can business fell due to the impact of a major new contract in the US, along with the effect of the pass through to customers for increased aluminium costs in the Americas and higher energy and freight costs.

The company expects the margin to increase over the medium term.

Overall the company's strategy seems to have been successful in keeping costs down while supporting growth. Rexam continued to solidify its growing importance as a beverage can provider, increasing its worldwide sales in the segment by 11 per cent during the first six months of the year.

The company this week reported sales growth of 20 per cent from ongoing operations. Organic sales growth was nine per cent, with acquisitions contributing another eight per cent. About three per cent of the growth was due to the effects of positive currency exchange rate translation into the US dollar.

Underlying profit from ongoing operations was up one per cent to £194m (€287m), reflecting volume growth and acquisitions. The profit was offset by the impact of higher input costs and the reduced prices of a major new beverage can contract won in North America, the company stated. Underlying profit before tax was £137m (€203m).

The company benefited from a 11 per cent growth in its beverage can sales to £1,224m, benefiting from significant market share gains as well as strong overall market growth.

"Capacity utilisation is extremely high in all our beverage can plants, and efficiency savings remain similar to last year as we continue to identify further opportunities to ensure best practice manufacturing across our 42 can and end making plants around the world,"​ the company stated in its financial report for the six months ended 30 June.

In the Americas, which includes the US, Mexico and South America, Rexam increased sales by 12 per cent. In Europe, beverage can volume increasing by seven per cent on the same period last year.

"We benefited from further growth in the energy drinks sector and the generally favourable market development, buoyed by the fine early summer weather in Europe and the FIFA World Cup,"​ Rexam reported.

To meet increased demand in the global energy drinks market, Rexam is building a £45m can making plant close to Red Bull's contract filling partner in Austria. The new plant will have a capacity of about one billion cans and is expected to come on line by the end of 2007.

In Russia, Rexam is also investing in a second can plant. Located in the Urals, it is expected to come on stream in mid 2008. The company is also installing a new line at its Naro Fominsk plant in the country to produce one litre cans to meet the market demand for larger container sizes for beer.

The group has operations in 22 countries. The company has made a series of acquisitions over the past two years and said last year it is looking at other "opportunities"​ for growth.

Beverage cans make up about 69 per cent of the company's sales. Glass packaging makes up another 12.7 per cent, beauty and pharma 13.5 per cent and plastic containers another five per cent of global sales.

In the plastic packaging market Rexam is focused on the more value added and faster growing sectors of the rigid plastic packaging sector. It includes beauty packaging operations, pharmaceutical packaging, closures and food and beverage plastics, as well as recently acquired businesses serving the home and personal care markets.

Plastic Packaging results were substantially up on the equivalent period last year benefiting from organic profit growth and acquisitions. The company reported improved profit margins compared with the second half of 2005.

The majority of its plastic operations performed strongly, notably pharmaceutical packaging and its high barrier food business. Beauty packaging operations continued to be affected by delays in the launch of new products. The company expects to see a "promising" number of planned new products from its customers to be launched in the second half of this year. Organic sales and profit growth were two per cent and five per cent respectively.

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