Q3 Industry Update:
Packaging Raw Materials,
Economic Activity,
and Transportation

Introduction

At Berlin Packaging, we pride ourselves on providing the most reliable, efficient, sustainable, 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 quarterly, features news and analysis on Plastic Resins and other Packaging Raw Materials, Economic Activity (consumer spending, inflation, interest rates, GDP), Ocean Freight, and Domestic Transportation.

Multiple market forces are influencing the price of packaging raw materials. While domestic energy costs (e.g., diesel fuel) and inflation ease, ocean shipping rates remain elevated. Soft demand, adequate supplies, and excess manufacturing capacity foster stable prices. However, tariffs on foreign goods, a potential dockworkers strike at East and Gulf Coast ports in October, and hurricane development in the Gulf of Mexico add to market volatility.

The Producer Price Index (PPI) for final demand goods (e.g., CPG products, raw materials) and services (e.g., transportation, warehousing) increased 0.2% in August after being flat in July and rising 0.2% in June. A 0.4% gain in final demand services drove the August increase, while the final demand goods remained unchanged from the prior month.

The August index for final demand transportation and warehousing services decreased by 0.1%. Over the past 12 months, the index for final demand plastic resins rose 1.6%.

Berlin Packaging maintains a best-in-class approach to sourcing packaging materials and manufacturing platforms. We are not bound to a specific material, technology, tool, or country of origin, affording us tremendous flexibility to find the most cost-effective packaging solutions for our customers.

As the third quarter wraps up, the economy may be showing signs of improvement. Here's a snapshot of recent economic activity, data, and news influencing the consumer packaged goods (CPG) market and the packaging industry in North America.

·       U.S. consumer spending rose 0.1% in August, following a 1.1% surge in July.

·        Consumer sentiment was positive for a second consecutive month in September.

·         On an annual basis, U.S. and Canadian inflation dropped to their lowest levels since February 2021.

·         The Fed cut interest rates by 0.5% in September, the first reduction in over 4 years.

·         In the second quarter, U.S. GDP rose 3.0%, beating analysts' expectations.

·         U.S. holiday retail projections indicate modest YOY growth.

Consumer Spending and Sentiment

U.S. consumer spending and retail sales increased 0.1% month over month (MOM) in August, following a 1.1% surge in July. Food and beverage store sales slid 0.7% in August after posting a 0.9% gain in July. Health and personal care store sales rang up increases in August (0.7%) and July (1.7%), while building materials & garden supplies stores also showed sales advances in August (0.1%) and July (0.8%). Online shopping sales in August rebounded 1.4% after falling 0.4% in July.

In Canada, consumer spending and retail sales fell 0.3% MOM in June, capping off a 0.5% decline in the second quarter, according to data from Statistics Canada. However, core retail sales rose 0.4%, led by a 1.2.% gain at food and beverage retailers. Statistics Canada projects retail sales to rise 0.6% MOM in July.

Consumer sentiment — a measure of how U.S. consumers view their finances and the economy — increased for a second consecutive month in September, according to the University of Michigan consumer sentiment survey. The increase was largely thanks to better buying conditions for durable goods, with consumers believing prices were more favorable. Looking ahead, people feel more optimistic about the economy, even though there's been a slight dip in confidence around the job market.

In the third quarter, U.S. consumer optimism about the economy grew to its highest level in a year, according to research from McKinsey & Co. The study also found that consumers plan to increase their spending on most essential (e.g., food, beverages), semi-discretionary (e.g., personal care, dietary supplements), and discretionary (e.g., alcoholic drinks, sit-down restaurant meals) items in the next three months.

Berlin Packaging's mission is to improve our customers' net income through our packaging products and services. We help to increase their sales, reduce costs, and/or improve productivity. Along with having a positive impact on their income, we are committed to providing accurate and timely information and products.

Inflation and Interest Rates

The U.S. consumer price index (CPI) rose 0.2% in July and August, according to the Bureau of Labor Statistics. Food at-home prices were flat in August, while food away-from-home costs increased 0.3%. Energy prices declined 0.8% in August, while the cost of personal care products dropped 0.4%. On an annual basis, the CPI rose 2.5% for the 12 months ending in August, the smallest 12-month increase since February 2021.

