In today's Finshots we talk about trouble brewing in the packaging industry


The Story

There was an interesting headline on ET yesterday and it went something like this — “Prices of refrigerators, washing machines, air-conditioners and televisions are set to go up by up to 5–6% next month.” And the reason it seems is because of a sharp increase in input costs and freight charges. For instance, copper prices are on the rise. We’ve already talked about that. Semiconductors are in short supply. We’ve already talked about that too. Shipping charges are exorbitant because of missing containers and believe it or not, we’ve discussed that as well. So the price increase shouldn't come as a surprise. But there’s one other element that’s also contributing to this price hike and it’s not something you think about too often.

Packaging. Specifically — corrugated boxes. It’s used everywhere. We use it to pack refrigerators. We use it to pack air conditioners. We use it to pack e-commerce goods. We use it rather extensively. Unfortunately, the people that manufacture these boxes have been in a bind for a while. Their costs have been shooting up and they have struggled to pass on the increase in price to their customers.

Why? you ask.

Well, let’s start with Kraft Paper — the key raw material used to whip up one of these corrugated boxes. Indian manufacturers have had trouble procuring Kraft paper because they haven’t been able to access pulp at competitive rates. And if you know anything about paper, you know that wood pulp is fundamental to your cause. But this begets another question?

Why are pulp prices increasing?

Well, you could manufacturer paper in one of two ways. You could use wood pulp from trees or you could use recycled paper. And as it stands, demand for virgin wood pulp is through the roof.

Why is that you ask?

Well, China. You see, the Red Dragon once built a thriving enterprise by shipping in the world’s waste. They’d accept trash from multiple countries only to recycle, use and export these products elsewhere. It worked for a while but it also paved the way for toxic industries to pollute the clear skies of Beijing. Something had to change. So a few years back, the country’s lawmakers promised to move away from waste altogether. And today, they don’t import waste paper like they used to. Meaning China’s paper companies are now more reliant on wood pulp than ever before. And they’re buying this stuff in bulk.

Also, there are speculators in China right now who are hoarding wood pulp in the hope of seeing a price increase soon enough. They want to profit from this endeavour. And if that weren’t already too bad, certain manufacturers are also importing the finished product i.e. Kraft Paper in bulk from the likes of India. After all, the pandemic has created new demand for paper products across the globe and Chinese manufacturers don’t want to be left behind. So yeah, the prices of wood pulp are on the rise and Kraft paper supplies are being diverted to China, leaving Indian paper manufacturers high and dry.

So what do Indian Kraft paper manufacturers do? They bump up their price and the packaging industry now has to contend with the possibility of buying this key raw material at a higher rate. Also, 85% of the cost of manufacturing corrugated boxes can be attributed to Kraft Paper alone. So this impact isn’t negligible by any stretch of the imagination.

Unfortunately, this only explains part of the equation. The incumbents in the packaging industry are also reeling from a double blow because they haven’t been able to unilaterally increase prices for a while now. Most of these manufacturers are small scale enterprises that supply boxes after having contracted orders at a fixed price. And while some companies have the flexibility to renegotiate, most companies don’t. So they’ve been biding their time hoping to sign new contracts. But now things are finally looking up. After a very long time, it seems some manufacturers are in a position to pass on the increase in packaging costs to end consumers. Which in turn partially explains why prices of certain white goods are on the rise.

Until next time…

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