Buyers of polyethylene, and especially PE film converters, have long had a practice of offering their customers various fixed-pricing programs. In even the best circumstances and with well-written agreements, converters are not able to implement price increases until the following month.
However, in many other cases, converters may have to hold their price longer before they are contractually allowed to implement an increase. The “fixed-price” approach has been around for many years and has always been somewhat of a challenge for film manufacturers. So what's different today?
The pricing practices of the flexible packaging industry were developed and aggressively applied during periods of relatively modest price volatility — both up and down. Over the past 15 months, resin price moves have been neither modest nor two-way. In 2009, PE prices increased 17 cents per pound. So far in 2010, resin prices have increased another 18 cents. That's a total of 35 cents over 15 months.
Few film converters are prepared to manage such sustained price pressure while maintaining an acceptable margin. The exception is those who have structured sales agreements to allow for prompt cost pass-through.
A few years ago, resin producers eliminated broad-based price-increase protection in an effort to more quickly recoup unexpected increases. They realized that, due to a more volatile raw material environment, the practices of the past were not necessarily going to serve them well. They systematically removed the barriers that prevented them from changing their prices when faced with raw material cost increases. They developed a “new normal.” When that occurred, the burden of margin volatility was not removed; it simply shifted from resin producers to resin converters.
The film industry must press the issue of more efficient price pass-through agreements. Converters can start by asking customers for contract relief. In many cases, there is no other viable solution.
Resin price volatility will continue. Failure to make changes now will result in the same margin compression in the future.
The system today is broken. Resin increases come fast and furious. Film and bag salespeople are encountering significant resistance to price increases and lack the tools and support to adequately address the situation. Margins are squeezed to a breaking point. We need to better educate our film sellers and we need to encourage management to show resolve. If we do not, a very good industry will be destroyed. The film industry must recognize its own “new normal.”
Morris is president of Benchmark Polymers LLC, a consulting service in Coppell, Texas.