Packaging firms face future financial squeeze

By Charlotte Eyre

- Last updated on GMT

Related tags: Material, Cost

A new report warns that the future remains challenging for European
packaging firms, as rising input and transportation costs will
continue to weigh down on the industry.

Fitch Ratings, the credit agency which compiled the report, said that many packaging firms are currently suffering financially as they are not passing their costs on to customers. "Failure to pass through raw material and transportation cost inflation, together with an inability to generate sufficient mitigating cost efficiencies are the hallmarks of weaker credit quality for highly leveraged packaging producers,"​ said analyst Michelle de Angelis. De Angelis told that the although nine companies reviewed for the study cannot be revealed, as the shadow ratings are private, more than half provide packaging for the food and beverage industry. Input costs ​According to the report, the price of the raw materials needed for packaging - polymer resins, recovered paper, wood and aluminium - all increased during 2007. One of the principle reasons for the rise is increased demand, with manufacturers in Asia in particular seeking more and more raw materials, the agency said. Poor weather conditions have also had an adverse effect on supply, Fitch added. Examples given in the report include power shortages and harsh conditions in China, the world's largest producer of aluminium, and poor wood harvesting conditions in Russia and Finland. The price of energy and transportation is also likely to put pressure on margins, Fitch said Weathering the storm ​The most successful packaging companies can contain costs by passing them to customers, combined with rationalisation - organising the business to improve efficiency, the report said. According to Fitch, larger packaging firms will be able to deal with rising costs more effectively than their smaller counterparts, "with larger players generally more able to leverage on their relationships with suppliers and consumers." ​ Some markets, such as food, may also be moderately insulated from the slowdown of the European economy, the analysts said, Fitch said that the nine companies reviewed had "different degrees of success"​ in passing on their costs. Consequently, margins decreased by an average 0.3 percentage points for 44 per cent of the firms, while for three others the improvements in performance were lower than expected, the analysts said. "Ongoing cost control measures were therefore insufficiently successful to fully counterbalance pricing pressures in raw materials,"​ Fitch said. Ratings ​Overall, 44 per cent of the companies were rated B- (B minus) by Fitch, and the other 56 per cent were rated B. The B ratings are at the lower end of Fitch's spectrum, which ranges from AAA to D. "B' ratings indicate that significant credit risk is present, but a limited margin of safety remains,"​ the group said.

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