Rising prices of paper products to hit F&B
As wood pulp is the major input for paper, rising wood pulp prices are expected to flow through to the price of paper.
KUCHING: With wood pulp – the major raw material of paper – prices hitting historically highs, the food and beverage (F&B) sector is expected to be hit the hardest from increased costs.
In a sector update, the research arm of MIDF Amanah Investment Bank Bhd ( MIDF Research) detailed that to date, international hardwood pulp prices has rallied from US$ 200 per tonne to US$ 690 per tonne mainly due to supply disruptions as pulp mills in Indonesia and Brazil experienced lower production from environmental concerns as well as maintenance shutdown.
“As wood pulp is the major input for paper, rising wood pulp prices are expected to flow through to the price of paper.
“This threatens the prof it margins of paper-based packaging suppliers and as a result of costpass through, the end consumers mainly F&B manufacturers will also be affected,” explained the research arm.
Currently, the F& B industry represents the biggest market for global packing with 69 per cent of the total market size, while paper and board packaging products are the largest consumer packaging category – constituting approximately 34 per cent of the total packaging market.
Due to this, the research team pointed out that the rising paper price would be a major concern to F&B players as it would contribute to a higher cost for packaging which could translate to higher costs for their products.
“Our channel check with industry player confirms that as of this year, there were already two rounds of price increases by packaging supplier for packaging material of about two to three per cent increases each time.
“Hence, it is also expected that packaging material supplier will further increase their product selling prices going forward,” guided the research arm.
In contrast, certain players like Spritzer Bhd (Spritzer) which uses more plastic-based packaging for its products were expected to see enhance average selling prices and profit margins due to PET and HDPE polymer prices remaining stable as crude oil prices are forecasted to average US$ 55 per barrel in FY18.
“Also, we believe that sales volume should remain stable due to minimal increase in prices. Spritzer was also a sponsor of the SEA Games and the promotional activities should have driven volume and sales higher.
“We expect brighter prospects for Spritzer going forward due to stabilising PET prices, stronger sales from Malaysia and lower operating expenses in China,” added the research arm.
Besides rising packaging prices, MIDF Research also reckoned that going forward, F&B players like Nestle Malaysia Bhd ( Nestle) and Fraser and Neave Holdings Bhd ( F& N) would be plagued with shrinking gross prof it (GP) margins derived from the ever increasing input costs in manufacturing.
To date, Nestle and F& N’s average product prices have increased marginally by about 0.5 per cent eyar over year while their GP margin has been on a downward trend with the latest recorded margin in the 2Q17 at 36.6 and 32.3 per cent from the peaked of 42.6 and 36.1 per cent respectively.
“From this observation, we conclude that while F&B players need to increase product prices, the rising input costs were mostly absorbed for now as it is necessary to maintain market share in the current environment,” reasoned the research arm.
Overal l, MIDF Research maintained a ‘ neutral’ stance on the F&B sector due to rising input costs from paper- based packing material, and expected small to mid- sized players to be impacted the most due to a weaker bargaining power and their limited ability to switch suppliers.
MIDF Research