The annual inflation rate in Canada dropped to 2.0% in August, increasing at the slowest pace since February 2021. Lower prices for gasoline, air transportation, clothing, and footwear contributed to the waning inflation rate. With inflation at the central bank's 2% target, many economists predict the Canadian fiscal policymaker will cut interest rates by 50 basis points at its October meeting.

At its recent September meeting, the U.S. Federal Reserve reduced interest rates by 50 basis points or 0.5% to settle at 4.75% – 5.0%, the first rate cut in more than four years. Following a run-up in rates in 2022 and 2023, the 23-year-high interest rate range held steady since July 2023.

While the impact won't be immediate, the reduction may signal the start of a more favorable environment for businesses and individuals to borrow and invest in capital projects and home improvements, respectively. The U.S. central bank may lower interest rates an additional 0.5% by year-end and another full percentage point in 2025.

Ocean freight spot rates have ticked downward as peak season demand winds down and vessel capacity improves. However, in early September, global spot rates for forty-foot containers averaged more than 250% higher than one year ago, according to Drewry's World Container Index.

To maintain rates and adjust their capacity, ocean carriers have increased their blank or canceled sailings. Through the first half of the year, schedule reliability is averaging 50–55%, a 12% drop in July compared to 12 months ago, according to data from Sea-Intelligence. Global average delays for late vessel arrivals topped five days in July, a figure only surpassed by the pandemic highs of 2021 and 2022.

As volatility persists in many global trade lanes, Berlin Packaging continues to proactively provide alternate routings and real-time visibility of the global freight market to help our customers minimize any disruptions to their supply chains. We partner with all major ocean carrier alliances to help mitigate delays due to route changes or blank sailings from a single carrier.

Bad Weather, Good Weather

Weather can disrupt ocean freight. To avoid attacks on shipping near the Red Sea, many ocean carriers have rerouted their vessels around the African continent. The southern tip of Africa is known for its strong storms and rough seas. Since June, several ships have lost or sustained damage to hundreds of containers due to extreme weather in this region of the Indian Ocean.

In late August, torrential rains and flooding along India's west coast shut down the country's largest container port for several days, creating a backlog of shipments and congestion at neighboring ports. In early September, a super typhoon with wind speeds over 125 mph battered the South China Sea, southern ports in China, and northern ports in Vietnam before making landfall on the northeast coast of Vietnam. The powerful storm temporarily halted manufacturing, vessel sailings, and port terminal operations.

Abundant and beneficial rains are lifting transit restrictions through the Panama Canal, which curtailed shipping activities for many months due to severe drought conditions. In September, the Gatun Lake reservoir that feeds the canal recorded water levels above its five-year average. To lessen the impact of future droughts, the Panama Canal Authority has proposed a $1.6 billion project to dam the nearby Indio River and create a reservoir. Constructing a five-mile mountain tunnel will connect the new reservoir to Gatun Lake.

The lingering market forces of sufficient truckload capacity, moderate freight demand, weak manufacturing activity, and sinking diesel fuel prices continue to stabilize transportation costs — both contract and spot rates — in North America. However, tightening capacity, holiday merchandise distribution, and a potential East and Gulf Coast port strike could spell higher truckload rates in the fall and winter.

In July, freight shipments and expenditures slipped 1.1% and 6.2% YOY, respectively, according to data from Cass Transportation Systems. Compared to the prior year, shipments and expenditures have fallen for 18 consecutive months.

The August 2024 Logistics Managers' Index report showed a drop in transportation prices following three months of increases. After several months of contraction, inventory levels rose in August. Companies are likely building inventories in anticipation of Q4 and holiday merchandise shopping. "This suggests a return to traditional patterns of seasonality that we have not seen since pre-COVID," noted the report.

With a dedicated and accomplished team of logistics specialists, Berlin Packaging excels in all modes of transportation to ensure our customers benefit from competitive rates and freight expertise. We are flexible and nimble, ready to tackle urgent and expedited shipments and special requests like drop trailer services for customer convenience.