No industry has been immune from the effects of the credit crunch but illiquidity in the credit market has also come at a time when economic fundamentals are weakening in key markets – notably the US.

The flow of negative economic data continues, and its effects can be seen in worsening confidence among US manufacturers.

“Since the start of 2008 there has been growing indication that Europe’s forest products sector has been feeling the pinch on margins.”

In its survey for the first quarter of 2008, PricewaterhouseCoopers found that most US industrial manufacturers are pessimistic about the year ahead, facing pressure on margins and cooling their appetite for expansion.

Indeed, the pattern of economic weakness extends to much of the developed world. The Organisation for Economic Cooperation and Development (OECD), whose member states include the world’s major economies in Europe, North America and Asia, recently reported leading indicators for the future strength of industrial production, noting that “a slowdown in economic activity lies ahead in the OECD area. March 2008 data indicate a weakening outlook for all the major seven economies.”

Though these macroeconomic trends have a broad impact, their effects on sectors of the packaging industry have started to emerge. Since the start of 2008 there has been growing indication that Europe’s forest products sector has been feeling the pinch on margins, which has negative implications for the paper and board industries.

Furthermore, the wider economic trends must be viewed in the context of other factors that are denting margins across the packaging sector.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.


If there are hard times ahead for the packaging industry it will not only be because there is pressure on demand in many mature markets, but also because increased production costs are being passed through the chain from materials suppliers to packaging companies, which feel pressure to pass the costs onto their customers.

Many companies have been feeling the impact of higher production costs, and just recently the Belgian board manufacturer VPK Packaging highlighted the issue in its quarterly earnings review, noting that its profits so far this year have been affected.

“Profit margins under pressure due to high energy prices,” the company noted, adding that “the price of recovered paper increased again and the energy prices, which reached record heights, will represent an additional cost.”

“The obvious response to rising production costs is for a company to find efficiency wherever it can.”

Although the oil price has fallen has from its recent highs of over $135 a barrel, in part because there are concerns over lower global demand for energy, it remains historically high. Natural gas prices have also risen sharply since the beginning of the year.

The effect has been seen in the plastics sector, where materials producers are passing on higher costs. Plastic packaging is a key demand sector for petrochemicals, so costs for companies in the sector are directly linked to oil

Dow Chemical recently announced that its prices would be rising by 20% to cover its rising input costs, largely the result of higher energy prices. Similarly, chemical manufacturer Huntsman Corporation will be raising prices for all its products by as much as 25% “in response to sharp and sustained increases in its costs for energy, commodity and intermediate feedstocks, and transportation,” and in some cases could also impose an energy surcharge.

“We hope we have seen the worst of the energy and commodity price increases,” noted president and CEO Peter Huntsman. “However, the impact of large-scale speculation by traders on the price of energy, in addition to the increased costs we are absorbing from our raw material suppliers and service providers, cannot be underestimated.”

Other sectors are also under pressure, including the foil sector, which has had to cope with rising costs of aluminium. While there seems to be plenty of stock of primary aluminium around the world, global daily consumption is high and the price is very volatile in response to any change in supply. Given that aluminium production is highly energy intensive, smelters are facing ever higher input costs from rising energy prices.

Furthermore, China accounts for a large proportion of global aluminium production, given the dramatic increase in smelting capacity in recent years, but a shortage of power has prompted the government to impose export taxes to control the sector’s energy demands. If supply from China, or anywhere else, is curtailed the aluminium price could once again start to rise.

An official from China’s Nonferrous Metals Industry Association recently noted that this year “we are aware that China is a net exporter of aluminium in the first four months”, but added that “the aim is to secure balance in the aluminium trade situation in China”, which points to fewer exports in the future and a potential reduction of material available on the international market.

“Investment in Central and Eastern Europe is booming in many sectors.”

The combination of a weaker macroeconomic environment, the risk of flat or falling demand, rising production costs and, in some cases, unfavourable shifts in foreign exchange rates, means the packaging sector must work hard to maximise margins in challenging times.


The obvious response to rising production costs is for a company to find efficiency wherever it can. In some cases, notably Europe’s paper and board sector, this has meant closing plants or consolidating the enterprise, to improve productivity. Nevertheless, the demand prospects in mature European markets may still lead to overcapacity, so the search for efficiency is likely to go hand-in-hand with a search for new market opportunities.

Europe’s cartonboard industry, for instance, is unlikely to see significant growth in the UK or Western Europe, but may find promising opportunities in Eastern European countries like Poland and Russia, where rapid economic growth – albeit from a low base – is pushing up consumption by as much as 9% a year.

Investment in Central and Eastern Europe is booming in many sectors, and the days when products made in the region all came back to consumers in Western Europe have gone. Domestic markets in the region have huge potential as per capita wealth increases. There is growing momentum, therefore, behind the packaging industry’s move eastwards.

In fact, despite its concerns about rising energy prices, Belgium’s VPK Packaging also noted that “the uncertain market circumstances in Western Europe which were announced in the first quarter of 2008, contrast with the market situation in Central and Eastern Europe. These countries are set to realise strong growth figures in the first half of 2008. As the standard of living increases, the consumption and the demand for packaging grows. These growth markets will, therefore, remain of prior
importance in view of the further expansion of the business activities.”

“As the standard of living increases, the consumption and the demand for packaging grows.”

This shift has also had a noticeable effect on the strategy effect of folding carton manufacturers in Western Europe, many of which have started to focus on providing value-added services while locating manufacturing operations in countries where some input costs are lower.

This, however, could further increase the overcapacity in Western Europe, according to some industry commentators, and make the economic situation more precarious for some companies.

There are also growth opportunities further afield, and packaging companies realise the potential in Asian and Latin American markets. China’s unprecedented economic growth and rising industrial production are accompanied by rising consumption of products and packaging. Flexible packaging in particular is seen as an important growth sector in China.

Accessing such markets will be a great challenge for packaging companies in mature markets, but those that achieve is successfully must note that economic growth rates and rates of consumption can be volatile. The OECD, which recently pointed out the weakness in the world’s developed economies, also highlights that its leading indicators suggest “a potential downturn in Brazil, China, and India”.

Asian economists at Lehman Brothers have noted challenges for China’s economy, for instance, with analyst Mingchun Sun observing that “since October 2007, with the US housing recession spreading to a credit crunch in most of the world’s major economies, we have argued that China’s GDP growth has entered a downtrend”.

There will no doubt be many more twists and turns to the global economic story in the near future, but packaging companies are in no doubt that cost rationalisation, geographical expansion and business transformation lie ahead.