2022 will be another challenging year for packaging industry

KUCHING: Analysts have projected that 2022 will be another challenging year for the packaging industry, amid elevated cost of production due to lofty naphtha and gas prices.

According to the research arm of Hong Leong Investment Bank Bhd (HLIB Research), despite robust packaging demand driven by the economic recovery, the skyrocketing oil prices caused by the rising geopolitical tension between Ukraine and Russia coupled with the ongoing oil supply curbs has put a hit to packaging player’s margin as the rise of naphtha and natural gas (the feedstock of polymer) has driven the prices of polymer (raw material for producing thermoplastic).

“Consequently, LLDPE, LDPE, and HDPE – the three most widely used polymers in producing thermoplastic – has risen 41 per cent, 35 per cent, and 24 per cent in over the past two years, respectively,” HLIB Research said.

Despite the upward revision on packaging average selling prices (ASPs), the research arm noted that the sudden spike in polymer prices (elevated input costs) will give rise to the sector-wide erosion of packaging players’ margins.

“Going into the second half of 2022 (2H22), there are some downward bias in the resin prices due to the increase in capacity and subdued demand from China – the world’s largest consuming country of polyethylene, at 32 per cent of global consumption in 2020.

“Nevertheless, factors such as elevated oil prices (HLIB Brent average oil forecast: US$100 per barrel (bbl) to US$110 per bbl in 2022), prolonged Russia and Ukraine war, and increasing demand for plastic alongside the transition to endemicity globally, will keep polyethylene prices buoyant, in our view.”

HLIB Research highlighted that additionally, the rising operating costs due to the imposition of new minimum wages (from RM1,200 to RM1,500 effective May 1) and the shortage of foreign workers will impact plastic players over the near term.

“This is expected to put pressure on the already downtrending packaging players’ profitability margins.”

The research arm viewed that plastic players will find it difficult to pass on the entirety of additional costs to customers which have their own interests to protect.

It noted that this means packaging players may have to swallow some of these incremental costs in the immediate term.

“Given the abovementioned headwinds, we reckon 2022 will be another challenging year for the packaging industry, albeit better than 2021.”