Industry Update: Raw Materials, Glass Packaging, & Transportation
By: Berlin Packaging Specialist
Date: July 16, 2021
At Berlin Packaging, we pride ourselves on providing the most reliable, efficient, and cost-effective packaging solutions available to our customers. As your packaging partner, we closely monitor industry conditions that may impact your business. Our Industry Update, published bimonthly, features news on Resins and Raw Materials, Glass Packaging, Ocean Freight, and Domestic Transportation.
Resins & Raw Materials
Plastic resins and other packaging raw material supplies continue to face inflationary pressures due to
tight supplies, strong demand, resin producer allocations, increased labor costs, higher transportation
charges, and production fluctuations.
Several persistent market drivers are negatively impacting the cost of plastic resins. Here’s a brief rundown
of market conditions for various resins:
PET (Polyethylene Terephthalate):
The PET supply chain has largely recovered from the deep freeze in Texas, and prices have started to stabilize as we approach the peak bottle season. However, the recent drought in Mexico caused plant outages and supply disruptions.
Strong demand and inadequate supplies, plus multiple outages from several major producers, have resulted in increased polyethylene prices. However, price erosion is expected in the second half of the year.
PVC (Polyvinyl Chloride):
Planned outages, strong demand (aided by the booming housing market), and increased raw material costs have increased PVC prices. The supply/demand balance is expected to improve in the second half of the year, which may offer some pricing relief.
The PP market continues to be tight with limited availability and lean inventories. Thankfully, some data points indicate the market has started to improve, but
balancing supply with demand may take months.
PS prices, which had been on the rise due to increasing raw material and logistics costs, fell slightly in the month of June. Food packaging and food service represent the majority of PS sales in North America. As restaurants reopen and move to regular on-premise capacity, the demand for takeout containers may be declining.
Tight supplies of glass containers worldwide, higher ocean freight surcharges for imported glass, and increased operating costs for domestic glass producers are boosting prices.
Raw material increases are driving a price change on aluminum beverage cans and ends. Short supply of aluminum combined with increased demand in the packaging, automotive, and construction industries have pushed aluminum rates higher.
Glass and aluminum prices are on the rise.
Glass Packaging Market
Supplies of glass containers worldwide remain tight due to volatile market conditions. The COVID-19 pandemic triggered a shift to at-home food preparation and at-home beverage consumption (both alcohol and non-alcohol), resulting in a spike of foods such as sauces, oils, condiments and single-serve beverages packed in glass jars and bottles. Consumers like glass packaging for its premium appearance and feel, product quality and safety, reusability, and sustainability.
Globally, beverages account for the lion’s share of glass packaging with 232 billion units annually or 77%, reports Euromonitor. Foods packed in glass containers represent 63 billion units or 21%, followed by beauty & personal care with 6 billion units or nearly 2%, and home care with less than 1%.
U.S. Glass Container Industry
Three manufacturers produce 90% of the glass containers in the U.S. These large players are focused on long production runs and mass volume products. Because of their lack of manufacturing flexibility, smaller domestic producers and imported glass containers have filled a growing niche for regional and specialty foods and alternative drinks like kombucha, functional beverages, and CBD-laced drinks.
From 2015 through 2019, imported glass containers
increased from 1.4 million tons to 2 million tons
in the U.S. During the same period, domestic glass container production fell from 8.8 million tons to 8.1 million tons due to plant closures and consolidation.
In addition, some of the decline can be attributed to beer bottles. Beer consumption is stagnant in the U.S., and the only growth that has occurred in the beer category is craft products in aluminum cans. Beer packed in bottles is also under siege from hard seltzers and spirits-based ready-to-drink cocktails in aluminum cans.
Ironically, the micro-distillery boom has helped spur investment in custom glass bottle production in North America, with two new plants coming onstream in Mexico and the U.S. In addition, an Austrian company recently purchased a glass plant in Pennsylvania that makes spirits bottles and plans to invest $50 million over the next four years.
Another reason for the overall decline in domestic glass production is the lack of investment in retooling existing furnaces to add flexibility or building significant additional capacity to meet the changing market dynamics. Several factors may be at play here, such as the regulatory environment in the U.S., energy costs, skilled labor issues, the high cost and long lead times of capital expenditure projects in glass container manufacturing, and investment priorities in other parts of the world.
Until a couple of years ago, China had been a large exporter of glass containers to the U.S. However, that trade partnership changed significantly when the Trump administration imposed a 10% tariff on Chinese glass containers in 2018 that increased to 25% in 2019. To date, the Biden administration has not altered the glass tariffs. With Chinese glass as an expensive option, domestic users have had to look elsewhere for
supplies. The U.S. imports glass containers from
Mexico, Canada, Europe, Middle East, Southeast
Asia, Taiwan, India, and South America.
The outlook for glass packaging is continued strong demand and fixed supplies. Glass producers are hesitant to add capacity because of the high cost of capital investment in a new furnace and its operating cost. Furnaces run continuously, so many producers look for customers with high volumes.
