Mayan Packaging

Surging crude oil demand, a sharp depreciation of the US dollar, political turmoil in OPEC oil-producing countries, and harsh weather conditions in refining r researchers worldwide investigate the root causes of the sustained rise in crude oil prices, industries heavily reliant on crude oil derivatives are on high alert, closely monitoring the fluctuations of that critical figure very moment. Since April 2002, international crude oil prices have been on an upward trend; although the upward momentum slowed from October to December last year, prices have continhover around $60 per barrel.

The impact of rising oil prices is ubiquitous across the globe. Airlines worldwide are struggling to cope with the pressure of high fuel costs, even when passing them on t passengers. Multinational automakers are seeing their annual profits plummet due to low purchasing desire caused by high fuel prices. Meanwhile, the rise in crude oil prices is rapidly spreading to mring sectors in various countries through increased costs of derivative materials such as plastics, particularly affecting the flexible packaging industry, where raw materials are almost 100% derived from.

The rise in crude oil prices is like a tsunami sweeping across the global flexible packaging industry; what impact has it had on China's flexible packaging industry, and what reflections insights has it brought to the industry?

Prices of particles and films have increased significantly

The various raw and auxiliary materials used in flexible packaging production, such as plastic pellets, films, inks, adhesives, and sealing compounds, arederived from petroleum. Rising crude oil prices have driven up the cost of these raw materials, particularly having a significant impact on the prices of pellets and films. This has led to continuously risinuction costs for flexible packaging manufacturers.

Taking polyethylene, a major raw material used in the flexible packaging industry, as an example, the international low point price in eary 2002 was 5,700 yuan per ton, but it reached 15,500 yuan per ton between August and September 2004,a rise of 172%—what an astonishing figure! The price at the end of 2005 was approximately 10,300 yuan per ton, representing an incrase of over 80% compared to the low point in 2002.

The supply of polyethylene in China has long been unable to meet demand. Data shows that domestic production has long been insufficient to meet neds; in 2004, domestic PE production was 4.31 million tons, while imports reached 5.1 million tons, accounting for approximately 52.2%. It is prted that the annual consumption of polyethylene in 2005 will reach 9.9 million tons, an increase of 7.7% compa Furthermore, China's import dependence on raw materials such as PP and PVC is also relatively high, indicating that China still has a long way to go in the production of chemical raw materials.

Based on current trends, it is unlikely that international market oil prices will drop significantly in 2005-2006. As international bulkties heavily influenced by crude oil prices, and due to disharmony in domestic supply and demand, domestic selling prices of particles such as polyethylene will continue to rise. In ct, the price growth of some films with massive domestic production, such as BOPP and PET, is slowing down. A senior executive from a well-known flexible packaging manufacturer tated: "In 2005, raw material procurement prices rose by 5%-10% compared to the same period in 2004, with the increase in particles being particularlyastonishing. It is estimated that overall raw material prices will continue to rise in the future; however, prices for certain products like PET will be adjusted downward fror 2004 peaks due to the influx of massive investment leading to a balance in supply and demand." ”。

The price of aluminum foil, which is frequently used in film lamination, has also been rising continuously; by the end of 2005, the averapproximately 17,126 yuan, an increase of about 25% compared to the average price of 14,036 yuan at the bginning of 2003. Recent futures prices indicate that the price of aluminum will continue to rise in 2006.

The price increase of ink and adhesives is relatively small.

Rising crude oil prices have also driven up the costs of products used in flexible packaging production, such as inks and adhesives; r, the price fluctuations of these products are not as pronounced as those of particles and films. A senior executive from an adhesive company in East China noted that compared to th end of 2003, the company's product costs rose by approximately 13% by the end of 2005. During the period from August to Or 2004, when crude oil prices were at their peak, product costs surged by a full 37% compared to the end of 2003. The executive sta "Rising raw material prices have increased costs, but we do not pass all of these increases on to flexible packaging manufacturers. During the extraordinary period from August to October 200n costs rose by 37%, we only increased our product prices by 7%, while absorbing the remaining 30% ourselves." Taking the company's LY50A ads an example, the product's price followed the fluctuations in crude oil prices from 2003 to 2005, albeit with a smaller amplitude, reaching a pea in October 2004 and falling back to early 2003 levels by the end of 2005. Due to measures taken by suppliers inks, adhesives, and similar products to absorb costs internally, price fluctuations in recent years have been less frequent than those of products like particle

Flexible packaging manufacturers under high raw material costs

There are over 18,000 domestic flexible packaging factories of various sizes, most of which are relatively small and face issues such as product honization and overcapacity. These factories struggle to reduce costs in raw material procurement and to raise selling prices for finished products, placing them in a difficult position.

The cost increases of bulk products such as particles are almost directly passed on to flexible packaging manufacturers. While some suppliers refrain from fully passing on the increased cosin customers, the costs that have been passed on still cause significant headaches for the packaging plants. It is almost impossible for raw material procurement prices to return to 03 levels. A well-known flexible packaging manufacturer in the Shanghai area noted that the rise in most raw material prices is almost unstoppable, and the opportunity to negotiate prices only exists with one or trm suppliers.

To cope with rising raw material prices, raising the selling price of packaged products accordingly would seem the most direct and effective solution, but is it realthat easy to implement? On one hand, the massive number of 18,000 flexible packaging factories has led to overall overcapacity in the industry. In the scramblers, everyone is competing on costs and prices, and improper price adjustments often lead to the loss of customers. On the other hand, since last year, downstream customers have faced reduced productiorising costs due to shortages of coal, electricity, and oil. Coupled with intensified competition across the consumer sector, customers have tightened cost controls to the extreme, making price a criticin selecting flexible packaging suppliers. A senior executive from a well-known flexible packaging factory stated: "All flexible packaging factories want to raise prices but find it difficult to d we can only selectively adjust prices for certain customers and certain products." With profit margins on existing prices shrinking rapidly, flexible packaging factories are forced to raise product prices, but the magnitude of these eases is far below the rate of cost escalation.

To maintain existing markets, many flexible packaging enterprises have been forced to reduce production capacity, operate at low profit margins, or even produce at a loss.ed to before the sharp rise in oil prices, the gross profit margins of flexible packaging manufacturers nationwide have generally declined by 3%-8%. A senior executive from a leading flexible packaging manufactn East China stated, "Given the current decline in gross profit margins, sales revenue must increase by at least 8-20% to maintain the original level of profitability." Although mt demand for flexible packaging is growing year by year, profitability in the sector is actually decreasing.

Where are the solutions for flexible packaging manufacturers?

275/2000 To alleviate the pressure caused by rising crude oil prices, some low-end enterprises with lower market shares have resorted to irregular means to cut costs, such ag to produce according to product standards, temporarily modifying corporate production standards, and using low-cost substitute or filler materials. The practice of reducing costs at the expense of product quality is extremelangerous; it will gradually erode user trust in the enterprises and deal a severe blow to the credit system of the entire industry.

The rise in oil prices is a double-edged sword with dual effects. On one hand, it highlights enterprises with genuine vitality, enabling them to receive further posupport from the state; on the other hand, it eliminates fragile, imperfect, and low-credibility small enterprises. Since the majority of the flexible packaging industry consists of smalmedium-sized private enterprises, they also face the issue of resource integration and must grow stronger and larger to withstand market scrutiny. Given the current rise in raw material costs caused by higher prices, the bankruptcy of some small enterprises is not necessarily a bad thing for the country. Only if enterprises can survive and continuously expand under such circumstances can it be said that they possess strong vitality.