Industry Update: Raw Materials, Custom-Decorated Stock Packaging, and Transportation

Softening demand, improving supplies, and lower feedstock costs are keeping packaging raw material prices in check. But high energy rates (diesel fuel and natural gas), persistent inflation, transportation and warehousing challenges, and rising labor wages are elevating operational costs and upholding pricing.

The pandemic and subsequent restaurant and entertainment closures (plus personal and business travel suspensions) prompted consumers to spend more on at-home goods and less on away-from-home services. That two-year dynamic has now reversed course, resulting in purchase cutbacks on packaged goods, electronics, furniture, and home & garden supplies. High inflation and recession worries are also restricting consumer spending.

Plastic Resins

Slowing demand, more imports, ample supplies and inventories, and reduced feedstock costs are putting downward pressure on plastic resin prices. However, the cost of colorants, liners, energy, wood pallets, and labor continues to escalate. And the superfund excise tax, which took effect in July, is being passed along to customers of virgin resins.

Here's a brief rundown of the current market conditions for various resins:

Brand owners in search of packaging for their products typically encounter two basic choices: stock packaging or custom packaging.

Stock packaging presents an attractive option because of its cost (generally less expensive than custom packaging), familiarity (think canned foods), and availability (mass production, sufficient quantities, small and large orders). It's also reliable, with a proven track record of high quality and manufacturing efficiency. But stock packaging may not meet all the needs of the product or brand.

A custom package is unique and can be designed to personify the brand and stand out on a crowded shelf and highly competitive product category. But custom packaging comes with added costs — mold tooling, design costs, prototypes, etc. — that may be out of reach for some brand owners. Moreover, custom packages usually shoulder longer lead times compared to stock packages.

While not as well publicized as a stock or custom structure, a third option — custom-decorated stock packaging — balances cost and convenience with individuality and style. Through the use of decorative techniques, novel label designs, custom closures, and other accessories, stock containers can be transformed into one-of-a-kind packages that rival their custom-format cousins.

Trans-Pacific ocean freight rates continue to decline as import volumes remain well below their usual peak season numbers. In response to low inbound demand to North America, ocean carriers have reduced capacity (i.e., blank sailings) to balance supply and demand and maintain rates. The uptick in blank sailings is negatively influencing schedule reliability.

In September, schedule reliability or on-time performance was 32% on the West Coast and 21% on the East Coast. For all global trade lanes, schedule reliability is about 45%. In 2019 before the pandemic, schedule reliability worldwide ranged from a low of 73% to a high of 83%.

While ocean freight rates to North America are improving, carrier cancellations, congestion at some East/Gulf Coast ports, long rail dwell times at some West Coast ports, and coronavirus lockdowns in Asia are impeding supply chains.

China's zero-COVID policy is hampering trucking and port activities in its key transportation hubs of Ningbo, Shanghai, and Tianjin. Most ports are open but moving goods from the manufacturers to the ports remains a challenge with cross-province trucking restrictions.

North American importers brought in many goods ahead of schedule in the first half of the year to counter shipping delays and avoid stock shortfalls for the holiday season. But consumer spending slowed down, and the economy slumped, leaving retailers with higher-than-expected inventories. Retailers are canceling orders and buying cautiously, constraining imports. The National Retail Federation predicts imports will fall nearly 7% in Q4 2022 compared to the same quarter last year.

Port Activity

A potential dockworkers' strike and long port dwell times on the West Coast have shifted many container shipments from Asia to East and Gulf Coast ports. In September, the port of Los Angeles (LA) handled the fewest number of import containers since 2009, while its sister port of Long Beach (LB) posted a monthly import low not seen since 2016.

Even with ship volume down at LA/LB, the ports are not operating smoothly. In mid-October, terminal dwell times were averaging 3–8 days, and rail dwell times were running 4–12 days. Tensions appear to be rising between the West Coast dockworkers union and port terminals management as contract negotiations continue to drag on with no resolution in sight. Dockworkers have been without a contract since July. This uncertainty is prompting ocean carriers to avoid West Coast ports.

Congestion at East/Gulf Coast ports is causing delays at Houston and Savannah. In mid-October, ships awaiting berths in Houston were anchored for up to 22 days. In Savannah, that number reached as high as 17 days. In September, the port of Houston recorded its second busiest month ever for cargo containers.

A system-wide rail strike may once again be a possibility this fall as two unions voted to reject the contract agreement. As of October 31, six of the 12 unions (representing about 20% of all railroad-related workers) have ratified the new agreement. Two of the largest unions have yet to vote. If any union calls a strike, the other unions will likely honor it, creating a broad work stoppage.

Transportation costs in North America have been nearly flat since the late summer. Capacity continues to loosen, putting downward pressure on rates. However, high diesel fuel costs and fuel surcharges continue to bolster transportation costs.

Several broad economic factors are impacting the transportation industry. Consumers have shifted their purchases to more services and fewer goods. High inflation and fears of a recession have dampened consumer spending. Forward buying and overbuying by retailers in the first half of the year have resulted in excess inventories, canceled orders, and shrinking import shipments.

In mid-September, a rail strike was averted when two of the largest railroad unions reached a tentative agreement with the freight railroads. Since then, two unions have voted to reject the deal, setting up the possibility of a rail strike in late November or early December. Such a strike would likely cost $2 billion per day in lost economic output. As of October 31, only six of the 12 railroad unions (representing about 20% of all railroad-related workers) have approved the agreement.