In addition, glass producers cannot react quickly to sudden spikes in demand — it can take one to two years to build a glass container manufacturing plant. Furthermore, line changeovers are expensive. For example, changing a production line from a beer bottle to a bespoke container shape for an alternative drink can cost millions of dollars.
As we head into the peak freight season, all global trade lanes continue to grapple with strong demand that is outpacing capacity, port congestion, container and vessel availability, and other obstacles, resulting in unprecedented ocean freight rates. With consumer demand expected to accelerate throughout the year, transportation delays and disruptions will likely continue into 2022.
BREAKING NEWS ON SHIPPING COSTS: President Joe Biden has signed an executive order to promote competition in the American economy and has instructed maritime regulators to vigorously enforce unjust and unreasonable shipping practices, work with the U.S. Dept. of Justice to investigate anticompetitive behavior, and to consider further shipping rules. The executive order focuses on “saving American businesses money on shipping costs,” stated White House Press Secretary Jen Psaki. “Many freight routes are monopolized,” with “three foreign-owned shipping alliances controlling more than 80% of the market,” leading to higher shipping costs, noted Psaki.
Container Shortages & Port Congestion
Empty container/equipment availability remains extremely tight. The occurrence of shipment “rollings” (postponing a booking to the following week’s sailing) rates is climbing. Q1–Q2 major carriers’ sailings saw a frequency of rolled bookings at or above 50%. Minimally, this frequency is expected to continue at 15–20% for the foreseeable future.
Port congestion is rampant in North America, with recent ship wait times running a minimum of 2–6 days for Los Angeles, 5–7 days for Oakland, 4–12 days for Seattle, and 1–12 days for New York.
These ship unloading delays have a ripple effect throughout the transportation network, increasing truck and rail dwell times and cost.
Due to a COVID-19 outbreak in May, the port of Shenzhen/Yantian Terminal, China (one of the world’s busiest ports) partially shut down for several days – and operated at reduced capacity for several weeks. Carriers avoided the disabled port, which created capacity issues and spot rate increases at nearby ports and terminals. While Yantian became fully operational in late June, it may take several weeks or months to clear the backlog of containers.
With low inventory-to-sales ratios, U.S. retailers are aggressively attempting to restock inventory and pulling forward demand to meet the upcoming year-end holiday season.
Because of retailers’ “name your price” approach to securing cargo space, shipping prices continue to escalate and boost spot market rates.
Spot Market Prices
Spot rates for the Trans-Pacific lane (Asia to North America) are maintaining their premium levels as demand far exceeds available capacity. Other global
lanes face tight to critical space and capacity issues,
which put strong upward pressure on spot rates.
Prepayment of transportation costs for guaranteed
space is happening for the first time in history. This
is the most recent driver for sustained premium spot market rates.
The North American freight market continues to experience elevated rates due to strong demand, combined with labor and parts shortages and higher fuel costs. While there is some regional variability, all modes of transportation are impacted, and supply networks are encountering multiple challenges.
The biggest challenge facing the trucking industry may be finding and retaining qualified drivers. The shortage of drivers has boosted labor costs, and drivers are switching jobs for more attractive salaries.
Costs per mile for dry van spot market shipments are averaging above $2.75. While there may be some temporary jumps in rates going forward, the trend appears to be downward.
Inventory-to-sales ratios continue to drop, hitting 1.25 in April – a low not seen since 2012. Retailers are scrambling to restock and increase their inventories, creating increased demand for transportation.
Fuel costs continue to climb; diesel is averaging $3.30 per gallon – up nearly 90 cents from a year ago.
Due to record high prices for lumber, there’s a shortage of disposable pallets that impacts both the transportation industry and supply chains.
As manufacturing continues to expand and the
e-commerce channel grows, LTL volumes and tonnage are expected to remain strong through the year. Inventory replenishment and increasing average shipment sizes will further boost LTL loads.
Because of the strong demand for LTL services, shippers are experiencing price hikes. Major LTL carriers include FedEx, XPO, ODFL, and YRC Freight.
As vaccinated Americans increase their away-from-
home activities, there are early signs of a shift from purchases of durable goods to services and personal products. In May, consumers trimmed their expenditures of furniture, appliances, garden supplies, and automobiles. Simultaneously, purchases at restaurants and bars rose nearly 2%, clothing sales increased 3%, and sales of health and personal care products ticked up 1.8%.
Shipments continue to rise as the economy recovers at a faster pace than following the Great Recession.
E-commerce sales reached nearly $200 billion in the first quarter of 2021 — a 39% jump from Q1 2020 and the second-highest quarterly increase year-over-year (YOY) since Q2 2020. Online purchases accounted for 19.5% of total retail sales in the first quarter of 2021.
Amazon was a big beneficiary of the e-commerce
growth. Its revenues jumped 44% YOY to surpass
$100 billion in the first quarter of this year.